SIRIUS XM HOLDINGS INC.
10-Ks and 10-Qs
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UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
Washington, D.C. 20549
Form 10-K
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þ
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For Fiscal Year Ended December 31, 2010 | ||
|
OR
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||
|
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
| For the Transition Period From to | ||
COMMISSION
FILE NUMBER
001-34295
SIRIUS XM RADIO INC.
(Exact name of registrant as
specified in its charter)
|
Delaware
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52-1700207 | |
|
(or other jurisdiction of
incorporation of organization) |
(I.R.S. Employer
Identification Number) |
|
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1221 Avenue of the Americas, 36th Floor
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10020 | |
| New York, New York | (Zip Code) | |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code:
(212) 584-5100
Securities registered pursuant to Section 12(b) of the
Act:
| Title of Each Class: | Name of Each Exchange 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:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or 15(d) of the
Act. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for the past
90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any,
every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of
Regulation S-T
during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such
files). Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of the registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K.
þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2
of the
Exchange Act. (Check one):
|
Large accelerated filer
þ
|
Accelerated filer o |
Non-accelerated filer
o
(Do not check if a smaller reporting company) |
Smaller Reporting company o |
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes
o
No
þ
The aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant as of June 30,
2010 was $3,689,667,663. 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 registrant’s common stock
outstanding as of February 14, 2011 was 3,933,999,616.
DOCUMENTS
INCORPORATED BY REFERENCE
Information included in our definitive proxy statement for our
2011 annual meeting of stockholders scheduled to be held on
Wednesday, May 25, 2011 is incorporated by reference in
Items 10, 11, 12, 13 and 14 of Part III of this report.
SIRIUS XM
RADIO INC.
2010
FORM 10-K
ANNUAL REPORT
TABLE OF CONTENTS
| Item No | Description | Page | ||||
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Item 1
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Business | 1 | ||||
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Item 1A.
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Risk Factors | 13 | ||||
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Item 1B.
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Unresolved Staff Comments | 20 | ||||
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Item 2.
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Properties | 20 | ||||
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Item 3.
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Legal Proceedings | 20 | ||||
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Item 4.
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(Removed and Reserved) | 21 | ||||
| PART II | ||||||
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 22 | ||||
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Item 6.
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Selected Financial Data | 24 | ||||
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 | ||||
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risks | 53 | ||||
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Item 8.
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Financial Statements and Supplementary Data | 53 | ||||
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 53 | ||||
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Item 9A.
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Controls and Procedures | 53 | ||||
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Item 9B.
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Other Information | 54 | ||||
| PART III | ||||||
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Item 10.
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Directors, Executive Officers and Corporate Governance | 55 | ||||
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Item 11.
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Executive Compensation | 55 | ||||
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 55 | ||||
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence | 55 | ||||
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Item 14.
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Principal Accounting Fees and Services | 55 | ||||
| PART IV | ||||||
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Item 15.
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Exhibits and Financial Statement Schedules | 56 | ||||
| Signatures | 57 | |||||
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 “Risk
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 competitive position versus other forms of audio and video entertainment including terrestrial radio, HD radio, Internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies; | |
| • | our ability to retain subscribers and maintain our average monthly revenue per subscriber; | |
| • | our dependence upon automakers and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers; | |
| • | our substantial indebtedness; and | |
| • | the useful life of our satellites, which, in most cases, are not insured. |
Because the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in
any forward-looking statements made by us or on our behalf, you
should not place undue reliance on any of these forward-looking
statements. In addition, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no
obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which the
statement is made, to reflect the occurrence of unanticipated
events or otherwise. New factors emerge from time to time, and
it is not possible for us to predict which will arise or to
assess with any precision the impact of each factor on our
business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
| ITEM 1. | BUSINESS |
We broadcast our music, sports, news, talk, entertainment,
traffic and weather channels in the United States on a
subscription fee basis through our two proprietary satellite
radio systems. Subscribers can also receive certain of our music
and other channels over the Internet, including through
applications for Apple, Blackberry and Android-powered mobile
devices.
As of December 31, 2010, we had 20,190,964 subscribers. Our
subscriber totals include:
| • | subscribers under our regular and discounted pricing plans; | |
| • | subscribers that have prepaid, including payments either made or due from automakers for prepaid subscriptions included in the sale or lease price of a vehicle; | |
| • | certain radios activated for daily rental fleet programs; | |
| • | certain subscribers to our Internet services; and | |
| • | certain subscribers to our weather, traffic, data and Backseat TV services. |
Our primary source of revenue is subscription fees, with most of
our customers subscribing on an annual, semi-annual, quarterly
or monthly basis. We offer discounts for prepaid and long-term
subscription plans as well as discounts for multiple
subscriptions on each platform. We also derive revenue from
activation and other fees, the
1
sale of advertising on select non-music channels, the direct
sale of satellite radios and accessories, and other ancillary
services, such as our weather, traffic, data and Backseat TV
services.
Our satellite radios are primarily distributed through
automakers (“OEMs”); retail locations nationwide; and
through our websites. We have agreements with every major
automaker to offer satellite radios as factory or
dealer-installed equipment in their vehicles. Satellite radio
services are also offered to customers of certain rental car
companies.
Certain important dates in our corporate history are listed
below:
| • | Sirius XM Radio Inc. was incorporated in the State of Delaware as Satellite CD Radio, Inc. on May 17, 1990. | |
| • | On December 7, 1992, Satellite CD Radio, Inc. changed its name to CD Radio Inc., and Satellite CD Radio, Inc. was formed as a wholly owned subsidiary. | |
| • | On November 18, 1999, CD Radio Inc. changed its name to Sirius Satellite Radio Inc. | |
| • | In July 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged (the “Merger”) with and into XM Satellite Radio Holdings Inc. | |
| • | On August 5, 2008, we changed our name from Sirius Satellite Radio Inc. to Sirius XM Radio Inc. | |
| • | In April 2010, XM Satellite Radio Holdings Inc. merged with and into XM Satellite Radio Inc.; and in January 2011, XM Satellite Radio Inc., our wholly-owned subsidiary, merged with and into Sirius XM Radio Inc. |
Prior to January 12, 2011, we operated XM Satellite Radio
Inc., together with its subsidiaries, as an unrestricted
subsidiary under the agreements governing our indebtedness.
Programming
We offer a dynamic programming lineup of more than 135 channels
of commercial-free music, sports, news, talk, entertainment, and
traffic and weather. The channel
line-ups
for
our services vary in certain respects and are available at
siriusxm.com.
Our subscription packages allow most listeners to customize and
enhance our standard programming lineup. Our “Best of
SIRIUS” package offers XM subscribers the Howard Stern
channels, Martha Stewart Living Radio, SIRIUS NFL Radio, SIRIUS
NASCAR Radio, Playboy Radio, Spice Radio and
play-by-play
NFL games and college sports programming. Our “Best of
XM” package offers SIRIUS subscribers Oprah Radio, The
Virus, XM Public Radio, MLB Network Radio, NHL Home Ice,
The PGA Tour Network, and select
play-by-play
of NBA and NHL games and college sports programming.
Subscribers with a la carte-capable radios may customize the
programming they receive through our a la carte subscription
packages. We also offer family friendly, “mostly
music” and “mostly sports, news and talk”
packages.
We make changes to our programming lineup from time to time as
we strive to attract new subscribers and offer content which
appeals to a broad range of audiences and to our existing
subscribers.
Music
Programming
We offer an extensive selection of music genres, ranging from
rock, pop and hip-hop to country, dance, jazz, Latin and
classical. Within each genre we offer a range of formats, styles
and recordings.
All of our original music channels are broadcast commercial
free. Certain of our music channels are programmed by third
parties and air commercials. Our channels are produced,
programmed and hosted by a team of experts in their fields, and
each channel is operated as an individual radio station, with a
distinct format and branding. We also, from time to time,
provide special features, such as our
Artist Confidential
series which provides interviews and performances from some
of the biggest names in music, and an array of “pop
up” channels featuring the music of particular artists.
2
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 (“NFL”), Major League Baseball
(“MLB”), NASCAR, National Basketball Association
(“NBA”), National Hockey League (“NHL”) and
PGA Tour, and broadcast most major college sports, including
NCAA Division I football and basketball games. Soccer
coverage includes matches from the Barclays English Premier
League. We also air FIS Alpine Skiing, World Cup events and
horse racing.
We offer many exclusive talk channels and programs such as MLB
Network Radio, SIRIUS NASCAR Radio, SIRIUS NFL Radio and Chris
“Mad Dog” Russo’s
Mad Dog Unleashed
on Mad
Dog Radio, as well as two ESPN channels, ESPN Radio and ESPN
Xtra. Simulcasts of select ESPN television shows, including
SportsCenter
, can be found on ESPN Xtra.
Talk
and Entertainment Programming
We offer a multitude of talk and entertainment channels for a
variety of audiences. Our diverse spectrum of talk programming
is a significant differentiator from terrestrial radio and other
audio entertainment providers.
Our talk radio offerings feature dozens of popular talk
personalities, many creating radio shows that air exclusively on
our services, including Howard Stern, Oprah Winfrey, Martha
Stewart, Dr. Laura Schlessinger, Barbara Walters, Opie and
Anthony, Bob Edwards, Senator Bill Bradley, Deepak Chopra and
doctors from the NYU Langone Medical Center.
Our comedy channels present a range of humor such as Jamie
Foxx’s The Foxxhole, Laugh USA, Blue Collar Comedy and Raw
Dog Comedy. Other talk and entertainment channels include SIRIUS
XM Book Radio, Kids Place Live and Radio Disney, as well as
OutQ, Road Dog Trucking and Playboy Radio.
Our religious programming includes The Catholic Channel, which
is programmed with the Archdiocese of New York, EWTN, a Global
Catholic Radio Network, and Family Talk.
News
and Information Programming
We offer a wide range of national, international and financial
news, including news from BBC World Service News, Bloomberg
Radio, CNBC, CNN, FOX News, MSNBC, NPR and World Radio Network.
We also air a range of political call-in talk shows on a variety
of channels including our exclusive channel, POTUS.
We offer continuous, local traffic reports for 22 metropolitan
markets throughout the United States on the XM service, and
20 metropolitan markets throughout the United States on the
SIRIUS service. We broadcast these reports together with local
weather reports from The Weather Channel.
Distribution
of Radios
Automakers
Our primary means of distributing satellite radios is through
the sale and lease of new vehicles. We have agreements with
every major automaker to offer satellite radios as factory or
dealer-installed equipment in their vehicles. As of
December 31, 2010, satellite radios were available as a
factory or dealer-installed option in substantially all vehicle
makes sold in the United States.
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 certain 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
satellite radios installed in their vehicles, including in
certain cases hardware costs, tooling expenses and promotional
and advertising expenses.
3
Retail
We sell satellite radios directly to consumers through our
websites. Satellite radios are also marketed and distributed
through major national and regional retailers. We develop
in-store merchandising materials and provide sales force
training for several retailers.
Previously
Owned Vehicles
We expect to acquire an increasing number of subscribers through
the sale and lease of previously owned vehicles with
factory-installed satellite radios. We have entered into
agreements with several automakers to market subscriptions to
purchasers and lessees of vehicles which include satellite
radios sold through their certified pre-owned programs.
We are developing systems and methods to identify purchasers and
lessees of used vehicles which include satellite radios, and
expect to make other efforts to market and sell satellite radio
subscriptions to owners of used vehicles.
Our
Satellite Radio Systems
Our satellite radio systems are 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 in the continental US
where the satellite radio has an unobstructed
line-of-sight
with one of our satellites or is within range of one of our
terrestrial repeaters. We continually monitor our infrastructure
and regularly evaluate improvements in technology.
The FCC has allocated the portion of the S-band located between
2320 MHz and 2345 MHz exclusively for satellite radio.
Each of our services uses 12.5 MHz of this bandwidth to
transmit its respective signals. Uplink transmissions (from the
ground to our satellites) use 12.5 MHz of bandwidth in the
7060-7072.5 MHz
band.
Our satellite radio systems have three principal components:
| • | satellites, terrestrial repeaters and other satellite facilities; | |
| • | studios; and | |
| • | satellite radios. |
Satellites,
Terrestrial Repeaters and Other Satellite
Facilities
SIRIUS Satellites.
We own four orbiting
satellites and one spare satellite for use in the SIRIUS system.
These satellites are of the Loral FS-1300 model series. The
chart below provides certain information on these satellites:
|
Estimated End of
|
||||||
| Satellite Designation | Year Delivered | Useful Life | Current Use | |||
|
FM-1
|
2000 | 2013 |
Broadcasting from
an inclined elliptical orbit |
|||
|
FM-2
|
2000 | 2013 | Broadcasting from an inclined elliptical orbit | |||
|
FM-3
|
2000 | 2015 | Broadcasting from an inclined elliptical orbit | |||
|
FM-4
|
2002 | 2010 | Spare satellite in ground storage | |||
|
FM-5
|
2009 | 2024 | Broadcasting from a geostationary orbit at 96° West Longitude |
Our FM-1, FM-2 and FM-3 satellites travel in a figure eight
pattern extending above and below the equator, and spend
approximately 16 hours per day north of the equator. At any
time, two of these three satellites are orbiting north of the
equator — with one of them in operation, while the
third satellite does not transmit as it traverses the
4
portion of the orbit south of the equator. This orbital
configuration yields high signal elevation angles, reducing
service interruptions from signal blockage. Our FM-5 satellite
is deployed in a geostationary orbit which provides redundant
coverage and enhances performance of the satellite constellation.
Space Systems/Loral is constructing a sixth satellite for use in
this system. This satellite is also a Loral FS-1300 model
satellite. We have an agreement with International Launch
Services to launch this satellite on a Proton rocket, and expect
to launch this sixth satellite in the fourth quarter of 2011. We
plan to deploy this satellite in a geostationary orbit at
115° West Longitude.
XM Satellites.
We own five orbiting satellites
for use in the XM system. Four of these satellites were
manufactured by Boeing Satellite Systems International and one
was manufactured by Space Systems/Loral. The chart below
provides certain information on these satellites:
|
Estimated End of
|
||||||
| Satellite Designation | Year Delivered | Useful Life | Current Use | |||
|
XM-1
|
2001 | 2013 |
In-orbit spare satellite in a geostationary orbit at 85°
West Longitude |
|||
|
XM-2
|
2001 | 2013 | In-orbit spare satellite in a geostationary orbit at 115° West Longitude | |||
|
XM-3
|
2005 | 2020 |
Broadcasting from a geostationary orbit at 85°
West Longitude |
|||
|
XM-4
|
2006 | 2021 | Broadcasting from a geostationary orbit at 115° West Longitude | |||
|
XM-5
|
2010 | 2025 |
In-orbit spare satellite in a geostationary orbit at 85°
West Longitude |
Satellite Insurance.
We maintain in-orbit
insurance for our FM-5, XM-4 and XM-5 satellites. These policies
provide coverage for a total, constructive total or partial loss
of the satellites that occurs during annual (or multi-year)
in-orbit periods. The insurance does not cover the full cost of
constructing, launching and insuring new satellites, nor will it
protect us from the adverse effect on business operations due to
the loss of a satellite. The policies contain standard
commercial satellite insurance provisions, including coverage
exclusions.
Terrestrial Repeaters.
In some areas with high
concentrations of tall buildings, such as urban centers, signals
from our satellites may be blocked and reception of satellite
signals can be adversely affected. In many of these areas, we
have deployed terrestrial repeaters to supplement satellite
coverage. We operate over 140 terrestrial repeaters in the
SIRIUS system and over 580 terrestrial repeaters in the XM
system.
Other Satellite Facilities.
We control and
communicate with our SIRIUS satellites from an uplink facility
in New Jersey. We also maintain earth stations in Panama and
Ecuador to control and communicate with several of our SIRIUS
satellites. Our SIRIUS satellites and the XM-1, XM-2 and XM-5
satellites are monitored, tracked and controlled by Intelsat, a
satellite operator. Our XM-3 and XM-4 satellites are monitored,
tracked and controlled by Telesat Canada, a satellite operator.
We also operate backup earth stations in the United States.
Studios
Our programming originates principally from studios in New York
City and Washington D.C., and, to a lesser extent, from smaller
studio facilities in Cleveland, Los Angeles, Memphis, Nashville
and Orlando. Our New York City offices house our corporate
headquarters. Both our New York City and Washington D.C. offices
house facilities for programming origination, programming
personnel and facilities to transmit programming.
5
Satellite
Radios
We design, establish specifications for, source or specify parts
and components for, and manage various aspects of the logistics
and production of satellite radios. We do not manufacture
radios. We have authorized manufacturers and distributors to
produce and distribute satellite radios, and have licensed our
technology to various electronics manufacturers to develop,
manufacture and distribute radios under certain brands. We
directly import radios distributed through our websites. To
facilitate the sale of satellite radios, we may subsidize a
portion of the radio manufacturing costs to reduce the hardware
price to consumers.
Satellite radios are manufactured in three principal
configurations — as in-dash radios, Dock &
Play radios and portable or wearable radios.
| • | In-dash radios are integrated into vehicles and allow the user to listen to satellite radio with the push of a button. Aftermarket in-dash radios are available at retailers nationally, and to automakers for factory or dealer installation. | |
| • | Dock & Play radios enable subscribers to transport their radios easily to and from their cars, trucks, homes, offices, boats or other locations with available adapter kits. Dock & Play radios adapt to existing audio systems through FM modulation or direct audio connection and can be easily installed. Audio systems and boom boxes, which enable subscribers to use their radios virtually anywhere, are available for various models. The Stratus 6 and Starmate 5 Dock & Play radios also support a la carte channel selection. | |
| • | Portable or wearable radios offer live satellite radio “on the go” and recorded satellite, MP3 and WMA content. |
Home units that provide our satellite service to home and
commercial audio systems are also available.
We have introduced an interoperable radio called MiRGE. This
radio has a unified control interface allowing for easy
switching between our two satellite radio networks. We have
introduced the XM SkyDock, which connects to an Apple iPhone and
iPod touch and provides live XM satellite radio using the
control capability of the iPhone or iPod touch.
Internet
Radio
We simulcast music channels and select non-music channels over
the Internet. Access to our Internet services is offered to
subscribers for a fee. We have available products that provide
access to our internet radio services in the home without the
need for a personal computer. We also offer applications to
allow consumers to access our internet services on mobile
devices. Subscribers to our internet services are not included
in our subscriber count, unless the service is purchased
separately and not as part of a satellite radio subscription.
International
Canada.
We have an interest in the satellite
radio services offered in Canada. SIRIUS Canada, a Canadian
corporation that we jointly own with Canadian Broadcasting
Corporation and Slaight Communications Inc., offers a satellite
radio service in Canada. SIRIUS Canada offers over 120 channels
of commercial-free music and news, sports, talk and
entertainment programming, including 12 channels offering
Canadian content. XM Canada, a Canadian corporation in which we
have an ownership interest, also offers satellite radio service
in Canada. XM Canada offers over 130 channels of music and news,
sports, talk and entertainment programming. Subscribers to these
Canadian services are not included in our subscriber count.
In November 2010, SIRIUS Canada and XM Canada announced a
definitive agreement to combine in a
stock-for-stock
transaction. The transaction is subject to regulatory review and
approvals, including approval of the Canadian
Radio-television & Telecommunications Commission,
approval by XM Canada’s stockholders and other customary
conditions. The companies will continue to operate independently
until the transaction is complete.
Mexico.
In May 2010, our letter of intent with
ACIR DARS Mexico, S. de R.L. de C.V. to pursue a license to
offer satellite radio in Mexico was terminated.
6
Other
Services
Commercial Accounts.
Our music services are
also available for commercial establishments. Commercial
accounts are available through providers of in-store
entertainment solutions and directly from us. Certain commercial
subscribers are included in our subscriber count.
Satellite Television Service.
We offer music
channels as part of certain programming packages on the DISH
Network satellite television service. Subscribers to the DISH
Network satellite television service are not included in our
subscriber count.
Content Through Mobile Phone Carriers.
We
offer between 20 and 25 music and comedy channels to mobile
phone users through relationships with AT&T, Alltel, Sprint
and RIM. Subscribers to these services are not included in our
subscriber count.
Subscribers to the following services are not included in our
subscriber count, unless the applicable service is purchased by
the subscriber separately and not as part of a radio
subscription to our services:
Backseat TV.
We offer Backseat TV, a service
offering television content designed primarily for children in
the backseat of vehicles. Backseat TV is available as a
factory-installed option in select Chrysler, Dodge and Jeep
models, and at retail for aftermarket installation.
Travel Link.
We offer Travel Link, a suite of
data services that includes graphical weather, fuel prices,
sports schedules and scores, and movie listings.
Real-Time Traffic Services.
We also offer
services that provide graphic information as to road closings,
traffic flow and incident data to consumers with compatible
in-vehicle navigation systems.
Real-Time Weather Services.
We offer several
real-time weather services designed for improving situational
awareness in vehicle, marine
and/or
aviation use.
FCC
Conditions
In order to demonstrate to the FCC that the Merger was in the
public interest, we agreed to implement a number of voluntary
commitments. These commitments include certain voluntary
assurances regarding our programming and programming packages;
the creation of public interest channels; and equipment
manufacturing, all of which we have complied with. Below we
describe other voluntary commitments that we are in the process
of complying with or that impose restrictions:
Qualified
Entity Channels
We agreed to enter into long-term leases or other agreements to
provide rights to four percent of the full-time audio channels
on our platforms to a Qualified Entity or Entities defined as an
entity or entities that: (1) are not directly or indirectly
owned, in whole or in part, by us or one of our affiliates;
(2) do not share any common officers, directors or
employees with us or any affiliate of us; and (3) do not
have any existing relationships with us for the supply of
programming during the two years prior to October 19, 2010.
We intend to balance the following considerations in selecting
lessees:
| • | provide a new source of programming and is a new entrant in the mass media industry, | |
| • | offer a diverse viewpoint or diverse entertainment content, | |
| • | provide original content or programming of a type not otherwise available to our subscribers, | |
| • | improve service to historically underserved audiences, and | |
| • | in our reasonable judgment, be able to meet its obligations and be able to deliver its proposed mix or type of programming for the duration of the lease term. |
We will notify the FCC of our tentative selections before
signing agreements for the leased channels and will enter into
lease agreements by April 17, 2011. As digital compression
technology enables us to broadcast additional full-time audio
channels, we will ensure that four percent of the full-time
audio channels on our platforms are
7
reserved for Qualified Entities. The Qualified Entities will not
be required to make any lease payments for such channels. We may
not alter, censor, or otherwise exercise any control over the
leased programming but we may remove programming that violates
the law.
Subscription
Rates
We have agreed not to raise the retail price for, or reduce the
number of channels in, our basic $12.95 per month subscription
package, our a la carte programming packages or certain other
programming packages until July 28, 2011. Under the
FCC’s order approving the Merger, we may pass through cost
increases incurred since the filing of our FCC merger
application as a result of statutorily or contractually required
payments to the music, recording and publishing industries for
the performance of musical works and sound recordings or for
device recording fees. Effective July 29, 2009, we began
adding a U.S. Music Royalty Fee to subscriber invoices.
Until December 2010, the U.S. Music Royalty Fee was $1.98 a
month on our base $12.95 subscriptions and $0.97 for base plans
that are eligible for a second radio discount; as of
December 6, 2010, we reduced the fee to $1.40 a month on
our base $12.95 subscriptions. Subscription packages, such as
our “News, Sports and Talk” package, that contain
little music are not subject to the U.S. Music Royalty Fee.
Amounts collected on account of the U.S. Music Royalty Fee
are being used to partially offset payments to the music
industry. A summary of the costs passed through pursuant to
U.S. Music Royalty Fee is available on our websites.
Competition
We face significant competition for both listeners and
advertisers. In addition to pre-recorded entertainment purchased
or playing in cars, homes and using portable players, we compete
with the following providers of radio or other audio services:
Traditional
AM/FM Radio
Our services compete with traditional AM/FM radio. Many
traditional radio companies are substantial entities owning
large numbers of radio stations or other media properties. The
radio broadcasting industry is highly competitive.
Traditional AM/FM radio has had a well-established demand for
its services and offers free broadcasts paid for by commercial
advertising rather than by a subscription fee like satellite
radio. Many radio stations offer information programming of a
local nature, such as local news and sports. Traditional free
AM/FM radio reduces the likelihood that customers would be
willing to pay for our subscription services and, by offering
free broadcasts, it imposes limits on what we can charge for our
services. Some AM/FM radio stations have reduced the number of
commercials per hour, expanded the range of music played on the
air and experimented with new formats in order to lure customers
away from satellite radio.
HD
Radio
Many radio stations now broadcast digital signals, which have
clarity similar to our signals. These stations do not charge a
subscription fee for their digital signals but do generally
carry advertising. A group of major broadcast radio networks
have created a coalition to jointly market digital radio
services. According to this coalition, over 2,000 radio stations
are currently broadcasting primary signals with HD Radio
technology and broadcasting more than 1,100 new FM multicast
channels (HD2/HD3), and manufacturers are marketing and
distributing digital receivers. To the extent that traditional
AM/FM radio stations adopt digital transmission technology and
listeners adopt digital receivers, any competitive advantage
that we enjoy over traditional radio because of our clearer
digital signal would be lessened. Traditional AM/FM broadcasters
are also aggressively pursuing Internet radio and wireless
Internet-based distribution arrangements. Several automakers
install HD Radio equipment as factory standard equipment in
select models, including Ford, Volkswagen, BMW, Mercedes-Benz,
Kia and Hyundai.
Internet
Radio and Internet-Enabled Smartphones
Internet radio broadcasts often have no geographic limitations
and can provide listeners with radio programming from across the
country and around the world. Major media companies and
online-only providers, including
8
Clear Channel, CBS and Pandora, make high fidelity digital
streams available through the Internet for free or, in some
cases, for a fraction of the cost of a satellite radio
subscription. These services compete directly with our services,
at home, in the automobile, and wherever audio entertainment is
consumed.
Mobile Internet-enabled smartphones, most of which have the
capability of interfacing with vehicles, have become popular.
These smartphones can typically play recorded or cached content
and access live Internet radio via dedicated applications or
browsers. These applications are often free to the user and
offer music and talk content as long as the user is subscribed
to a sufficiently large mobile data plan. Leading audio
smartphone applications include Pandora, last.FM, Slacker,
iheartradio and Stitcher. Certain of these applications also
include advanced functionality, such as personalization and song
skipping, and allow the user to access large libraries of
content and podcasts on demand.
Third generation mobile networks have enabled a steady increase
in the audio quality and reliability of mobile Internet radio
streaming, and this is expected to further increase as fourth
generation networks become the standard. We expect that
improvements from higher bandwidths, wider programming
selection, and advancements in functionality are likely to
continue making Internet radio and smartphone applications an
increasingly significant competitor, particularly in vehicles.
Advanced
In-Dash Infotainment Systems
A number of automakers have deployed or are planning to deploy
integrated multimedia systems in dash boards, such as
Ford’s SYNC, Toyota’s Entune, and BMW/Mini’s
Connected. These systems can combine control of audio
entertainment from a variety of sources, including AM/FM/HD
radio broadcasts, satellite radio, Internet radio, and stored
audio, with navigation and other advanced applications such as
restaurant bookings, movie show times, and financial
information, among others. Live Internet radio and other data is
typically pulled into the car via a Bluetooth link to an
Internet-enabled smartphone, and the entire system may be
controlled by touchscreen or voice recognition. These systems
enhance the attractiveness of our Internet-based competition by
making such applications more prominent, easier to access, and
safer to use in the car.
Portable
Audio Devices
The Apple
iPod
®
is a portable digital music player that allows users to download
and purchase music through Apple’s
iTunes
®
Music Store, as well as convert music on compact disc to digital
files.
iPods
®
are compatible with certain car stereos and various home speaker
systems, and certain automakers have entered into arrangements
with manufacturers of portable media players that are expected
to enhance this compatibility. Availability of music in the
public MP3 audio standard has been growing in recent years with
sound files available on the websites of online music retailers,
artists and record labels and through numerous file sharing
software programs. In addition, many emerging artists give away
their music for free via blogs and other websites in order to
increase live event ticket sales, which are often more
profitable to emerging artists than music sales. These MP3 files
can be played instantly, burned to a compact disc or stored in
various portable players available to consumers. Internet-based
audio formats are becoming increasingly competitive as quality
improves and costs are reduced. In addition, many current
generation portable audio devices, such as the iPod touch, also
contain WiFi connections enabling direct Internet connections
for purchasing additional music or streaming music that is not
stored on the local device.
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 generally do not pay an
additional monthly charge for the audio service.
Other
Digital Media Services
The audio entertainment marketplace continues to evolve rapidly,
with a steady emergence of new media platforms and portable
devices that compete with our services now or that could compete
with those services in the future.
9
Traffic
News Services
A number of providers also compete with our traffic services.
Clear Channel and Tele Atlas deliver nationwide traffic
information for the top 50 markets to in-vehicle navigation
systems using RDS/TMC, the radio broadcast standard technology
for delivering traffic and travel information to drivers. The
in-dash navigation market in which we primarily compete is also
being threatened by increasingly capable smartphones that
provide advanced navigation functionality, including live
traffic. For instance, Android, Palm, Blackberry, and Apple
iOS-based smartphones all include GPS mapping and navigation
functionality, often with
turn-by-turn
navigation.
Government
Regulation
As operators of a privately owned satellite system, we are
regulated by the FCC under the Communications Act of 1934,
principally with respect to:
| • | the licensing of our satellite systems; | |
| • | 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 licenses must
be approved by the FCC. The FCC’s order approving the
Merger requires us to comply with certain voluntary commitments
we made as part of the FCC merger proceeding. We believe we
comply with those commitments.
In 1997, XM and SIRIUS was each a winning bidder for an FCC
license to operate a satellite digital audio radio service and
provide other ancillary services. Our FCC licenses for our
SIRIUS satellites expire in 2017. Our FCC licenses for our XM
satellites expire in 2013, 2014 and 2018. We anticipate that,
absent significant misconduct on our part, the FCC will renew
our licenses to permit operation of our satellites for their
useful lives, and grant a license for any replacement satellites.
We have entered into an agreement with Space Systems/Loral to
design and construct a sixth satellite for the SIRIUS system. In
September 2008, the FCC granted our application to amend our
license to add this satellite to the existing SIRIUS satellite
constellation. We applied to modify that authorization in April
2010 and that application remains pending.
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. In 2010, the FCC established rules governing
terrestrial repeaters which are also intended to protect
adjacent wireless services from interference. Once fully
implemented, these rules will allow us to obtain blanket
licenses to authorize operation of our repeater network for
repeaters meeting certain technical specifications.
Site-by-site
licensing is available for all other repeaters.
We design, establish specifications for, source or specify parts
and components for, manage various aspects of the logistics and
production of, and, in most cases, obtain FCC certifications
for, satellite radios, including satellite radios that include
FM modulators. We believe our radios that are in production
comply with all applicable FCC rules.
We are required to obtain export licenses from the United States
government to deliver components of our satellite radio systems
and related technical data. In addition, the delivery of
satellites and the supply of related ground control equipment,
technical data, and satellite communication/control services to
destinations outside the United States and to foreign persons is
subject to strict export control and prior approval requirements
from the United States government (including prohibitions on the
sharing of certain satellite-related goods and services with
China).
Changes in law or regulations relating to communications policy
or to matters affecting our services could adversely affect our
ability to retain our FCC licenses or the manner in which we
operate.
10
Copyrights
to 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 (that is, the music and
lyrics) and holders of copyrights in sound recordings (that is,
the actual recording of a work).
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 (“ASCAP”), Broadcast Music, Inc.
(“BMI”), and SESAC, Inc. (“SESAC”). These
organizations negotiate fees with copyright users, collect
royalties and distribute them to the rights holders. We have
arrangements with all of these organizations.
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. Under the Digital Performance Right in Sound
Recordings Act of 1995 and the Digital Millennium Copyright Act
of 1998, we may negotiate royalty arrangements with the sound
recording copyright owners, or if negotiation is unsuccessful,
the royalty rate is established by the Copyright Royalty Board
(the “CRB”) of the Library of Congress. In January
2008, the CRB issued a decision regarding the royalty rate
payable by us under the statutory license covering the
performance of sound recordings over our satellite radio
services for the six-year period starting January 1, 2007
and ending December 31, 2012. Under the terms of the
CRB’s decision, we paid, or will pay, a royalty of 6.0%,
6.0%, 6.5%, 7.0%, 7.5% and 8.0% of gross revenues, subject to
certain exclusions, for 2007, 2008, 2009, 2010, 2011 and 2012,
respectively. Our next rate setting proceeding before the CRB
commenced in January 2011 with a request from the CRB for a
notice of intention to participate in that rate setting
proceeding.
Trademarks
We have registered, and intend to maintain, the trademark
“SIRIUS”, “XM” and the “Dog
design” logo with the United States Patent and Trademark
Office (the “PTO”) in connection with the services we
offer. We are not aware of any material claims of infringement
or other challenges to our right to use the “SIRIUS”
or “XM” trademark or the “Dog design” logo
in the United States. We also have registered, and intend to
maintain, trademarks for the names of certain of our channels.
We have also registered the trademarks “SIRIUS”,
“XM”, and the “Dog design” logo in Canada.
We have granted a license to use certain of our trademarks in
Canada to each of SIRIUS Canada and XM Canada.
Personnel
As of December 31, 2010, we had 1,479 full-time
employees. In addition, we rely upon a number of part-time
employees, consultants, other advisors and outsourced
relationships. None of our employees are represented by a labor
union, and we believe that our employee relations are good.
Corporate
Information
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 www.siriusxm.com. Our annual, quarterly
and current reports, and any amendments to those reports, filed
or furnished pursuant to Section 13(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 or
furnished such material with the SEC. Siriusxm.com (including
any other reference to such address in this Annual Report) is an
inactive textual reference only, meaning that the information
contained on or accessible from the website is not part of this
Annual Report on
Form 10-K
and is not incorporated in this report by reference.
11
Executive
Officers of the Registrant
Certain information regarding our executive officers is provided
below:
| Name | Age | Position | ||||
|
Mel Karmazin
|
67 | Chief Executive Officer | ||||
|
Scott A. Greenstein
|
51 | President and Chief Content Officer | ||||
|
James E. Meyer
|
56 | President, Operations and Sales | ||||
|
Dara F. Altman
|
52 | Executive Vice President and Chief Administrative Officer | ||||
|
Patrick L. Donnelly
|
49 | Executive Vice President, General Counsel and Secretary | ||||
|
David J. Frear
|
54 | 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. Mr. Karmazin
served as Chairman, President and Chief Executive Officer of
Infinity Broadcasting Corporation from December 1998 until the
merger of Infinity with Viacom in February 2001. 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.
Scott A. Greenstein
has served as our President and Chief
Content Officer 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.
James E. Meyer
has served as our President, Operations
and Sales, since May 2004. Prior to May 2004, Mr. Meyer was
President of Aegis Ventures Incorporated, a consulting firm that
provides general management services. From December 2001 until
2002, Mr. Meyer served as special advisor to the Chairman
of Thomson S.A., a leading consumer electronics company. From
January 1997 until December 2001, Mr. Meyer served as the
Senior Executive Vice President for Thomson as well as the Chief
Operating Officer for Thomson Consumer Electronics. From 1992
until 1996, Mr. Meyer served as Thomson’s Senior Vice
President of Product Management. Mr. Meyer is a director of
ROVI Corporation.
Dara F. Altman
has served as our Executive Vice President
and Chief Administrative Officer since September 2008. From
January 2006 until September 2008, Ms. Altman served as
Executive Vice President, Business and Legal Affairs, of XM.
Ms. Altman was Executive Vice President of Business Affairs
for Discovery Communications from 1997 to 2005. From 1993 to
1997, Ms. Altman served as Senior Vice President and
General Counsel of Reiss Media Enterprises, which owned Request
TV, a national
pay-per-view
service. Before Request TV, Ms. Altman served as counsel
for Home Box Office. Ms. Altman started her career as an
attorney at the law firm of Willkie Farr & Gallagher
LLP.
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 attorney at the law
firm of Simpson Thacher & Bartlett LLP.
12
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.
| ITEM 1A. | RISK FACTORS |
In addition to the other information in this Annual Report on
Form 10-K,
including the information under the caption
“Competition,” the following risk factors should be
considered carefully in evaluating us and our business. This
Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
federal securities laws. Actual results and the timing of events
could differ materially from those projected in forward-looking
statements due to a number of factors, including those set forth
below and elsewhere in this Annual Report on
Form 10-K.
See “Special Note Regarding Forward-Looking
Statements.”
We
face substantial competition and that competition is likely to
increase over time.
We face substantial competition in the audio entertainment
business. Our ability to retain and attract subscribers depends
on our success in creating and providing popular or unique
music, entertainment, news and sports programming. Our
subscribers can obtain certain similar content for free through
terrestrial radio stations. In addition, audio entertainment
delivered via the Internet, including through mobile devices, is
becoming increasingly competitive with our services. A number of
automakers have introduced, or will shortly introduce,
factory-installed radios capable of accessing Internet-delivered
audio entertainment. A summary of various services that compete
with us is contained in the section entitled
“Business — Competition.”
Competition could result in lower subscription, advertising or
other revenue or increase our marketing, promotion or other
expenses and, consequently, lower our earnings and free cash
flow. We cannot assure you we will be able to compete
successfully with our existing or future competitors or that
competition will not have a material adverse effect on our
business, financial condition or results of operations.
Our
business depends in large part upon automakers and demand for
our service is difficult to predict.
Most of our new subscription growth has come from purchasers and
lessees of new and used automobiles; as a result, the sale and
lease of vehicles with satellite radios is an important source
of subscribers for our satellite radio service. We have
agreements with every major automaker to include satellite
radios in new vehicles, although these agreements do not require
automakers to install specific or minimum quantities of radios
in any given period.
Automotive production and sales are dependent on many factors,
including the availability of consumer credit, general economic
conditions, consumer confidence and fuel costs. To the extent
vehicle sales by automakers decline, or the penetration of
factory-installed satellite radios in those vehicles is reduced,
subscriber growth for our satellite radio services will be
adversely impacted if there is no offsetting growth in vehicle
sales or increased penetration by other automakers.
We cannot estimate with any certainty whether demand for our
services will be sufficient for us to continue to increase the
number of subscribers to our services.
General
economic conditions can affect our business.
The purchase of a satellite radio subscription is discretionary,
and our business and our financial condition can be affected by
adverse general economic conditions. For example, the dramatic
slowdown in auto sales negatively impacted our subscriber growth
in 2008 and 2009.
13
Failure
of our satellites would significantly damage our business and
potential satellite losses may not be covered by
insurance.
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 the satellites consume; and | |
| • | damage or destruction by electrostatic storms or collisions with other objects in space. |
Three of the SIRIUS in-orbit satellites have experienced circuit
failures on their solar arrays. The circuit failures these
satellites have experienced do not affect current operations.
Additional circuit failures on the first three SIRIUS satellites
could reduce the estimated useful lives of those satellites.
We have entered into an agreement with Space Systems/Loral to
design and construct a new satellite for the SIRIUS system that
is expected to be launched in the fourth quarter of 2011.
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.
Our XM-1 and XM-2 satellites have experienced progressive
degradation problems common to early Boeing 702 class satellites
and now serve as in-orbit spares. We estimate that the XM-3 and
XM-4 satellites will meet their
15-year
predicted useful lives, and that the XM-1 and XM-2
satellites’ useful lives will end in 2013. Our XM-5
satellite serves as an in-orbit spare for both of our services.
In the event of a failure of XM-3, XM-4 or any of the SIRIUS
satellites, service would be maintained through XM-5.
In addition, our networks of terrestrial repeaters each
communicates with one third-party satellite. If the satellites
communicating with the applicable repeater network fail
unexpectedly, the services would be disrupted for several hours
or longer.
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 these satellites. These failures and
anomalies are expected to continue in the ordinary course, and
we cannot 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.
We maintain in-orbit insurance policies covering only our XM-4,
XM-5 and FM-5 satellites. In addition, we may not renew this
in-orbit insurance when the policies expire.
Any insurance proceeds will not fully cover our losses in the
event of a satellite failure or significant degradation. For
example, the policies covering the insured satellites do not
cover the full cost of constructing, launching and insuring new
satellites, nor will they cover, and we do not have protection
against, business interruption, loss of business or similar
losses. Our insurance contains customary exclusions, material
change and other conditions that could limit recovery under
those policies. Further, any insurance proceeds may not be
received on a timely basis in order to launch a spare satellite
or construct and launch a replacement satellite or take other
remedial measures. In addition, the policies are subject to
limitations involving uninsured losses, large satellite
performance deductibles and policy limits.
Higher
than expected costs of attracting new subscribers or higher
subscriber turnover (i.e., churn) could each adversely affect
our financial performance and operating results.
We are spending substantial funds on advertising and marketing
and in transactions with automakers, retailers and others to
obtain and attract subscribers. If the costs of attracting new
subscribers are greater than expected, our financial performance
and operating results could be adversely affected.
14
We are experiencing, and expect to continue to experience,
subscriber turnover (i.e., churn). If we are unable to retain
current subscribers, or the costs of retaining subscribers are
higher than expected, our financial performance and operating
results could be adversely affected. We cannot predict how
successful we will be at retaining customers who purchase or
lease vehicles that include a subscription to our satellite
radio service. During 2010, we converted approximately 46.2% of
the customers who received a promotional subscription as part of
the purchase or lease of a new vehicle to a self-paying
subscription. Over the same period, we have experienced churn of
our self-pay subscribers of approximately 1.9% per month.
We cannot predict the amount of churn we will experience over
the longer term. Our inability to retain our existing self-pay
subscribers, customers who either purchase or lease vehicles
with our service beyond the promotional period, or customers who
purchase or lease a vehicle that includes a prepaid subscription
to our service could adversely affect our financial performance
and results of operations.
Our
ability to retain subscribers and maintain our average monthly
revenue per subscriber is uncertain.
During 2010, we added 1,418,206 net subscribers to our
satellite radio service. Our ability to retain our subscribers,
or increase the number of subscribers to our service, in any
given period is subject to many factors, including:
| • | the health of the economy; | |
| • | the production and sale of new vehicles in the United States; | |
| • | our ability to convince owners and lessees of new and used vehicles that include satellite radios to purchase subscriptions to our service; | |
| • | the effectiveness of our marketing programs; | |
| • | the entertainment value of our programming; and | |
| • | actions by our competitors, such as terrestrial radio and other audio entertainment providers. |
Average monthly revenue per subscriber, which we refer to as
ARPU, is one of the key metrics we use to evaluate our business
and the trends in our business. Over the past several years, we
have focused substantial attention and efforts on maintaining
and increasing ARPU. Our ability to maintain ARPU at present
levels is uncertain and depends upon various factors, including:
| • | the value consumers perceive in our service; | |
| • | our ability to add and retain compelling programming; | |
| • | the increasing competition we experience from terrestrial radio and other providers of audio entertainment; and | |
| • | pricing and other offers we may make to attract new subscribers and retain existing subscribers. |
Our business only recently began to generate free cash flow. If
we are unable to consistently generate sufficient revenues to be
profitable, the value of our common stock could decline, and
without sufficient cash flow we may not be able to make the
required payments on our indebtedness and could ultimately
default on our commitments.
Royalties
for music rights may increase.
We must maintain music programming royalty arrangements with,
and pay license fees to, BMI, ASCAP and SESAC. These
organizations negotiate with copyright users, collect royalties
and distribute them to songwriters and music publishers. We have
agreements with ASCAP and SESAC through December 2011. We do not
have a definitive agreement with BMI and continue to operate
under an interim agreement. There can be no assurance that the
royalties we pay to ASCAP, SESAC and BMI will not increase.
Under the Digital Performance Right in Sound Recordings Act of
1995 and the Digital Millennium Copyright Act of 1998, we pay
royalties to copyright owners of sound recordings. Those royalty
rates may be established through negotiation or, if negotiation
is unsuccessful, by the CRB. Owners of copyrights in sound
recordings have
15
created SoundExchange, a collective organization, to collect and
distribute royalties. SoundExchange is exempt by statute from US
antitrust laws and exercises significant market power in the
licensing of sound recordings. A rate setting proceeding
commenced in January 2011, and, if negotiations with
SoundExchange prove unsuccessful, new royalty rates will be
determined by the CRB, will be effective for the five-year
period beginning in 2013, and may be higher than current royalty
rates.
Failure
to comply with FCC requirements could damage our
business.
We hold FCC licenses and authorizations to operate commercial
satellite radio services in the United States, including
authorizations for satellites and terrestrial repeaters, and
related authorizations. The FCC generally grants licenses and
authorizations for a fixed term. Although we expect our licenses
and authorizations to be renewed in the ordinary course upon
their expiration, there can be no assurance that this will be
the case. Any assignment or transfer of control of any of our
FCC licenses or authorizations must be approved in advance by
the FCC.
The operation of our satellite radio systems is subject to
significant regulation by the FCC under authority granted
through the Communications Act and related federal law. We are
required, among other things, to operate only within specified
frequencies; to meet certain conditions regarding the
interoperability of our satellite radios with those of other
licensed satellite radio systems; to coordinate our satellite
radio services with radio systems operating in the same range of
frequencies in neighboring countries; and to coordinate our
communications links to our satellites with other systems that
operate in the same frequency band. Non-compliance by us with
these requirements or other conditions or with other applicable
FCC rules and regulations could result in fines, additional
license conditions, license revocation or other detrimental FCC
actions. There is no guarantee that Congress will not modify the
statutory framework governing our services, or that the FCC will
not modify its rules and regulations in a manner that would have
a material impact on our operations.
The terms of our licenses, the order of the FCC approving the
Merger, and the consent decrees we entered into with the FCC
require us to meet certain conditions. Non-compliance with these
conditions could result in fines, additional license conditions,
license revocation or other detrimental FCC actions.
The
unfavorable outcome of pending or future litigation could have a
material adverse effect.
We are parties to several legal proceedings arising out of
various aspects of our business, including class action lawsuits
alleging violations of federal antitrust laws and state consumer
protection statutes. We are defending all claims against us. The
outcome of these proceedings may not be favorable, and an
unfavorable outcome may have a material adverse effect on our
business or financial results.
Rapid
technological and industry changes could adversely impact our
services.
The audio entertainment industry is characterized by rapid
technological change, frequent new product innovations, changes
in customer requirements and expectations, and evolving
standards. If we are unable to keep pace with these changes, our
business may be unsuccessful. Products using new technologies,
or emerging industry standards, could make our technologies less
competitive in the marketplace.
Failure
of other third parties to perform could adversely affect our
business.
Our business depends, in part, on various other third parties,
including:
| • | manufacturers that build and distribute satellite radios; | |
| • | companies that manufacture and sell integrated circuits for satellite radios; | |
| • | programming providers and on-air talent; | |
| • | retailers that market and sell satellite radios and promote subscriptions to our services; and | |
| • | vendors that have designed or built, and vendors that support or operate, important elements of our systems, such as our satellites and customer service facilities. |
16
If one or more of these third parties do not perform in a
sufficient or timely manner, our business could be adversely
affected. In addition, a number of third parties on which we
depend have experienced, and may in the future experience,
financial difficulties or file for bankruptcy protection. Such
third parties may not be able to perform their obligations to us
in a timely manner, if at all, as a result of their financial
condition or may be relieved of their obligations to us as part
of seeking bankruptcy protection.
We design, establish specifications, source or specify parts and
components, and manage various aspects of the logistics and
production of radios. As a result of these activities, we may be
exposed to liabilities associated with the design, manufacture
and distribution of 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, as well as the costs of
returned product.
Interruption
or failure of our information technology and communications
systems could negatively impact our results and our
brand.
We operate a complex and growing business. We offer a wide
variety of subscription packages at different price points. Our
business is dependent on the operation and availability of our
information technology and communication systems and those of
third party service providers. Any degradation in the quality,
or any failure, of our systems could reduce our revenues, cause
us to lose customers and damage our brand. Although we have
implemented practices designed to maintain the availability of
our information technology systems and mitigate the harm of any
unplanned interruptions, we do not have complete redundancy for
all of our information technology systems, and our disaster
recovery planning cannot anticipate all eventualities. We
occasionally experience unplanned outages or technical
difficulties. We could also experience loss of data or
processing capabilities, which could cause us to lose customers
and could materially harm our reputation and our operating
results.
We are involved in continuing efforts to upgrade and maintain
our information technology systems. These maintenance and
upgrade activities are costly, and problems with the design or
implementation of system enhancements could harm our business
and our results of operations.
Our data centers and our information technology and
communications systems are vulnerable to damage or interruption
from natural disasters, malicious attacks, fire, power loss,
telecommunications failures, computer viruses or other attempts
to harm our systems. If hackers were able to circumvent our
security measures, we could lose proprietary information or
personal information or experience significant disruptions. If
our systems become unavailable or suffer a security breach, we
may be required to expend significant resources to address these
problems, including notification under various federal and state
data privacy regulations, and our reputation and operating
results could suffer.
We rely on internal systems and external systems maintained by
manufacturers, distributors and service providers to take,
fulfill and handle customer service requests and host certain
online activities. Any interruption or failure of our internal
or external systems could prevent us from servicing customers or
cause data to be unintentionally disclosed.
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. These changes in our plans or strategy may
include: the acquisition or termination 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, including acquisitions that
are not directly related to our satellite radio business.
17
Our
substantial indebtedness could adversely affect our operations
and could limit our ability to react to changes in the economy
or our industry.
As of December 31, 2010, we had an aggregate principal
amount of approximately $3.3 billion of indebtedness. Our
substantial indebtedness has important consequences. For
example, it:
| • | increases our vulnerability to general adverse economic and industry conditions; | |
| • | requires us to dedicate a substantial portion of our cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund capital expenditures, marketing and other general corporate activities; | |
| • | limits our ability to borrow additional funds or make capital expenditures; | |
| • | limits our flexibility in planning for, or reacting to, changes in our business and the audio entertainment industry; and | |
| • | may place us at a competitive disadvantage compared to other competitors. |
The instruments governing our indebtedness contain covenants
that, among other things, place certain limitations on our
ability to incur more debt, pay dividends, make distributions,
make investments, repurchase stock, create liens, enter into
transactions with affiliates, enter into sale lease-back
transactions, merge or consolidate, and transfer or sell assets.
Failure to comply with the covenants associated with this debt
could result in an event of default, which, if not cured or
waived, could cause us to seek the protection of the bankruptcy
laws, discontinue operations or seek a purchaser for our
business or assets.
Changes
in consumer protection laws and their enforcement could damage
our business.
We engage in extensive marketing efforts to attract and retain
subscribers to our services. We employ a wide variety of
communications tools as part of our marketing campaigns,
including telemarketing efforts; print, television, radio and
online advertising; and email solicitations.
Consumer protection laws, rules and regulations are extensive
and have developed rapidly, particularly at the State level.
Consumer protection laws in certain jurisdictions cover nearly
all aspects of our marketing efforts, including the content of
our advertising, the terms of consumer offers and the manner in
which we communicate with subscribers and prospective
subscribers. We are engaged in considerable efforts to ensure
that all our activities comply with federal and state laws,
rules and regulations relating to consumer protection, including
laws relating to privacy. Modifications to federal and state
laws, rules and regulations concerning consumer protection,
including decisions by federal and state courts and agencies
interpreting these laws, could have an adverse impact on our
ability to attract and retain subscribers to our services. While
we monitor the changes in and interpretations of these laws in
consumer-related settlements and decisions, and while we believe
that we are in material compliance with applicable laws, there
can be no assurances that new laws or regulations will not be
enacted or adopted, preexisting laws or regulations will not be
more strictly enforced or that our varied operations will
continue to comply with all applicable laws, which might
adversely affect our operations.
A Multistate Working Group of 28 State Attorneys General, led by
the Attorney General of the State of Ohio, is investigating
certain of our consumer practices. The investigation focuses on
practices relating to the cancellation of subscriptions;
automatic renewal of subscriptions; charging, billing,
collecting, and refunding or crediting of payments from
consumers; and soliciting customers. A separate investigation
into our consumer practices is being conducted by the Attorney
General of the State of Florida. In addition, the Attorney
General of the State of Missouri has commenced an action against
us regarding our telemarketing practices to residents of the
State of Missouri.
Our
broadcast studios, terrestrial repeater networks, satellite
uplink facilities 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 broadcast studios,
terrestrial repeater networks or satellite uplink facilities,
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
18
networks. We do have redundant facilities that can be used to
assume immediately many of the functions of the broadcast
studios and satellite uplink facilities in the event of a
catastrophic event.
Any damage to the satellites that transmit to our terrestrial
repeater networks would likely result in degradation of the
affected service for some subscribers and could result in
complete loss of service in certain or all areas. Damage to our
satellite uplink facilities could result in a complete loss of
either of our services until we could transfer operations to
suitable
back-up
facilities.
Electromagnetic
interference from others could damage our
business.
Our satellite radio service may be subject to interference
caused by other users of radio frequencies, such as RF lighting,
ultra-wideband technology and Wireless Communications Service
(“WCS”) users. The FCC has approved modifications to
the rules governing the operations of WCS devices in the
spectrum adjacent to satellite radio, including rule changes
that facilitate mobile broadband services in the WCS
frequencies. We have opposed certain of the changes out of a
concern for their impact on the reception of satellite radio
service; and have filed a petition with the FCC asking the
Commission to reconsider certain of the changes. We cannot
predict the outcome of our petition for reconsideration. The
ultimate impact of certain of these rules changes on satellite
radio reception is impossible to predict and dependent on
numerous factors outside of our control, such as the design and
implementation of WCS systems and devices, the applications
deployed through WCS devices, and ultimately the number of WCS
devices ultimately adopted by consumers.
Our
business may be impaired by third-party intellectual property
rights.
Development of our systems has depended upon the intellectual
property that we have developed, as well as intellectual
property licensed from third parties. If the intellectual
property that we have developed or use is not adequately
protected, others will be permitted to and may duplicate
portions of our satellite radio systems or services without
liability. In addition, others may challenge, invalidate, render
unenforceable or circumvent our intellectual property rights,
patents or existing sublicenses or we may face significant legal
costs in connection with defending and enforcing those
intellectual property rights. Some of the know-how and
technology we have developed, and plan to develop, is not now,
nor will it be, covered by U.S. patents or trade secret
protections. Trade secret protection and contractual agreements
may not provide adequate protection if there is any unauthorized
use or disclosure. The loss of necessary technologies could
require us to obtain substitute technology of lower quality
performance standards, at greater cost or on a delayed basis,
which could harm us.
Other parties may have patents or pending patent applications,
which will later mature into patents or inventions that may
block our ability to operate our system or license technologies.
We may have to resort to litigation to enforce our rights under
license agreements or to determine the scope and validity of
other parties’ proprietary rights in the subject matter of
those licenses. This may be expensive. Also, we may not succeed
in any such litigation.
Third parties may assert claims or bring suit against us for
patent, trademark or copyright infringement, or for other
infringement or misappropriation of intellectual property
rights. Any such litigation could result in substantial cost,
and diversion of effort and adverse findings in any proceeding
could subject us to significant liabilities to third parties;
require us to seek licenses from third parties; block our
ability to operate our systems or license our technology; or
otherwise adversely affect our ability to successfully develop
and market our satellite radio systems.
Liberty
Media Corporation has significant influence over our business
and affairs and its interests may differ from
ours.
Liberty Media Corporation holds preferred stock that is
convertible into 2,586,976,000 shares of common stock.
Pursuant to the terms of the preferred stock held by Liberty
Media, we cannot take certain actions, such as certain issuances
of equity or debt securities, without the consent of Liberty
Media. Additionally, Liberty Media has the right to designate a
corresponding percentage of our board of directors. As a result,
Liberty Media has significant influence over our business and
affairs. The interests of Liberty Media may differ from our
interests. The extent of Liberty Media’s stock ownership in
us also may have the effect of discouraging offers to acquire
control of us.
19
Our
net operating loss carryforwards could be substantially limited
if we experience an ownership change as defined in the Internal
Revenue Code.
We have generated a federal net operating loss carryforward of
approximately $8.1 billion through the year ended
December 31, 2010, and we may generate net operating loss
carryforwards in future years.
Section 382 of the Internal Revenue Code of 1986, as
amended (the “Code”), contains rules that limit the
ability of a company that undergoes an ownership change, which
is generally any change in ownership of more than 50% of its
stock over a three-year period, to utilize its net operating
loss carryforwards and certain built-in losses recognized in
years after the ownership change. These rules generally operate
by focusing on ownership changes among stockholders owning
directly or indirectly 5% or more of the stock of a company and
any change in ownership arising from a new issuance of stock by
the company.
If we undergo an ownership change for purposes of
Section 382 as a result of future transactions involving
our common stock, including purchases or sales of stock between
5% stockholders, our ability to use our net operating loss
carryforwards and to recognize certain built-in losses would be
subject to the limitations of Section 382. Depending on the
resulting limitation, a significant portion of our net operating
loss carryforwards could expire before we would be able to use
them. Our inability to utilize our net operating loss
carryforwards could have a negative impact on our long-term
financial position and results of operations. We have adopted a
shareholder rights plan designed to preserve shareholder value
and the value of certain tax assets primarily associated with
net operating loss carryforwards and built-in losses under
Section 382 of the Code.
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
| ITEM 2. | PROPERTIES |
Below is a list of the principal properties that we own or lease:
| Location | Purpose | Own/Lease | ||
|
New York, NY
|
Corporate headquarters and studio/production facilities | Lease | ||
|
New York, NY
|
Office facilities | Lease | ||
|
Washington, DC
|
Office and studio/production facilities | Own | ||
|
Washington, DC
|
Office facilities and data center | Own | ||
|
Lawrenceville, NJ
|
Office and technical/engineering facilities | Lease | ||
|
Deerfield Beach, FL
|
Office and technical/engineering facilities | Lease | ||
|
Farmington Hills, MI
|
Office and technical/engineering facilities | Lease | ||
|
Nashville, TN
|
Studio/production facilities | Lease | ||
|
Vernon, NJ
|
Technical/engineering facilities | Own | ||
|
Ellenwood, GA
|
Technical/engineering facilities | Lease |
We also own or lease other small facilities that we use as
offices for our advertising sales personnel, studios and
warehouse and maintenance space. These facilities are not
material to our business or operations. We also lease properties
in Panama and Ecuador that we use as earth stations to command
and control satellites.
In addition, we lease space at over 700 locations for use in
connection with the terrestrial repeater networks that support
our satellite radio services. In general, these leases are for
space on building rooftops and communications towers. None of
these individual leases is material to our business or
operations.
| ITEM 3. | LEGAL PROCEEDINGS |
State Consumer Investigations.
A Multistate
Working Group, led by the Attorney General of the State of Ohio
and joined by the Attorneys General of 27 other states, has
commenced a multi-jurisdictional investigation
20
into certain of our consumer practices. The investigation
focuses on practices relating to the cancellation of
subscriptions; automatic renewal of subscriptions; charging,
billing, collecting, and refunding or crediting of payments from
consumers; and soliciting customers.
A separate investigation into our consumer practices is being
conducted by the Attorney General of the State of Florida. In
addition, in September 2010, the Attorney General of the State
of Missouri commenced an action against us in Missouri Circuit
Court, Twenty-Second Judicial Circuit, St. Louis, Missouri,
alleging violations of the Missouri Telemarketing No-Call List
Act. The suit seeks a permanent injunction prohibiting us from
making, or causing to be made, telephone solicitations to our
subscribers in the State of Missouri who are on Missouri’s
no-call list, statutory penalties and reimbursement of costs. We
believe our telemarketing activities to our subscribers in
Missouri fully comply with applicable law.
We are cooperating with these investigations and believe our
consumer practices comply with all applicable federal and state
laws and regulations.
Carl Blessing et al. v. Sirius XM Radio Inc.
A
subscriber, Carl Blessing, filed a lawsuit against us in
December 2009 in the United States District Court for the
Southern District of New York. Mr. Blessing’s lawsuit
has been consolidated with substantially identical lawsuits
brought by other subscribers. Mr. Blessing and 23 other
plaintiffs purport to represent all subscribers who were subject
to: an increase in the price for additional-radio subscriptions
from $6.99 to $8.99; the imposition of the US Music Royalty Fee;
and the elimination of our free streaming internet service.
Based on these pricing changes, the suit raises four claims.
First, the suit claims the pricing changes show that the Merger
lessened competition or led to a monopoly in violation of the
Clayton Act. Second, it claims that, for the same reason, the
Merger led to monopolization in violation of the Sherman Act.
Third, it claims that our subscriber service agreement
misrepresents that the US Music Royalty Fee will be used
exclusively to defray increases in royalty costs incurred since
the filing of the merger application with the FCC (and as
permitted by the FCC order) in violation of the consumer
protection and unfair trade practice laws of 41 states and
the District of Columbia. A fourth claim — that the
alleged misrepresentation violates the implied duty of good
faith and fair dealing we owe our subscribers under New York
contract law — has been dismissed by the court. The
complaint seeks monetary damages as well as treble damages under
the Clayton Act. Discovery in this matter is substantially
complete and a trial has been scheduled for May 2011. We believe
that the plaintiffs’ claims are without merit and we are
vigorously defending ourselves in this litigation.
A stockholder, Mark Fialkov, also filed a shareholder derivative
suit in January 2010 in the Supreme Court of the State of New
York claiming that, by allowing the price increases that
prompted the Blessing litigation, our board of directors
breached its duty of loyalty to the corporation. The action
names as defendants Sirius XM and fifteen
individuals — all directors or former directors of
Sirius XM. This lawsuit has been stayed pending resolution of
the Blessing litigation.
Other Matters.
In the ordinary course of
business, we are a defendant in various lawsuits and arbitration
proceedings, including actions filed by subscribers, both on
behalf of themselves and on a class action basis; 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, financial condition or
results of operations.
| ITEM 4. | (REMOVED AND RESERVED) |
21
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the Nasdaq Global Select Market
under the symbol “SIRI.” The following table sets
forth the high and low sales price for our common stock, as
reported by Nasdaq, for the periods indicated below:
| High | Low | |||||||
|
Year ended December 31, 2009
|
||||||||
|
First Quarter
|
$ | 0.43 | $ | 0.05 | ||||
|
Second Quarter
|
0.63 | 0.30 | ||||||
|
Third Quarter
|
0.78 | 0.35 | ||||||
|
Fourth Quarter
|
0.69 | 0.51 | ||||||
|
Year ended December 31, 2010
|
||||||||
|
First Quarter
|
$ | 1.18 | $ | 0.61 | ||||
|
Second Quarter
|
1.25 | 0.84 | ||||||
|
Third Quarter
|
1.20 | 0.90 | ||||||
|
Fourth Quarter
|
1.69 | 1.18 | ||||||
On February 14, 2011, the closing sales price of our common
stock on the Nasdaq Global Select Market was $1.83 per share. On
February 14, 2011, there were approximately 11,457 record
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. Our ability to pay dividends on our common
stock is currently limited by the covenants under our debt
agreements. See Note 11 to our consolidated financial
statements included in this report.
22
COMPARISON
OF CUMULATIVE TOTAL RETURNS
Set forth below is a graph comparing the cumulative performance
of our common stock with the Standard & Poor’s
Composite-500 Stock Index, or the S&P 500, and the NASDAQ
Telecommunications Index from December 31, 2005 to
December 31, 2010. The graph assumes that $100 was invested
on December 31, 2005 in each of our common stock, the
S&P 500 and the NASDAQ Telecommunications Index. There were
no dividends declared during these periods.
Stockholder Return Performance Table
|
Nasdaq
|
|||||||||||||||
|
Telecommunications
|
|||||||||||||||
| Index | S&P 500 Index | Sirius XM Radio Inc. | |||||||||||||
|
December 31, 2005
|
$ | 100.00 | $ | 100.00 | $ | 100.00 | |||||||||
|
December 31, 2006
|
$ | 127.76 | $ | 113.62 | $ | 52.84 | |||||||||
|
December 31, 2007
|
$ | 139.48 | $ | 117.63 | $ | 45.22 | |||||||||
|
December 31, 2008
|
$ | 79.53 | $ | 72.36 | $ | 1.79 | |||||||||
|
December 31, 2009
|
$ | 117.89 | $ | 89.33 | $ | 8.96 | |||||||||
|
December 31, 2010
|
$ | 122.52 | $ | 100.75 | $ | 24.33 | |||||||||
23
Equity
Compensation Plan Information
|
Number of
|
||||||||||||
|
Securities
|
||||||||||||
|
Number of
|
Remaining Available
|
|||||||||||
|
Securities to be
|
for Future Issuance
|
|||||||||||
|
Issued Upon
|
Weighted-Average
|
Under Equity
|
||||||||||
|
Exercise of
|
Exercise Price
|
Compensation
|
||||||||||
|
Outstanding
|
of Outstanding
|
Plans (Excluding
|
||||||||||
|
Options, Warrants
|
Options, Warrants
|
Securities Reflected
|
||||||||||
|
and Rights
|
and Rights
|
in Column (a))
|
||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
| (Shares in thousands) | ||||||||||||
|
Equity compensation plans approved by security holders
|
444,291 | $ | 1.45 | 268,255 | ||||||||
|
Equity compensation plans not approved by security holders
|
— | — | — | |||||||||
|
Total
|
444,291 | $ | 1.45 | 268,255 | ||||||||
| 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, 2010, 2009 and 2008, and with respect to the
consolidated balance sheets at December 31, 2010 and 2009,
are derived from our audited consolidated financial statements
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, 2007 and 2006, and with respect to the
consolidated balance sheets at December 31, 2008, 2007 and
2006 are derived from our audited consolidated financial
statements, which are not included in this Annual Report on
Form 10-K.
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 on
Form 10-K
and “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” included in
Item 7 of this Annual Report on
Form 10-K.
| As of and for the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009(1) | 2008(1)(2) | 2007 | 2006 | ||||||||||||||||
| (In thousands, except per share data) | ||||||||||||||||||||
|
Statements of Operations Data:
|
||||||||||||||||||||
|
Total revenue
|
$ | 2,816,992 | $ | 2,472,638 | $ | 1,663,992 | $ | 922,066 | $ | 637,235 | ||||||||||
|
Net income (loss)
|
$ | 43,055 | $ | (538,226 | ) | $ | (5,316,910 | ) | $ | (565,252 | ) | $ | (1,104,867 | ) | ||||||
|
Net income (loss) per share — basic
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | $ | (0.39 | ) | $ | (0.79 | ) | ||||||
|
Net income (loss) per share — diluted
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | $ | (0.39 | ) | $ | (0.79 | ) | ||||||
|
Weighted average common shares outstanding — basic
|
3,693,259 | 3,585,864 | 2,169,489 | 1,462,967 | 1,402,619 | |||||||||||||||
|
Weighted average common shares outstanding — diluted
|
6,391,071 | 3,585,864 | 2,169,489 | 1,462,967 | 1,402,619 | |||||||||||||||
|
Balance Sheet Data:
|
||||||||||||||||||||
|
Cash and cash equivalents
|
$ | 586,691 | $ | 383,489 | $ | 380,446 | $ | 438,820 | $ | 393,421 | ||||||||||
|
Restricted investments
|
$ | 3,396 | $ | 3,400 | $ | 141,250 | $ | 53,000 | $ | 77,850 | ||||||||||
|
Total assets
|
$ | 7,383,086 | $ | 7,322,206 | $ | 7,527,075 | $ | 1,687,231 | $ | 1,650,147 | ||||||||||
|
Long-term debt, net of current portion
|
$ | 3,021,763 | $ | 3,063,281 | $ | 2,820,781 | $ | 1,271,699 | $ | 1,059,868 | ||||||||||
|
Stockholders’ equity (deficit)(3)
|
$ | 207,636 | $ | 95,522 | $ | 75,875 | $ | (792,737 | ) | $ | (389,071 | ) | ||||||||
| (1) | The 2009 and 2008 results and balances reflect the adoption of ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. | |
| (2) | The 2008 results and balances reflect the results and balances of XM Satellite Radio Holdings Inc. from the date of the Merger and a $4,766,190 goodwill impairment charge. | |
| (3) | No cash dividends were declared or paid in any of the periods presented. |
24
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Annual Report on
Form 10-K
contains forward-looking statements within the meaning of the
federal securities laws. Actual results and the timing of events
could differ materially from those projected in forward-looking
statements due to a number of factors, including those described
under “Item 1A — Risk Factors” and
elsewhere in this Annual Report. See “Special Note
Regarding Forward-Looking Statements.”
(All dollar amounts referenced in this Item 7 are in
thousands, unless otherwise stated)
Executive
Summary
We broadcast our music, sports, news, talk, entertainment,
traffic and weather channels in the United States on a
subscription fee basis through two proprietary satellite radio
systems. Subscribers can also receive certain of our music and
other channels over the Internet, including through an
application on Apple, Blackberry and Android-powered mobile
devices.
We have agreements with every major automaker (“OEMs”)
to offer satellite radios as factory- or dealer-installed
equipment in their vehicles. We also distribute our satellite
radios through retail locations nationwide and through our
websites. Satellite radio services are also offered to customers
of certain daily rental car companies.
As of December 31, 2010, we had 20,190,964 subscribers. Our
subscriber totals include subscribers under our regular pricing
plans; discounted pricing plans; subscribers that have prepaid,
including payments either made or due from automakers and
dealers for subscriptions included in the sale or lease price of
a vehicle; activated radios in daily rental fleet vehicles;
certain subscribers to our Internet services; and certain
subscribers to our weather, traffic, data and video services.
Our primary source of revenue is subscription fees, with most of
our customers subscribing on an annual, semi-annual, quarterly
or monthly basis. We offer discounts for prepaid and long-term
subscription plans, as well as discounts for multiple
subscriptions on each platform. We also derive revenue from
activation and other subscription-related fees, the sale of
advertising on select non-music channels, the direct sale of
satellite radios, components and accessories, and other
ancillary services, such as our Backseat TV, data and weather
services.
In certain cases, automakers include a subscription to our radio
services in the sale or lease price of new and certified
pre-owned vehicles. The length of these prepaid subscriptions
varies, but is typically three to twelve months. 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 satellite radios
installed in their vehicles.
We also have an interest in the satellite radio services offered
in Canada. Subscribers to the SIRIUS Canada service and the XM
Canada service are not included in our subscriber count.
25
Actual
Results of Operations
Set forth below are our results of operations for the year ended
December 31, 2010 compared with the year ended
December 31, 2009 and the year ended December 31, 2009
compared with the year ended December 31, 2008.
|
2010 vs 2009
|
2009 vs 2008
|
|||||||||||||||||||||||||||
| For the Years Ended December 31, | Change | Change | ||||||||||||||||||||||||||
| 2010 | 2009 | 2008 | Amount | % | Amount | % | ||||||||||||||||||||||
|
Revenue:
|
||||||||||||||||||||||||||||
|
Subscriber revenue, including effects of rebates
|
$ | 2,414,174 | $ | 2,287,503 | $ | 1,548,919 | $ | 126,671 | 6 | % | $ | 738,584 | 48 | % | ||||||||||||||
|
Advertising revenue, net of agency fees
|
64,517 | 51,754 | 47,190 | 12,763 | 25 | % | 4,564 | 10 | % | |||||||||||||||||||
|
Equipment revenue
|
71,355 | 50,352 | 56,001 | 21,003 | 42 | % | (5,649 | ) | (10 | )% | ||||||||||||||||||
|
Other revenue
|
266,946 | 83,029 | 11,882 | 183,917 | 222 | % | 71,147 | 599 | % | |||||||||||||||||||
|
Total revenue
|
2,816,992 | 2,472,638 | 1,663,992 | 344,354 | 14 | % | 808,646 | 49 | % | |||||||||||||||||||
|
Operating expenses:
|
||||||||||||||||||||||||||||
|
Revenue share and royalties
|
435,410 | 397,210 | 280,852 | 38,200 | 10 | % | 116,358 | 41 | % | |||||||||||||||||||
|
Programming and content
|
305,914 | 308,121 | 312,189 | (2,207 | ) | (1 | )% | (4,068 | ) | (1 | )% | |||||||||||||||||
|
Customer service and billing
|
241,680 | 234,456 | 165,036 | 7,224 | 3 | % | 69,420 | 42 | % | |||||||||||||||||||
|
Satellite and transmission
|
80,947 | 84,033 | 59,279 | (3,086 | ) | (4 | )% | 24,754 | 42 | % | ||||||||||||||||||
|
Cost of equipment
|
35,281 | 40,188 | 46,091 | (4,907 | ) | (12 | )% | (5,903 | ) | (13 | )% | |||||||||||||||||
|
Subscriber acquisition costs
|
413,041 | 340,506 | 371,343 | 72,535 | 21 | % | (30,837 | ) | (8 | )% | ||||||||||||||||||
|
Sales and marketing
|
215,454 | 228,956 | 231,937 | (13,502 | ) | (6 | )% | (2,981 | ) | (1 | )% | |||||||||||||||||
|
Engineering, design and development
|
45,390 | 41,031 | 40,496 | 4,359 | 11 | % | 535 | 1 | % | |||||||||||||||||||
|
General and administrative
|
240,970 | 227,554 | 213,142 | 13,416 | 6 | % | 14,412 | 7 | % | |||||||||||||||||||
|
Impairment of goodwill
|
— | — | 4,766,190 | — | 0 | % | (4,766,190 | ) | nm | |||||||||||||||||||
|
Depreciation and amortization
|
273,691 | 309,450 | 203,752 | (35,759 | ) | (12 | )% | 105,698 | 52 | % | ||||||||||||||||||
|
Restructuring, impairments and related costs
|
63,800 | 32,807 | 10,434 | 30,993 | 94 | % | 22,373 | 214 | % | |||||||||||||||||||
|
Total operating expenses
|
2,351,578 | 2,244,312 | 6,700,741 | 107,266 | 5 | % | (4,456,429 | ) | (67 | )% | ||||||||||||||||||
|
Income (loss) from operations
|
465,414 | 228,326 | (5,036,749 | ) | 237,088 | 104 | % | 5,265,075 | 105 | % | ||||||||||||||||||
|
Other income (expense):
|
||||||||||||||||||||||||||||
|
Interest expense, net of amounts capitalized
|
(295,643 | ) | (315,668 | ) | (148,455 | ) | 20,025 | 6 | % | (167,213 | ) | (113 | )% | |||||||||||||||
|
Loss on extinguishment of debt and credit facilities, net
|
(120,120 | ) | (267,646 | ) | (98,203 | ) | 147,526 | 55 | % | (169,443 | ) | (173 | )% | |||||||||||||||
|
Interest and investment (loss) income
|
(5,375 | ) | 5,576 | (21,428 | ) | (10,951 | ) | (196 | )% | 27,004 | 126 | % | ||||||||||||||||
|
Other income
|
3,399 | 3,355 | (9,599 | ) | 44 | 1 | % | 12,954 | 135 | % | ||||||||||||||||||
|
Total other expense
|
(417,739 | ) | (574,383 | ) | (277,685 | ) | 156,644 | 27 | % | (296,698 | ) | (107 | )% | |||||||||||||||
|
Income (loss) before income taxes
|
47,675 | (346,057 | ) | (5,314,434 | ) | 393,732 | 114 | % | 4,968,377 | 93 | % | |||||||||||||||||
|
Income tax expense
|
(4,620 | ) | (5,981 | ) | (2,476 | ) | 1,361 | 23 | % | (3,505 | ) | (142 | )% | |||||||||||||||
|
Net income (loss)
|
43,055 | (352,038 | ) | (5,316,910 | ) | 395,093 | 112 | % | 4,964,872 | 93 | % | |||||||||||||||||
|
Preferred stock beneficial conversion feature
|
— | (186,188 | ) | — | 186,188 | nm | (186,188 | ) | nm | |||||||||||||||||||
|
Net income (loss) attributable to common stockholders
|
$ | 43,055 | $ | (538,226 | ) | $ | (5,316,910 | ) | $ | 581,281 | 108 | % | $ | 4,778,684 | 90 | % | ||||||||||||
nm — not meaningful
26
Total
Revenue
Subscriber Revenue
includes subscription fees, activation
and other fees and the effects of rebates.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, subscriber revenue was $2,414,174 and $2,287,503, respectively, an increase of 6%, or $126,671. The increase was primarily attributable to a 5% increase in daily weighted average subscribers, an increase in the sale of “Best of” programming, decreases in discounts on multi-subscription and internet packages and a $32,159 decrease in the impact of purchase price accounting adjustments attributable to acquired deferred subscriber revenues, partially offset by an increase in the number of subscribers on promotional plans. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, subscriber revenue was $2,287,503 and $1,548,919, respectively, an increase of 48%, or $738,584. The Merger was responsible for approximately $670,870 of the increase and the remaining increase was primarily attributable to the sale of “Best of” programming, decreases in discounts on multi-subscription packages, increased sales of internet packages and higher average subscribers. |
Future subscriber revenue will be dependent, among other things,
upon the growth of our subscriber base, conversion and churn
rates, promotions, rebates offered to subscribers and
corresponding take-rates, plan mix, subscription prices and the
identification of additional revenue streams from subscribers.
The impact of purchase price accounting adjustments attributable
to acquired subscriber deferred revenues will continue to
decline in absolute amount and as a percentage of reported total
subscriber revenues through 2013 as balances are earned over the
acquired subscription period.
Advertising Revenue
includes the sale of advertising on
our non-music channels, net of agency fees. Agency fees are
based on a contractual percentage of the gross advertising
billing revenue.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, advertising revenue was $64,517 and $51,754, respectively, an increase of 25%, or $12,763. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, net advertising revenue was $51,754 and $47,190, respectively, an increase of 10%, or $4,564. The increase was due to the inclusion of XM revenue from the Merger, which was offset by a decrease in advertising revenue due to the economic environment in 2009. |
Our advertising revenue is subject to fluctuation based on the
effectiveness of our sales efforts and the national economic
environment. We expect advertising revenue to grow as our
subscribers increase and national advertising spend continues to
increase.
Equipment Revenue
includes revenue and royalties from the
sale of satellite radios, components and accessories.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, equipment revenue was $71,355 and $50,352, respectively, an increase of 42%, or $21,003. The increase was driven by royalties from increased OEM installations and aftermarket radios and accessories. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, equipment revenue was $50,352 and $56,001, respectively, a decrease of 10%, or $5,649. The decrease was primarily due to a decline in sales through our direct to consumer distribution channel and lower product royalties, partially offset by the inclusion of XM revenue for a full year. |
We expect equipment revenue to fluctuate based on OEM
installations for which we receive royalty payments for our
technology and, to a lesser extent, on the volume and mix of
equipment sales in our direct to consumer business.
27
Other Revenue
includes the U.S. Music Royalty Fee,
revenue from affiliates, content licensing fees and syndication
fees.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, other revenue was $266,946 and $83,029, respectively. The $183,917 increase was primarily due to the full year impact of the U.S. Music Royalty Fee introduced in the third quarter of 2009. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, other revenue was $83,029 and $11,882, respectively, an increase of 599%, or $71,147. The increase was primarily due to the introduction of the U.S. Music Royalty Fee in the third quarter of 2009 and the inclusion of XM revenue for a full year. |
Future other revenues will be dependent upon revenues from
affiliates, content and syndication fees, and the monthly fee
assessed for the U.S. Music Royalty Fee. The FCC’s
order approving the Merger allows us to pass through cost
increases incurred since the filing of our FCC merger
application as a result of statutorily or contractually required
payments to the music, recording and publishing industries for
the performance of musical works and sound recordings or for
device recording fees.
Operating
Expenses
Revenue Share and Royalties
include distribution and
content provider revenue share, advertising revenue share,
residuals and broadcast and web streaming royalties. Residuals
are monthly fees paid based upon the number of subscribers using
satellite radios purchased from retailers. Advertising revenue
share is recognized as a component of revenue share and
royalties in the period in which the advertising is broadcast.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, revenue share and royalties were $435,410 and $397,210, respectively, an increase of 10%, or $38,200. For the year ended December 31, 2010, revenue share and royalties decreased as a percentage of total revenue. The increase was primarily attributable to a 12% increase in our revenues subject to royalty and/or revenue sharing arrangements and an 8% increase in the statutory royalty rate for the performance of sound recordings, partially offset by a decrease in the revenue sharing rate with an automaker and a $18,187 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, revenue share and royalties were $397,210 and $280,852, respectively, an increase of 41%, or $116,358. The increase was primarily attributable to the inclusion of XM’s revenue share and royalty expense as a result of the Merger and an 8% increase in the statutory royalty rate for the performance of sound recordings. |
We expect our revenue sharing and royalty costs to increase as
our revenues grow, as we expand our distribution of satellite
radios through automakers, and as a result of statutory
increases in the royalty rate for the performance of sound
recordings. Under the terms of the Copyright Royalty
Board’s decision, we paid royalties of 6.0%, 6.5% and 7.0%
of gross revenues, subject to certain exclusions, for 2008, 2009
and 2010, respectively, and will pay royalties of 7.5% and 8.0%
for 2011 and 2012, respectively. Our next rate setting
proceeding before the Copyright Royalty Board commenced in
January 2011 and the results of that proceeding may have an
impact on our results of operations. The deferred credits on
executory contracts initially recognized in purchase price
accounting associated with the Merger are expected to provide
increasing benefits to revenue share and royalties through the
expiration of the acquired executory contracts, principally in
2012 and 2013.
Programming and Content
includes costs to acquire, create
and produce content and on-air talent costs. We have entered
into various agreements with third parties for music and
non-music programming that 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.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, programming and content expenses were $305,914 and $308,121, respectively, a decrease of 1%, or $2,207 and decreased as a percentage of total revenue. The decrease was primarily due to savings in content agreements and production costs, partially offset by increases in personnel costs, general operating expenses and a $14,503 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts. |
28
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, programming and content expenses were $308,121 and $312,189, respectively, a decrease of $4,068, or 1% and decreased as a percentage of total revenue. The increase from the inclusion of a full year of XM expense was offset by savings in content agreements, personnel and on-air talent costs. |
Our programming and content expenses are expected to decrease as
various agreements expire and are renewed or replaced on more
cost effective terms. The impact of purchase price accounting
adjustments associated with the Merger attributable to the
amortization of the deferred credit on acquired programming
executory contracts will continue to decline, in absolute amount
and as a percentage of reported programming and content costs,
through 2013.
Customer Service and Billing
includes costs associated
with the operation of third party customer service centers and
our subscriber management systems as well as bad debt expense.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, customer service and billing expenses were $241,680 and $234,456, respectively, an increase of 3%, or $7,224 but decreased as a percentage of total revenue. The increase was primarily due to higher call volume, partially offset by lower call center expenses as a result of moving calls to lower cost locations. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, customer service and billing expenses were $234,456 and $165,036, respectively, an increase of 42%, or $69,420 but decreased as a percentage of total revenue. The increase was primarily due to the inclusion of XM’s customer and billing expense as a result of the Merger and increased bad debt expense due to the economic environment during 2009. |
We expect our customer care and billing expenses to increase as
our subscriber base grows due to increased call center operating
costs, transaction fees and bad debt expense.
Satellite and Transmission
consists of costs associated
with the operation and maintenance of our satellites; satellite
telemetry, tracking and control systems; terrestrial repeater
networks; satellite uplink facilities; and broadcast studios.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, satellite and transmission expenses were $80,947 and $84,033, respectively, a decrease of 4%, or $3,086 but decreased as a percentage of total revenue. The decrease was primarily due to savings in repeater expenses, partially offset by increased satellite insurance costs related to our FM-5 satellite. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, satellite and transmission expenses were $84,033 and $59,279, respectively, an increase of 42%, or $24,754 but decreased as a percentage of total revenue. The increase was primarily due to the inclusion of XM’s satellite and transmission expense, partially offset by decreases due to the elimination of contracts, decommissioned repeater sites and a decrease in streaming costs. |
We expect satellite and transmission expenses to decline as a
result of decreasing operating costs associated with our
in-orbit satellite fleet and repeater network optimization.
Cost of Equipment
includes costs from the sale of
satellite radios, components and accessories and provisions for
inventory allowance attributable to products purchased for
resale in our direct to consumer distribution channels.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, cost of equipment was $35,281 and $40,188, respectively, a decrease of 12%, or $4,907 and decreased as a percentage of total revenue. The decrease was primarily due to lower inventory write-downs, lower sales through distributors and reduced costs to produce aftermarket radios. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, cost of equipment was $40,188 and $46,091, respectively, a decrease of 13%, or $5,903 and decreased as a percentage of total revenue. The decrease was primarily due to lower sales volume through our direct to consumer channel, lower inventory related charges and lower product and component sales, partially offset by the inclusion of XM’s cost of equipment expense as a result of the Merger. |
29
We expect cost of equipment to vary with changes in sales,
supply chain management, and inventory valuations.
Subscriber Acquisition Costs
include hardware subsidies
paid to radio manufacturers, distributors and automakers,
including subsidies paid to automakers who include a satellite
radio and subscription to our service in the sale or lease price
of a new or certified pre-owned vehicle; subsidies paid for chip
sets and certain other components used in manufacturing radios;
device royalties for certain radios; commissions paid to
retailers and automakers as incentives to purchase, install and
activate satellite radios; product warranty obligations; and
provisions for inventory allowances attributable to inventory
consumed in our OEM and retail distribution channels. The
majority of subscriber acquisition costs are incurred and
expensed in advance of, or concurrent with, acquiring a
subscriber. Subscriber acquisition costs do not include
advertising, loyalty payments to distributors and dealers of
satellite radios and revenue share payments to automakers and
retailers of satellite radios.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, subscriber acquisition costs were $413,041 and $340,506, respectively, an increase of 21%, or $72,535 and increased as a percentage of total revenue. The increase was primarily a result of the 25% increase in gross subscriber additions and higher subsidies related to the 49% increase in OEM installations, partially offset by lower OEM subsidies per vehicle and an $18,275 increase in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, subscriber acquisition costs were $340,506 and $371,343, respectively, a decrease of 8%, or $30,837 and decreased as a percentage of total revenue. The decrease was primarily a result of lower OEM subsidies and chip set costs, decreases in production of certain radios and lower aftermarket inventory charges in the year ended December 31, 2009 compared to the year ended December 31, 2008, partially offset by the inclusion of XM’s subscriber acquisition costs as a result of the Merger. |
We expect total subscriber acquisition costs to fluctuate with
increases or decreases in OEM installations, which are driven by
OEM manufacturing and penetration rates, and changes in our
gross subscriber additions. Declines in the cost of subsidized
radio components will also impact total subscriber acquisition
costs. The impact of purchase price accounting adjustments
associated with the Merger attributable to the amortization of
the deferred credit for acquired executory contracts will vary,
in absolute amount and as a percentage of reported subscriber
acquisition costs, through the expiration of the acquired
contracts, primarily in 2013. We intend to continue to offer
subsidies, commissions and other incentives to acquire
subscribers.
Sales and Marketing
includes costs for advertising, media
and production, including promotional events and sponsorships;
cooperative marketing; customer retention and personnel.
Cooperative marketing costs include fixed and variable payments
to reimburse retailers and automakers for the cost of
advertising and other product awareness activities performed on
our behalf.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, sales and marketing expenses were $215,454 and $228,956, respectively, a decrease of 6%, or $13,502 and decreased as a percentage of total revenue. The decrease was primarily due to reductions in consumer advertising, event marketing and third party distribution support expenses, partially offset by additional cooperative marketing and personnel costs. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, sales and marketing expenses were $228,956 and $231,937, respectively, a decrease of 1%, or $2,981 and decreased as a percentage of total revenue. The decrease was due to reductions in consumer advertising and cooperative marketing, personnel costs and third party distribution support expenses, partially offset by the inclusion of XM’s sales and marketing expense. |
We expect sales and marketing expenses to increase as we
increase advertising and promotional initiatives to attract new
subscribers in existing and new distribution channels, and
launch and expand programs to retain our subscribers.
30
Engineering, Design and Development
includes costs to
develop chip sets and new products, research and development for
broadcast information systems and costs associated with the
incorporation of our radios into vehicles manufactured by
automakers.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, engineering, design and development expenses were $45,390 and $41,031, respectively, an increase of 11%, or $4,359 but remained flat as a percentage of total revenue. The increase was primarily due to higher personnel, overhead and aftermarket product development costs. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, engineering, design and development expenses were $41,031 and $40,496, respectively, an increase of 1%, or $535 but decreased as a percentage of total revenue. The increase was primarily due to the inclusion of XM’s engineering, design and development expenses, partially offset by lower costs associated with development, tooling and testing of radios as well as lower personnel costs. |
We expect engineering, design and development expenses to
increase in future periods as we develop our next generation
chip sets and products.
General and Administrative
includes rent and occupancy,
finance, legal, human resources, information technology and
investor relations costs.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, general and administrative expenses were $240,970 and $227,554, respectively, an increase of 6%, or $13,416 but decreased as a percentage of total revenue. The increase was primarily due to increased personnel and legal costs, partially offset by lower share-based payment expense. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, general and administrative expenses were $227,554 and $213,142, respectively, an increase of 7%, or $14,412 but decreased as a percentage of total revenue. The increase was primarily due to the impact of the Merger, offset by lower costs for certain merger, litigation and regulatory matters. |
We expect our general and administrative expenses to increase in
future periods primarily as a result of increased information
technology and personnel costs to support the growth of our
business, as well as rising legal costs.
Impairment of Goodwill
is recorded when the carrying
value of goodwill exceeds the implied fair value of goodwill.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, we did not record any impairment of goodwill. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, impairment of goodwill was $0 and $4,766,190, respectively. |
Depreciation and Amortization
represents the systematic
recognition in earnings of the acquisition cost of assets used
in operations, including our satellite constellations, property,
equipment and intangible assets, over their estimated service
lives.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, depreciation and amortization expense was $273,691 and $309,450, respectively, a decrease of 12%, or $35,759 and decreased as a percentage of total revenue. The decrease was primarily due to a $38,136 reduction in the depreciation of acquired satellite constellation and amortization of subscriber relationships, partially offset by depreciation recognized on additional assets placed in-service. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, depreciation and amortization expense was $309,450 and $203,752, respectively, an increase of 52%, or $105,698 and increased as a percentage of total revenue. The increase was primarily due to the impact of the Merger. |
We expect depreciation and amortization expenses to increase in
future periods as we recognize depreciation expense on our
recently launched satellite, XM-5, and complete the construction
and launch of our FM-6 satellite,
31
which will be partially offset by reduced depreciation and
amortization associated with the
stepped-up
basis in assets acquired in the Merger (including intangible
assets, satellites, property and equipment) through the end of
their estimated service lives, principally through 2017.
Restructuring, Impairments and Related Costs
represents
charges related to the re-organization of our staff and
restructuring of contracts, as well as charges related to the
impairment of assets when those costs are deemed to provide no
future benefit.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, restructuring, impairments and related costs was $63,800 and $32,807, respectively, an increase of 94%, or $30,993. The increase was primarily due to the impairment of our FM-4 satellite, due to the launch of XM-5 in the fourth quarter of 2010, and contract termination costs in the year ended December 31, 2010 compared to losses incurred on capitalized installment payments which were expected to provide no future benefit due to the counterparty’s bankruptcy filing in the year ended December 31, 2009. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, restructuring, impairments and related costs was $32,807 and $10,434, respectively, an increase of 214%, or $22,373. The increase was primarily due to losses incurred on capitalized installment payments which were expected to provide no future benefit due to the counterparty’s bankruptcy filing in the year ended December 31, 2009 compared to Merger related restructuring charges in the year ended December 31, 2008. |
Other
Income (Expense)
Interest Expense, Net of Amounts Capitalized,
includes
interest on outstanding debt, reduced by interest capitalized in
connection with the construction of our satellites and related
launch vehicles.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, interest expense was $295,643 and $315,668, respectively, a decrease of 6%, or $20,025. The decrease was primarily due to decreases in the weighted average interest rate on our outstanding debt in the year ended December 31, 2010 compared to the year ended December 31, 2009 and the redemption of XM’s 10% Senior PIK Secured Notes due 2011 on June 1, 2010. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, interest expense was $315,668 and $148,455, respectively, an increase of 113%, or $167,213. Interest expense increased significantly as a result of the Merger, due to additional debt and higher interest rates. Increases in interest expense were partially offset by the capitalized interest associated with satellite construction and related launch vehicles. |
Loss on Extinguishment of Debt and Credit Facilities, Net,
includes losses incurred as a result of the conversion and
retirement of certain debt.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, loss on extinguishment of debt and credit facilities, net, was $120,120 and $267,646, respectively, a decrease of 55%, or $147,526. During the year ended December 31, 2010, the loss was incurred on the repayment of our Senior Secured Term Loan due 2012 and 9.625% Senior Notes due 2013 and XM’s 10% Senior PIK Secured Notes due 2011 and 9.75% Senior Notes due 2014, as well as the partial repayment of XM’s 11.25% Senior Secured Notes due 2013 and our 3.25% Convertible Notes due 2011. During the year ended December 31, 2009, the loss was incurred on the retirement of our 2.5% Convertible Notes due 2009, the extinguishment of our Term Loan and Purchase Money Loan with Liberty Media, the repayment of the XM’s Amended and Restated Credit Agreement due 2011, the partial repayment of XM’s 10% Convertible Senior Notes due 2009 and the termination of XM’s Second Lien Credit Agreement. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, loss on extinguishment of debt and credit facilities, net, was $267,646 and $98,203, respectively, an increase of 173%, or $169,443. During the year ended December 31, 2009, the loss was incurred on the retirement of our 2.5% Convertible Notes due 2009, the extinguishment of our Term Loan and Purchase Money Loan with Liberty Media, the repayment of XM’s Amended and Restated Credit Agreement due 2011, the partial repayment of XM’s 10% Convertible Senior Notes due 2009 and the termination of XM’s Second Lien Credit Agreement. During the year ended |
32
| December 31, 2008, the loss was incurred on the partial induced conversion of our 2.5% Convertible Notes due 2009. |
Interest and Investment Income (Loss)
includes realized
gains and losses, dividends, interest income, our share of
SIRIUS Canada’s and XM Canada’s net losses and losses
recorded from investments in those entities, as well as debt
instruments issued by XM Canada, when the fair value of those
instruments falls below carrying value and the decline is
determined to be other than temporary.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, interest and investment (loss) income was ($5,375) and $5,576, respectively, a decrease of 196%, or $10,951. The decrease in income was primarily attributable to higher net losses at XM Canada and SIRIUS Canada and a decrease in payments received from SIRIUS Canada in excess of the carrying value of our investments, partially offset by the gain on sale of auction rate securities during the year ended December 31, 2010. In addition, we recorded an impairment charge on our investment in XM Canada during the year ended December 31, 2009. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, interest and investment (loss) income was $5,576 and ($21,428), respectively, an increase of 126%, or $27,004. The increase was attributable to payments received from SIRIUS Canada in excess of the carrying value of our investment, decreases in our share of XM Canada’s net loss and decreases in impairment charges related to our investment in XM Canada for the year ended December 31, 2009 compared to the year ended December 31, 2008, partially offset by increases in our share of SIRIUS Canada’s net loss, lower interest rates in 2009 and a lower average cash balance. |
Income
Taxes
Income Tax Expense
primarily represents the deferred tax
liability related to the difference in accounting for our FCC
licenses, which are amortized over 15 years for tax
purposes but not amortized for book purposes in accordance with
GAAP and foreign withholding taxes on royalty income.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, income tax expense was $4,620 and $5,981, respectively, a decrease of 23%, or $1,361 primarily related to a decrease in the applicable tax rate and foreign withholding taxes on royalty income. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, income tax expense was $5,981 and $2,476, respectively, an increase of 142%, or $3,505 primarily related to the inclusion of XM. |
33
Subscriber
Data
The following table contains actual subscriber data for the
years ended December 31, 2010 and 2009, respectively, and
adjusted subscriber data for the year ended December 31,
2008. The subscriber data for the year ended December 31,
2008 has been adjusted to include XM results:
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (Actual) | (Actual) | (Adjusted) | ||||||||||
|
Beginning subscribers
|
18,772,758 | 19,003,856 | 17,348,622 | |||||||||
|
Gross subscriber additions
|
7,768,827 | 6,208,482 | 7,710,306 | |||||||||
|
Deactivated subscribers
|
(6,350,621 | ) | (6,439,580 | ) | (6,055,072 | ) | ||||||
|
Net additions
|
1,418,206 | (231,098 | ) | 1,655,234 | ||||||||
|
Ending subscribers
|
20,190,964 | 18,772,758 | 19,003,856 | |||||||||
|
Retail
|
6,947,830 | 7,725,750 | 8,905,087 | |||||||||
|
OEM
|
13,104,972 | 10,930,952 | 9,995,953 | |||||||||
|
Rental
|
138,162 | 116,056 | 102,816 | |||||||||
|
Ending subscribers
|
20,190,964 | 18,772,758 | 19,003,856 | |||||||||
|
Self-pay
|
16,686,799 | 15,703,932 | 15,549,657 | |||||||||
|
Paid promotional
|
3,504,165 | 3,068,826 | 3,454,199 | |||||||||
|
Ending subscribers
|
20,190,964 | 18,772,758 | 19,003,856 | |||||||||
|
Retail
|
(777,920 | ) | (1,179,452 | ) | (333,628 | ) | ||||||
|
OEM
|
2,174,020 | 935,114 | 1,962,685 | |||||||||
|
Rental
|
22,106 | 13,240 | 26,177 | |||||||||
|
Net additions
|
1,418,206 | (231,098 | ) | 1,655,234 | ||||||||
|
Self-pay
|
982,867 | 154,275 | 1,676,311 | |||||||||
|
Paid promotional
|
435,339 | (385,373 | ) | (21,077 | ) | |||||||
|
Net additions
|
1,418,206 | (231,098 | ) | 1,655,234 | ||||||||
|
Daily weighted average number of subscribers
|
19,385,055 | 18,529,696 | 18,373,274 | |||||||||
|
Average self-pay monthly churn(1)
|
1.9 | % | 2.0 | % | 1.8 | % | ||||||
|
Conversion rate(2)
|
46.2 | % | 45.4 | % | 47.5 | % | ||||||
Note: See pages 46 through 53 for footnotes.
Subscribers.
At December 31, 2010, we had
20,190,964 subscribers, an increase of 1,418,206 subscribers, or
8%, from the 18,772,758 subscribers as of December 31, 2009.
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, net additions were 1,418,206 and (231,098), respectively, an increase in net additions of 1,649,304. The improvement was due to the 25% increase in gross subscriber additions, primarily resulting from an increase in U.S. light vehicle sales, new vehicle penetration and returning activations. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, net additions were (231,098) and 1,655,234, respectively, a decrease in net additions of 1,886,332. The decline was due to a decrease in gross subscriber additions of 19% and an increase in deactivated subscribers of 6%, both of which were impacted by the economic environment during 2009. The decrease in net additions was primarily attributable to fewer |
34
| paid promotional trials due to the decline in North American auto sales and an increase in the average self-pay monthly churn rate from 1.8% in 2008 to 2.0% in 2009. |
Average Self-pay Monthly Churn
is derived by dividing the
monthly average of self-pay deactivations for the quarter by the
average self-pay subscriber balance for the quarter. (See
accompanying footnotes on pages 46 through 53 for more details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, our average self-pay monthly churn rate was 1.9% and 2.0%, respectively. The decrease was due to an improving economy, the success of retention and win-back programs and reductions in non-pay cancellation rates. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, our average self-pay monthly churn rate was 2.0% and 1.8%, respectively. The increase was due to the economic environment during 2009 which drove reductions in consumer discretionary spending, combined with subscriber response to our decreases in discounts on multi-subscription and internet packages, channel line-up changes in 2008 and the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
Conversion Rate
is the percentage of owners and lessees
of new vehicles that receive our service and convert to become
self-paying subscribers after an initial promotional period.
(See accompanying footnotes on pages 46 through 53 for more
details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, our conversion rate was 46.2% and 45.4%, respectively. The increase was primarily due to marketing to promotional period subscribers and an improving economy. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, our conversion rate was 45.4% and 47.5%, respectively. The decrease was primarily due to a reduction in consumer discretionary spending resulting from the economic environment during 2009. |
The discussion of operating results below excludes the effects
of stock-based compensation and purchase price accounting
adjustments associated with the Merger. Financial measures and
metrics previously reported as “pro forma” have been
renamed “adjusted.”
Adjusted
Results of Operations
In this section, we present certain financial performance
measures that are not calculated and presented in accordance
with generally accepted accounting principles in the United
States of America (“Non-GAAP”). These Non-GAAP
financial measures include: average monthly revenue per
subscriber, or ARPU; subscriber acquisition cost, or SAC, per
gross subscriber addition; customer service and billing
expenses, per average subscriber; free cash flow; adjusted total
revenue; and adjusted EBITDA. These measures include the
historical results of operations of XM and exclude the impact of
certain purchase price accounting adjustments. We use these
Non-GAAP financial measures to manage our business, set
operational goals and as a basis for determining
performance-based compensation for our employees.
The purchase price accounting adjustments include the
elimination of the earnings benefit of deferred revenue
associated with the investment in XM Canada, the recognition of
subscriber revenues not recognized in purchase price accounting
and the elimination of the earnings benefit of deferred credits
on executory contracts, which are primarily attributable to
third party arrangements with an OEM and programming providers.
Our adjusted EBITDA also reallocates share-based payment expense
from functional operating expense line items to a separate line
within operating expenses. We believe the exclusion of
share-based payment expense from functional operating expenses
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
operating costs.
We believe these Non-GAAP financial measures provide useful
information to investors regarding our financial condition and
results of operations. We believe investors find these Non-GAAP
financial performance measures useful in evaluating our core
trends because it provides a direct view of our underlying
contractual costs.
35
We believe investors use our current and projected adjusted
EBITDA to estimate our current or prospective enterprise value
and to make investment decisions. By providing these Non-GAAP
financial measures, together with the reconciliations to the
most directly comparable GAAP measure, we believe we are
enhancing investors understanding of our business and our
results of operations. These Non-GAAP financial measures should
be viewed in addition to, and not as an alternative for or
superior to, our reported results prepared in accordance with
GAAP. Please refer to the footnotes (pages 46 through
53) for a further discussion of such Non-GAAP financial
measures and reconciliations to the most directly comparable
GAAP measure.
The following table contains our key operating metrics based on
our unaudited adjusted results of operations for the years ended
December 31, 2010, 2009 and 2008, respectively:
| Unaudited Adjusted | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
| (In thousands, except for per subscriber amounts) | ||||||||||||
|
ARPU(3)
|
$ | 11.73 | $ | 10.95 | $ | 10.56 | ||||||
|
SAC, per gross subscriber addition(4)
|
$ | 59 | $ | 63 | $ | 74 | ||||||
|
Customer service and billing expenses, per average subscriber(5)
|
$ | 1.03 | $ | 1.05 | $ | 1.11 | ||||||
|
Free cash flow(6)
|
$ | 210,481 | $ | 185,319 | $ | (551,771 | ) | |||||
|
Adjusted total revenue(8)
|
$ | 2,838,898 | $ | 2,526,703 | $ | 2,436,740 | ||||||
|
Adjusted EBITDA(7)
|
$ | 626,288 | $ | 462,539 | $ | (136,298 | ) | |||||
Note: See pages 46 through 53 for footnotes.
ARPU
is derived from total earned subscriber revenue, net
advertising revenue and other subscription-related revenue, net
of purchase price accounting adjustments, divided by the number
of months in the period, divided by the daily weighted average
number of subscribers for the period. (See accompanying
footnotes on pages 46 through 53 for more details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, ARPU was $11.73 and $10.95, respectively. The increase was driven primarily by the full year impact of the U.S. Music Royalty Fee introduced in the third quarter of 2009, increased revenues from the sale of “Best of” programming, decreases in discounts on multi-subscription and internet packages, and increased net advertising revenue, partially offset by an increase in the number of subscribers on promotional plans. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, ARPU was $10.95 and $10.56, respectively. The increase in subscriber revenue was driven mainly by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, the sale of “Best of” programming, decreases in discounts on multi-subscription and internet packages, partially offset by lower advertising revenue. |
SAC, Per Gross Subscriber Addition
is derived from
subscriber acquisition costs and margins from the direct sale of
radios and accessories, excluding share-based payment expense
and purchase price accounting adjustments, divided by the number
of gross subscriber additions for the period. (See accompanying
footnotes on pages 46 through 53 for more details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, SAC, per gross subscriber addition was $59 and $63, respectively. The decrease was primarily due to lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from radio manufacturers compared to the year ended December 31, 2009, partially offset by a 49% increase in OEM production with factory-installed satellite radios. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, SAC, per gross subscriber addition was $63 and $74, respectively. The decrease was primarily driven by lower OEM subsidies, fewer OEM installations relative to gross subscriber additions and lower aftermarket inventory charges in the year ended December 31, 2009 compared to the year ended December 31, 2008. |
36
Customer Service and Billing Expenses, Per Average Subscriber
is derived from total customer service and billing expenses,
excluding share-based payment expense and purchase price
accounting adjustments, divided by the number of months in the
period, divided by the daily weighted average number of
subscribers for the period. (See accompanying footnotes on pages
46 through 53 for more details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, customer service and billing expenses, per average subscriber was $1.03 and $1.05, respectively. The decrease was primarily due to lower call center expenses as a result of moving calls to lower cost locations, partially offset by higher call volume. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, customer service and billing expenses, per average subscriber was $1.05 and $1.11, respectively. The decrease was primarily due to decreases in personnel costs and customer call center expenses. |
Free Cash Flow
includes the net cash provided by (used
in) operations, additions to property and equipment, merger
related costs and restricted and other investment activity. (See
accompanying footnotes on pages 46 through 53 for more details.)
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, free cash flow was $210,481 and $185,319, respectively, an increase of $25,162. Net cash provided by operating activities increased $79,065 to $512,895 for the year ended December 31, 2010 compared to the $433,830 provided by operations for the year ended December 31, 2009. Capital expenditures for property and equipment for the year ended December 31, 2010 increased $63,357 to $311,868 compared to $248,511 for the year ended December 31, 2009. The increase in net cash provided by operating activities was primarily the result of growth in deferred revenue and changes in net assets. The increase in capital expenditures for the year ended December 31, 2010 was primarily the result of satellite construction and launch expenditures for our XM-5 and FM-6 satellites. | |
| • | 2009 vs. 2008: For the years ended December 31, 2009 and 2008, free cash flow was $185,319 and ($551,771), respectively, an increase of $737,090. Net cash provided by (used in) operating activities increased $837,713 to $433,830 for the year ended December 31, 2009 compared to the ($403,883) used in operations for the year ended December 31, 2008. Capital expenditures for property and equipment, merger related costs, and restricted and other investment activity for the year ended December 31, 2009 increased $100,623 to $248,511 compared to $147,888 for the year ended December 31, 2008. The increase in net cash provided by operating activities was primarily the result of growth in deferred revenue and changes in net assets. The increase in capital expenditures for the year ended December 31, 2009 was primarily the result of satellite construction and launch expenditures for our FM-4 and XM-5 satellites. |
37
Adjusted Total Revenue.
Our adjusted total
revenue includes the recognition of deferred subscriber revenues
acquired in the Merger that are not recognized in our results
under purchase price accounting and the elimination of the
benefit in earnings from deferred revenue associated with our
investment in XM Canada acquired in the Merger. (See the
accompanying footnotes on pages 46 through 53 for more details.)
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Revenue:
|
||||||||||||
|
Subscriber revenue, including effects of rebates
|
$ | 2,414,174 | $ | 2,287,503 | $ | 1,548,919 | ||||||
|
Advertising revenue, net of agency fees
|
64,517 | 51,754 | 47,190 | |||||||||
|
Equipment revenue
|
71,355 | 50,352 | 56,001 | |||||||||
|
Other revenue
|
266,946 | 83,029 | 11,882 | |||||||||
|
Predecessor financial information:
|
||||||||||||
|
Subscriber revenue, including effects of rebates
|
— | — | 670,870 | |||||||||
|
Advertising revenue, net of agency fees
|
— | — | 22,743 | |||||||||
|
Equipment revenue
|
— | — | 13,397 | |||||||||
|
Other revenue
|
— | — | 24,184 | |||||||||
|
Purchase price accounting adjustments:
|
||||||||||||
|
Subscriber revenue, including effects of rebates
|
14,655 | 46,814 | 38,533 | |||||||||
|
Other revenue
|
7,251 | 7,251 | 3,021 | |||||||||
|
Adjusted total revenue
|
$ | 2,838,898 | $ | 2,526,703 | $ | 2,436,740 | ||||||
| • | 2010 vs. 2009: Our adjusted total revenue increased 12%, or $312,195, in the year ended December 31, 2010 compared to the year ended December 31, 2009. Subscriber revenue increased 4%, or $94,512, in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in subscriber revenue was driven by the increase in subscribers as well as an increase in the sale of “Best of” programming and the decreases in discounts on multi-subscription and internet packages, partially offset by an increase in the number of subscribers on promotional plans. Advertising revenue increased 25%, or $12,763, in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in advertising revenue was driven by more effective sales efforts and improvements in the national market for advertising. Equipment revenue increased 42%, or $21,003, in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in equipment revenue was driven by royalties from increased OEM installations. Other revenue increased $183,917 in the year ended December 31, 2010 compared to the year ended December 31, 2009. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. | |
| • | 2009 vs. 2008: Our adjusted total revenue increased 4%, or $89,963, in the year ended December 31, 2009 compared to the year ended December 31, 2008. Subscriber revenue increased 3%, or $75,995, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase in subscriber revenue was driven by the sale of “Best of” programming, decreases in discounts on multi-subscription packages, increased sales of internet packages and higher average subscribers. Advertising revenue decreased 26%, or $18,179, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in advertising revenue was driven by the economic environment. Equipment revenue decreased 27%, or $19,046, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The decrease in equipment revenue was driven by declines in sales through our direct to consumer distribution channel and lower product and component sales offset by higher product royalties. Other revenue increased 131%, or $51,193, in the year ended December 31, 2009 compared to the year ended December 31, 2008. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
38
Adjusted EBITDA.
EBITDA is defined as net
income (loss) before interest and investment income (loss);
interest expense, net of amounts capitalized; income tax expense
and depreciation and amortization. Adjusted EBITDA removes the
impact of other income and expense, losses on extinguishment of
debt as well as certain other charges, such as, goodwill
impairment; restructuring, impairments and related costs;
certain purchase price accounting adjustments and share-based
payment expense. (See the accompanying footnotes on pages 46
through 53 for more details):
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Adjusted EBITDA
|
$ | 626,288 | $ | 462,539 | $ | (136,298 | ) | |||||
| • | 2010 vs. 2009: For the years ended December 31, 2010 and 2009, adjusted EBITDA was $626,288 and $462,539, respectively, an increase of 35%, or $163,749. The increase was primarily due to an increase of 12%, or $312,195, in revenues, partially offset by an increase of 7%, or $148,446, in expenses included in adjusted EBITDA. The increase in revenue was primarily due to the increase in our subscriber base and the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, as well as increased advertising and equipment revenue, decreases in discounts on multi-subscription and internet packages, and an increase in the sale of “Best of” programming, partially offset by an increase in the number of subscribers on promotional plans. The increase in expenses was primarily driven by higher subscriber acquisition costs related to the 25% increase in gross additions and higher revenue share and royalties expenses associated with growth in revenues subject to revenue sharing and royalty arrangements. | |
| • | 2009 vs. 2008: For the years ended December 31, 2010 and 2009, adjusted EBITDA was $462,539 and ($136,298), respectively, an increase of 439%, or $598,837. The increase was primarily due to an increase of 4%, or $89,963, in revenues and a decrease of 20%, or $508,874, in expenses included in adjusted EBITDA. The increase in revenue was primarily due to an increase in weighted average subscribers as well as decreases in discounts on multi-subscription and internet packages, the introduction of the U.S. Music Royalty Fee in the third quarter of 2009 and the sale of “Best of” programming, partially offset by decreased equipment revenue. The decreases in expenses were primarily driven by lower subscriber acquisition costs, lower sales and marketing discretionary spend, savings in programming and content expenses, and lower legal and consulting costs in general and administrative expenses. |
39
Liquidity
and Capital Resources
Cash
Flows for the Year Ended December 31, 2010 Compared with
the Year Ended December 31, 2009 and Year Ended
December 31, 2009 Compared with the Year Ended
December 31, 2008
As of December 31, 2010 and 2009, we had $586,691 and
$383,489, respectively, in cash and cash equivalents. The
following table presents a summary of our cash flow activity for
the periods set forth below:
| For the Years Ended December 31, | ||||||||||||||||||||
| 2010 | 2009 | 2008 | 2010 vs. 2009 | 2009 vs. 2008 | ||||||||||||||||
|
Net cash provided by (used in) operating activities
|
$ | 512,895 | $ | 433,830 | $ | (152,797 | ) | $ | 79,065 | $ | 586,627 | |||||||||
|
Net cash (used in) provided by investing activities
|
(302,414 | ) | (248,511 | ) | 728,425 | (53,903 | ) | (976,936 | ) | |||||||||||
|
Net cash used in financing activities
|
(7,279 | ) | (182,276 | ) | (634,002 | ) | 174,997 | 451,726 | ||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
203,202 | 3,043 | (58,374 | ) | 200,159 | 61,417 | ||||||||||||||
|
Cash and cash equivalents at beginning of period
|
383,489 | 380,446 | 438,820 | 3,043 | (58,374 | ) | ||||||||||||||
|
Cash and cash equivalents at end of period
|
$ | 586,691 | $ | 383,489 | $ | 380,446 | $ | 203,202 | $ | 3,043 | ||||||||||
Cash
Flows Provided by (Used in) Operating Activities
Cash provided by operating activities increased by $79,065, or
18%, to $512,895 for the year ended December 31, 2010 from
$433,830 for the year ended December 31, 2009. Cash
provided by operating activities increased by $586,627, or 384%,
to $433,830 for the year ended December 31, 2009 from cash
used in operating activities of $152,797 for the year ended
December 31, 2008. The primary drivers of our operating
cash flow growth have been improvements in profitability and
changes in operating assets and liabilities.
| • | Our net income (loss) was $43,055, ($352,038) and ($5,316,910) for the years ended December 31, 2010, 2009 and 2008, respectively. Our revenue growth has been primarily due to growth in our subscriber revenues which increased by $126,671, or 6%, and $738,584, or 48% (including the impact of the Merger), for the years ended December 31, 2010 and 2009, respectively. Included in the net loss for 2008 was a $4,766,190 charge related to the impairment of goodwill. | |
| • | Net non-cash adjustments to net income (loss) were $357,743, $566,524 and $5,142,961 for the years ended December 31, 2010, 2009 and 2008, respectively. Significant components of non-cash expenses, and their impact on cash flows from operating activities, include the following: |
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Depreciation and amortization
|
$ | 273,691 | $ | 309,450 | $ | 203,752 | ||||||
|
Impairment of goodwill
|
— | — | 4,766,190 | |||||||||
|
Restructuring, impairments and related costs
|
66,731 | 26,964 | — | |||||||||
|
Loss on extinguishment of debt and credit facilities, net
|
120,120 | 267,646 | 98,203 | |||||||||
|
Share-based payment expense
|
60,437 | 73,981 | 87,405 | |||||||||
|
Other non-cash purchase price adjustments
|
(250,727 | ) | (202,054 | ) | (68,330 | ) | ||||||
Depreciation and amortization expense is expected to increase in
future periods as we recognize depreciation expense on our
recently launched satellite, XM-5, and complete the construction
and launch of our FM-6 satellite.
During 2008, we recorded a goodwill impairment charge of
$4,766,190, which reduced the carrying value of goodwill from
$6,601,046 to $1,834,856. There were no impairment charges
recorded in 2010 and 2009.
40
Included in restructuring, impairments and related costs for the
year ended December 31, 2010 are contract termination costs
of $7,361 and a loss on the full impairment of our FM-4
satellite of $56,100.
Loss on extinguishment of debt and credit facilities, net,
includes losses incurred as a result of the conversion and
retirement of certain debt instruments. Future charges related
to the retirement or conversions of debt are dependent upon many
factors, including the conversion price of debt or our ability
to refinance or retire specific debt instruments.
Share-based payment expense is expected to increase in future
periods as we grant equity awards to our employees and
directors. Compensation expense for share-based awards is
recorded in the financial statements based on the fair value.
The fair value of stock option awards are determined using the
Black-Scholes-Merton option-pricing model which is subject to
various assumptions including the market price of our stock,
estimated forfeiture rates of awards and the volatility of our
stock price. The fair value of restricted shares and restricted
stock units is based on the market price at date of grant.
Other non-cash purchase price adjustments include liabilities
recorded as a result of the Merger related to executory
contracts with an OEM and certain programming providers, as well
as amortization resulting from changes in the value of deferred
revenue as a result of the Merger.
| • | Changes in operating assets and liabilities contributed $112,097, $219,344 and $21,152 to operating cash flows for the years ended December 31, 2010, 2009 and 2008, respectively. Significant changes in operating assets and liabilities include the growth in deferred revenue, the timing of collections from our customers and distributors and the timing of payments to vendors and related parties. As we continue to grow our subscriber and revenue base, we expect that deferred revenue and amounts due from customers and distributors will continue to increase. Amounts payable to vendors are also expected to increase as our business grows. The timing of payments to vendors and related parties are based on both contractual commitments and the terms and conditions of each of our vendors. |
Cash
Flows (Used in) Provided by Investing Activities
Cash used for investing activities consists primarily of capital
expenditures for property and equipment. Capital expenditures
have increased as we have continued to invest in the
construction of our satellites and related launch vehicles and
improvements in infrastructure to support the growth of our
business. We will continue to incur significant costs to
construct and launch our new satellites and improve our
terrestrial repeater network and broadcast and administrative
infrastructure. We have entered into various agreements to
design, construct, and launch our satellites in the normal
course of business.
Cash
Flows Used in Financing Activities
Cash flows used in financing activities have generally been the
result of the issuance and repayment of long-term debt and
related party debt and cash proceeds from equity issuances.
Proceeds from long-term debt, related party debt and equity
issuances have been used to fund our operations, construct and
launch new satellites and invest in other infrastructure
improvements.
Financings
and Capital Requirements
We have historically financed our operations through the sale of
debt and equity securities. The Certificate of Designations for
our Series B Preferred Stock provides that, so long as
Liberty Media beneficially owns at least half of its initial
equity investment, Liberty Media’s consent is required for
certain actions, including the grant or issuance of our equity
securities and the incurrence of debt (other than, in general,
debt incurred to refinance existing debt) in amounts greater
than $10,000 in any calendar year.
Future
Liquidity and Capital Resource Requirements
We have entered into various agreements to design, construct,
and launch our satellites in the normal course of business. As
disclosed in Note 15 in our consolidated financial
statements, as of December 31, 2010, we expect to incur
capital expenditures of approximately $120,444 and $5,481 in
2011 and 2012, respectively, and an additional
41
$55,610 over the next five years, the majority of which is
attributable to the construction and launch of our FM-6
satellite and related launch vehicle.
Based upon our current plans, we believe that we have sufficient
cash, cash equivalents and marketable securities to cover our
estimated funding needs. We expect to fund operating expenses,
capital expenditures, working capital requirements, interest
payments, taxes and scheduled maturities of our debt with
existing cash and cash flow from operations, and we believe that
we will be able to generate sufficient revenues to meet our cash
requirements.
Our ability to meet our debt and other obligations depends on
our future operating performance and on economic, financial,
competitive and other factors. We continually review our
operations for opportunities to adjust the timing of
expenditures to ensure that sufficient resources are maintained.
Our financial projections are based on assumptions, which we
believe are reasonable but contain significant uncertainties.
We regularly evaluate our business plans and strategy. These
evaluations often result in changes to our business plans and
strategy, some of which may be material and significantly change
our cash requirements. These changes in our business 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, including acquisitions that
are not directly related to our satellite radio business. In
addition, our operations are affected by the FCC order approving
the Merger, which imposed certain conditions upon, among other
things, our program offerings and our ability to increase prices.
The indentures governing our debt include restrictive covenants.
As of December 31, 2010, we were in compliance with our
debt covenants.
For a discussion of our “Debt Covenants”, refer to
Note 11 to our consolidated financial statements in
Item 8 of this Annual Report on
Form 10-K.
Off-Balance
Sheet Arrangements
We do not have any significant off-balance sheet arrangements
other than those disclosed in Note 15 to our consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K
that are reasonably likely to have a material effect on our
financial condition, results of operations, liquidity, capital
expenditures or capital resources.
2009
Long-Term Stock Incentive Plan
In May 2009, our stockholders approved the Sirius XM Radio Inc.
2009 Long-Term Stock Incentive Plan (the “2009 Plan”).
Employees, consultants and members of our board of directors are
eligible to receive awards under the 2009 Plan, which 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 2009 Plan are generally
subject to a vesting requirement. Stock-based awards generally
expire ten years from the date of grant. Each restricted stock
unit entitles the holder to receive one share of common stock
upon vesting. As of December 31, 2010, approximately
268,255,000 shares of common stock were available for
future grants under the 2009 Plan.
Other
Plans
We maintain four other share-based benefit plans — the
XM 2007 Stock Incentive Plan, the Amended and Restated Sirius
Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM
1998 Shares Award Plan and the XM Talent Option Plan.
No further awards may be made under these plans. Outstanding
awards under these plans are being continued.
42
Contractual
Cash Commitments
For a discussion of our “Contractual Cash
Commitments,” refer to Note 15 to our consolidated
financial statements in Item 8 of this Annual Report on
Form 10-K.
Related
Party Transactions
For a discussion of “Related Party Transactions,”
refer to Note 9 to our consolidated financial statements in
Item 8 of this Annual Report on
Form 10-K.
Critical
Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with U.S. GAAP, 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.
Accounting estimates require the use of significant management
assumptions and judgments as to future events, and the effect of
those events cannot be predicted with certainty. The accounting
estimates will change as new events occur, more experience is
acquired and more information is obtained. We evaluate and
update our assumptions and estimates on an ongoing basis and use
outside experts to assist in that evaluation when we deem
necessary. We have disclosed all significant accounting policies
in Note 3 to our consolidated financial statements in
Item 8 of this Annual Report on
Form 10-K.
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 of our results of operations.
Fair Value of XM Assets Acquired and Liabilities
Assumed.
On July 28, 2008, our wholly-owned
subsidiary, Vernon Merger Corporation, merged with and into XM
Satellite Radio Holdings Inc., with XM Holdings becoming our
wholly-owned subsidiary. The application of purchase accounting
resulted in the transaction being valued at $5,836,363 and our
recording of goodwill acquired totaling $6,601,046. During 2008,
we recorded an impairment charge of $4,766,190, which resulted
in a carrying value of goodwill of $1,834,856.
Goodwill.
Goodwill represents the excess of
the purchase price over the estimated fair value of net tangible
and identifiable intangible assets acquired in business
combinations. Our annual impairment assessment of our single
reporting unit is performed as of
October 1
st
of
each year, and an assessment is performed at other times if
events or circumstances indicate it is more likely than not that
the asset is impaired. Step one of the impairment assessment
compares the fair value of the entity to its carrying value and
if the fair value exceeds its carrying value, goodwill is not
impaired. If the carrying value exceeds the fair value, the
implied fair value of goodwill is compared to the carrying value
of goodwill. If the implied fair value exceeds the carrying
value then goodwill is not impaired; otherwise, an impairment
loss will be recorded by the amount the carrying value exceeds
the implied fair value. At October 1, 2010 and
December 31, 2010, the fair value of our single reporting
unit substantially exceeded its carrying value and therefore was
not at risk of failing step one of
ASC 350-20,
Goodwill
(“ASC
350-20”).
As a result, there were no changes in the carrying value of our
goodwill during the years ended December 31, 2010 and 2009.
Long-Lived Assets.
We carry our long-lived
assets at cost less accumulated depreciation. We review our
long-lived assets for impairment of our single reporting unit
whenever events or changes in circumstances indicate that the
carrying amount of an asset is not recoverable. At the time an
impairment in the 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.
Our annual impairment assessment of our FCC licenses is
performed as of October 1st of each year and an
assessment is made at other times if events or changes in
circumstances indicate that it is more likely than not that the
asset is impaired. At October 1, 2010 and December 31,
2010, the fair value of our FCC licenses substantially exceeded
the carrying value and therefore was not at risk of impairment.
We use independent appraisals to assist in determining the fair
value of our FCC licenses. The income approach, which is
commonly called the “Jefferson Pilot Method” or the
“Greenfield Method”, has been consistently used to
estimate the fair value. This method attempts to isolate the
income that is properly attributable
43
to the license alone (that is, apart from tangible and
intangible assets and goodwill). It is based upon modeling a
hypothetical “Greenfield”
build-up
to
a normalized enterprise that, by design, lacks inherent goodwill
and has essentially purchased (or added) all other assets as
part of the
build-up
process. The methodology assumes that, rather than acquiring
such an operation as a going concern, the buyer would
hypothetically obtain a license at nominal cost and build a new
operation with similar attributes from inception. The
significant assumption was that the hypothetical start up entity
would begin its network build out phase at the impairment
testing date and revenues and variable costs would not be
generated until the satellite network was operational,
approximately five years from inception.
There were no changes in the carrying value of our indefinite
life intangible assets during the years ended December 31,
2010 and 2009.
Useful Life of Broadcast/Transmission
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. 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 four in-orbit
SIRIUS satellites were originally 15 years from the date
they were placed into orbit. In June 2006, we adjusted the
useful lives of two of our in-orbit SIRIUS satellites to
13 years to reflect the unanticipated loss of power from
the solar array and the way we operate the constellation. We
currently expect our first two in-orbit SIRIUS satellites to
operate effectively through 2013, FM-3 to operate effectively
through 2015, FM-5 to operate effectively through 2024 and will
continue to evaluate the impact of current satellite operational
data on the expected useful lives. In December 2010, we recorded
an other than temporary charge for FM-4, the ground spare held
in storage since 2002. We operate five in-orbit XM satellites,
three of which function as in-orbit spares. The three in-orbit
spare satellites were launched in 2001 and 2010 while the other
two satellites were launched in 2005 and 2006. We estimate that
the XM-3, XM-4 and XM-5 satellites will meet their 15 year
predicted useful lives, and that the useful lives of XM-1 and
XM-2 will end in 2013.
Certain of our in-orbit satellites have experienced circuit
failures on their solar arrays. We continue to monitor the
operating condition of our in-orbit satellites. If events or
circumstances indicate that the useful lives of our in-orbit
satellites have changed, we will modify the depreciable life
accordingly. If we were to revise our estimates, our
depreciation expense would change, for example, a 10% decrease
in the expected useful lives of satellites and spacecraft
control facilities during 2010 would have resulted in
approximately $23,028 of additional depreciation expense.
Revenue Recognition.
We derive revenue
primarily from subscribers, advertising and direct sales of
merchandise. Revenue from subscribers consists of subscription
fees; revenue derived from our agreements with daily rental
fleet programs; non-refundable activation and other fees; and
the effects of rebates. Revenue is recognized as it is realized
or realizable and earned.
We recognize subscription fees as our services are provided.
Prepaid subscription fees are recorded as deferred revenue and
amortized to revenue ratably over the term of the applicable
subscription plan.
At the time of sale, vehicle owners purchasing or leasing a
vehicle with a subscription to our service typically receive
between a three-month and twelve-month prepaid subscription.
Prepaid subscription fees received from certain automakers are
recorded as deferred revenue and amortized to revenue ratably
over the service period which commences upon retail sale and
activation. We reimburse automakers for certain costs associated
with the satellite 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.
These payments are included in Subscriber acquisition costs
because we are responsible for providing the service to the
customers, including being obligated to the customers in the
case of an interruption of service.
Activation fees are recognized ratably over the estimated term
of a subscriber relationship, estimated to be approximately
3.5 years during 2010. The estimated term of a subscriber
relationship is based on historical experience. If we were to
revise our estimate our recognition of activation fees would
change, for example, a 10% decrease to the estimated term of a
subscriber relationship during 2010 would have resulted in
approximately $1,781 of additional activation fees.
44
We record an estimate of rebates that are paid by us to
subscribers as a reduction to revenue in the period the
subscriber activates service. For certain rebate promotions, a
subscriber must remain active for a specified period of time to
be considered eligible. In those instances, the 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 take-rate data
available at the time. In subsequent periods, estimates are
adjusted when necessary. For instant rebate promotions, we
record the consideration paid to the consumer as a reduction to
revenue in the period the customer participates in the promotion.
We recognize revenue from the sale of advertising 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 as we are the primary obligor in the
transaction. Advertising revenue share payments are recorded to
revenue share and royalties during the period in which the
advertising is broadcast.
Equipment revenue and royalties from the sale of satellite
radios, components and accessories is recognized upon shipment,
net of discounts and rebates. Shipping and handling costs billed
to customers are recorded as revenue. Shipping and handling
costs associated with shipping goods to customers are reported
as a component of cost of equipment.
Revenue arrangements with multiple deliverables are divided into
separate units of accounting when the products and services meet
certain criteria and consideration is allocated among the
separate units of accounting based on their relative fair values.
Share-based Payment.
We account for equity
instruments granted to employees in accordance with ASC 718,
Compensation — Stock Compensation
. ASC 718
requires all share-based compensation payments to be recognized
in the financial statements based on fair value. ASC 718
requires forfeitures to be estimated at the time of grant and
revised in subsequent periods if actual forfeitures differ from
initial estimates. We use the Black-Scholes-Merton
option-pricing model to value stock option awards and have
elected to treat awards with graded vesting as a single award.
Share-based compensation expense is recognized ratably over the
requisite service period, which is generally the vesting period,
net of forfeitures. We measure non-vested stock awards using the
fair market value of restricted shares of common stock on the
day the award is granted.
Fair value as determined using Black-Scholes-Merton model varies
based on assumptions used for the expected life, expected stock
price volatility and risk-free interest rates. We estimate the
fair value of awards granted using the hybrid approach for
volatility, which weights observable historical volatility and
implied volatility of qualifying actively traded options on our
common stock. The expected life assumption represents the
weighted-average period stock-based awards are expected to
remain outstanding. These expected life assumptions are
established through a review of historical exercise behavior of
stock-based award grants with similar vesting periods. Where
historical patterns do not exist, contractual terms are used.
The risk-free interest rate represents the daily treasury yield
curve rate at the grant 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.
Equity instruments granted to non-employees are accounted for in
accordance with ASC 505,
Equity
. The final
measurement date for the fair value of equity instruments with
performance criteria is the date that each performance
commitment for such equity instrument is satisfied or there is a
significant disincentive for non-performance.
Stock-based awards granted to employees, non-employees and
members of our board of directors include warrants, stock
options, restricted stock and restricted stock units.
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 recognized when, based on the weight of
all available evidence, 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.
45
Footnotes
| (1) | Average self-pay monthly churn represents the monthly average of self-pay deactivations for the quarter divided by the average number of self-pay subscribers for the quarter. Average self-pay churn for the year is the average of the quarterly average self-pay churn. | |
| (2) | We measure the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after the initial promotion period. We refer to this as the “conversion rate.” At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive trial subscriptions ranging from three to twelve months. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. | |
| (3) | ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee, which was initially charged to subscribers in the third quarter of 2009. Purchase price accounting adjustments include the recognition of deferred subscriber revenues not recognized in purchase price accounting associated with the Merger. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Subscriber revenue:
|
||||||||||||
|
GAAP
|
$ | 2,414,174 | $ | 2,287,503 | $ | 1,548,919 | ||||||
|
Predecessor financial information
|
— | — | 670,870 | |||||||||
|
Net advertising revenue:
|
||||||||||||
|
GAAP
|
64,517 | 51,754 | 47,190 | |||||||||
|
Predecessor financial information
|
— | — | 22,743 | |||||||||
|
Other subscription-related revenue (GAAP)
|
234,148 | 48,679 | — | |||||||||
|
Purchase price accounting adjustments
|
14,655 | 46,814 | 38,533 | |||||||||
| $ | 2,727,494 | $ | 2,434,750 | $ | 2,328,255 | |||||||
|
Daily weighted average number of subscribers
|
19,385,055 | 18,529,696 | 18,373,274 | |||||||||
|
ARPU
|
$ | 11.73 | $ | 10.95 | $ | 10.56 | ||||||
| (4) | Subscriber acquisition cost, per gross subscriber addition (or SAC, per gross subscriber addition) is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger |
46
| date attributable to an OEM. SAC, per gross subscriber addition, is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Subscriber acquisition costs:
|
||||||||||||
|
GAAP
|
$ | 413,041 | $ | 340,506 | $ | 371,343 | ||||||
|
Predecessor financial information
|
— | — | 174,083 | |||||||||
|
Less: margin from direct sales of radios and accessories:
|
||||||||||||
|
GAAP
|
(36,074 | ) | (10,164 | ) | (9,910 | ) | ||||||
|
Predecessor financial information
|
— | — | 6,616 | |||||||||
|
Less: share-based payment expense granted to third parties and
employees (GAAP)
|
— | — | (14 | ) | ||||||||
|
Add: purchase price accounting adjustments
|
79,439 | 61,164 | 31,714 | |||||||||
| $ | 456,406 | $ | 391,506 | $ | 573,832 | |||||||
|
Gross subscriber additions
|
7,768,827 | 6,208,482 | 7,710,306 | |||||||||
|
SAC, per gross subscriber addition
|
$ | 59 | $ | 63 | $ | 74 | ||||||
| (5) | Customer service and billing expenses, per average subscriber, is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments associated with the Merger, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, 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 customer service and billing expenses. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit associated with incremental share-based payment arrangements recognized at the Merger date. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Customer service and billing expenses:
|
||||||||||||
|
GAAP
|
$ | 241,680 | $ | 234,456 | $ | 165,036 | ||||||
|
Predecessor financial information
|
— | — | 82,947 | |||||||||
|
Less: share-based payment expense, net of purchase price
accounting adjustments:
|
||||||||||||
|
GAAP
|
(2,207 | ) | (2,504 | ) | (2,112 | ) | ||||||
|
Predecessor financial information
|
— | — | (1,869 | ) | ||||||||
|
Add: purchase price accounting adjustments
|
281 | 453 | 193 | |||||||||
| $ | 239,754 | $ | 232,405 | $ | 244,195 | |||||||
|
Daily weighted average number of subscribers
|
19,385,055 | 18,529,696 | 18,373,274 | |||||||||
|
Customer service and billing expenses, per average subscriber
|
$ | 1.03 | $ | 1.05 | $ | 1.11 | ||||||
47
| (6) | Free cash flow is calculated as follows (in thousands): |
| Unaudited | ||||||||||||
| For The Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net cash provided by operating activities:
|
||||||||||||
|
GAAP
|
$ | 512,895 | $ | 433,830 | $ | (152,797 | ) | |||||
|
Predecessor financial information
|
— | — | (251,086 | ) | ||||||||
|
Additions to property and equipment:
|
||||||||||||
|
GAAP
|
(311,868 | ) | (248,511 | ) | (130,551 | ) | ||||||
|
Predecessor financial information
|
(30,843 | ) | ||||||||||
|
Merger related costs:
|
||||||||||||
|
GAAP
|
— | — | (23,519 | ) | ||||||||
|
Predecessor financial information
|
— | — | — | |||||||||
|
Restricted and other investment activity:
|
||||||||||||
|
GAAP
|
9,454 | — | 62,974 | |||||||||
|
Predecessor financial information
|
(25,949 | ) | ||||||||||
|
Free cash flow
|
$ | 210,481 | $ | 185,319 | $ | (551,771 | ) | |||||
| (7) | EBITDA is defined as net income (loss) before interest and investment income (loss); interest expense, net of amounts capitalized; taxes expense and depreciation and amortization. We adjust EBITDA to remove the impact of other income and expense, loss on extinguishment of debt as well as certain other charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) goodwill impairment, (iii) restructuring, impairments, and related costs, (iv) depreciation and amortization and (v) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to 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 depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the 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 restructuring, impairments and related costs is useful given the nature of these expenses. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair market value of our common stock. | |
| Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income (loss) as disclosed in our consolidated statements of operations. Since adjusted EBITDA is a Non-GAAP financial performance |
48
| measure, our calculation of adjusted EBITDA 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. The reconciliation of net income (loss) to the adjusted EBITDA is calculated as follows (in thousands): |
| Unaudited | ||||||||||||
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net income (loss) (GAAP):
|
$ | 43,055 | $ | (352,038 | ) | $ | (5,316,910 | ) | ||||
|
Predecessor financial information:
|
||||||||||||
|
Revenues (see page 52)
|
— | — | 731,194 | |||||||||
|
Operating expenses (see page 52)
|
— | — | (961,663 | ) | ||||||||
|
Add back items excluded from Adjusted EBITDA:
|
||||||||||||
|
Purchase price accounting adjustments:
|
||||||||||||
|
Revenues (see
pages 50-52)
|
21,906 | 54,065 | 41,554 | |||||||||
|
Operating expenses (see
pages 50-52)
|
(261,832 | ) | (240,891 | ) | 4,661,812 | |||||||
|
Share-based payment expense, net of purchase price accounting
adjustments:
|
||||||||||||
|
GAAP
|
63,309 | 78,782 | 90,134 | |||||||||
|
Predecessor financial information (see page 52)
|
— | — | 34,485 | |||||||||
|
Depreciation and amortization:
|
||||||||||||
|
GAAP
|
273,691 | 309,450 | 203,752 | |||||||||
|
Predecessor financial information (see page 52)
|
— | — | 88,749 | |||||||||
|
Restructuring, impairments and related costs (GAAP)
|
63,800 | 32,807 | 10,434 | |||||||||
|
Interest expense, net of amounts capitalized (GAAP)
|
295,643 | 315,668 | 148,455 | |||||||||
|
Loss on extinguishment of debt and credit facilities, net (GAAP)
|
120,120 | 267,646 | 98,203 | |||||||||
|
Interest and investment (income) loss (GAAP)
|
5,375 | (5,576 | ) | 21,428 | ||||||||
|
Other (income) loss (GAAP)
|
(3,399 | ) | (3,355 | ) | 9,599 | |||||||
|
Income tax expense (GAAP)
|
4,620 | 5,981 | 2,476 | |||||||||
|
Adjusted EBITDA
|
$ | 626,288 | $ | 462,539 | $ | (136,298 | ) | |||||
49
| (8) | The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses for the years ended December 31, 2010, 2009 and 2008: |
| Unaudited for the Year Ended December 31, 2010 | ||||||||||||||||
|
Purchase Price
|
Allocation of
|
|||||||||||||||
|
Accounting
|
Share-Based
|
|||||||||||||||
| (In thousands) | As Reported | Adjustments | Payment Expense | Adjusted | ||||||||||||
|
Revenue:
|
||||||||||||||||
|
Subscriber revenue, including effects of rebates
|
$ | 2,414,174 | $ | 14,655 | $ | — | $ | 2,428,829 | ||||||||
|
Advertising revenue, net of agency fees
|
64,517 | — | — | 64,517 | ||||||||||||
|
Equipment revenue
|
71,355 | — | — | 71,355 | ||||||||||||
|
Other revenue
|
266,946 | 7,251 | — | 274,197 | ||||||||||||
|
Total revenue
|
$ | 2,816,992 | $ | 21,906 | $ | — | $ | 2,838,898 | ||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of services:
|
||||||||||||||||
|
Revenue share and royalties
|
435,410 | 107,967 | — | 543,377 | ||||||||||||
|
Programming and content
|
305,914 | 57,566 | (10,267 | ) | 353,213 | |||||||||||
|
Customer service and billing
|
241,680 | 281 | (2,207 | ) | 239,754 | |||||||||||
|
Satellite and transmission
|
80,947 | 1,170 | (3,397 | ) | 78,720 | |||||||||||
|
Cost of equipment
|
35,281 | — | — | 35,281 | ||||||||||||
|
Subscriber acquisition costs
|
413,041 | 79,439 | — | 492,480 | ||||||||||||
|
Sales and marketing
|
215,454 | 13,983 | (9,423 | ) | 220,014 | |||||||||||
|
Engineering, design and development
|
45,390 | 520 | (5,868 | ) | 40,042 | |||||||||||
|
General and administrative
|
240,970 | 906 | (32,147 | ) | 209,729 | |||||||||||
|
Depreciation and amortization(a)
|
273,691 | — | — | 273,691 | ||||||||||||
|
Restructuring, impairments and related costs
|
63,800 | — | — | 63,800 | ||||||||||||
|
Share-based payment expense(b)
|
— | — | 63,309 | 63,309 | ||||||||||||
|
Total operating expenses
|
$ | 2,351,578 | $ | 261,832 | $ | — | $ | 2,613,410 | ||||||||
| (a) | Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the year ended December 31, 2010 was $68,000. | |
| (b) | Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content
|
$ | 9,817 | $ | 450 | $ | — | $ | 10,267 | ||||||||
|
Customer service and billing
|
1,926 | 281 | — | 2,207 | ||||||||||||
|
Satellite and transmission
|
3,109 | 288 | — | 3,397 | ||||||||||||
|
Sales and marketing
|
8,996 | 427 | — | 9,423 | ||||||||||||
|
Engineering, design and development
|
5,348 | 520 | — | 5,868 | ||||||||||||
|
General and administrative
|
31,241 | 906 | — | 32,147 | ||||||||||||
|
Total share-based payment expense
|
$ | 60,437 | $ | 2,872 | $ | — | $ | 63,309 | ||||||||
50
| Unaudited for the Year Ended December 31, 2009 | ||||||||||||||||
|
Purchase Price
|
Allocation of
|
|||||||||||||||
|
Accounting
|
Share-Based
|
|||||||||||||||
| (In thousands) | As Reported | Adjustments | Payment Expense | Adjusted | ||||||||||||
|
Revenue:
|
||||||||||||||||
|
Subscriber revenue, including effects of rebates
|
$ | 2,287,503 | $ | 46,814 | $ | — | $ | 2,334,317 | ||||||||
|
Advertising revenue, net of agency fees
|
51,754 | — | — | 51,754 | ||||||||||||
|
Equipment revenue
|
50,352 | — | — | 50,352 | ||||||||||||
|
Other revenue
|
83,029 | 7,251 | — | 90,280 | ||||||||||||
|
Total revenue
|
$ | 2,472,638 | $ | 54,065 | $ | — | $ | 2,526,703 | ||||||||
|
Operating expenses
|
||||||||||||||||
|
Cost of services:
|
||||||||||||||||
|
Revenue share and royalties
|
397,210 | 89,780 | — | 486,990 | ||||||||||||
|
Programming and content
|
308,121 | 72,069 | (9,720 | ) | 370,470 | |||||||||||
|
Customer service and billing
|
234,456 | 453 | (2,504 | ) | 232,405 | |||||||||||
|
Satellite and transmission
|
84,033 | 1,339 | (3,202 | ) | 82,170 | |||||||||||
|
Cost of equipment
|
40,188 | — | — | 40,188 | ||||||||||||
|
Subscriber acquisition costs
|
340,506 | 61,164 | — | 401,670 | ||||||||||||
|
Sales and marketing
|
228,956 | 13,507 | (10,264 | ) | 232,199 | |||||||||||
|
Engineering, design and development
|
41,031 | 977 | (5,856 | ) | 36,152 | |||||||||||
|
General and administrative
|
227,554 | 1,602 | (47,236 | ) | 181,920 | |||||||||||
|
Depreciation and amortization(a)
|
309,450 | — | — | 309,450 | ||||||||||||
|
Restructuring, impairments and related costs
|
32,807 | — | — | 32,807 | ||||||||||||
|
Share-based payment expense(b)
|
— | — | 78,782 | 78,782 | ||||||||||||
|
Total operating expenses
|
$ | 2,244,312 | $ | 240,891 | $ | — | $ | 2,485,203 | ||||||||
| (a) | Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the year ended December 31, 2009 was $106,000. | |
| (b) | Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content
|
$ | 9,064 | $ | 656 | $ | — | $ | 9,720 | ||||||||
|
Customer service and billing
|
2,051 | 453 | — | 2,504 | ||||||||||||
|
Satellite and transmission
|
2,745 | 457 | — | 3,202 | ||||||||||||
|
Sales and marketing
|
9,608 | 656 | — | 10,264 | ||||||||||||
|
Engineering, design and development
|
4,879 | 977 | — | 5,856 | ||||||||||||
|
General and administrative
|
45,634 | 1,602 | — | 47,236 | ||||||||||||
|
Total share-based payment expense
|
$ | 73,981 | $ | 4,801 | $ | — | $ | 78,782 | ||||||||
51
| Unaudited for the Year Ended December 31, 2008 | ||||||||||||||||||||
|
Predecessor
|
Purchase Price
|
Allocation of
|
||||||||||||||||||
|
Financial
|
Accounting
|
Share-Based
|
||||||||||||||||||
| (In thousands) | As Reported | Information | Adjustments | Payment Expense | Adjusted | |||||||||||||||
|
Revenue:
|
||||||||||||||||||||
|
Subscriber revenue, including effects of rebates
|
$ | 1,548,919 | $ | 670,870 | $ | 38,533 | $ | — | $ | 2,258,322 | ||||||||||
|
Advertising revenue, net of agency fees
|
47,190 | 22,743 | — | — | 69,933 | |||||||||||||||
|
Equipment revenue
|
56,001 | 13,397 | — | — | 69,398 | |||||||||||||||
|
Other revenue
|
11,882 | 24,184 | 3,021 | — | 39,087 | |||||||||||||||
|
Total revenue
|
$ | 1,663,992 | $ | 731,194 | $ | 41,554 | $ | — | $ | 2,436,740 | ||||||||||
|
Operating expenses
|
||||||||||||||||||||
|
Cost of services:
|
||||||||||||||||||||
|
Revenue share and royalties
|
280,852 | 166,606 | 30,504 | — | 477,962 | |||||||||||||||
|
Programming and content
|
312,189 | 117,156 | 34,667 | (17,374 | ) | 446,638 | ||||||||||||||
|
Customer service and billing
|
165,036 | 82,947 | 193 | (3,981 | ) | 244,195 | ||||||||||||||
|
Satellite and transmission
|
59,279 | 46,566 | 424 | (7,084 | ) | 99,185 | ||||||||||||||
|
Cost of equipment
|
46,091 | 20,013 | — | — | 66,104 | |||||||||||||||
|
Subscriber acquisition costs
|
371,343 | 174,083 | 31,714 | (14 | ) | 577,126 | ||||||||||||||
|
Sales and marketing
|
231,937 | 126,054 | 5,393 | (21,088 | ) | 342,296 | ||||||||||||||
|
Engineering, design and development
|
40,496 | 23,045 | 400 | (11,441 | ) | 52,500 | ||||||||||||||
|
General and administrative
|
213,142 | 116,444 | 1,083 | (63,637 | ) | 267,032 | ||||||||||||||
|
Impairment of goodwill
|
4,766,190 | — | (4,766,190 | ) | — | — | ||||||||||||||
|
Depreciation and amortization(a)
|
203,752 | 88,749 | — | — | 292,501 | |||||||||||||||
|
Restructuring, impairments and related costs
|
10,434 | — | — | — | 10,434 | |||||||||||||||
|
Share-based payment expense(b)
|
— | — | — | 124,619 | 124,619 | |||||||||||||||
|
Total operating expenses
|
$ | 6,700,741 | $ | 961,663 | $ | (4,661,812 | ) | $ | — | $ | 3,000,592 | |||||||||
| (a) | Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the year ended December 31, 2008 was $47,000. | |
| (b) | Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content
|
$ | 12,148 | $ | 4,949 | $ | 277 | $ | — | $ | 17,374 | ||||||||||
|
Customer service and billing
|
1,920 | 1,869 | 192 | — | 3,981 | |||||||||||||||
|
Satellite and transmission
|
4,236 | 2,745 | 103 | — | 7,084 | |||||||||||||||
|
Subscriber acquisition costs
|
14 | — | — | — | 14 | |||||||||||||||
|
Sales and marketing
|
13,541 | 7,047 | 500 | — | 21,088 | |||||||||||||||
|
Engineering, design and development
|
6,192 | 4,675 | 574 | — | 11,441 | |||||||||||||||
|
General and administrative
|
49,354 | 13,200 | 1,083 | — | 63,637 | |||||||||||||||
|
Total share-based payment expense
|
$ | 87,405 | $ | 34,485 | $ | 2,729 | $ | — | $ | 124,619 | ||||||||||
52
| (9) | The following table reconciles our GAAP Net cash provided by operating activities to our Net income plus non-cash operating activities (in thousands): |
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Net cash provided by operating activities:
|
||||||||||||
|
GAAP
|
$ | 512,895 | $ | 433,830 | $ | (152,797 | ) | |||||
|
Predecessor financial information
|
— | — | (251,086 | ) | ||||||||
|
Less: Changes in operating assets and liabilities, net:
|
||||||||||||
|
GAAP
|
(112,097 | ) | (219,344 | ) | (21,152 | ) | ||||||
|
Predecessor financial information
|
— | — | 83,513 | |||||||||
|
Net income plus non cash operating activities
|
$ | 400,798 | $ | 214,486 | $ | (341,522 | ) | |||||
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS |
As of December 31, 2010, we did not have any derivative
financial instruments. We do not hold or issue any free-standing
derivatives. We hold investments in marketable securities
consisting of money market funds, and we also hold certificates
of deposit and investments in debt and equity securities of
other entities. We classify our investments in marketable
securities as
available-for-sale.
These securities are consistent with the investment objectives
contained within our investment policy. The basic objectives of
our investment policy are the preservation of capital,
maintaining sufficient liquidity to meet operating requirements
and maximizing yield.
Our debt includes fixed rate instruments and the fair market
value of our 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
As of December 31, 2010, an evaluation was performed under
the supervision and with the participation of our management,
including Mel Karmazin, our Chief Executive Officer, and David
J. Frear, our Executive Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures (as that term is defined in
Rule 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act). Based on that evaluation,
our management, including our Chief Executive Officer and our
Chief Financial Officer, concluded that our disclosure controls
and procedures were effective as of December 31, 2010.
There has been no change in our internal control over financial
reporting (as that term is defined in
Rule 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act) during the quarter ended
December 31, 2010 that has materially affected, or is
reasonably likely to materially affect, our internal control
over financial reporting.
Management’s
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
53
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, 2010.
Audit
Report of the Independent Registered Public Accounting
Firm
The effectiveness of our internal control over financial
reporting as of December 31, 2010 has been audited by KPMG
LLP, an independent registered public accounting firm, as stated
in their audit report appearing on
page F-2
of this Annual Report on
Form 10-K.
| ITEM 9B. | OTHER INFORMATION |
None.
54
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
The information required by this Item 10 is incorporated in
this report by reference to the applicable information in our
definitive proxy statement for the 2011 annual meeting of
stockholders set forth under the captions Stock Ownership,
Governance of the Company and Executive Compensation, which we
expect to file with the Securities and Exchange Commission prior
to April 30, 2011.
Code of
Ethics
We have adopted a code of ethics that applies to all employees,
including executive officers, and to directors. The Code of
Ethics is available on the Corporate Governance page of our
website at
www.siriusxm.com.
If we ever were to amend or
waive any provision of our Code of Ethics that applies to our
principal executive officer, principal financial officer,
principal accounting officer or any person performing similar
functions, we intend to satisfy our disclosure obligations with
respect to any such waiver or amendment by posting such
information on our internet website set forth above rather than
filing a
Form 8-K.
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by this Item 11 is incorporated in
this report by reference to the applicable information in our
definitive proxy statement for the 2011 annual meeting of
stockholders set forth under the caption Executive Compensation,
which we expect to file with the Securities and Exchange
Commission prior to April 30, 2011.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Certain information required by this item is set forth under the
heading “Equity Compensation Plan Information” in
Part II, Item 5, of this report.
The additional information required by this Item 12 is
incorporated in this report by reference to the applicable
information in our definitive proxy statement for the 2011
annual meeting of stockholders set forth under the caption Stock
Ownership and Governance of the Company, which we expect to file
with the Securities and Exchange Commission prior to
April 30, 2011.
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by this Item 13 is incorporated in
this report by reference to the applicable information in our
definitive proxy statement for the 2011 annual meeting of
stockholders set forth under the captions Governance of the
Company and Executive Compensation, which we expect to file with
the Securities and Exchange Commission prior to April 30,
2011.
| ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
The information required by this Item 14 is incorporated in
this report by reference to the applicable information in our
definitive proxy statement for the 2011 annual meeting of
stockholders set forth under the caption Principal Accountant
Fees and Services, which we expect to file with the Securities
and Exchange Commission prior to April 30, 2011.
55
| ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES |
Documents filed as part of this report:
(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-5
for a
list of exhibits filed or incorporated by reference as part of
this Annual Report on
Form 10-K.
56
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized on this 16th day of February 2011.
SIRIUS XM 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/
Eddy
W. Hartenstein
|
Chairman of the Board of Directors and Director | February 16, 2011 | ||||
|
/s/
Mel
Karmazin
|
Chief Executive Officer and Director (Principal Executive Officer) | February 16, 2011 | ||||
|
/s/
David
J. Frear
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer) |
February 16, 2011 | ||||
|
/s/
Thomas
D. Barry
|
Senior Vice President and Controller (Principal Accounting Officer) | February 16, 2011 | ||||
|
/s/
Joan
L. Amble
|
Director | February 16, 2011 | ||||
|
/s/
Leon
D. Black
|
Director | February 16, 2011 | ||||
|
/s/
David
A. Flowers
|
Director | February 16, 2011 | ||||
|
/s/
Lawrence
F. Gilberti
|
Director | February 16, 2011 | ||||
|
/s/
James
P. Holden
|
Director | February 16, 2011 | ||||
|
/s/
Gregory
B. Maffei
|
Director | February 16, 2011 | ||||
|
/s/
John
C. Malone
|
Director | February 16, 2011 | ||||
57
| Signature | Title | Date | ||||
|
/s/
James
F. Mooney
|
Director | February 16, 2011 | ||||
|
/s/
Jack
Shaw
|
Director | February 16, 2011 | ||||
58
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS
|
Reports of Independent Registered Public Accounting Firm
|
F-2 | |||
|
Consolidated Statements of Operations for the years ended
December 31, 2010, 2009 and 2008
|
F-4 | |||
|
Consolidated Balance Sheets as of December 31, 2010 and 2009
|
F-5 | |||
|
Consolidated Statements of Stockholders’ Equity (Deficit)
and Comprehensive Income (Loss) for the years ended
December 31, 2010, 2009 and 2008
|
F-6 | |||
|
Consolidated Statements of Cash Flows for the years ended
December 31, 2010, 2009 and 2008
|
F-8 | |||
|
Notes to Consolidated Financial Statements
|
F-10 | |||
|
Schedule II — Schedule of Valuation and
Qualifying Accounts
|
F-44 |
F-1
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sirius XM Radio Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of
Sirius XM Radio Inc. and subsidiaries as of December 31,
2010 and 2009, and the related consolidated statements of
operations, stockholders’ equity (deficit) and
comprehensive income (loss), and cash flows for each of the
years in the three-year period ended December 31, 2010. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedule listed in Item 15(2). These consolidated financial
statements and financial statement schedule are the
responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated
financial statements and financial statement 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 financial
position of Sirius XM Radio Inc. and subsidiaries as of
December 31, 2010 and 2009, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2010, 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 consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States),
Sirius XM Radio Inc. and subsidiaries’ internal control
over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated February 16, 2011 expressed an unqualified opinion on
the effectiveness of the Company’s internal control over
financial reporting.
As discussed in Note 3 to the consolidated financial
statements, Sirius XM Radio Inc. changed its method of
accounting for share lending arrangements on January 1,
2010.
/s/
KPMG
LLP
New York, New York
February 16, 2011
F-2
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Sirius XM Radio Inc. and subsidiaries:
We have audited Sirius XM Radio Inc. and subsidiaries’
internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Sirius XM Radio Inc.’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting, included in the
accompanying
Management’s Report on Internal Control
over Financial Reporting
. Our responsibility is to express
an opinion on the Company’s internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s 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 company’s
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
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Sirius XM Radio Inc. and subsidiaries
maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2010, based on
criteria established in
Internal Control —
Integrated Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Sirius XM Radio Inc. and
subsidiaries as of December 31, 2010 and 2009, and the
related consolidated statements of operations,
stockholders’ equity (deficit) and comprehensive income
(loss), and cash flows for each of the years in the three-year
period ended December 31, 2010, and our report dated
February 16, 2011 expressed an unqualified opinion on those
consolidated financial statements.
/s/
KPMG
LLP
New York, New York
February 16, 2011
F-3
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(In thousands, except per share
data)
|
||||||||||||
|
Revenue:
|
||||||||||||
|
Subscriber revenue
|
$ | 2,414,174 | $ | 2,287,503 | $ | 1,548,919 | ||||||
|
Advertising revenue, net of agency fees
|
64,517 | 51,754 | 47,190 | |||||||||
|
Equipment revenue
|
71,355 | 50,352 | 56,001 | |||||||||
|
Other revenue
|
266,946 | 83,029 | 11,882 | |||||||||
|
Total revenue
|
2,816,992 | 2,472,638 | 1,663,992 | |||||||||
|
Operating expenses:
|
||||||||||||
|
Cost of services:
|
||||||||||||
|
Revenue share and royalties
|
435,410 | 397,210 | 280,852 | |||||||||
|
Programming and content
|
305,914 | 308,121 | 312,189 | |||||||||
|
Customer service and billing
|
241,680 | 234,456 | 165,036 | |||||||||
|
Satellite and transmission
|
80,947 | 84,033 | 59,279 | |||||||||
|
Cost of equipment
|
35,281 | 40,188 | 46,091 | |||||||||
|
Subscriber acquisition costs
|
413,041 | 340,506 | 371,343 | |||||||||
|
Sales and marketing
|
215,454 | 228,956 | 231,937 | |||||||||
|
Engineering, design and development
|
45,390 | 41,031 | 40,496 | |||||||||
|
General and administrative
|
240,970 | 227,554 | 213,142 | |||||||||
|
Impairment of goodwill
|
— | — | 4,766,190 | |||||||||
|
Depreciation and amortization
|
273,691 | 309,450 | 203,752 | |||||||||
|
Restructuring, impairments and related costs
|
63,800 | 32,807 | 10,434 | |||||||||
|
Total operating expenses
|
2,351,578 | 2,244,312 | 6,700,741 | |||||||||
|
Income (loss) from operations
|
465,414 | 228,326 | (5,036,749 | ) | ||||||||
|
Other income (expense):
|
||||||||||||
|
Interest expense, net of amounts capitalized
|
(295,643 | ) | (315,668 | ) | (148,455 | ) | ||||||
|
Loss on extinguishment of debt and credit facilities, net
|
(120,120 | ) | (267,646 | ) | (98,203 | ) | ||||||
|
Interest and investment (loss) income
|
(5,375 | ) | 5,576 | (21,428 | ) | |||||||
|
Other income (loss)
|
3,399 | 3,355 | (9,599 | ) | ||||||||
|
Total other expense
|
(417,739 | ) | (574,383 | ) | (277,685 | ) | ||||||
|
Income (loss) before income taxes
|
47,675 | (346,057 | ) | (5,314,434 | ) | |||||||
|
Income tax expense
|
(4,620 | ) | (5,981 | ) | (2,476 | ) | ||||||
|
Net income (loss)
|
43,055 | (352,038 | ) | (5,316,910 | ) | |||||||
|
Preferred stock beneficial conversion feature
|
— | (186,188 | ) | — | ||||||||
|
Net income (loss) attributable to common stockholders
|
$ | 43,055 | $ | (538,226 | ) | $ | (5,316,910 | ) | ||||
|
Net income (loss) per common share:
|
||||||||||||
|
Basic
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | ||||
|
Diluted
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | ||||
|
Weighted average common shares outstanding:
|
||||||||||||
|
Basic
|
3,693,259 | 3,585,864 | 2,169,489 | |||||||||
|
Diluted
|
6,391,071 | 3,585,864 | 2,169,489 | |||||||||
See accompanying notes to the consolidated financial statements.
F-4
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
| As of December 31, | ||||||||
| 2010 | 2009 | |||||||
|
(In thousands, except share and per share data)
|
||||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 586,691 | $ | 383,489 | ||||
|
Accounts receivable, net
|
121,658 | 113,580 | ||||||
|
Receivables from distributors
|
67,576 | 48,738 | ||||||
|
Inventory, net
|
21,918 | 16,193 | ||||||
|
Prepaid expenses
|
134,994 | 100,273 | ||||||
|
Related party current assets
|
6,719 | 106,247 | ||||||
|
Deferred tax asset
|
44,787 | 72,640 | ||||||
|
Other current assets
|
7,432 | 18,620 | ||||||
|
Total current assets
|
991,775 | 859,780 | ||||||
|
Property and equipment, net
|
1,761,274 | 1,711,003 | ||||||
|
Long-term restricted investments
|
3,396 | 3,400 | ||||||
|
Deferred financing fees, net
|
54,135 | 66,407 | ||||||
|
Intangible assets, net
|
2,629,200 | 2,695,115 | ||||||
|
Goodwill
|
1,834,856 | 1,834,856 | ||||||
|
Related party long-term assets
|
30,162 | 111,767 | ||||||
|
Other long-term assets
|
78,288 | 39,878 | ||||||
|
Total assets
|
$ | 7,383,086 | $ | 7,322,206 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable and accrued expenses
|
$ | 593,174 | $ | 543,686 | ||||
|
Accrued interest
|
72,453 | 74,566 | ||||||
|
Current portion of deferred revenue
|
1,201,346 | 1,083,430 | ||||||
|
Current portion of deferred credit on executory contracts
|
271,076 | 252,831 | ||||||
|
Current maturities of long-term debt
|
195,815 | 13,882 | ||||||
|
Related party current liabilities
|
15,845 | 108,246 | ||||||
|
Total current liabilities
|
2,349,709 | 2,076,641 | ||||||
|
Deferred revenue
|
273,973 | 255,149 | ||||||
|
Deferred credit on executory contracts
|
508,012 | 784,078 | ||||||
|
Long-term debt
|
2,695,856 | 2,799,702 | ||||||
|
Long-term related party debt
|
325,907 | 263,579 | ||||||
|
Deferred tax liability
|
914,637 | 940,182 | ||||||
|
Related party long-term liabilities
|
24,517 | 46,301 | ||||||
|
Other long-term liabilities
|
82,839 | 61,052 | ||||||
|
Total liabilities
|
7,175,450 | 7,226,684 | ||||||
|
Commitments and contingencies (Note 15)
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Preferred stock, par value $0.001; 50,000,000 authorized at
December 31, 2010 and 2009:
|
||||||||
|
Series A convertible preferred stock (liquidation
preference of $0 at December 31, 2010 and $51,370 at
December 31, 2009); no shares issued and outstanding at
December 31, 2010 and 24,808,959 shares issued and
outstanding at December 31, 2009
|
— | 25 | ||||||
|
Convertible perpetual preferred stock, series B
(liquidation preference of $13 at December 31, 2010 and
2009); 12,500,000 shares issued and outstanding at
December 31, 2010 and 2009
|
13 | 13 | ||||||
|
Convertible preferred stock, series C junior; no shares
issued and outstanding at December 31, 2010 and 2009,
respectively
|
— | — | ||||||
|
Common stock, par value $0.001; 9,000,000,000 shares
authorized at December 31, 2010 and 2009; 3,933,195,112 and
3,882,659,087 shares issued and outstanding at
December 31, 2010 and 2009, respectively
|
3,933 | 3,882 | ||||||
|
Accumulated other comprehensive loss, net of tax
|
(5,861 | ) | (6,581 | ) | ||||
|
Additional paid-in capital
|
10,420,604 | 10,352,291 | ||||||
|
Accumulated deficit
|
(10,211,053 | ) | (10,254,108 | ) | ||||
|
Total stockholders’ equity
|
207,636 | 95,522 | ||||||
|
Total liabilities and stockholders’ equity
|
$ | 7,383,086 | $ | 7,322,206 | ||||
See accompanying notes to the consolidated financial statements.
F-5
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
AND COMPREHENSIVE INCOME (LOSS)
|
Series A
|
Series B
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||||||||||||
|
Convertible
|
Convertible
|
Other
|
Additional
|
Stockholders’
|
||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Common Stock |
Comprehensive
|
Paid-in
|
Accumulated
|
Equity
|
||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Loss | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||
|
(In thousands, except share and per share data)
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at January 1, 2008
|
— | $ | — | — | $ | — | 1,471,143,570 | $ | 1,471 | $ | — | $ | 3,604,764 | $ | (4,398,972 | ) | $ | (792,737 | ) | |||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | (5,316,910 | ) | (5,316,910 | ) | ||||||||||||||||||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||
|
Unrealized loss on
available-for-sale
securities
|
— | — | — | — | — | — | (1,040 | ) | — | — | (1,040 | ) | ||||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of tax of $137
|
— | — | — | — | — | — | (6,831 | ) | — | — | (6,831 | ) | ||||||||||||||||||||||||||||
|
Total comprehensive loss
|
(5,324,781 | ) | ||||||||||||||||||||||||||||||||||||||
|
Common stock issued to XM Satellite Radio Holdings stockholders
|
— | — | — | — | 1,440,858,219 | 1,441 | — | 5,459,412 | — | 5,460,853 | ||||||||||||||||||||||||||||||
|
Restricted common stock issued to XM Satellite Radio Holdings
stockholders
|
— | — | — | — | 29,739,201 | 30 | — | 66,598 | — | 66,628 | ||||||||||||||||||||||||||||||
|
Issuance of common stock to employees and employee benefit
plans, net of forfeitures
|
— | — | — | — | 5,091,274 | 5 | — | 10,841 | — | 10,846 | ||||||||||||||||||||||||||||||
|
Issuance of common stock under share borrow agreements
|
— | — | — | — | 262,399,983 | 262 | — | — | — | 262 | ||||||||||||||||||||||||||||||
|
Series A convertible preferred stock issued to XM Satellite
Radio Holdings stockholders
|
24,808,959 | 25 | — | — | — | — | — | 47,070 | — | 47,095 | ||||||||||||||||||||||||||||||
|
Compensation in connection with the issuance of stock-based
awards
|
— | — | — | — | — | — | — | 83,610 | — | 83,610 | ||||||||||||||||||||||||||||||
|
Conversion of XM Satellite Radio Holdings vested stock-based
awards
|
— | — | — | — | — | — | — | 94,616 | — | 94,616 | ||||||||||||||||||||||||||||||
|
Conversion of XM Satellite Radio Holdings outstanding warrants
|
— | — | — | — | — | — | — | 115,784 | — | 115,784 | ||||||||||||||||||||||||||||||
|
Exercise of options
|
— | — | — | 117,442 | — | — | 208 | — | 208 | |||||||||||||||||||||||||||||||
|
Exercise of warrants
|
— | — | — | — | 899,836 | 1 | — | (1 | ) | — | — | |||||||||||||||||||||||||||||
|
Exercise of XM Satellite Radio Holdings outstanding warrants
|
— | — | — | — | 17,173,644 | 17 | — | (17 | ) | — | — | |||||||||||||||||||||||||||||
|
Exchange of 3.5% Convertible Notes due 2008, including
accrued interest
|
— | — | — | — | 24,131,155 | 24 | — | 33,478 | — | 33,502 | ||||||||||||||||||||||||||||||
|
Exchange of 2.5% Convertible Notes due 2009, including
accrued interest
|
— | — | — | — | 400,211,513 | 401 | — | 208,712 | — | 209,113 | ||||||||||||||||||||||||||||||
|
Restricted shares withheld for taxes upon vesting
|
— | — | — | — | — | — | — | (84 | ) | — | (84 | ) | ||||||||||||||||||||||||||||
|
Adoption of ASU
2009-15
(Refer to Note 3)
|
— | — | — | — | — | — | — | 70,960 | — | 70,960 | ||||||||||||||||||||||||||||||
|
Balance at December 31, 2008
|
24,808,959 | $ | 25 | — | $ | — | 3,651,765,837 | $ | 3,652 | $ | (7,871 | ) | $ | 9,795,951 | $ | (9,715,882 | ) | $ | 75,875 | |||||||||||||||||||||
|
Net loss
|
— | — | — | — | — | — | — | — | (352,038 | ) | (352,038 | ) | ||||||||||||||||||||||||||||
|
Other comprehensive loss:
|
||||||||||||||||||||||||||||||||||||||||
|
Unrealized gain on
available-for-sale
securities
|
— | — | — | — | — | — | 473 | — | — | 473 | ||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of tax of $110
|
— | — | — | — | — | — | 817 | — | — | 817 | ||||||||||||||||||||||||||||||
|
Total comprehensive loss
|
— | — | — | — | — | — | — | — | — | (350,748 | ) | |||||||||||||||||||||||||||||
|
Issuance of preferred stock — related party, net of
issuance costs
|
— | — | 12,500,000 | 13 | — | — | — | 410,179 | (186,188 | ) | 224,004 | |||||||||||||||||||||||||||||
|
Issuance of common stock to employees and employee benefit
plans, net of forfeitures
|
— | — | — | — | 8,511,009 | 8 | — | 2,622 | — | 2,630 | ||||||||||||||||||||||||||||||
|
Structuring fee on 10% Senior PIK Secured Notes due 2011
|
— | — | — | — | 59,178,819 | 59 | — | 5,859 | — | 5,918 | ||||||||||||||||||||||||||||||
|
Share-based payment expense
|
— | — | — | — | — | — | — | 71,388 | — | 71,388 | ||||||||||||||||||||||||||||||
|
Returned shares under share borrow agreements
|
— | — | — | — | (60,000,000 | ) | (60 | ) | — | 60 | — | — | ||||||||||||||||||||||||||||
|
Issuance of restricted stock units in satisfaction of accrued
compensation
|
— | — | — | — | 83,803,422 | 84 | — | 31,207 | — | 31,291 | ||||||||||||||||||||||||||||||
|
Exchange of 2.5% Convertible Notes due 2009, including
accrued interest
|
— | — | — | — | 139,400,000 | 139 | — | 35,025 | — | 35,164 | ||||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
24,808,959 | $ | 25 | 12,500,000 | $ | 13 | 3,882,659,087 | $ | 3,882 | $ | (6,581 | ) | $ | 10,352,291 | $ | (10,254,108 | ) | $ | 95,522 | |||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
F-6
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY (DEFICIT)
AND COMPREHENSIVE INCOME (LOSS)
|
Series A
|
Convertible Perpetual
|
Accumulated
|
Total
|
|||||||||||||||||||||||||||||||||||||
|
Convertible
|
Preferred Stock,
|
Other
|
Additional
|
Stockholders’
|
||||||||||||||||||||||||||||||||||||
| Preferred Stock | Series B | Common Stock |
Comprehensive
|
Paid-in
|
Accumulated
|
Equity
|
||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Loss | Capital | Deficit | (Deficit) | |||||||||||||||||||||||||||||||
|
(In thousands, except share and per share data)
|
||||||||||||||||||||||||||||||||||||||||
|
Balance at December 31, 2009
|
24,808,959 | $ | 25 | 12,500,000 | $ | 13 | 3,882,659,087 | $ | 3,882 | $ | (6,581 | ) | $ | 10,352,291 | $ | (10,254,108 | ) | $ | 95,522 | |||||||||||||||||||||
|
Net income
|
43,055 | 43,055 | ||||||||||||||||||||||||||||||||||||||
|
Other comprehensive income:
|
||||||||||||||||||||||||||||||||||||||||
|
Unrealized gain on
available-for-sale
securities
|
— | — | — | — | — | — | 469 | — | — | 469 | ||||||||||||||||||||||||||||||
|
Foreign currency translation adjustment, net of tax of $63
|
— | — | — | — | — | — | 251 | — | — | 251 | ||||||||||||||||||||||||||||||
|
Total comprehensive income
|
— | — | — | — | —— | — | — | — | — | 43,775 | ||||||||||||||||||||||||||||||
|
Issuance of common stock to employees and employee benefit
plans, net of forfeitures
|
— | — | — | — | 6,175,089 | 6 | — | 5,265 | — | 5,271 | ||||||||||||||||||||||||||||||
|
Share-based payment expense
|
— | — | — | — | — | — | — | 52,229 | — | 52,229 | ||||||||||||||||||||||||||||||
|
Exercise of options and vesting of restricted stock units
|
— | — | — | — | 19,551,977 | 20 | — | 10,819 | — | 10,839 | ||||||||||||||||||||||||||||||
|
Conversion of preferred stock to common stock
|
(24,808,959 | ) | (25 | ) | — | — | 24,808,959 | 25 | — | — | — | — | ||||||||||||||||||||||||||||
|
Balance at December 31, 2010
|
— | $ | — | 12,500,000 | $ | 13 | 3,933,195,112 | $ | 3,933 | $ | (5,861 | ) | $ | 10,420,604 | $ | (10,211,053 | ) | $ | 207,636 | |||||||||||||||||||||
See accompanying notes to the consolidated financial statements.
F-7
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(In thousands)
|
||||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income (loss)
|
$ | 43,055 | $ | (352,038 | ) | $ | (5,316,910 | ) | ||||
|
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
|
||||||||||||
|
Depreciation and amortization
|
273,691 | 309,450 | 203,752 | |||||||||
|
Impairment of goodwill
|
— | — | 4,766,190 | |||||||||
|
Non-cash interest expense, net of amortization of premium
|
42,841 | 43,066 | (2,689 | ) | ||||||||
|
Provision for doubtful accounts
|
32,379 | 30,602 | 21,589 | |||||||||
|
Restructuring, impairments and related costs
|
66,731 | 26,964 | — | |||||||||
|
Amortization of deferred income related to equity method
investment
|
(2,776 | ) | (2,776 | ) | (1,156 | ) | ||||||
|
Loss on extinguishment of debt and credit facilities, net
|
120,120 | 267,646 | 98,203 | |||||||||
|
Loss on investments, net
|
11,722 | 13,664 | 28,999 | |||||||||
|
Loss on disposal of assets
|
1,017 | — | 4,879 | |||||||||
|
Share-based payment expense
|
60,437 | 73,981 | 87,405 | |||||||||
|
Deferred income taxes
|
2,308 | 5,981 | 2,476 | |||||||||
|
Other non-cash purchase price adjustments
|
(250,727 | ) | (202,054 | ) | (68,330 | ) | ||||||
|
Other
|
— | — | 1,643 | |||||||||
|
Changes in operating assets and liabilities:
|
||||||||||||
|
Accounts receivable
|
(39,236 | ) | (42,158 | ) | (32,121 | ) | ||||||
|
Receivables from distributors
|
(11,023 | ) | (2,788 | ) | 14,401 | |||||||
|
Inventory
|
(5,725 | ) | 8,269 | 8,291 | ||||||||
|
Related party assets
|
(9,803 | ) | 15,305 | (22,249 | ) | |||||||
|
Prepaid expenses and other current assets
|
75,374 | 10,027 | (19,953 | ) | ||||||||
|
Other long-term assets
|
17,671 | 86,674 | (5,490 | ) | ||||||||
|
Accounts payable and accrued expenses
|
5,420 | (46,645 | ) | (83,037 | ) | |||||||
|
Accrued interest
|
(884 | ) | 2,429 | 23,081 | ||||||||
|
Deferred revenue
|
133,444 | 93,578 | 79,090 | |||||||||
|
Related party liabilities
|
(53,413 | ) | 50,172 | 28,890 | ||||||||
|
Other long-term liabilities
|
272 | 44,481 | 30,249 | |||||||||
|
Net cash provided by (used in) operating activities
|
512,895 | 433,830 | (152,797 | ) | ||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Additions to property and equipment
|
(311,868 | ) | (248,511 | ) | (130,551 | ) | ||||||
|
Sales of property and equipment
|
— | — | 105 | |||||||||
|
Purchases of restricted and other investments
|
— | — | (3,000 | ) | ||||||||
|
Acquisition of acquired entity cash
|
— | — | 819,521 | |||||||||
|
Merger related costs
|
— | — | (23,519 | ) | ||||||||
|
Sale of restricted and other investments
|
9,454 | — | 65,869 | |||||||||
|
Net cash (used in) provided by investing activities
|
(302,414 | ) | (248,511 | ) | 728,425 | |||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Proceeds from exercise of warrants and stock options
|
10,839 | — | 471 | |||||||||
|
Preferred stock issuance, net of costs
|
— | (3,712 | ) | — | ||||||||
|
Long-term borrowings, net of costs
|
1,274,707 | 582,612 | 531,743 | |||||||||
|
Related party long-term borrowings, net of costs
|
196,118 | 362,593 | — | |||||||||
|
Payment of premiums on redemption of debt
|
(84,326 | ) | (17,075 | ) | (18,693 | ) | ||||||
|
Payments to noncontrolling interest
|
— | — | (61,880 | ) | ||||||||
|
Repayment of long-term borrowings
|
(1,262,396 | ) | (755,447 | ) | (1,085,643 | ) | ||||||
|
Repayment of related party long-term borrowings
|
(142,221 | ) | (351,247 | ) | — | |||||||
|
Net cash used in financing activities
|
(7,279 | ) | (182,276 | ) | (634,002 | ) | ||||||
|
Net increase (decrease) in cash and cash equivalents
|
203,202 | 3,043 | (58,374 | ) | ||||||||
|
Cash and cash equivalents at beginning of period
|
383,489 | 380,446 | 438,820 | |||||||||
|
Cash and cash equivalents at end of period
|
$ | 586,691 | $ | 383,489 | $ | 380,446 | ||||||
See accompanying notes to the consolidated financial statements.
F-8
SIRIUS
XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
— (Continued)
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
(In thousands)
|
||||||||||||
|
Supplemental Disclosure of Cash and Non-Cash Flow Information
|
||||||||||||
|
Cash paid during the period for:
|
||||||||||||
|
Interest, net of amounts capitalized
|
$ | 241,160 | $ | 257,328 | $ | 137,542 | ||||||
|
Non-cash investing and financing activities:
|
||||||||||||
|
Share-based payments in satisfaction of accrued compensation
|
— | 31,291 | 8,729 | |||||||||
|
Common stock issued in exchange of 3.5% Convertible Notes
due
|
||||||||||||
|
2008, including accrued interest
|
— | — | 33,502 | |||||||||
|
Common stock issued in exchange of 2.5% Convertible Notes
due
|
||||||||||||
|
2009, including accrued interest
|
— | 18,000 | 209,113 | |||||||||
|
Structuring fee on 10% Senior PIK Secured Notes due 2011
|
— | 5,918 | — | |||||||||
|
Preferred stock issued to Liberty Media
|
— | 227,716 | — | |||||||||
|
Release of restricted investments
|
— | 137,850 | — | |||||||||
|
Equity issued in the acquisition of XM
|
— | — | 5,784,976 | |||||||||
|
In-orbit satellite performance incentives
|
21,450 | 14,905 | — | |||||||||
|
Sale-leaseback of equipment
|
5,305 | — | — | |||||||||
|
Conversion of Series A preferred stock to common stock
|
25 | — | — | |||||||||
See accompanying notes to the consolidated financial statements.
F-9
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
| (1) | Business |
We broadcast our music, sports, news, talk, entertainment,
traffic and weather channels in the United States on a
subscription fee basis through our two proprietary satellite
radio systems. Subscribers can also receive certain of our music
and other channels over the Internet, including through
applications for Apple, Blackberry and Android-powered mobile
devices.
Our primary source of revenue is subscription fees, with most of
our customers subscribing on an annual, semi-annual, quarterly
or monthly basis. We offer discounts for prepaid and long-term
subscription plans as well as discounts for multiple
subscriptions on each platform. We also derive revenue from
activation and other fees, the sale of advertising on select
non-music channels, the direct sale of satellite radios and
accessories, and other ancillary services, such as our weather,
traffic, data and Backseat TV services.
Our satellite radios are primarily distributed through
automakers (“OEMs”); nationwide through retail
locations; and through our websites. We have agreements with
every major automaker to offer satellite radios as factory or
dealer-installed equipment in their vehicles. Satellite radios
are also offered to customers of rental car companies.
| (2) | Principles of Consolidation and Basis of Presentation |
Principles
of Consolidation
The accompanying consolidated financial statements of Sirius XM
Radio Inc. and subsidiaries have been prepared in accordance
with U.S. generally accepted accounting principles
(“GAAP”). All significant intercompany transactions
have been eliminated in consolidation.
Basis
of Presentation
In the opinion of management, all normal recurring adjustments
necessary for a fair presentation of our consolidated financial
statements as of December 31, 2010 and 2009, and for the
years ended December 31, 2010, 2009 and 2008 have been made.
Although the effective date of the Merger was July 28,
2008, due to the immateriality of the results of operations for
the period between July 28 and July 31, 2008, we have
accounted for the Merger as if it had occurred on July 31,
2008 with the results and balances of XM Holdings included as of
July 31, 2008. We accounted for the Merger as an
acquisition of XM Holdings under the purchase method of
accounting for business combinations. The acquisition cost
approximated $5,836,363, including transaction costs, and was
allocated to the underlying net assets acquired, based on the
respective estimated fair values. This allocation included
intangible assets, such as FCC licenses, customer relationships,
license agreements and trademarks. The excess of the purchase
price over the estimated fair values of the net assets acquired
was recorded as goodwill. Because the Merger was consummated on
July 28, 2008, the accompanying financial statements and
notes for periods prior to that date reflect only the financial
results of Sirius Satellite Radio Inc., as predecessor to Sirius
XM Radio Inc., and are therefore not comparable to our financial
results for 2010, 2009 and the fourth quarter of 2008.
We have evaluated events subsequent to the balance sheet date
and prior to the filing of this Annual Report on
Form 10-K
for the year ended December 31, 2010 and have determined no
events have occurred that would require adjustment to our
consolidated financial statements. For a discussion of
subsequent events refer to Note 16.
Reclassifications
Certain amounts in our prior period consolidated financial
statements have been reclassified to conform to our current
period presentation.
F-10
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (3) | Summary of Significant Accounting Policies |
Use of
Estimates
In presenting consolidated financial statements, management
makes estimates and assumptions that affect the reported amounts
and accompanying notes. Additionally, estimates were used when
recording the fair values of assets acquired and liabilities
assumed in the Merger. Estimates, by their nature, are based on
judgment and available information. Actual results could differ
materially from those estimates.
Significant estimates inherent in the preparation of the
accompanying consolidated financial statements include revenue
recognition, asset impairment, useful lives of our satellites,
share-based payment expense, and valuation allowances against
deferred tax assets. Economic conditions in the United States
could have a material impact on our accounting estimates.
Recent
Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”)
updated Accounting Standards Codification (“ASC”) 470
to incorporate ASU
2009-15,
Accounting for Own-Share Lending Arrangements in
Contemplation of Convertible Debt Issuance or Other
Financing,
into the ASC. This standard requires
share-lending arrangements in an entity’s own shares to be
initially measured at fair value and treated as an issuance
cost, excluded from basic and diluted earnings per share, and
requires an entity to recognize a charge to earnings if it
becomes probable the counterparty will default on the
arrangement. This guidance was adopted as of January 1,
2010 on a retrospective basis, as required, for all arrangements
outstanding as of that date. The following table reflects the
retrospective adoption of ASU
2009-15
on
our December 31, 2009 consolidated balance sheet:
|
As Originally
|
Retrospective
|
As Currently
|
||||||||||
| Reported | Adjustments | Reported | ||||||||||
|
Balance Sheet Line Item:
|
||||||||||||
|
Deferred financing fees, net
|
$ | 8,902 | $ | 57,505 | $ | 66,407 | ||||||
|
Related party long-term assets, net of current portion
|
110,594 | 1,173 | 111,767 | |||||||||
|
Long-term debt, net of current portion
|
2,799,127 | 575 | 2,799,702 | |||||||||
|
Long-term related party debt, net of current portion
|
263,566 | 13 | 263,579 | |||||||||
|
Additional paid-in capital
|
10,281,331 | 70,960 | 10,352,291 | |||||||||
|
Accumulated deficit
|
(10,241,238 | ) | (12,870 | ) | (10,254,108 | ) | ||||||
The following table reflects the adoption of ASU
2009-15
on
our statement of operations for the years ended
December 31, 2009 and 2008:
|
For the Year Ended
|
For the Year Ended
|
|||||||||||||||||||||||
| December 31, 2009 | December 31, 2008 | |||||||||||||||||||||||
|
As Originally
|
Retrospective
|
As Currently
|
As Originally
|
Retrospective
|
As Currently
|
|||||||||||||||||||
| Reported | Adjustments | Reported | Reported | Adjustments | Reported | |||||||||||||||||||
|
Statement of Operations Line Item:
|
||||||||||||||||||||||||
|
Interest expense, net of amounts capitalized
|
$ | (306,420 | ) | $ | (9,248 | ) | $ | (315,668 | ) | $ | (144,833 | ) | $ | (3,622 | ) | $ | (148,455 | ) | ||||||
|
Net loss attributable to common stockholders
|
(528,978 | ) | (9,248 | ) | (538,226 | ) | (5,313,288 | ) | (3,622 | ) | (5,316,910 | ) | ||||||||||||
For the year ended December 31, 2010, we recorded $10,095,
in interest expense related to the amortization of the costs
associated with the share-lending arrangement and other issuance
costs. As of December 31, 2010, the unamortized balance of
the debt issuance costs was $51,243, with $50,218 recorded in
deferred financing fees, net,
F-11
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
and $1,025 recorded in long-term related party assets. As of
December 31, 2010 and 2009, the estimated fair value of the
remaining 202,400,000 loaned shares was approximately $329,912
and $121,440, respectively.
Revenue
Recognition
We derive revenue primarily from subscribers, advertising and
direct sales of merchandise. Revenue from subscribers consists
of subscription fees; revenue derived from our agreements with
daily rental fleet programs; non-refundable activation and other
fees; and the effects of rebates. Revenue is recognized as it is
realized or realizable and earned.
We recognize subscription fees as our services are provided.
Prepaid subscription fees are recorded as deferred revenue and
amortized to revenue ratably over the term of the applicable
subscription plan.
Prepaid subscription fees received from certain automakers are
recorded as deferred revenue and amortized to revenue ratably
over the service period which commences upon retail sale and
activation. We reimburse automakers for certain costs associated
with the satellite 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.
These payments are included in Subscriber acquisition costs
because we are responsible for providing the service to the
customers, including being obligated to the customers in the
case of an interruption of service.
Activation fees are recognized ratably over the estimated term
of a subscriber relationship, estimated to be approximately
3.5 years during 2010. The estimated term of a subscriber
relationship is based on historical experience.
We record an estimate of rebates that are paid by us to
subscribers as a reduction to revenue in the period the
subscriber activates service. For certain rebate promotions, a
subscriber must remain active for a specified period of time to
be considered eligible. In those instances, the 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 take-rate data
available at the time. In subsequent periods, estimates are
adjusted when necessary. For instant rebate promotions, we
record the consideration paid to the consumer as a reduction to
revenue in the period the customer participates in the promotion.
We recognize revenue from the sale of advertising 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 as we are the primary obligor in the
transaction. Advertising revenue share payments are recorded to
Revenue share and royalties during the period in which the
advertising is broadcast.
Equipment revenue and royalties from the sale of satellite
radios, components and accessories are recognized upon shipment,
net of discounts and rebates. Shipping and handling costs billed
to customers are recorded as revenue. Shipping and handling
costs associated with shipping goods to customers are reported
as a component of Cost of equipment.
ASC 605,
Revenue Recognition,
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.
Programming
Costs
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 or
period are amortized over the season or period on a straight-
F-12
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
line basis. We allocate a portion of certain 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
Media is expensed when aired and advertising production costs
are expensed as incurred. Market development funds consist of
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 when
aired and production costs are expensed as incurred. During the
years ended December 31, 2010, 2009 and 2008, we recorded
advertising costs of $110,050, $128,784 and $109,253,
respectively. These costs are reflected in Sales and marketing
expense in our consolidated statements of operations.
Stock-Based
Compensation
We account for equity instruments granted to employees in
accordance with ASC 718,
Compensation — Stock
Compensation
. ASC 718 requires all share-based
compensation payments to be recognized in the financial
statements based on fair value. ASC 718 requires
forfeitures to be estimated at the time of grant and revised in
subsequent periods if actual forfeitures differ from initial
estimates. We use the Black-Scholes-Merton option-pricing model
to value stock option awards and have elected to treat awards
with graded vesting as a single award. Share-based compensation
expense is recognized ratably over the requisite service period,
which is generally the vesting period, net of forfeitures. We
measure non-vested stock awards using the fair market value of
restricted shares of common stock on the day the award is
granted.
Fair value as determined using Black-Scholes-Merton model varies
based on assumptions used for the expected life, expected stock
price volatility and risk-free interest rates. We estimate the
fair value of awards granted using the hybrid approach for
volatility, which weights observable historical volatility and
implied volatility of qualifying actively traded options on our
common stock. The expected life assumption represents the
weighted-average period stock-based awards are expected to
remain outstanding. These expected life assumptions are
established through a review of historical exercise behavior of
stock-based award grants with similar vesting periods. Where
historical patterns do not exist, contractual terms are used.
The risk-free interest rate represents the daily treasury yield
curve rate at the grant 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.
Equity instruments granted to non-employees are accounted for in
accordance with ASC 505,
Equity
. The final
measurement date for the fair value of equity instruments with
performance criteria is the date that each performance
commitment for such equity instrument is satisfied or there is a
significant disincentive for non-performance.
Stock-based awards granted to employees, non-employees and
members of our board of directors include warrants, stock
options, restricted stock and restricted stock units.
Subscriber
Acquisition Costs
Subscriber acquisition costs consist of costs incurred to
acquire new subscribers and include hardware subsidies paid to
radio manufacturers, distributors and automakers, including
subsidies paid to automakers who include a satellite radio and a
prepaid subscription to our service in the sale or lease price
of a new vehicle; subsidies paid for chip sets and certain other
components used in manufacturing radios; device royalties for
certain radios; commissions paid to retailers and automakers as
incentives to purchase, install and activate radios; product
warranty obligations; and provisions for inventory allowance.
Subscriber acquisition costs do not include advertising, loyalty
payments to distributors and dealers of radios and revenue share
payments to automakers and retailers of radios.
F-13
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Subsidies paid to radio manufacturers and automakers are
expensed upon installation, shipment, receipt of product or
activation. Commissions paid to retailers and automakers are
expensed upon either the sale or activation of radios. 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 automaker confirms receipt.
We record product warranty obligations in accordance with
ASC 460,
Guarantees,
which requires a guarantor to
recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken by issuing the
guarantee. We warrant that certain products sold through our
retail and direct to consumer distribution channels will perform
in all material respects in accordance with specifications in
effect at the time of the purchase of the products by the
customer. The product warranty period on our products is
90 days from the purchase date for repair or replacement of
components
and/or
products that contain defects of material or workmanship. We
record a liability for costs that we expect to incur under our
warranty obligations when the product is shipped from the
manufacturer. Factors affecting the 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.
Research &
Development Costs
Research and development costs are expensed as incurred and
primarily include the cost of new product development, chip set
design, software development and engineering. During the years
ended December 31, 2010, 2009 and 2008, we recorded
research and development costs of $40,043, $38,852 and $41,362,
respectively. These costs are reported as a component of
Engineering, design and development expense in our consolidated
statements of operations.
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 recognized when, based on the weight of
all available evidence, 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.
ASC 740,
Income Taxes,
requires a company to first
determine whether it is more-likely-than-not that a tax position
will be sustained based on its technical merits as of the
reporting date, assuming that taxing authorities will examine
the position and have full knowledge of all relevant
information. A tax position that meets this more-likely-than-not
threshold is then measured and recognized at the largest amount
of benefit that is greater than fifty percent likely to be
realized upon effective settlement with a taxing authority.
Changes in recognition or measurement are reflected in the
period in which the change in judgment occurs. We record
interest and penalties related to uncertain tax positions in
income tax expense, net of amounts capitalized, in our
consolidated statement of operations.
We report revenues net of any tax assessed by a governmental
authority that is both imposed on, and concurrent with, a
specific revenue-producing transaction between a seller and a
customer in our consolidated statements of operations.
Earnings
per Share (“EPS”)
Basic net income (loss) per common share is calculated using the
weighted average common shares outstanding during each reporting
period. Diluted net income (loss) per common share adjusts the
weighted average common shares outstanding for the potential
dilution that could occur if common stock equivalents
(convertible debt and preferred stock, warrants, stock options,
restricted stock and restricted stock units) were
F-14
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
exercised or converted into common stock, calculated using the
treasury stock method. For the year ended December 31,
2010, common stock equivalents of approximately 689,922,000 were
excluded from the calculation of diluted net income per common
share as the effect would have been anti-dilutive. Due to the
net loss for the years ended December 31, 2009 and 2008,
common stock equivalents of approximately 3,381,905,000 and
787,000,000, respectively, were excluded from the calculation of
diluted net loss per common share as the effect would have been
anti-dilutive.
| Years Ended December 31, | ||||||||||||
| (In thousands, except per share data) | 2010 | 2009 | 2008 | |||||||||
|
Net income (loss)
|
$ | 43,055 | $ | (352,038 | ) | $ | (5,316,910 | ) | ||||
|
Preferred stock beneficial conversion feature
|
— | (186,188 | ) | — | ||||||||
|
Net income (loss) per common share:
|
$ | 43,055 | $ | (538,226 | ) | $ | (5,316,910 | ) | ||||
|
Average common shares outstanding-basic
|
3,693,259 | 3,585,864 | 2,169,489 | |||||||||
|
Dilutive effect of equity awards
|
2,697,812 | — | — | |||||||||
|
Average common shares outstanding-diluted
|
6,391,071 | 3,585,864 | 2,169,489 | |||||||||
|
Net income (loss) per common share
|
||||||||||||
|
Basic
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | ||||
|
Diluted
|
$ | 0.01 | $ | (0.15 | ) | $ | (2.45 | ) | ||||
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand, money market
funds, certificates of deposit, in-transit credit card receipts
and highly liquid investments with an original maturity of three
months or less when purchased. Cash and cash equivalents are
stated at fair market value.
Accounts
Receivable
Accounts receivable are stated at amounts due from customers net
of an allowance for doubtful accounts. Our allowance for
doubtful accounts considers historical experience, the age of
amounts due, current economic conditions and other factors that
may affect the counterparty’s ability to pay.
Accounts receivable, net, consists of the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Gross accounts receivable
|
$ | 131,880 | $ | 122,247 | ||||
|
Allowance for doubtful accounts
|
(10,222 | ) | (8,667 | ) | ||||
|
Total accounts receivable, net
|
$ | 121,658 | $ | 113,580 | ||||
Receivables from distributors include billed and unbilled
amounts due from OEMs for radio services included in the sale or
lease price of vehicles, as well as billed amounts due from
retailers. Receivables from distributors consist of the
following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Billed
|
$ | 30,456 | $ | 25,207 | ||||
|
Unbilled
|
37,120 | 23,531 | ||||||
|
Total
|
$ | 67,576 | $ | 48,738 | ||||
F-15
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Inventory
Inventory consists of finished goods, refurbished 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, obsolete or whose
carrying value is in excess of net realizable value. The
provision related to products purchased for resale in our direct
to consumer distribution channel and components held for resale
by us is reported as a component of Cost of equipment in our
consolidated statements of operations. The provision related to
inventory consumed in our OEM and retail distribution channel is
reported as a component of Subscriber acquisition costs in our
consolidated statements of operations.
Inventory, net, consists of the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Raw materials
|
$ | 18,181 | $ | 17,370 | ||||
|
Finished goods
|
24,492 | 19,704 | ||||||
|
Allowance for obsolescence
|
(20,755 | ) | (20,881 | ) | ||||
|
Total inventory, net
|
$ | 21,918 | $ | 16,193 | ||||
Investments
Marketable Securities
— Marketable securities
consist of certificates of deposit, auction rate certificates
and investments in debt and equity securities of other entities.
Our investment policy objectives are the preservation of
capital, maintenance of liquidity to meet operating requirements
and yield maximization. Marketable securities are classified as
available-for-sale
securities and carried at fair market value. Unrealized gains
and losses on
available-for-sale
securities are included in Accumulated other comprehensive loss,
net of tax, as a separate component of Stockholders’ equity
(deficit). Realized gains and losses, dividends and interest
income, including amortization of the premium or 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 other comprehensive loss into
earnings.
We received proceeds from the sale or maturity of marketable
securities of $9,456, $0 and $5,469 for the years ended
December 31, 2010, 2009 and 2008, respectively. We recorded
$425 of realized gains on marketable securities for the year
ended December 31, 2010 and $473 of net unrealized gains on
marketable securities for the year ended December 31, 2009.
Restricted Investments
— Restricted investments
consist of letters of credit, certificates of deposit, money
market funds and interest-bearing accounts which are restricted
as to their withdrawal. We received proceeds from the release of
restricted investments of $60,400 for the year ended
December 31, 2008.
Equity Method Investments
— Investments in
which we have the ability to exercise significant influence but
not control are accounted for pursuant to the equity method of
accounting. We recognize our proportionate share of earnings or
losses of our affiliates as they occur as a component of Other
(expense) income in our consolidated statements of operations.
We evaluate our equity method investments for impairment
whenever events, or changes in circumstances, indicate that the
carrying amounts of such investments may not be recoverable. The
difference between the carrying value and the estimated fair
values of our equity method investments is recognized as an
impairment loss when the loss is deemed to be other than
temporary.
Cost Method Investments
— Investments in equity
securities that do not have readily determinable fair values and
in which we do not have a controlling interest or are unable to
exert significant influence are recorded at cost.
F-16
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
ASC 820,
Fair Value Measurements and Disclosures,
establishes a fair value hierarchy for input into valuation
techniques as follows: i) Level 1 input —
unadjusted quoted prices in active markets for identical
instrument; ii) Level 2 input — observable
market data for the same or similar instrument but not
Level 1; and iii) Level 3 input —
unobservable inputs developed using management’s
assumptions about the inputs used for pricing the asset or
liability. We use Level 3 inputs to fair value our
investments in auction rate certificates issued by student loan
trusts and the 8% convertible unsecured subordinated debentures
issued by XM Canada. These investments are not material to our
consolidated results of operations or financial position.
Investments are periodically reviewed for impairment and a write
down is recorded whenever declines in fair value below carrying
value are determined to be other than temporary. In making this
determination, we consider, among other factors, the severity
and duration of the decline as well as the likelihood of a
recovery within a reasonable timeframe.
Property
and Equipment
Property and equipment, including satellites, are stated at cost
less accumulated depreciation and amortization. Equipment under
capital leases is stated at the present value of minimum lease
payments. Depreciation and amortization are calculated using the
straight-line method over the following estimated useful lives:
|
Satellite system
|
2 - 15 years | |
|
Terrestrial repeater network
|
5 - 15 years | |
|
Broadcast studio equipment
|
3 - 15 years | |
|
Capitalized software and hardware
|
3 - 7 years | |
|
Satellite telemetry, tracking and control facilities
|
3 - 17.5 years | |
|
Furniture, fixtures, equipment and other
|
2 - 7 years | |
|
Building
|
20 or 30 years | |
|
Leasehold improvements
|
Lesser of useful life or remaining lease term |
We review long-lived assets, such as property and equipment, and
purchased intangibles subject to amortization for impairment
whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. Recoverability of assets
to be held and used is measured by a comparison of the carrying
amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of
an asset exceeds the estimated future cash flows, an impairment
charge is recognized for the amount by which the carrying amount
exceeds the fair value of the asset.
Goodwill
and Other Intangible Assets
Goodwill represents the excess of the purchase price over the
estimated fair value of net tangible and identifiable intangible
assets acquired in business combinations. Our annual impairment
assessment of our single reporting unit is performed as of
October 1st of each year, and an assessment is
performed at other times if events or circumstances indicate it
is more likely than not that the asset is impaired. Step one of
the impairment assessment compares the fair value of the entity
to its carrying value and if the fair value exceeds its carrying
value, goodwill is not impaired. If the carrying value exceeds
the fair value, the implied fair value of goodwill is compared
to the carrying value of goodwill. If the implied fair value
exceeds the carrying value then goodwill is not impaired;
otherwise, an impairment loss will be recorded by the amount the
carrying value exceeds the implied fair value.
The impairment test for other intangible assets not subject to
amortization consists of a comparison of the fair value of the
intangible asset with its carrying value. If the carrying value
of the intangible asset exceeds its fair value, an impairment
loss is recognized in an amount equal to that excess.
F-17
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We use independent appraisals to assist in determining the fair
value of our FCC licenses. The income approach, which is
commonly called the “Jefferson Pilot Method” or the
“Greenfield Method”, has been consistently used to
estimate the fair value. This method attempts to isolate the
income that is properly attributable to the license alone (that
is, apart from tangible and intangible assets and goodwill). It
is based upon modeling a hypothetical “Greenfield”
build-up
to
a normalized enterprise that, by design, lacks inherent goodwill
and has essentially purchased (or added) all other assets as
part of the
build-up
process. The methodology assumes that, rather than acquiring
such an operation as a going concern, the buyer would
hypothetically obtain a license at nominal cost and build a new
operation with similar attributes from inception. The
significant assumption was that the hypothetical start up entity
would begin its network build out phase at the impairment
testing date and revenues and variable costs would not be
generated until the satellite network was operational,
approximately five years from inception.
Other intangible assets with finite lives are amortized over
their respective estimated useful lives to their estimated
residual values, and reviewed for impairment under the
provisions of
ASC 360-10-35,
Property, Plant and Equipment/Overall/Subsequent
Measurement
. We review intangible assets subject to
amortization for impairment whenever events or circumstances
indicate that the carrying amount of an asset may not be
recoverable. If the sum of the expected cash flows, undiscounted
and without interest, is less than the carrying amount of the
asset, an impairment loss is recognized as the amount by which
the carrying amount of the asset exceeds its fair value.
Fair
Value of Financial Instruments
The fair value of a financial instrument is the amount at which
the instrument could be exchanged in an orderly transaction
between market participants to sell the asset or transfer the
liability. As of December 31, 2010 and 2009, the carrying
amounts of cash and cash equivalents, accounts and other
receivables, and accounts payable approximated fair value due to
the short-term nature of these instruments.
The fair value for publicly traded instruments is determined
using quoted market prices while the fair value for non-publicly
traded instruments is based upon estimates from a market maker
and brokerage firm. As of December 31, 2010 and 2009, the
carrying value of our debt was $3,217,578 and $3,077,163,
respectively; and the fair value approximated $3,722,905 and
$3,195,375, respectively.
| (4) | Goodwill |
Goodwill represents the excess of the purchase price over the
estimated fair value of net tangible and identifiable intangible
assets acquired in business combinations. Our annual impairment
assessment is performed as of October 1st of each
year, and an assessment is performed at other times if events or
circumstances indicate it is more likely than not that the asset
is impaired. At October 1, 2010 and December 31, 2010,
the fair value of our single reporting unit substantially
exceeded its carrying value and therefore was not at risk of
failing step one of ASC
350-20,
Goodwill
(“ASC
350-20”).
As a result, there were no changes in the carrying value of our
goodwill during the years ended December 31, 2010 and 2009.
During 2008, we recorded goodwill in the amount of $6,601,046
and we recorded an impairment charge of $4,766,190.
F-18
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (5) | Intangible Assets |
Intangible assets consisted of the following:
| December 31, 2010 | December 31, 2009 | |||||||||||||||||||||||||||
|
Gross
|
Gross
|
|||||||||||||||||||||||||||
|
Weighted Average
|
Carrying
|
Accumulated
|
Net Carrying
|
Carrying
|
Accumulated
|
Net Carrying
|
||||||||||||||||||||||
| Useful Lives | Value | Amortization | Value | Value | Amortization | Value | ||||||||||||||||||||||
|
Indefinite life intangible assets:
|
||||||||||||||||||||||||||||
|
FCC licenses
|
Indefinite | $ | 2,083,654 | $ | — | $ | 2,083,654 | $ | 2,083,654 | $ | — | $ | 2,083,654 | |||||||||||||||
|
Trademark
|
Indefinite | 250,000 | — | 250,000 | 250,000 | — | 250,000 | |||||||||||||||||||||
|
Definite life intangible assets:
|
||||||||||||||||||||||||||||
|
Subscriber relationships
|
9 years | 380,000 | (144,325 | ) | 235,675 | 380,000 | (91,186 | ) | 288,814 | |||||||||||||||||||
|
Licensing agreements
|
9.1 years | 75,000 | (23,721 | ) | 51,279 | 75,000 | (13,906 | ) | 61,094 | |||||||||||||||||||
|
Proprietary software
|
6 years | 16,552 | (9,566 | ) | 6,986 | 16,552 | (6,823 | ) | 9,729 | |||||||||||||||||||
|
Developed technology
|
10 years | 2,000 | (483 | ) | 1,517 | 2,000 | (283 | ) | 1,717 | |||||||||||||||||||
|
Leasehold interests
|
7.4 years | 132 | (43 | ) | 89 | 132 | (25 | ) | 107 | |||||||||||||||||||
|
Total intangible assets
|
$ | 2,807,338 | $ | (178,138 | ) | $ | 2,629,200 | $ | 2,807,338 | $ | (112,223 | ) | $ | 2,695,115 | ||||||||||||||
Indefinite
Life Intangible Assets
We have identified our FCC licenses and the XM trademark as
indefinite life intangible assets after considering the expected
use of the assets, the regulatory and economic environment
within which they are used and the effects of obsolescence on
their use.
We hold FCC licenses to operate our satellite digital audio
radio service and provide ancillary services. The following
table outlines the years in which each of our licenses expires:
| FCC License | Expiration Year | |||
|
SIRIUS FM-1 satellite
|
2017 | |||
|
SIRIUS FM-2 satellite
|
2017 | |||
|
SIRIUS FM-3 satellite
|
2017 | |||
|
SIRIUS FM-4 ground spare satellite
|
2017 | |||
|
SIRIUS FM-5 satellite
|
2017 | |||
|
XM-1 satellite
|
2014 | |||
|
XM-2 satellite
|
2014 | |||
|
XM-3 satellite
|
2013 | |||
|
XM-4 satellite
|
2014 | |||
|
XM-5 satellite
|
2018 | |||
Prior to expiration, we are required to apply for a renewal of
our FCC licenses. The renewal and extension of our licenses is
reasonably certain at minimal cost, which is expensed as
incurred. Each of the FCC licenses authorizes us to use the
broadcast spectrum, which is a renewable, reusable resource that
does not deplete or exhaust over time.
F-19
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In connection with the Merger, $250,000 of the purchase price
was allocated to the XM trademark. As of December 31, 2010,
there were no legal, regulatory or contractual limitations
associated with the XM trademark.
Our annual impairment assessment of our indefinite intangible
assets is performed as of October 1st of each year. An
assessment is made at other times if events or changes in
circumstances indicate that it is more likely than not that the
assets have been impaired. At October 1, 2010 and
December 31, 2010, the fair value of our indefinite
intangible assets substantially exceeded its carrying value and
therefore was not at risk of impairment.
Definite
Life Intangible Assets
Subscriber relationships are amortized on an accelerated basis
over 9 years, which reflects the estimated pattern in which
the economic benefits will be consumed. Other definite life
intangible assets include certain licensing agreements, which
are amortized over a weighted average useful life of
9.1 years on a straight-line basis.
Amortization expense for definite life intangible assets was
$65,915, $76,587 and $35,789 for the years ended
December 31, 2010, 2009 and 2008, respectively. Expected
amortization expense for each of the fiscal years through
December 31, 2015 and for periods thereafter is as follows:
| Year Ending December 31, | Amount | |||
|
2011
|
$ | 58,850 | ||
|
2012
|
53,420 | |||
|
2013
|
47,097 | |||
|
2014
|
38,619 | |||
|
2015
|
37,293 | |||
|
Thereafter
|
60,267 | |||
|
Total definite life intangibles assets, net
|
$ | 295,546 | ||
| (6) | Subscriber Revenue |
Subscriber revenue consists of subscription fees, revenue
derived from agreements with certain daily rental fleet
operators, non-refundable activation and other fees as well as
the effects of rebates. Revenues received from OEMs for
subscriptions included in the sale or lease price of vehicles
are also included in subscriber revenue over the service period.
Subscriber revenue consists of the following:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Subscription fees
|
$ | 2,398,790 | $ | 2,266,809 | $ | 1,529,726 | ||||||
|
Activation fees
|
16,028 | 21,837 | 23,025 | |||||||||
|
Effect of rebates
|
(644 | ) | (1,143 | ) | (3,832 | ) | ||||||
|
Total subscriber revenue
|
$ | 2,414,174 | $ | 2,287,503 | $ | 1,548,919 | ||||||
F-20
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (7) | Interest Costs |
We capitalize a portion of the interest on funds borrowed to
finance the construction costs of our satellites and related
launch vehicles for our FM-6 and XM-5 satellites. We also incur
interest costs on all of our debt instruments and on our
satellite incentive agreements. The following is a summary of
our interest costs:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Interest costs charged to expense
|
$ | 295,643 | $ | 315,668 | $ | 148,455 | ||||||
|
Interest costs capitalized
|
63,880 | 61,201 | 20,872 | |||||||||
|
Total interest costs incurred
|
$ | 359,523 | $ | 376,869 | $ | 169,327 | ||||||
Included in interest costs incurred is non-cash interest
expense, consisting of amortization related to original issue
discounts, premiums and deferred financing fees of $42,841,
$43,066 and $(2,689) for the years ended December 31, 2010,
2009 and 2008, respectively.
| (8) | Property and Equipment |
Property and equipment, net, consists of the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Satellite system
|
$ | 1,943,537 | $ | 1,680,732 | ||||
|
Terrestrial repeater network
|
109,582 | 108,841 | ||||||
|
Leasehold improvements
|
43,567 | 43,480 | ||||||
|
Broadcast studio equipment
|
51,985 | 49,965 | ||||||
|
Capitalized software and hardware
|
163,689 | 146,035 | ||||||
|
Satellite telemetry, tracking and control facilities
|
57,665 | 55,965 | ||||||
|
Furniture, fixtures, equipment and other
|
63,265 | 57,536 | ||||||
|
Land
|
38,411 | 38,411 | ||||||
|
Building
|
56,685 | 56,424 | ||||||
|
Construction in progress
|
297,771 | 430,543 | ||||||
|
Total property and equipment
|
2,826,157 | 2,667,932 | ||||||
|
Accumulated depreciation and amortization
|
(1,064,883 | ) | (956,929 | ) | ||||
|
Property and equipment, net
|
$ | 1,761,274 | $ | 1,711,003 | ||||
Construction in progress consists of the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Satellite system
|
$ | 262,744 | $ | 398,425 | ||||
|
Terrestrial repeater network
|
19,239 | 19,396 | ||||||
|
Other
|
15,788 | 12,722 | ||||||
|
Construction in progress
|
$ | 297,771 | $ | 430,543 | ||||
Depreciation and amortization expense on property and equipment
was $207,367, $232,863 and $167,963 for the years ended
December 31, 2010, 2009 and 2008, respectively. We retired
property and equipment, which included our SIRIUS FM-4
satellite, with a cost basis of $155,000 during the year ended
December 31, 2010.
F-21
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Satellites
We own four orbiting satellites and one spare satellite, FM-4,
for use in the SIRIUS system. These satellites are of the Loral
FS-1300 model series. Space Systems/Loral is constructing a
sixth satellite for use in this system. We have an agreement
with International Launch Services to launch this satellite on a
Proton rocket.
During the fourth quarter of 2010, we recorded an other than
temporary impairment charge of $56,100 to Restructuring,
impairments, and related costs in the statement of operations
for FM-4, a ground spare satellite held in storage since 2002.
We determined that the probability of launching FM-4 is remote
due to the launch of XM-5 in the fourth quarter of 2010 and our
business plan.
We own five orbiting satellites for use in the XM system. Four
of these satellites were manufactured by Boeing Satellite
Systems International and one was manufactured by Space
Systems/Loral.
During the year ended December 31, 2010, we capitalized
interest of $63,880 and expenditures of $184,727 related to the
construction of our satellites and related launch vehicles for
FM-6 and XM-5.
| (9) | Related Party Transactions |
We had the following related party transaction balances at
December 31, 2010 and 2009:
|
Related party
|
Related Party
|
Related Party
|
Related Party
|
Related Party
|
||||||||||||||||||||||||||||||||||||
| Current Assets | Long-Term Assets | Current Liabilities | Long-Term Liabilities | Long-Term Debt | ||||||||||||||||||||||||||||||||||||
| 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||||||||||||
|
Liberty Media
|
$ | — | $ | — | $ | 1,571 | $ | 1,974 | $ | 9,765 | $ | 8,523 | $ | — | $ | — | $ | 325,907 | $ | 263,579 | ||||||||||||||||||||
|
SIRIUS Canada
|
5,613 | 2,327 | — | — | 1,805 | — | — | — | — | — | ||||||||||||||||||||||||||||||
|
XM Canada
|
1,106 | 1,011 | 28,591 | 24,429 | 4,275 | 2,775 | 24,517 | 28,793 | — | — | ||||||||||||||||||||||||||||||
|
General Motors
|
— | 99,995 | — | 85,364 | — | 93,107 | — | 17,508 | — | — | ||||||||||||||||||||||||||||||
|
American Honda
|
— | 2,914 | — | — | — | 3,841 | — | — | — | — | ||||||||||||||||||||||||||||||
|
Total
|
$ | 6,719 | $ | 106,247 | $ | 30,162 | $ | 111,767 | $ | 15,845 | $ | 108,246 | $ | 24,517 | $ | 46,301 | $ | 325,907 | $ | 263,579 | ||||||||||||||||||||
Neither General Motors nor American Honda is considered a
related party following May 27, 2010, the date on which the
individuals nominated by General Motors and American Honda,
respectively, ceased to be members of our board of directors.
Liberty
Media
In February, 2009, we entered into an Investment Agreement (the
“Investment Agreement”) with an affiliate of Liberty
Media Corporation, Liberty Radio, LLC (collectively,
“Liberty Media”). Pursuant to the Investment
Agreement, in March 2009 we issued to Liberty Radio, LLC
12,500,000 shares of our Convertible Perpetual Preferred
Stock, Series B (the “Series B Preferred
Stock”), with a liquidation preference of $0.001 per share
in partial consideration for certain loan investments. Liberty
Media has representatives on our board of directors.
The Series B Preferred Stock is convertible into
2,586,976,000 shares of common stock. Liberty Media has
agreed not to acquire more than 49.9% of our outstanding common
stock prior to March 2012, except that Liberty Media may acquire
more than 49.9% of our outstanding common stock at any time
after March 2011 pursuant to any cash tender offer for all of
the outstanding shares of our common stock that are not
beneficially owned by Liberty Media or its affiliates at a price
per share greater than the closing price of the common stock on
the trading day preceding the earlier of the public announcement
or commencement of such tender offer. The Investment Agreement
also provides for certain other standstill provisions during the
three year period ending in March 2012.
F-22
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We accounted for the Series B Preferred Stock by recording
a $227,716 increase to additional paid-in capital, excluding
issuance costs, for the amount of allocated proceeds received
and an additional $186,188 increase in paid-in capital for the
beneficial conversion feature, which was immediately recognized
as a charge to retained earnings.
Loan
Investments
On February 17, 2009, SIRIUS entered into a Credit
Agreement (the “LM Credit Agreement”) with Liberty
Media Corporation, as administrative agent and collateral agent,
and Liberty Media, LLC, as lender. The LM Credit Agreement
provided for a $250,000 term loan and $30,000 of purchase money
loans. In August 2009, we repaid all amounts due and terminated
the LM Credit Agreement in connection with the issue and sale of
SIRIUS’ 9.75% Senior Secured Notes due 2015.
On February 17, 2009, XM entered into a Credit Agreement
with Liberty Media Corporation, as administrative agent and
collateral agent, and Liberty Media, LLC, as lender. On
March 6, 2009, XM amended and restated that credit
agreement (the “Second-Lien Credit Agreement”) with
Liberty Media Corporation. In June 2009, XM repaid all amounts
due and terminated the Second-Lien Credit Agreement in
connection with the issue and sale of its 11.25% Senior
Secured Notes due 2013.
On March 6, 2009, XM amended and restated the $100,000 Term
Loan, dated as of June 26, 2008 and the $250,000 Credit
Agreement, dated as of May 5, 2006. These facilities were
combined as term loans into the Amended and Restated Credit
Agreement, dated as of March 6, 2009. Liberty Media, LLC,
purchased $100,000 aggregate principal amount of such loans from
the existing lenders. In June 2009, XM used a portion of the net
proceeds from the sale of its 11.25% Senior Secured Notes
due 2013 to extinguish the Amended and Restated Credit Agreement.
Liberty Media has advised us that as of December 31, 2010
and 2009, respectively, it owned the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
9.625% Senior Notes due 2013
|
$ | — | $ | 55,221 | ||||
|
8.75% Senior Notes due 2015
|
150,000 | — | ||||||
|
9.75% Senior Secured Notes due 2015
|
50,000 | 50,000 | ||||||
|
11.25% Senior Secured Notes due 2013
|
— | 87,000 | ||||||
|
13% Senior Notes due 2013
|
76,000 | 76,000 | ||||||
|
7% Exchangeable Senior Subordinated Notes due 2014
|
11,000 | 11,000 | ||||||
|
7.625% Senior Notes due 2018
|
50,000 | — | ||||||
|
Total principal debt
|
337,000 | 279,221 | ||||||
|
Less: discounts
|
11,093 | 15,642 | ||||||
|
Total carrying value debt
|
$ | 325,907 | $ | 263,579 | ||||
In October 2010, Liberty Media tendered its $87,000 of the
11.25% Senior Secured Notes due 2013 and purchased $50,000
of the 7.625% Senior Notes due 2018 at issuance.
As of December 31, 2010 and 2009, we recorded $9,765 and
$8,523, respectively, related to accrued interest with Liberty
Media to Related party current liabilities. We recognized
Interest expense associated with debt held by Liberty Media of
$40,169 and $79,640 for the years ended December 31, 2010
and 2009, respectively.
SIRIUS
Canada
In 2005, we entered into a license and services agreement with
SIRIUS Canada. Pursuant to such agreement, SIRIUS is reimbursed
for certain costs incurred to provide SIRIUS Canada service,
including certain costs incurred
F-23
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
for the production and distribution of radios, as well as
information technology support costs. In consideration for the
rights granted pursuant to this license and services agreement,
we have the right to receive a royalty equal to a percentage of
SIRIUS Canada’s gross revenues based on subscriber levels
(ranging between 5% to 15%) and the number of Canadian-specific
channels made available to SIRIUS Canada. Our investment in
SIRIUS Canada is primarily non-voting shares which carry an 8%
cumulative dividend.
We recorded the following revenue from SIRIUS Canada. Royalty
income is included in other revenue and dividend income is
included in Interest and investment income (loss) in our
consolidated statements of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Royalty income
|
$ | 10,684 | $ | 5,797 | $ | 1,309 | ||||||
|
Dividend income
|
926 | 839 | 199 | |||||||||
|
Total revenue from SIRIUS Canada
|
$ | 11,610 | $ | 6,636 | $ | 1,508 | ||||||
Receivables from royalty and dividend income were utilized to
absorb a portion of our share of net losses generated by SIRIUS
Canada during the years ended December 31, 2010 and 2009.
Total costs that have been or will be reimbursed by SIRIUS
Canada for the years ended December 31, 2010, 2009 and 2008
were $12,185, $11,031 and $14,973, respectively.
XM
Canada
In 2005, XM entered into agreements to provide XM Canada with
the right to offer XM satellite radio service in Canada. The
agreements have an initial ten year term and XM Canada has the
unilateral option to extend the agreements for an additional
five years. We receive a 15% royalty for all subscriber fees
earned by XM Canada each month for its basic service and an
activation fee for each gross activation of an XM Canada
subscriber on XM’s system. XM Canada is obligated to pay us
a total of $70,300 for the rights to broadcast and market
National Hockey League (“NHL”) games for a
10-year
term. We recognize these payments on a gross basis as a
principal obligor pursuant to the provisions of ASC 605,
Revenue Recognition
. The estimated fair value of deferred
revenue from XM Canada as of the Merger date was approximately
$34,000, which is amortized on a straight-line basis through
2020, the expected term of the agreements. As of
December 31, 2010 and 2009, the carrying value of deferred
revenue related to XM Canada was $28,792 and $31,568,
respectively.
We have extended a Cdn$45,000 standby credit facility to XM
Canada, which can be utilized to purchase terrestrial repeaters
or finance royalty and activation fees payable to us. The
facility matures on December 31, 2012 and bears interest at
17.75% per annum. We have the right to convert unpaid principal
amounts into Class A subordinate voting shares of XM Canada
at the price of Cdn$16.00 per share. As of December 31,
2010 and 2009, amounts drawn by XM Canada on this facility in
lieu of payment of fees recorded in Related party long-term
assets were $21,390, net of a $9,607 valuation allowance, and
$18,429, respectively. The December 31, 2010 valuation
allowance of $9,607 related to the absorption of our share of
the net loss from our investment in XM Canada shares.
As of December 31, 2010 and 2009, amounts due from XM
Canada also included $7,201 and $6,000, respectively,
attributable to deferred programming costs and accrued interest
(in addition to the amounts drawn on the standby credit
facility), all of which is reported as Related party long-term
assets.
F-24
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We recorded the following revenue from XM Canada as Other
revenue in our consolidated statements of operations:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Amortization of XM Canada deferred income
|
$ | 2,776 | $ | 2,776 | $ | 1,156 | ||||||
|
Subscriber and activation fee royalties
|
10,313 | 11,603 | 97 | |||||||||
|
Licensing fee revenue
|
4,500 | 6,000 | 2,500 | |||||||||
|
Advertising reimbursements
|
1,083 | 1,067 | 366 | |||||||||
|
Total revenue from XM Canada
|
$ | 18,672 | $ | 21,446 | $ | 4,119 | ||||||
General
Motors and American Honda
We have a long-term distribution agreement with General Motors
Company (“GM”). GM had a representative on our board
of directors and was considered a related party through
May 27, 2010. During the term of the agreement, GM has
agreed to distribute the XM service. We subsidize a portion of
the cost of satellite radios and makes incentive payments to GM
when the owners of GM vehicles with factory- or dealer-installed
satellite radios become self-paying subscribers. We also share
with GM a percentage of the subscriber revenue attributable to
GM vehicles with factory- or dealer- installed satellite radios.
As part of the agreement, GM provides certain call-center
related services directly to subscribers who are also GM
customers for which we reimburse GM.
We make bandwidth available to OnStar Corporation for audio and
data transmissions to owners of enabled GM vehicles, regardless
of whether the owner is a subscriber. OnStar’s use of our
bandwidth must be in compliance with applicable laws, must not
compete or adversely interfere with our business, and must meet
our quality standards. We also granted to OnStar a certain
amount of time to use our studios on an annual basis and agreed
to provide certain audio content for distribution on
OnStar’s services.
We have a long-term distribution agreement with American Honda.
American Honda had a representative on our board of directors
and was considered a related party through May 27, 2010. We
have an agreement to make a certain amount of its bandwidth
available to American Honda. American Honda’s use of our
bandwidth must be in compliance with applicable laws, must not
compete or adversely interfere with our business, and must meet
our quality standards. This agreement remains in effect so long
as American Honda holds a certain amount of its investment in
us. We make incentive payments to American Honda for each
purchaser of a Honda or Acura vehicle that becomes a self-paying
subscriber and shares with American Honda a portion of the
subscriber revenue attributable to Honda and Acura vehicles with
installed satellite radios.
As of May 27, 2010, the following aggregate assets and
liabilities related to GM and American Honda were reclassified
from related party to non-related party:
|
Balance sheet line item:
|
||||
|
Related party current assets
|
$ | 107,908 | ||
|
Related party long term assets
|
73,016 | |||
|
Related party current liabilities
|
57,996 |
F-25
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We recorded the following total related party revenue from GM
and American Honda, primarily consisting of subscriber revenue,
in connection with the agreements above:
| For the Years Ended December 31, | ||||||||||||
| 2010* | 2009 | 2008 | ||||||||||
|
GM
|
$ | 12,759 | $ | 31,037 | $ | 16,803 | ||||||
|
American Honda
|
4,990 | 12,254 | 7,504 | |||||||||
|
Total
|
$ | 17,749 | $ | 43,291 | $ | 24,307 | ||||||
| * | GM and American Honda were considered related parties through May 27, 2010. |
We have incurred the following related party expenses with GM
and American Honda:
| For the Years Ended December 31, | ||||||||||||||||||||||||
| 2010* | 2009 | 2008 | ||||||||||||||||||||||
|
American
|
American
|
American
|
||||||||||||||||||||||
| GM | Honda | GM | Honda | GM | Honda | |||||||||||||||||||
|
Sales and marketing
|
$ | 13,374 | $ | — | $ | 31,595 | $ | 500 | $ | 16,115 | $ | 815 | ||||||||||||
|
Revenue share and royalties
|
15,823 | 3,167 | 58,992 | 6,541 | 36,305 | 2,051 | ||||||||||||||||||
|
Subscriber acquisition costs
|
17,514 | 1,969 | 34,895 | 5,397 | 30,975 | 3,433 | ||||||||||||||||||
|
Customer service and billing
|
125 | — | 268 | — | 119 | — | ||||||||||||||||||
|
Interest expense, net of amounts capitalized
|
1,421 | — | 4,644 | — | 51 | — | ||||||||||||||||||
|
Total
|
$ | 48,257 | $ | 5,136 | $ | 130,394 | $ | 12,438 | $ | 83,565 | $ | 6,299 | ||||||||||||
| * | GM and American Honda were considered related parties through May 27, 2010. |
| (10) | Investments |
Our investments consist of the following:
|
December 31,
|
December 31,
|
|||||||
| 2010 | 2009 | |||||||
|
Investment in SIRIUS Canada
|
$ | — | $ | — | ||||
|
Investment in XM Canada
|
— | 2,390 | ||||||
|
Investment in XM Canada debentures
|
3,313 | 2,970 | ||||||
|
Auction rate certificates
|
— | 8,556 | ||||||
|
Restricted investments
|
3,396 | 3,400 | ||||||
|
Total investments
|
$ | 6,709 | $ | 17,316 | ||||
Canadian
Entities
Our investments in SIRIUS Canada and XM Canada (the
“Canadian Entities”) are recorded using the equity
method since we have a significant influence, but do not control
the Canadian Entities. Under this method, our investments in the
Canadian Entities, originally recorded at cost, are adjusted
quarterly to recognize our proportionate share of net earnings
or losses as they occur, rather than at the time dividends or
other distributions are received, limited to the extent of our
investment in, advances to and commitments to fund the Canadian
Entities. We have a 49.9% economic interest in SIRIUS Canada and
a 21.54% economic interest in XM Canada.
F-26
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Our share of net earnings or losses of the Canadian Entities is
recorded to Interest and investment income (loss) in our
consolidated statements of operations. As it relates to XM
Canada, this is done on a one month lag. We evaluate the
Canadian Entities periodically and record an impairment charge
to Interest and investment income (loss) in our consolidated
statements of operations if we determine that decreases in fair
value are considered to be other-than temporary. In addition,
any payments received from the Canadian Entities in excess of
the carrying value of our investments in, advances to and
commitments to such entity is recorded to Interest and
investment income (loss) in our consolidated statements of
operations.
We recorded the following related party amounts to Interest and
investment income (loss):
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Share of SIRIUS Canada net loss
|
$ | (10,257 | ) | $ | (6,636 | ) | $ | (4,745 | ) | |||
|
Payments received from SIRIUS Canada in excess of carrying value
|
10,281 | 13,738 | — | |||||||||
|
Release of liability with SIRIUS Canada
|
— | 1,351 | — | |||||||||
|
Share of XM Canada net loss
|
(12,147 | ) | (2,292 | ) | (9,309 | ) | ||||||
|
Impairment of XM Canada
|
— | (4,734 | ) | (16,453 | ) | |||||||
|
Realized gain on sale of auction rate certificates
|
425 | — | — | |||||||||
|
Other
|
— | 504 | — | |||||||||
|
Total
|
$ | (11,698 | ) | $ | 1,931 | $ | (30,507 | ) | ||||
In addition, during the years ended December 31, 2010 and
2009, we recorded $149 and $543, respectively, of a foreign
exchange gain to Accumulated other comprehensive loss, net of
tax, related to our investment in XM Canada.
We hold an investment in Cdn$4,000 face value of 8% convertible
unsecured subordinated debentures issued by XM Canada, for which
the embedded conversion feature is bifurcated from the host
contract. The host contract is accounted for at fair value as an
available-for-sale
security with changes in fair value recorded to Accumulated
other comprehensive loss, net of tax. The embedded conversion
feature is accounted for at fair value as a derivative with
changes in fair value recorded in earnings as Interest and
investment income (loss). As of December 31, 2010, the
carrying values of the host contract and embedded derivative
related to our investment in the debentures was $3,302 and $11,
respectively. As of December 31, 2009, the carrying values
of the host contract and embedded derivative related to our
investment in the debentures was $2,961 and $9, respectively.
Auction
Rate Certificates
Auction rate certificates are long-term securities structured to
reset their coupon rates by means of an auction. We accounted
for our investment in auction rate certificates as
available-for-sale
securities. In January 2010, our investment in the auction rate
certificates was called by the issuer at par plus accrued
interest, or $9,456, resulting in a gain of $425 in the year
ended December 31, 2010.
Restricted
Investments
Restricted investments relate to reimbursement obligations under
letters of credit issued for the benefit of lessors of office
space. As of December 31, 2010 and 2009, Long-term
restricted investments were $3,396 and $3,400, respectively.
F-27
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (11) | Debt |
Our debt consists of the following:
|
Conversion
|
||||||||||||
|
Price
|
December 31,
|
December 31,
|
||||||||||
| (per Share) | 2010 | 2009 | ||||||||||
|
3.25% Convertible Notes due 2011(a)
|
$ | 5.30 | $ | 191,979 | $ | 230,000 | ||||||
|
Less: discount
|
(515 | ) | (1,371 | ) | ||||||||
|
Senior Secured Term Loan due 2012(b)
|
N/A | — | 244,375 | |||||||||
|
9.625% Senior Notes due 2013(c)
|
N/A | — | 500,000 | |||||||||
|
Less: discount
|
— | (3,341 | ) | |||||||||
|
8.75% Senior Notes due 2015(d)
|
N/A | 800,000 | — | |||||||||
|
Less: discount
|
(12,213 | ) | — | |||||||||
|
9.75% Senior Secured Notes due 2015(e)
|
N/A | 257,000 | 257,000 | |||||||||
|
Less: discount
|
(10,116 | ) | (11,695 | ) | ||||||||
|
10% Senior PIK Secured Notes due 2011(f)
|
N/A | — | 113,685 | |||||||||
|
Less: discount
|
— | (7,325 | ) | |||||||||
|
11.25% Senior Secured Notes due 2013(g)
|
N/A | 36,685 | 525,750 | |||||||||
|
Less: discount
|
(1,705 | ) | (32,259 | ) | ||||||||
|
13% Senior Notes due 2013(h)
|
N/A | 778,500 | 778,500 | |||||||||
|
Less: discount
|
(59,592 | ) | (76,601 | ) | ||||||||
|
9.75% Senior Notes due 2014(i)
|
N/A | — | 5,260 | |||||||||
|
7% Exchangeable Senior Subordinated Notes due 2014(j)
|
$ | 1.875 | 550,000 | 550,000 | ||||||||
|
Less: discount
|
(7,620 | ) | (9,119 | ) | ||||||||
|
7.625% Senior Notes due 2018(k)
|
N/A | 700,000 | — | |||||||||
|
Less: discount
|
(12,054 | ) | — | |||||||||
|
Other debt:
|
||||||||||||
|
Capital leases
|
N/A | 7,229 | 14,304 | |||||||||
|
Total debt
|
3,217,578 | 3,077,163 | ||||||||||
|
Less: total current maturities non-related party
|
195,815 | 13,882 | ||||||||||
|
Total long-term
|
3,021,763 | 3,063,281 | ||||||||||
|
Less: related party
|
325,907 | 263,579 | ||||||||||
|
Total long-term, excluding related party
|
$ | 2,695,856 | $ | 2,799,702 | ||||||||
| (a) | 3.25% Convertible Notes due 2011 |
In October 2004, we issued $230,000 in aggregate principal
amount of 3.25% Convertible Notes due October 15, 2011
(the “3.25% Notes”), which 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 principal amount, or $5.30 per share of
common stock, subject to certain adjustments. Interest is
payable semi-annually on April 15 and October 15 of each year.
The obligations under the 3.25% Notes are not secured by
any of our assets. In December 2010, we purchased $38,021 of the
outstanding 3.25% Notes at a price of 100.25% of the
principal amount plus accrued interest. We recorded an aggregate
loss on extinguishment of the 3.25% Notes of $209,
F-28
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
consisting primarily of unamortized discount, deferred financing
fees and repayment of premium to Loss on extinguishment of debt
and credit facilities, net, in our consolidated statement of
operations.
In February 2011, we purchased $94,148 of the outstanding
3.25% Notes at a price of 100.75%-100.94% of the principal
amount plus accrued interest. We will recognize an aggregate
loss on extinguishment of $1,079 on the 3.25% Notes, which
consists primarily of unamortized discount and deferred
financing fees in the first quarter of 2011.
| (b) | Senior Secured Term Loan due 2012 |
In June 2007, we entered into a term credit agreement with a
syndicate of financial institutions. The term credit agreement
provided for a senior secured term loan (the “Senior
Secured Term Loan”) of $250,000, which was fully drawn. On
March 16, 2010, we used net proceeds of $244,714 from the
sale of our 8.75% Senior Notes due 2015 to repay the Senior
Secured Term Loan, including accrued and unpaid interest of
$339. We recorded an aggregate loss on extinguishment on the
Senior Secured Term Loan of $2,450, consisting of deferred
financing fees to Loss on extinguishment of debt and credit
facilities, net, in our consolidated statements of operations.
| (c) | 9.625% Senior Notes due 2013 |
In August 2005, we issued $500,000 in aggregate principal amount
of 9.625% Senior Notes due 2013 (the
“9.625% Notes”). In April 2010, we used net
proceeds of $534,091 from the issuance of our 8.75% Senior
Notes due 2015 to redeem the 9.625% Notes, including
accrued and unpaid interest of $10,026 and a repayment premium
of $24,065. We recorded an aggregate loss on extinguishment on
the 9.625% Notes of $27,705, consisting primarily of
unamortized discount, deferred financing fees and repayment
premium to Loss on extinguishment of debt and credit facilities,
net, in our consolidated statements of operations.
| (d) | 8.75% Senior Notes due 2015 |
In March 2010, we issued $800,000 aggregate principal amount of
8.75% Senior Notes due 2015 (the
“8.75% Notes”). Interest is payable semi-annually
in arrears on April 1 and October 1 of each year at a rate of
8.75% per annum. The 8.75% Notes mature on April 1,
2015. The 8.75% Notes were issued for $786,000, resulting
in an aggregate original issuance discount of $14,000.
Substantially all of our domestic wholly-owned subsidiaries
guarantee our obligations under the 8.75% Notes on a senior
unsecured basis.
| (e) | 9.75% Senior Secured Notes due 2015 |
In August 2009, we issued $257,000 aggregate principal amount of
9.75% Senior Secured Notes due September 1, 2015 (the
“9.75% Notes”). Interest is payable semi-annually
in arrears on March 1 and September 1 of each year at a rate of
9.75% per annum. The 9.75% Notes were issued for $244,292,
resulting in an aggregate original issuance discount of $12,708.
Substantially all of our domestic wholly-owned subsidiaries
guarantee our obligations under the 9.75% Notes. The
9.75% Notes and related guarantees are secured by
first-priority liens on substantially all of our assets and the
assets of the guarantors. In connection with the merger of XM
Satellite Radio Inc. into us, we entered into a new collateral
agreement relating to the 9.75% Notes which secures the
9.75% Notes with a lien on substantially all of our and the
guarantors’ assets.
| (f) | 10% Senior PIK Secured Notes due 2011 |
On December 31, 2009, XM had outstanding $113,685 aggregate
principal amount of 10% Senior PIK Secured Notes due 2011
(the “PIK Notes”). On June 1, 2010, XM redeemed
all outstanding PIK Notes at a price of 100% plus accrued
interest. We recognized an aggregate loss on extinguishment of
the PIK Notes of $4,138, consisting primarily of unamortized
discount, as a Loss on extinguishment of debt and credit
facilities, net, in our consolidated statements of operations.
F-29
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
| (g) | 11.25% Senior Secured Notes due 2013 |
In June 2009, XM issued $525,750 aggregate principal amount of
11.25% Senior Secured Notes due 2013 (the
“11.25% Notes”). The 11.25% Notes were
issued for $488,398, resulting in an aggregate original issuance
discount of $37,352.
In October 2010, XM purchased $489,065 in aggregate principal
amount of the 11.25% Notes. The aggregate purchase price
for the 11.25% Notes, including the consent payments and
accrued and unpaid interest, was $567,927. We recorded an
aggregate loss on extinguishment of the 11.25% Notes of
$85,216, consisting primarily of unamortized discount, deferred
financing fees and repayment premium to Loss on extinguishment
of debt and credit facilities, net, in our consolidated
statement of operations. The purchases were made pursuant to a
tender offer for the 11.25% Notes. Concurrent with the
tender offer for the 11.25% Notes, XM solicited consents to
amend the 11.25% Notes and the related indenture and
security documents to eliminate most of the restrictive
covenants and certain events of default applicable to the
11.25% Notes and to release the security for, and
guarantees of, the 11.25% Notes.
The remainder of the 11.25% Notes of $36,685 was purchased
in January 2011 for an aggregate purchase price of $40,376. A
loss from extinguishment of debt of $4,891 will be recorded in
the first quarter of 2011.
| (h) | 13% Senior Notes due 2013 |
In July 2008, XM issued $778,500 aggregate principal amount of
13% Senior Notes due 2013 (the “13% Notes”).
Interest is payable semi-annually in arrears on February 1 and
August 1 of each year at a rate of 13% per annum. The
13% Notes mature on August 1, 2013. Substantially all
of our domestic wholly-owned subsidiaries guarantee the
obligations under the 13% Notes.
| (i) | 9.75% Senior Notes due 2014 |
On December 31, 2009, XM had outstanding $5,260 aggregate
principal amount of 9.75% Senior Notes due 2014 (the
“XM 9.75% Notes”). In August 2010, XM redeemed
all of the outstanding XM 9.75% Notes plus accrued interest
of $150 for $5,666. We recorded a loss on extinguishment on the
XM 9.75% Notes of $256 due to the cash redemption premium
paid, as a Loss on extinguishment of debt and credit facilities,
net, in our consolidated statements of operations.
| (j) | 7% Exchangeable Senior Subordinated Notes due 2014 |
In August 2008, XM issued $550,000 aggregate principal amount of
7% Exchangeable Senior Subordinated Notes due 2014 (the
“Exchangeable Notes”). The Exchangeable Notes are
senior subordinated obligations and rank junior in right of
payment to our existing and future senior debt and equally in
right of payment with our existing and future senior
subordinated debt. Substantially all of our domestic
wholly-owned subsidiaries have guaranteed the Exchangeable Notes
on a senior subordinated basis.
Interest is payable semi-annually in arrears on June 1 and
December 1 of each year at a rate of 7% per annum. The
Exchangeable Notes mature on December 1, 2014. The
Exchangeable Notes are exchangeable at any time at the option of
the holder into shares of our common stock at an initial
exchange rate of 533.3333 shares of common stock per $1,000
principal amount of Exchangeable Notes, which is equivalent to
an approximate exchange price of $1.875 per share of common
stock.
| (k) | 7.625% Senior Notes due 2018 |
In October 2010, XM issued $700,000 aggregate principal amount
of 7.625% Senior Notes due 2018 (the
“7.625% Senior Notes”). Interest is payable
semi-annually in arrears on May 1 and November 1 of each year,
commencing on May 1, 2011, at a rate of 7.625% per annum. A
majority of the net proceeds were used to purchase
F-30
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
$489,065 aggregate principal amount of the 11.25% Notes.
The 7.625% Senior Notes mature on November 1, 2018.
Substantially all of our domestic wholly-owned subsidiaries
guarantee our obligations under the 7.625% Senior Notes.
Expired
Credit Arrangements
LM Term
Loan and LM Purchase Money Loan
In February 2009, SIRIUS entered into a Credit Agreement (the
“LM Credit Agreement”) with Liberty Media Corporation,
as administrative agent and collateral agent. The LM Credit
Agreement provided for a $250,000 term loan (“LM Term
Loan”) and $30,000 of purchase money loans (“LM
Purchase Money Loan”). Concurrently with entering into the
LM Credit Agreement, SIRIUS borrowed $250,000 under the LM Term
Loan. The proceeds of the LM Term Loan were used (i) to
repay at maturity our outstanding 2.5% Convertible Notes
due February 17, 2009 and (ii) for general corporate
purposes, including related transaction costs.
In August 2009, SIRIUS used net proceeds from the sale of its
9.75% Notes to extinguish the LM Term Loan and LM Purchase
Money Loan. We recorded an aggregate loss on extinguishment of
the LM Term Loan and LM Purchase Money Loan of $134,520
consisting primarily of the unamortized discount, deferred
financing fees and unaccreted portion of the repayment premium
to Loss on extinguishment of debt and credit facilities, net, in
our consolidated statements of operations.
Amended
and Restated Credit Agreement due 2011
In March 2009, XM amended and restated the $100,000 Senior
Secured Term Loan due 2009, dated as of June 26, 2008, and
the $250,000 Senior Secured Revolving Credit Facility due 2009,
dated as of May 5, 2006. These facilities were combined as
term loans into the Amended and Restated Credit Agreement, dated
as of March 6, 2009. Liberty Media LLC purchased $100,000
aggregate principal amount of such loans from the lenders.
In June 2009, XM used net proceeds from the sale of its
11.25% Notes to repay amounts due under and extinguish the
Amended and Restated Credit Agreement. XM paid a repayment
premium of $6,500. We recorded an aggregate loss on
extinguishment of the Amended and Restated Credit Agreement of
$49,996 consisting primarily of the unamortized discount,
deferred financing fees and unaccreted portion of the repayment
premium to Loss on extinguishment of debt and credit facilities,
net, in our consolidated statements of operations.
Second-Lien
Credit Agreement
In February 2009, XM entered into a Credit Agreement (the
“XM Credit Agreement”) with Liberty Media Corporation,
as administrative agent and collateral agent. The XM Credit
Agreement provided for a $150,000 term loan. On March 6,
2009, XM amended and restated the XM Credit Agreement (the
“Second-Lien Credit Agreement”) with Liberty Media
Corporation.
In June 2009, XM terminated the Second-Lien Credit Agreement in
connection with the sale of the 11.25% Notes and repaid all
amounts due thereunder. We recorded a loss on termination of the
Second-Lien Credit Agreement of $57,663 related to deferred
financing fees to Loss on extinguishment of debt and credit
facilities, net, in our consolidated statements of operations.
Covenants
and Restrictions
Our debt generally requires compliance with certain covenants
that restrict our ability to, among other things, (i) incur
additional indebtedness unless our consolidated leverage ratio
would be no greater than 6.00 to 1.00 after the incurrence of
the 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
F-31
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
prepayments of certain debt, in each case subject to exceptions.
We operated XM as an unrestricted subsidiary for purposes of
compliance with the covenants contained in our debt instruments
through January 12, 2011.
Under our debt agreements, the following generally constitute an
event of default: (i) a default in the payment of interest;
(ii) a default in the payment of principal;
(iii) failure to comply with covenants; (iv) failure
to pay other indebtedness after final maturity or acceleration
of other indebtedness exceeding a specified amount;
(v) certain events of bankruptcy; (vi) a judgment for
payment of money exceeding a specified aggregate amount; and
(vii) voidance of subsidiary guarantees, subject to grace
periods where applicable. If an event of default occurs and is
continuing, our debt could become immediately due and payable.
At December 31, 2010, we were in compliance with our debt
covenants.
| (12) | Stockholders’ Equity |
Common
Stock, par value $0.001 per share
We were authorized to issue up to 9,000,000,000 shares of
common stock as of December 31, 2010 and 2009. There were
3,933,195,112 and 3,882,659,087 shares of common stock
issued and outstanding as of December 31, 2010 and 2009,
respectively.
As of December 31, 2010, approximately
3,361,345,000 shares of common stock were reserved for
issuance in connection with outstanding convertible debt,
preferred stock, warrants, incentive stock awards and common
stock to be granted to third parties upon satisfaction of
performance targets.
To facilitate the offering of the Exchangeable Notes, we entered
into share lending agreements with Morgan Stanley Capital
Services Inc. (“MS”) and UBS AG London Branch
(“UBS”) in July 2008, under which we loaned MS and UBS
an aggregate of 262,400,000 shares of our common stock in
exchange for a fee of $0.001 per share. The obligations of MS to
us under its share lending agreement are guaranteed by its
parent company, Morgan Stanley. During the third quarter of
2009, MS returned to us 60,000,000 shares of our common
stock borrowed in July 2008, which were retired upon receipt. As
of December 31, 2010 and 2009, there were
202,400,000 shares loaned under the facilities.
Under each share lending agreement, the share loan will
terminate in whole or in part, as the case may be, and the
relevant borrowed shares must be returned to us upon the
earliest of the following: (i) the share borrower
terminates all or a portion of the loan between it and us,
(ii) we notify the share borrower that some of the
Exchangeable Notes as to which borrowed shares relate have been
exchanged, repaid or repurchased or are otherwise no longer
outstanding, (iii) the maturity date of the Exchangeable
Notes, December 1, 2014, (iv) the date as of which the
entire principal amount of the Exchangeable Notes ceases to be
outstanding as a result of exchange, repayment, repurchase or
otherwise or (v) the termination of the share lending
agreement by the share borrower or by us upon default by the
other party, including the bankruptcy of us or the share
borrower or, in the case of the MS share lending agreement, the
guarantor. A share borrower may delay the return of borrowed
shares for up to 30 business days (or under certain
circumstances, up to 60 business days) if such share borrower is
legally prevented from returning the borrowed shares to us, in
which case the share borrower may, under certain circumstances,
choose to pay us the value of the borrowed shares in cash
instead of returning the borrowed shares. Once borrowed shares
are returned to us, they may not be re-borrowed under the share
lending agreements. There were no requirements for the share
borrowers to provide collateral.
The shares we loaned to the share borrowers are issued and
outstanding for corporate law purposes, and holders of borrowed
shares (other than the share borrowers) have the same rights
under those shares as holders of any of our other outstanding
common shares. Under GAAP, the borrowed shares are not
considered outstanding for the purpose of computing and
reporting our net income (loss) per common share. The accounting
method may change if, due to a default by either UBS or MS (or
Morgan Stanley, as guarantor), the borrowed shares, or the
equivalent value of those shares, will not be returned to us as
required under the share lending agreements.
F-32
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
In January 2004, SIRIUS signed a seven-year agreement with a
sports programming provider. Upon execution of this agreement,
SIRIUS delivered 15,173,070 shares of common stock valued
at $40,967 to that programming provider. These shares of common
stock are subject to transfer restrictions which lapse over
time. We recognized share-based payment expense associated with
these shares of $5,852 in the years ended December 31,
2010, 2009 and 2008. As of December 31, 2010, there was a
$1,568 remaining balance of common stock value included in other
current assets. As of December 31, 2009, there was a $7,420
remaining balance of common stock value included in other
current assets and other long-term assets in the amount of
$5,852 and $1,568, respectively.
Preferred
Stock, par value $0.001 per share
We were authorized to issue up to 50,000,000 shares of
undesignated preferred stock as of December 31, 2010 and
2009.
There were zero and 24,808,959 shares of Series A
Convertible Preferred Stock (“Series A Preferred
Stock”) issued and outstanding as of December 31, 2010
and 2009, respectively. In September 2010, the holder of the
Series A Preferred Stock converted the 24,808,959
outstanding shares into an equal number of shares of our common
stock.
There were 12,500,000 shares of Convertible Perpetual
Preferred Stock, Series B (the “Series B
Preferred Stock”), issued and outstanding as of
December 31, 2010 and 2009. The Series B Preferred
Stock is convertible into shares of our common stock at the rate
of 206.9581409 shares of common stock for each share of
Series B Preferred Stock, representing approximately 40% of
our outstanding shares of common stock (after giving effect to
such conversion). As the holder of the Series B Preferred
Stock, Liberty Radio LLC is entitled to a number of votes equal
to the number of shares of our common stock into which each such
Series B Preferred Stock share is convertible. Liberty
Radio LLC will also receive dividends and distributions ratably
with our common stock, on an as-converted basis. With respect to
dividend rights, the Series B Preferred Stock ranks evenly
with our common stock and each other class or series of our
equity securities not expressly provided as ranking senior to
the Series B Preferred Stock. With respect to liquidation
rights, the Series B Preferred Stock ranks evenly with each
other class or series of our equity securities not expressly
provided as ranking senior to the Series B Preferred Stock,
and will rank senior to our common stock. In 2009, we accounted
for the issuance of Series B Preferred Stock by recording a
$227,716 increase to additional paid-in capital for the amount
of allocated proceeds received and an additional $186,188
increase to paid-in capital for the beneficial conversion
feature, which was recognized as a charge to retained earnings.
There were no shares of Preferred Stock, Series C Junior
(the “Series C Junior Preferred Stock”), issued
and outstanding as of December 31, 2010 and 2009. In 2009,
our board of directors created and reserved for issuance in
accordance with the Rights Plan (as described below)
9,000 shares of the Series C Junior Preferred Stock.
The shares of Series C Junior Preferred Stock are not
redeemable and rank, with respect to the payment of dividends
and the distribution of assets, junior to all other series of
our preferred stock, unless the terms of such series shall so
provide.
Warrants
We have issued warrants to purchase shares of common stock in
connection with distribution and programming agreements,
satellite purchase agreements and certain debt issuances. As of
December 31, 2010, approximately 42,421,000 warrants to
acquire an equal number of shares of common stock with an
average exercise price of $2.66 per share were outstanding and
fully vested. Warrants vest over time or upon the achievement of
milestones and expire at various times through 2015. We incurred
warrant related expense of $0, $2,522 and $1,865 for the years
ended December 31, 2010, 2009 and 2008, respectively.
F-33
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
|
Average
|
Number of Warrants Outstanding | |||||||||||||
|
Exercise
|
Expiration
|
December 31, | ||||||||||||
| Price | Date | 2010 | 2009 | |||||||||||
| (Warrants in thousands) | ||||||||||||||
|
NFL
|
$ | 2.50 | March 2015 | 16,718 | 16,718 | |||||||||
|
DaimlerChrysler AG
|
1.04 | May 2012 | 16,500 | 16,500 | ||||||||||
|
RadioShack
|
— | December 2010 | — | 4,000 | ||||||||||
|
Ford
|
3.00 | October 2012 | 4,000 | 4,000 | ||||||||||
|
Lehman Warrants
|
15.00 | March 2011 - April 2011 | 1,575 | 2,100 | ||||||||||
|
Warrants associated with XM Holdings Debt
|
— | March 2010 | — | 325 | ||||||||||
|
Space Systems/Loral
|
7.05 | December 2011 | 1,840 | 1,840 | ||||||||||
|
Other distributors and programming providers
|
3.00 | June 2014 | 1,788 | 1,788 | ||||||||||
|
Total
|
$ | 2.66 | 42,421 | 47,271 | ||||||||||
Rights
Plan
In April 2009, our board of directors adopted a rights plan. The
terms of the rights and the rights plan are set forth in a
Rights Agreement dated as of April 29, 2009 (the
“Rights Plan”). The Rights Plan is intended to act as
a deterrent to any person or group acquiring 4.9% or more of our
outstanding common stock (assuming for purposes of this
calculation that all of our outstanding convertible preferred
stock is converted into common stock) without the approval of
our board of directors. The Rights Plan will continue in effect
until August 1, 2011, unless it is terminated or redeemed
earlier by our board of directors.
| (13) | Benefits Plans |
We recognized share-based payment expense of $54,585, $65,607
and $79,668 for the years ended December 31, 2010, 2009 and
2008, respectively. We did not realize any income tax benefits
from share-based benefits plans during the year ended
December 31, 2010, 2009 and 2008 as a result of the full
valuation allowance that is maintained for substantially all net
deferred tax assets.
2009
Long-Term Stock Incentive Plan
In May 2009, our stockholders approved the Sirius XM Radio Inc.
2009 Long-Term Stock Incentive Plan (the “2009 Plan”).
Employees, consultants and members of our board of directors are
eligible to receive awards under the 2009 Plan. The 2009 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 2009 Plan are
generally subject to a vesting requirement. Stock-based awards
generally expire ten years from the date of grant. Each
restricted stock unit entitles the holder to receive one share
of common stock upon vesting. As of December 31, 2010,
approximately 268,255,000 shares of common stock were
available for future grants under the 2009 Plan.
Other
Plans
We maintain four other share-based benefit plans — the
XM 2007 Stock Incentive Plan, the Amended and Restated Sirius
Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM
1998 Shares Award Plan and the XM
F-34
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Talent Option Plan. No further awards may be made under these
plans. Outstanding awards under these plans are being continued.
The following table summarizes the weighted-average assumptions
used to compute the fair value of options granted to employees
and members of our board of directors:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Risk-free interest rate
|
1.7 | % | 2.5 | % | 2.3 | % | ||||||
|
Expected life of options — years
|
5.28 | 4.68 | 4.89 | |||||||||
|
Expected stock price volatility
|
85 | % | 88 | % | 80 | % | ||||||
|
Expected dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
The following table summarizes the range of assumptions used to
compute the fair value of options granted to third parties,
other than non-employee members of our board of directors:
| For the Years Ended December 31, | ||||
| 2009 | 2008 | |||
|
Risk-free interest rate
|
0.67-2.69% | 0.37-3.34% | ||
|
Expected life — years
|
2.33-6.19 | 1.25-4.08 | ||
|
Expected stock price volatility
|
83-130% | 80% | ||
|
Expected dividend yield
|
0% | 0% | ||
There were no options granted to third parties, other than
non-employee members of our board of directors, during the year
ended December 31, 2010.
F-35
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes stock option activity under our
share-based payment plans for the years ended December 31,
2010, 2009 and 2008 (shares in thousands):
|
Weighted-
|
Weighted-Average
|
|||||||||||||||
|
Average
|
Remaining
|
Aggregate
|
||||||||||||||
|
Exercise
|
Contractual Term
|
Intrinsic
|
||||||||||||||
| Shares | Price | (Years) | Value | |||||||||||||
|
Outstanding, January 1, 2008
|
79,600 | $ | 5.38 | |||||||||||||
|
Options exchanged for outstanding XM Holdings options
|
67,711 | $ | 4.09 | |||||||||||||
|
Granted
|
24,358 | $ | 2.12 | |||||||||||||
|
Exercised
|
(117 | ) | $ | 1.74 | ||||||||||||
|
Forfeited, cancelled or expired
|
(6,116 | ) | $ | 4.09 | ||||||||||||
|
Outstanding, December 31, 2008
|
165,436 | $ | 4.42 | |||||||||||||
|
Granted
|
265,761 | $ | 0.53 | |||||||||||||
|
Exercised
|
— | $ | — | |||||||||||||
|
Forfeited, cancelled or expired
|
(66,405 | ) | $ | 5.21 | ||||||||||||
|
Outstanding, December 31, 2009
|
364,792 | $ | 1.44 | |||||||||||||
|
Granted
|
71,179 | $ | 0.97 | |||||||||||||
|
Exercised
|
(19,360 | ) | $ | 0.56 | ||||||||||||
|
Forfeited, cancelled or expired
|
(14,741 | ) | $ | 3.58 | ||||||||||||
|
Outstanding, December 31, 2010
|
401,870 | $ | 1.32 | 6.45 | $ | 327,294 | ||||||||||
|
Exercisable, December 31, 2010
|
123,479 | $ | 2.68 | 4.52 | $ | 59,739 | ||||||||||
The weighted average grant date fair value of options granted
during the years ended December 31, 2010, 2009 and 2008 was
$0.67, $0.36 and $1.27, respectively. The total intrinsic value
of stock options exercised during the years ended
December 31, 2010, 2009 and 2008 was $13,261, $0 and $127.
We recognized share-based payment expense associated with stock
options of $44,833, $46,080 and $49,148 for the years ended
December 31, 2010, 2009 and 2008, respectively.
F-36
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The following table summarizes the nonvested restricted stock
and restricted stock unit activity under our share-based payment
plans for the years ended December 31, 2010, 2009 and 2008
(shares in thousands):
|
Weighted-Average
|
||||||||
|
Grant Date
|
||||||||
| Shares | Fair Value | |||||||
|
Nonvested, January 1, 2008
|
3,623 | $ | 3.70 | |||||
|
Shares exchanged for non-vested XM holdings shares
|
33,339 | $ | 2.93 | |||||
|
Granted
|
3,208 | $ | 2.87 | |||||
|
Vested restricted stock awards
|
(15,342 | ) | $ | 2.97 | ||||
|
Vested restricted stock units
|
(2,793 | ) | $ | 3.55 | ||||
|
Forfeited
|
(2,104 | ) | $ | 2.90 | ||||
|
Nonvested, December 31, 2008
|
19,931 | $ | 2.84 | |||||
|
Granted
|
84,851 | $ | 0.37 | |||||
|
Vested restricted stock awards
|
(8,476 | ) | $ | 2.98 | ||||
|
Vested restricted stock units
|
(87,036 | ) | $ | 0.46 | ||||
|
Forfeited
|
(2,351 | ) | $ | 1.92 | ||||
|
Nonvested, December 31, 2009
|
6,919 | $ | 2.65 | |||||
|
Granted
|
— | $ | — | |||||
|
Vested restricted stock awards
|
(4,039 | ) | $ | 2.85 | ||||
|
Vested restricted stock units
|
(192 | ) | $ | 2.92 | ||||
|
Forfeited
|
(291 | ) | $ | 2.72 | ||||
|
Nonvested, December 31, 2010
|
2,397 | $ | 2.57 | |||||
The weighted average grant date fair value of restricted stock
units granted during the years ended December 31, 2010,
2009 and 2008 was $0, $0.37 and $2.87; no restricted stock units
were granted during 2010. The total intrinsic value of
restricted stock and restricted stock units that vested during
the years ended December 31, 2010, 2009 and 2008 was
$3,927, $45,827 and $21,451, respectively.
We recognized share-based payment expense associated with
restricted stock units and shares of restricted stock of $7,397,
$16,632 and $21,813 for the years ended December 31, 2010,
2009 and 2008, respectively.
Total unrecognized compensation costs related to unvested
share-based payment awards for stock options and restricted
stock units and shares granted to employees and members of our
board of directors at December 31, 2010 and 2009, net of
estimated forfeitures, was $108,170 and $114,068, respectively.
The weighted-average period over which the compensation expense
for these awards is expected to be recognized is three years as
of December 31, 2010.
401(k)
Savings Plan
We sponsor the Sirius XM Radio 401(k) Savings Plan (the
“Sirius XM Plan”) for eligible employees.
The Sirius XM Plan allows eligible employees to voluntarily
contribute from 1% to 50% of their pre-tax eligible earnings,
subject to certain defined limits. We match 50% of an
employee’s voluntary contributions, up to 6% of an
employee’s pre-tax salary, in the form of shares of common
stock. Employer matching contributions under the Sirius XM Plan
vest at a rate of
33
1
/
3
%
for each year of employment and are fully vested after three
years of employment for all current and future contributions.
Legacy XM Plan participants are fully vested for all current and
future employer contributions. Share-based payment expense
resulting from the matching contribution to the plans was
$2,356, $2,895 and $2,735 for the years ended December 31,
2010, 2009 and 2008, respectively.
F-37
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We may also elect to contribute to the profit sharing portion of
the Sirius XM Plan based upon the total eligible compensation of
eligible participants. These additional contributions in the
form of shares of common stock are determined by the
compensation committee of our board of directors. Employees are
only eligible to receive profit-sharing contributions during any
year in which they are employed on the last day of the year.
Profit-sharing contribution expense was $0, $0 and $6,610 for
the years ended December 31, 2010, 2009 and 2008,
respectively.
| (14) | Income Taxes |
Our income tax expense consisted of the following:
| For the Years Ended December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Current taxes:
|
||||||||||||
|
Federal
|
$ | — | $ | — | $ | — | ||||||
|
State
|
942 | — | — | |||||||||
|
Foreign
|
1,370 | 1,622 | — | |||||||||
|
Total current taxes
|
2,312 | 1,622 | — | |||||||||
|
Deferred taxes:
|
||||||||||||
|
Federal
|
4,163 | 3,962 | 2,674 | |||||||||
|
State
|
(1,855 | ) | 397 | (198 | ) | |||||||
|
Total deferred taxes
|
2,308 | 4,359 | 2,476 | |||||||||
|
Total income tax expense
|
$ | 4,620 | $ | 5,981 | $ | 2,476 | ||||||
The following table indicates the significant elements
contributing to the difference between the federal tax benefit
at the statutory rate and at our effective rate:
|
For the Years Ended
|
||||||||||||
| December 31, | ||||||||||||
| 2010 | 2009 | 2008 | ||||||||||
|
Federal tax expense (benefit), at statutory rate
|
$ | 16,678 | $ | (117,883 | ) | $ | (1,858,784 | ) | ||||
|
State income tax expense (benefit), net of federal benefit
|
1,620 | (11,788 | ) | (185,879 | ) | |||||||
|
State rate changes
|
(2,252 | ) | — | 17,307 | ||||||||
|
Non-deductible expenses
|
4,130 | 1,849 | 1,930,650 | |||||||||
|
Other, net
|
6,193 | (4,945 | ) | (477 | ) | |||||||
|
Change in valuation allowance
|
(21,749 | ) | 138,748 | 99,659 | ||||||||
|
Income tax expense
|
$ | 4,620 | $ | 5,981 | $ | 2,476 | ||||||
F-38
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities are presented below:
| December 31, | ||||||||
| 2010 | 2009 | |||||||
|
Deferred tax assets:
|
||||||||
|
Net operating loss carryforwards
|
$ | 3,091,869 | $ | 3,086,067 | ||||
|
GM payments and liabilities
|
308,776 | 311,235 | ||||||
|
Deferred revenue
|
346,221 | 226,763 | ||||||
|
Severance accrual
|
266 | 1,821 | ||||||
|
Accrued bonus
|
16,599 | 16,130 | ||||||
|
Expensed costs capitalized for tax
|
44,149 | 59,999 | ||||||
|
Loan financing costs
|
1,568 | 17,288 | ||||||
|
Investments
|
62,742 | 61,643 | ||||||
|
Stock based compensation
|
118,507 | 155,754 | ||||||
|
Other
|
53,260 | 49,538 | ||||||
|
Total deferred tax assets
|
4,043,957 | 3,986,238 | ||||||
|
Deferred tax liabilities:
|
||||||||
|
Depreciation of property and equipment
|
(379,180 | ) | (126,240 | ) | ||||
|
FCC license
|
(773,850 | ) | (771,407 | ) | ||||
|
Other intangible assets
|
(209,489 | ) | (251,360 | ) | ||||
|
Other
|
— | (89,441 | ) | |||||
|
Net deferred tax liabilities
|
(1,362,519 | ) | (1,238,448 | ) | ||||
|
Net deferred tax assets before valuation allowance
|
2,681,438 | 2,747,790 | ||||||
|
Valuation allowance
|
(3,551,288 | ) | (3,615,332 | ) | ||||
|
Net deferred tax liability
|
$ | (869,850 | ) | $ | (867,542 | ) | ||
The difference in the net deferred tax liability of $869,850 and
$867,542 at December 31, 2010 and 2009, respectively, is
primarily the result of the amortization of the 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 GAAP
since it relates to indefinite-lived assets and is not
anticipated to reverse in the same period.
At December 31, 2010, we had net operating loss
(“NOL”) carryforwards of approximately $8,052,000 for
federal and state income tax purposes available to offset future
taxable income. These NOL carryforwards expire on various dates
beginning in 2014. We have had several ownership changes under
Section 382 of the Internal Revenue Code, which may limit
our ability to utilize tax deductions.
As a result of the Merger, both SIRIUS and XM had a
Section 382 ownership change. The ownership change does not
limit our ability to utilize future tax deductions and so no
adjustments were made to gross deferred tax assets as a result
of the Merger.
Future changes in our ownership may limit our ability to utilize
our deferred tax assets. Realization of our deferred tax assets
is dependent upon future earnings; accordingly, a full valuation
allowance was recorded against the assets.
As of December 31, 2010 and 2009, we recorded $942 and $0,
respectively, for uncertain state tax positions in other long
term liabilities. We do not currently anticipate that our
existing reserves related to uncertain tax positions as of
December 31, 2010 will significantly increase or decrease
during the twelve-month period ending
F-39
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
December 31, 2011; however, various events could cause our
current expectations to change in the future. Should our
position with respect to the majority of these uncertain tax
positions be upheld, the effect would be recorded in the
statement of operations as part of the income tax provision.
The impact of temporary differences and tax attributes are
considered when calculating interest and penalty accruals
associated with the tax reserve. The amount accrued for interest
and penalties as of December 31, 2010 and December 31,
2009 was zero for both periods. Our policy is to recognize
interest and penalties accrued on uncertain tax positions as
part of income tax expense.
| (15) | Commitments and Contingencies |
The following table summarizes our expected contractual cash
commitments as of December 31, 2010:
| 2011 | 2012 | 2013 | 2014 | 2015 | Thereafter | Total | ||||||||||||||||||||||
|
Long-term debt obligations(1)
|
$ | 196,332 | $ | 1,558 | $ | 816,321 | $ | 550,182 | $ | 1,057,000 | $ | 700,000 | $ | 3,321,393 | ||||||||||||||
|
Cash interest payments
|
299,518 | 292,463 | 290,271 | 186,935 | 113,433 | 160,125 | 1,342,745 | |||||||||||||||||||||
|
Satellite and transmission
|
120,444 | 5,481 | 5,963 | 14,455 | 13,997 | 21,195 | 181,535 | |||||||||||||||||||||
|
Programming and content
|
255,463 | 218,662 | 174,596 | 151,581 | 145,231 | 3,750 | 949,283 | |||||||||||||||||||||
|
Marketing and distribution
|
44,657 | 20,155 | 12,956 | 8,590 | 7,000 | 8,000 | 101,358 | |||||||||||||||||||||
|
Satellite incentive payments
|
9,767 | 12,071 | 12,790 | 12,632 | 12,165 | 86,123 | 145,548 | |||||||||||||||||||||
|
Operating lease obligations
|
32,279 | 28,090 | 24,256 | 18,383 | 10,364 | 3,101 | 116,473 | |||||||||||||||||||||
|
Other
|
30,527 | 9,679 | 298 | 2 | — | — | 40,506 | |||||||||||||||||||||
|
Total(2)
|
$ | 988,987 | $ | 588,159 | $ | 1,337,451 | $ | 942,760 | $ | 1,359,190 | $ | 982,294 | $ | 6,198,841 | ||||||||||||||
| (1) | Includes capital lease obligations. | |
| (2) | The table does not include our reserve for uncertain taxes, which at December 31, 2010 totaled $942, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty. |
Long-term debt obligations.
Long-term debt
obligations include principal payments on outstanding debt and
capital lease obligations. Included in the chart above in 2013
is $36,685 of the 11.25% Notes, which were repurchased in
full in January 2011, for an aggregate purchase price of
$40,376, which includes consent payments and accrued and unpaid
interest. Included in the chart above in 2011, is $94,148 of the
3.25% Notes which was repurchased in February 2011 for a
purchase price of $96,041 which includes accrued and unpaid
interest.
Cash interest payments.
Cash interest payments
include interest due on outstanding debt through maturity. The
chart above does not give effect to the purchases of the
11.25% Notes in January 2011 or the 3.25% Notes in
February 2011.
Satellite and transmission.
We have entered
into agreements with third parties to operate and maintain the
off-site satellite telemetry, tracking and control facilities
and certain components of our terrestrial repeater networks. We
have also entered into various agreements to design and
construct a satellite and related launch vehicle for use in our
systems.
F-40
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
We have an agreement with Space Systems/Loral to design and
construct a sixth satellite, FM-6, for use in the SIRIUS system.
In January 2008, we entered into an agreement with International
Launch Services (ILS) to secure a satellite launch on a Proton
rocket for this satellite.
Programming and content.
We have entered into
various programming agreements. Under the terms of these
agreements, we are obligated to provide payments to other
entities that may include fixed payments, advertising
commitments and revenue sharing arrangements.
Marketing and distribution.
We have entered
into various marketing, sponsorship and distribution agreements
to promote our brand and are obligated to make payments to
sponsors, retailers, automakers and radio manufacturers under
these agreements. Certain programming and content agreements
also require us to purchase advertising on properties owned or
controlled by the licensors. We also reimburse automakers for
certain engineering and development costs associated with the
incorporation of satellite radios into vehicles they
manufacture. In addition, in the event certain new products are
not shipped by a distributor to its customers within
90 days of the distributor’s receipt of goods, we have
agreed to purchase and take title to the product.
Satellite incentive payments.
Boeing Satellite
Systems International, Inc., the manufacturer of four of
XM’s in-orbit satellites, may be entitled to future
in-orbit performance payments with respect to two of XM’s
satellites. As of December 31, 2010, we have accrued
$28,605 related to contingent in-orbit performance payments for
XM-3 and XM-4 based on expected operating performance over their
fifteen year design life. Boeing may also be entitled to an
additional $10,000 if XM-4 continues to operate above baseline
specifications during the five years beyond the satellite’s
fifteen-year design life.
Space Systems/Loral, may be entitled to future in-orbit
performance payments. As of December 31, 2010, we have
accrued $12,565 and $21,450 related to contingent performance
payments for FM-5 and XM-5, respectively, based on expected
operating performance over their fifteen-year design life.
Operating lease obligations.
We have entered
into cancelable and non-cancelable operating leases for office
space, equipment and terrestrial repeaters. These leases provide
for minimum lease payments, additional operating expense
charges, leasehold improvements and rent escalations that have
initial terms ranging from one to fifteen years, and certain
leases that have options to renew. The effect of the rent
holidays and rent concessions are recognized on a straight-line
basis over the lease term, including reasonably assured renewal
periods. Total rent recognized in connection with leases for the
years ended December 31, 2010, 2009 and 2008 was $36,652,
$44,374 and $40,378, respectively.
Other.
We have entered into various agreements
with third parties for general operating purposes. In addition
to the minimum contractual cash commitments described above, we
have entered into agreements with other variable cost
arrangements. These future costs are dependent upon many
factors, including 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 variable cost provisions.
We do not have any other significant off-balance sheet
arrangements that are reasonably likely to have a material
effect on our financial condition, results of operations,
liquidity, capital expenditures or capital resources.
Legal
Proceedings
State Consumer Investigations.
A Multistate
Working Group of 28 State Attorneys General, led by the Attorney
General of the State of Ohio, is investigating certain of our
consumer practices. The investigation focuses on practices
relating to the cancellation of subscriptions; automatic renewal
of subscriptions; charging, billing, collecting, and refunding
or crediting of payments from consumers; and soliciting
customers.
A separate investigation into our consumer practices is being
conducted by the Attorney General of the State of Florida. In
addition, in September 2010, the Attorney General of the State
of Missouri commenced an action against us in Missouri Circuit
Court, Twenty-Second Judicial Circuit, St. Louis, Missouri,
alleging violations of the
F-41
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Missouri Telemarketing No-Call List Act. The suit seeks a
permanent injunction prohibiting us from making, or causing to
be made, telephone solicitations to our subscribers in the State
of Missouri who are on Missouri’s no-call list, statutory
penalties and reimbursement of costs. We believe our
telemarketing activities to our subscribers in Missouri fully
comply with applicable law.
We are cooperating with these investigations and believe our
consumer practices comply with all applicable federal and state
laws and regulations.
Carl Blessing et al. v. Sirius XM Radio Inc.
A
subscriber, Carl Blessing, filed a lawsuit against us in the
United States District Court for the Southern District of
New York. Mr. Blessing’s lawsuit has been consolidated
with substantially identical lawsuits brought by other
subscribers. Mr. Blessing and 23 other plaintiffs purport
to represent all subscribers who were subject to: an increase in
the price for additional-radio subscriptions from $6.99 to
$8.99; the imposition of the US Music Royalty Fee; and the
elimination of our free streaming internet service. Based on
these pricing changes, the suit raises four claims. First, the
suit claims the pricing changes show that the Merger lessened
competition or led to a monopoly in violation of the Clayton
Act. Second, it claims that, for the same reason, the Merger led
to monopolization in violation of the Sherman Act. Third, it
claims that our subscriber service agreement misrepresents that
the US Music Royalty Fee will be used exclusively to defray
increases in royalty costs incurred since the filing of the
merger application with the FCC (and as permitted by the FCC
order) in violation of the consumer protection and unfair trade
practice laws of 41 states and the District of Columbia. A
fourth claim — that the alleged misrepresentation
violates the implied duty of good faith and fair dealing we owe
our subscribers under New York contract law — has been
dismissed by the court. The complaint seeks monetary damages as
well as treble damages under the Clayton Act. Discovery in this
matter is substantially complete and a trial has been scheduled
for May 2011. We believe that the plaintiffs’ claims are
without merit and we are vigorously defending ourselves in this
litigation.
A stockholder, Mark Fialkov, also filed a shareholder derivative
suit in the Supreme Court of the State of New York claiming
that, by allowing the price increases that prompted the Blessing
litigation, our board of directors breached its duty of loyalty
to the corporation. The action names as defendants Sirius XM and
fifteen individuals — all directors or former
directors of Sirius XM. This lawsuit has been stayed pending
resolution of the Blessing litigation.
Other Matters.
In the ordinary course of
business, we are a defendant in various lawsuits and arbitration
proceedings, including actions filed by subscribers, both on
behalf of themselves and on a class action basis; 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, financial condition or
results of operations.
| (16) | Subsequent Events |
Merger
of XM Satellite Radio Inc. and Sirius XM Radio
Inc.
On January 12, 2011, XM Satellite Radio Inc., our
wholly-owned subsidiary, merged with and into Sirius XM Radio
Inc. Prior to January 12, 2011, we operated XM Satellite
Radio Inc., together with its subsidiaries, as an unrestricted
subsidiary under the agreements governing our indebtedness.
Repurchase
of 11.25% Notes
The remainder of the 11.25% Notes of $36,685 was purchased
in January 2011, for an aggregate purchase price of $40,376. A
loss from extinguishment of debt of $4,891 will be recorded in
the first quarter of 2011.
F-42
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
Repurchase
of 3.25% Notes
In February 2011, $94,148 of the 3.25% Notes was purchased,
for an aggregate purchase price of $96,041. A loss from
extinguishment of debt of $1,079 will be recorded in the first
quarter of 2011.
Canada
Merger
Canadian Satellite Radio Holdings Inc. (“CSR”), parent
company of XM Canada, and SIRIUS Canada announced in November
2010 that they have entered into a definitive agreement to
combine the companies (the “Canada Merger”). Under the
terms of the agreement, SIRIUS Canada shareholders will be
issued shares of CSR representing a 58.0% equity interest in CSR
immediately following closing of the transaction. Our
approximate ownership interest in CSR following closing of the
Canada Merger will be a 37.1% equity interest (25.0% voting
interest) representing approximately 45.5 million shares
and will be accounted for under the equity method. The Canada
Merger is anticipated to close during the second quarter of
2011. We are still evaluating the impact of the Canada Merger on
our financial statements.
| (17) | 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 | |||||||||||||
|
2010:
|
||||||||||||||||
|
Total revenue
|
$ | 663,784 | $ | 699,761 | $ | 717,548 | $ | 735,899 | ||||||||
|
Cost of services
|
$ | (260,867 | ) | $ | (266,121 | ) | $ | (280,545 | ) | $ | (291,699 | ) | ||||
|
Income from operations
|
$ | 125,140 | $ | 125,634 | $ | 143,069 | $ | 71,571 | ||||||||
|
Net income (loss)
|
$ | 41,598 | $ | 15,272 | $ | 67,629 | $ | (81,444 | ) | |||||||
|
Net income (loss) per common share — basic(1)
|
$ | 0.01 | $ | — | $ | 0.02 | $ | (0.02 | ) | |||||||
|
Net income (loss) per common share — diluted(1)
|
$ | 0.01 | $ | — | $ | 0.01 | $ | (0.02 | ) | |||||||
|
2009:
|
||||||||||||||||
|
Total revenue
|
$ | 586,979 | $ | 590,829 | $ | 618,656 | $ | 676,174 | ||||||||
|
Cost of services
|
$ | (268,947 | ) | $ | (254,432 | ) | $ | (266,888 | ) | $ | (273,741 | ) | ||||
|
Income from operations
|
$ | 41,061 | $ | 37,235 | $ | 66,355 | $ | 83,675 | ||||||||
|
Net (loss) income
|
$ | (52,648 | ) | $ | (159,644 | ) | $ | (151,527 | ) | $ | 11,781 | |||||
|
Net loss per common share — basic and diluted(1)
|
$ | (0.07 | ) | $ | (0.04 | ) | $ | (0.04 | ) | $ | — | |||||
| (1) | The sum of the quarterly net loss per share applicable to common stockholders (basic and diluted) does not necessarily agree to the net loss per share for the year due to the timing of our common stock issuances. |
F-43
SIRIUS XM
RADIO INC. AND SUBSIDIARIES
Schedule II — Schedule of Valuation and Qualifying Accounts
Schedule II — Schedule of Valuation and Qualifying Accounts
|
Write-offs/
|
||||||||||||||||
|
Balance
|
Charged to
|
Payments/
|
Balance
|
|||||||||||||
| Description | January 1, | Expenses | Other | December 31, | ||||||||||||
| (In thousands) | ||||||||||||||||
|
2008
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 4,608 | 21,589 | (15,337 | ) | $ | 10,860 | |||||||||
|
Deferred tax assets — valuation allowance
|
$ | 1,426,092 | 99,659 | 1,950,832 | (1) | $ | 3,476,583 | |||||||||
|
2009
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 10,860 | 30,602 | (32,795 | ) | $ | 8,667 | |||||||||
|
Deferred tax assets — valuation allowance
|
$ | 3,476,583 | 138,749 | — | $ | 3,615,332 | ||||||||||
|
2010
|
||||||||||||||||
|
Allowance for doubtful accounts
|
$ | 8,667 | 32,379 | (30,824 | ) | $ | 10,222 | |||||||||
|
Deferred tax assets — valuation allowance
|
$ | 3,615,332 | (21,749 | ) | (42,295 | ) | $ | 3,551,288 | ||||||||
| (1) | Adjustments to reflect allocation of the purchase price in connection with the Merger. |
F-44
EXHIBIT INDEX
| Exhibit | Description | |||
| 2 | .1 | Agreement and Plan of Merger, dated as of February 19, 2007, among the Company, Vernon Merger Corporation and XM Satellite Radio Holdings Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K dated February 21, 2007). | ||
| 3 | .1 | Amended and Restated Certificate of Incorporation of the Company, dated March 4, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2002). | ||
| 3 | .2 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated July 28, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated August 1, 2008). | ||
| 3 | .3 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated December 18, 2008 (incorporated by reference to Exhibit 3.3 to the Company’s Registration Statement on Form S-3 dated December 30, 2008). | ||
| 3 | .4 | Certificate of Amendment of the Amended and Restated Certificate of Incorporation of the Company, dated May 29, 2009 (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 dated July 1, 2009). | ||
| 3 | .5 | Amended and Restated By-Laws of the Company (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001). | ||
| 3 | .6 | Certificate of Amendment of the Amended and Restated By-Laws of the Company, dated July 28, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated August 1, 2008). | ||
| 3 | .7 | Certificate of Designations of Series B-1 Convertible Perpetual Preferred Stock of the Company, dated March 5, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 6, 2009). | ||
| 3 | .8 | Certificate of Ownership and Merger, dated August 5, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated August 5, 2008). | ||
| 3 | .9 | Certificate of Ownership and Merger, dated January 12, 2011 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated January 12, 2011). | ||
| 4 | .1 | Form of certificate for shares of the Company’s Common Stock (incorporated by reference to Exhibit 4.3 to the Company’s Registration Statement on Form S-1 (File No. 33-74782)). | ||
| 4 | .2 | Amended and Restated Warrant Agreement, dated as of December 27, 2000, between the Company and United States Trust Company of New York, as warrant agent and escrow agent (incorporated by reference to Exhibit 4.27 to the Company’s Registration Statement on Form S-3 (File No. 333-65602)). | ||
| 4 | .3 | 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 Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002). | ||
| 4 | .4 | 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 Company’s Current Report on Form 8-K dated May 30, 2003). | ||
| 4 | .5 | Third Supplemental Indenture, dated as of October 13, 2004, between the Company and The Bank of New York, as trustee, relating to the Company’s 3.25% Convertible Notes due 2011 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated October 13, 2004). | ||
| 4 | .6 | Common Stock Purchase Warrant granted by the Company to DaimlerChrysler AG dated October 1, 2007 (incorporated by reference to Exhibit 4.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2007). | ||
| 4 | .7 | Written instrument, dated July 28, 2008, among the Company, XM Satellite Radio Holdings Inc. and Vernon Merger Corporation relating to the Warrant Agreement with Space Systems / Loral, dated June 3, 2005 (incorporated by reference to Exhibit 4.69 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
E-1
| Exhibit | Description | |||
| 4 | .8 | Indenture, dated as of July 31, 2008, among XM Escrow LLC and The Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to Exhibit 4.77 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 4 | .9 | Supplemental Indenture, dated as of July 31, 2008, among XM Satellite Radio Holdings Inc., XM Satellite Radio Inc., XM Equipment Leasing LLC, XM Radio Inc., and The Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to Exhibit 4.78 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 4 | .10 | Supplemental Indenture, dated as of July 31, 2008, among XM Satellite Radio Holdings Inc., XM Escrow LLC and The Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to Exhibit 4.79 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 4 | .11 | Indenture, dated as of August 1, 2008 among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment LLC, XM Radio Inc., the Company and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.80 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 4 | .12 | Registration Rights Agreement, dated August 1, 2008, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing LLC, XM Radio Inc., the Company, J.P. Morgan Securities Inc., Morgan Stanley & Co. Incorporated and UBS Securities LLC, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.81 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 4 | .13 | Form of Media-Based Incentive Warrant, dated as of January 27, 2009, issued by the Company to NFL Enterprises LLC (incorporated by reference to Exhibit 4.48 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| 4 | .14 | Investment Agreement, dated as of February 17, 2009, among the Company and Liberty Radio LLC (incorporated by reference to Exhibit 4.55 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2008). | ||
| 4 | .15 | Rights Agreement, dated as of April 29, 2009, between the Company and The Bank of New York Mellon, as Rights Agent, which includes the Form of Certificate of Designation as Exhibit A, Form of Right Certificate as Exhibit B and the Summary of Rights as Exhibit C (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on April 29, 2009). | ||
| 4 | .16 | Indenture, dated as of August 24, 2009, between the Company and U.S. Bank National Association relating to the 9.75% Senior Secured Notes due 2015 (incorporated by reference to Exhibit 4.61 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2009). | ||
| 4 | .17 | Indenture, dated as of March 17, 2010, among the Company, the guarantors thereto and U.S. Bank National Association, as trustee, relating to the 8.75% Senior Notes due 2015 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated March 19, 2010). | ||
| 4 | .18 | Third Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and The Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q filed on May 7, 2010). | ||
| 4 | .19 | Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q filed on May 7, 2010). | ||
| 4 | .20 | Indenture, dated as of October 27, 2010, among XM Satellite Radio Inc., the guarantors thereto and U.S. Bank National Association, as trustee, relating to the 7.625% Senior Notes due 2018 (incorporated by reference to Exhibit 4.1 to XM Satellite Radio Inc.’s Current Report on Form 8-K filed on October 28, 2010). | ||
| 4 | .21 | Supplemental Indenture, dated January 12, 2011, by and among XM Satellite Radio Inc., the Company, certain subsidiaries thereof and The Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on January 12, 2011). | ||
E-2
| Exhibit | Description | |||
| 4 | .22 | Supplemental Indenture, dated January 12, 2011, by and among XM Satellite Radio Inc., the Company, certain subsidiaries thereof and The Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K filed on January 12, 2011). | ||
| 4 | .23 | Supplemental Indenture, dated January 12, 2011, by and among XM Satellite Radio Inc., the Company, certain subsidiaries thereof and U.S. Bank National Association, as trustee, relating to the 7.625% Senior Notes due 2018 (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K filed on January 12, 2011). | ||
| 4 | .24 | Supplemental Indenture, dated January 12, 2011, by and among the Company, certain subsidiaries thereof and U.S. Bank National Association, as trustee, relating to the 8.75% Senior Notes due 2015 (filed herewith). | ||
| 4 | .25 | Supplemental Indenture, dated January 12, 2011, by and among the Company, certain subsidiaries thereof and U.S. Bank National Association, as trustee, relating to the 9.75% Senior Secured Notes due 2015 (filed herewith). | ||
| 4 | .26 | Collateral Agreement, dated January 12, 2011, by and among the Company, certain subsidiaries thereof and U.S. Bank National Association, as collateral agent, relating to the 9.75% Senior Secured Notes due 2015 (incorporated by reference to Exhibit 4.5 to the Company’s Current Report on Form 8-K filed on January 12, 2011). | ||
| 10 | .1 | Lease Agreement, dated as of March 31, 1998, between Rock-McGraw, Inc. and the Company (incorporated by reference to Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | ||
| **10 | .2 | Operational Assistance Agreement, dated as of June 7, 1999, between XM Satellite Radio Inc. and Clear Channel Communications, Inc. (incorporated by reference to Exhibit 10.10 to Amendment No. 1 to XM Satellite Radio Holdings Inc.’s Registration Statement on Form S-1, File No. 333-83619). | ||
| **10 | .3 | Technology Licensing Agreement among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management Corporation and American Mobile Satellite Corporation, dated as of January 1, 1998, amended by Amendment No. 1 to Technology Licensing Agreement, dated June 7, 1999 (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007). | ||
| ***10 | .4 | Third Amended and Restated Distribution and Credit Agreement, dated as of February 6, 2008, among General Motors Corporation, XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. (incorporated by reference to Exhibit 10.63 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2007). | ||
| 10 | .5 | Supplemental Indenture, dated as of March 22, 2000, between Rock-McGraw, Inc. and the Company (incorporated by reference to Exhibit 10.1.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2000). | ||
| **10 | .6 | Third Amended and Restated Satellite Purchase Contract for In-Orbit Delivery, dated as of May 15, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International Inc. (incorporated by reference to Exhibit 10.36 to Amendment No. 1 to XM Satellite Radio Holdings Inc.’s Registration Statement on Form S-3, File No. 333-89132). | ||
| 10 | .7 | Assignment and Novation Agreement, dated as of December 5, 2001, between XM Satellite Radio Holdings Inc., XM Satellite Radio Inc. and Boeing Satellite Systems International Inc. (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on December 6, 2001). | ||
| **10 | .8 | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated as of December 5, 2001, between XM Satellite Radio Inc. and Boeing Satellite Systems International Inc. (incorporated by reference to Exhibit 10.4 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on December 6, 2001). | ||
| 10 | .9 | Amended and Restated Assignment and Use Agreement, dated as of January 28, 2003, between XM Satellite Radio Inc. and XM Radio Inc. (incorporated by reference to Exhibit 10.7 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed on January 29, 2003). | ||
E-3
| Exhibit | Description | |||
| **10 | .10 | Amended and Restated Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated May 23, 2003, among XM Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.53 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). | ||
| **10 | .11 | Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated July 31, 2003, among XM Satellite Radio Inc. and XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.54 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). | ||
| 10 | .12 | Amendment No. 1 to Amended and Restated Director Designation Agreement, dated as of September 9, 2003, among XM Satellite Radio Holdings Inc. and the shareholders and noteholders named therein (incorporated by reference to Exhibit 10.56 to XM Satellite Radio Holdings Inc.’s Quarterly Report in Form 10-Q for the quarter ended September 30, 2003). | ||
| 10 | .13 | December 2003 Amendment to the Satellite Purchase Contract for In-Orbit Delivery, dated December 19, 2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc. and Boeing Satellite Systems International, Inc. (incorporated by reference to Exhibit 10.57 to XM Satellite Radio Holdings Inc.’s Annual Report on Form 10-K for the year ended December 31, 2003). | ||
| 10 | .14 | Share Lending Agreement, dated July 28, 2008, among the Company and Morgan Stanley Capital Services, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| 10 | .15 | Share Lending Agreement, dated July 28, 2008, among the Company and UBS AG, London Branch (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2008). | ||
| *10 | .16 | Form of Option Agreement between the Company and each Optionee (incorporated by reference to Exhibit 10.16.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). | ||
| *10 | .17 | Form of Director Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.25 to Amendment No. 5 to XM Satellite Radio Holdings Inc.’s Registration Statement on Form S-1, File No. 333-83619). | ||
| *10 | .18 | CD Radio Inc. 401(k) Savings Plan (incorporated by reference to Exhibit 4.4 to the Company’s Registration Statement on Form S-8 (File No. 333-65473)). | ||
| *10 | .19 | Employment Agreement, dated as of June 3, 2003, between the Company and David J. Frear (incorporated by reference to Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003). | ||
| *10 | .20 | Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2004). | ||
| *10 | .21 | Employment Agreement dated November 18, 2004 between the Company and Mel Karmazin (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004). | ||
| *10 | .22 | 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 Company’s Current Report on Form 8-K dated August 12, 2005). | ||
| *10 | .23 | 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 Company’s Current Report on Form 8-K dated August 12, 2005). | ||
| *10 | .24 | Form of Non-Qualified Stock Option Agreement (incorporated by reference to Exhibit 10.2 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed June 1, 2007). | ||
| *10 | .25 | Form of Restricted Stock Agreement (incorporated by reference to Exhibit 10.3 to XM Satellite Radio Holdings Inc.’s Current Report on Form 8-K filed June 1, 2007). | ||
| *10 | .26 | XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan (incorporated by reference to Exhibit 10.5 to XM Satellite Radio Holdings Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007). | ||
E-4
| Exhibit | Description | |||
| *10 | .27 | Sirius XM Radio 401(k) Savings Plan, as amended and restated effective January 1, 2009 (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009). | ||
| *10 | .28 | Second Amendment, dated as of February 12, 2008, to the Employment Agreement, dated as of June 3, 2003, between the Company and David J. Frear (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 13, 2008). | ||
| *10 | .29 | Employment Agreement, dated as of September 26, 2008, between the Company and Dara F. Altman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated October 1, 2008). | ||
| *10 | .30 | Agreement to Forfeit Non-Qualified Stock Options, dated as of May 13, 2009, between Mel Karmazin and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 13, 2009). | ||
| *10 | .31 | Letter Agreement dated June 30, 2009 amending the Employment Agreement dated November 18, 2004 between Mel Karmazin and the Company (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 1, 2009). | ||
| *10 | .32 | Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (incorporated by reference to Exhibit 4.9 to the Company’s Registration Statement on Form S-8 dated July 1, 2009). | ||
| *10 | .33 | Employment Agreement, dated as of July 28, 2009, between the Company and Scott A. Greenstein (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed July 29, 2009). | ||
| *10 | .34 | Employment Agreement, dated as of October 14, 2009, between the Company and James E. Meyer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October 16, 2009). | ||
| *10 | .35 | Separation Agreement and Release of Claims, dated as of November 12, 2009, between the Company, XM Satellite Radio Holdings Inc., XM Satellite Radio Inc, and Gary Parsons (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 12, 2009). | ||
| *10 | .36 | Employment Agreement, dated as of January 14, 2010, between the Company and Patrick L. Donnelly (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 15, 2010). | ||
| *10 | .37 | First Amendment, dated as of February 14, 2011, to the Employment Agreement, dated as of October 14, 2009, between the Company and James E. Meyer (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 15, 2011). | ||
| 21 | .1 | List of Subsidiaries (filed herewith). | ||
| 23 | .1 | Consent of KPMG 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. | |
| ** | Pursuant to the Commission’s Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of 1934, certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text. | |
| *** | Confidential treatment has been requested with respect to portions of this Exhibit that have been omitted by redacting a portion of the text. |
E-5
TABLE OF CONTENTS
Part IItem 1 Business 1Item 1A. Risk Factors 13Item 1B. Unresolved Staff Comments 20Item 2. Properties 20Item 3. Legal Proceedings 20Item 4. (removed and Reserved) 21Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity Securities 22Item 6. Selected Financial Data 24Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations 25Item 7A. Quantitative and Qualitative Disclosures About Market Risks 53Item 8. Financial Statements and Supplementary Data 53Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53Item 9A. Controls and Procedures 53Item 9B. Other Information 54Part IIIItem 10. Directors, Executive Officers and Corporate Governance 55Item 11. Executive Compensation 55Item 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder Matters 55Item 13. Certain Relationships and Related Transactions, and Director Independence 55Item 14. Principal Accounting Fees and Services 55Part IVItem 15. Exhibits and Financial Statement Schedules 56Item 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. (removed and Reserved)Item 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosure About Market RisksItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesItem 15. Exhibits and Financial Statement Schedules