XM Satellite Radio Holdings 10-K 2008
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Amendment No. 1)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2007
(State or other jurisdiction of incorporation or organization of both registrants)
1500 ECKINGTON PLACE, NE
WASHINGTON, DC 20002-2194
(Address of principal executive offices) (Zip code)
(Registrants telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Class A Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
(Title of Classes)
Indicate by check mark if each registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes x No ¨
Indicate by check mark if each registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of each registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).
Indicate by check mark whether each registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
The aggregate market value of common stock held by non-affiliates of XM Satellite Radio Holdings Inc., based upon the closing price of its Class A common stock as of June 30, 2007, is $3,611,162,210.
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
This Amendment No. 1 on Form 10-K/A (this Amendment) amends our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 that was filed with the Securities and Exchange Commission (SEC) on February 28, 2008 (the Original Filing). We are filing this Amendment to include the information required by Part III and not included in the Original Filing, as we will not file our definitive proxy statement within 120 days of the end of our fiscal year ended December 31, 2007. Because of our pending merger with Sirius Satellite Radio Inc., we have postponed our annual meeting of stockholders. If our merger with Sirius closes in the interim, then we will not hold an annual meeting of stockholders because we will be a wholly owned subsidiary of Sirius. In addition, pursuant to the rules of the Securities and Exchange Commission, Item 15 of Part IV of the Original Filing has been amended to contain currently dated certifications from our President and Chief Executive Officer and Chief Financial Officer, as required by Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 with respect to this Form 10-K/A. The currently dated certifications of our President and Chief Executive Officer and Chief Financial Officer are attached to this Form 10-K/A as Exhibits 31.1, 31.2, 31.3, 31.4, 32.1 and 32.2.
Except as set forth in Part III below, no other changes are made to the Original Filing other than the deletion of the reference on the cover of the Original Filing to the incorporation by reference of XM Satellite Radio Holdings Inc.s definitive proxy statement into Part III of the Original Filing. Unless expressly stated, this Amendment does not reflect events occurring after the filing of the Original Filing, nor does it modify or update in any way the disclosures contained in the Original Filing. Our annual report on Form 10-K is a combined report filed by two separate registrants: XM Satellite Radio Holdings Inc. (the Company, Holdings, or XM) and XM Satellite Radio Inc. (Inc.). Holdings principal wholly owned subsidiary is Inc. Unless the context requires otherwise, the terms we, our and us, refer to Holdings.
TABLE OF CONTENTS
The following table sets forth the name and age of each of our directors, indicating all positions and offices with our company currently held by the director.
Set forth below are descriptions of the backgrounds and principal occupations of each of our directors, and the period during which he or she has served as a director.
Gary M. Parsons has served as our Chairman of the Board of Directors since May 1997 and previously served as Chief Executive Officer. He serves on the board of Canadian Satellite Radio Holdings Inc. and Devas Multimedia Pvt. Ltd, and is Chairman and was previously Chief Executive Officer of Mobile Satellite Ventures L.P. Mr. Parsons was President and Chief Executive Officer of TerraStar Corporation, formerly Motient Corporation, from July 1996 to March 1998, and subsequently served as Chairman until May 2002. Previously, Mr. Parsons was with MCI Communications Corporation where he served in a variety of roles from 1990 to 1996, including Executive Vice President of MCI Communications, and as Chief Executive Officer of MCIs subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsons was one of the principals of Telecom*USA, which was acquired by MCI.
Nathaniel A. Davis has served as a member of our Board of Directors since October 1999, as President and Chief Operating Officer from July 2006 to August 2007, and as President and Chief Executive Officer since August 2007. He was formerly managing director of Rannd Advisors, Oakton, Virginia. Until May 2003, Mr. Davis was President and Chief Operating Officer and a member of the board of directors of XO Communications Inc., formerly Nextlink Communications Inc. From October 1998 to December 1999, he was Executive Vice President of Nextel Communications where he had responsibility for the technical and engineering operations of Nextels nationwide switching and wireless communications network, billing and information technology systems. From August 1986 through September 1998, Mr. Davis served in a variety of senior engineering and finance roles at MCI, most recently as Senior Vice President and Chief Financial Officer of MCI Telecommunications. Mr. Davis serves on the board of directors of Mutual of America Capital Management Corporation and Charter Communications.
Joan L. Amble has served as a member of our Board of Directors since December 2006. Ms. Amble has served as Executive Vice President and Corporate Comptroller for American Express Company since December
2003. Prior to joining American Express, Ms. Amble served as chief operating officer and chief financial officer of GE Capital Markets, a service business within GE Capital Services, Inc., overseeing securitizations, debt placements and syndication, as well as structured equity transactions for General Electric Company business. From 1994 to March 2003, Ms. Amble served as vice president and controller for GE Capital.
Thomas J. Donohue has served as a member of our Board of Directors since October 1999. Mr. Donohue is President and Chief Executive Officer of the U.S. Chamber of Commerce, the worlds largest business federation, and has been active in national policy and non-profit operations for 30 years. From July 1984 through September 1997, Mr. Donohue served as President and Chief Executive Officer of the American Trucking Association. He serves on the board of directors of Union Pacific Corporation, Sunrise Senior Living Corporation and Marymount University.
Eddy W. Hartenstein has served as a member of our Board of Directors since May 2005. Mr. Hartenstein was the Vice Chairman and a member of the board of directors of The DIRECTV Group, Inc. (formerly Hughes Electronics Corporation) from December 23, 2003 until his retirement on December 31, 2004. Mr. Hartenstein served as Chairman and CEO of DIRECTV, Inc. from late 2001 to 2004 and as President of DIRECTV, Inc. from its inception in 1990 to 2001. Prior to 1990, Mr. Hartenstein served in various capacities for Hughes Communications, Inc., Equatorial Communications Services Company and Hughes Communications. Mr. Hartenstein also serves as a member of the board of directors of SanDisk Corporation, Thomson Multimedia and the Consumer Electronics Association. As of December 2005, Mr. Hartenstein also serves as the Chairman and Chief Executive Officer of HD Partners Acquisition Corporation.
Chester A. Huber, Jr. has served as a member of our Board of Directors since January 2002. Mr. Huber was named President of OnStar Corporation in December 1999 and was General Manager of the OnStar Division of General Motors Corporation from June 1995 until December 1999. He has held a variety of engineering, operations and marketing roles in his 34-year career with General Motors, including General Director of Aftermarket Parts and Services, and General Director of Sales, Marketing and Product Support for the Electro-Motive Division. Mr. Huber recently served on a Federal Advisory Committee for the Centers for Disease Control (CDC) and currently serves on another on the Global Positioning System (GPS) convened by NASA.
John W. Mendel has served as a member of our Board of Directors since May 2005. Mr. Mendel is Senior Vice President, automobile operations of American Honda Motor Co., Inc., responsible for Product Planning, Advertising, Marketing, Public Relations and Distribution for both Honda and Acura Automobile Divisions. Prior to joining American Honda in December 2004, Mr. Mendel served as Executive Vice President and Chief Operating Officer for Mazda North American Operations from January 2002 until November 2004. From 1976 to 2002, Mr. Mendel held numerous sales and marketing and management positions within Ford and Lincoln Mercury Divisions, Ford Customer Service and Ford of Europe.
Jarl Mohn, who has also been known as Lee Masters since his days in radio, has served as a member of our Board of Directors since May 2004. Mr. Mohn is a private investor with over 20 years experience in radio and currently manages The Mohn Family Foundation, a philanthropic entity he and his wife created in 2000. Previously, Mr. Mohn was the founding President and Chief Executive Officer of Liberty Digital from January 1999 to April 2002. Prior to Liberty Digital, Mr. Mohn created E! Entertainment Television, serving as President and Chief Executive Officer for E! from January 1990 to December 1998. Before founding E!, Mr. Mohn was Executive Vice President and General Manager of MTV, a cable music television network. He currently serves as a member of the Board of Directors for E.W. Scripps Company, CNET and MobiTV.
Jack Shaw has served as a member of our Board of Directors since May 1997. Mr. Shaw served as Chief Executive Officer of Hughes Electronics Corporation from January 2000 until his retirement in December 2003 and served as Chief Executive Officer and Chairman of Hughes Network Systems, Inc. from 1987 and 1988, respectively, through January 2000. Previously, Mr. Shaw held senior management positions with companies including ITT Space Communications, Inc., Digital Communications Corporation and M/A-Com
Telecommunications, Inc., which was acquired by Hughes Electronics Corporation in 1987. Mr. Shaw is a member of the Board of Directors of Globecomm Systems, Inc.
Jeffrey D. Zients has served as a member of our Board of Directors since May 2006. Mr. Zients leads an investment company that focuses on public and private small-cap companies. He served as the Chairman of the Board of The Advisory Board Company and Chairman of the Board of The Corporate Executive Board Company, two business-to-business content companies from June 2001 to November 2004 and January 2000 to April 2001, respectively. From July 1998 to June 2001, he served as Chief Executive Officer and from 1996 to July 1998 he served as Chief Operating Officer of The Advisory Board Company. Mr. Zients currently serves as a member of the Board of Directors for Revolution Health, a holding company investing in consumer-driven healthcare, Best Practices, a provider of emergency medicine outsourcing services and Timbuk2 Designs, a messenger bag and apparel retailer.
Director Designation Agreements
We have director designation agreements that contemplate election to our Board of Directors of members selected by each of General Motors and American Honda. Mr. Huber is the director selected by General Motors, and Mr. Mendel is the director selected by American Honda. The director designation agreements will terminate upon consent of the parties.
The following table sets forth information concerning our executive officers. Officers are elected by and serve at the discretion of our Board of Directors.
Set forth below are descriptions of the backgrounds of each of our executive officers, other than Messrs. Parsons and Davis, whose positions and backgrounds are described above.
Dara F. Altman has served as our Executive Vice President, Business and Legal Affairs since January 2006. Previously, Ms. Altman was Executive Vice President of Business Affairs for Discovery Communications from 1997 to 2005, where she oversaw all business negotiations for Discoverys global television assets, representing expenditures of more than $750 million annually across a broad range of business activities, including its domestic television networks, Discovery Channel, TLC and Animal Planet, as well as its education business and online and commerce activities. Prior to joining Discovery Communications, Ms. Altman served as Senior Vice President and General Counsel of Reiss Media Enterprises from 1993 to 1997, which owned Request TV, a national pay-per-view service. Before Request TV, Ms. Altman served as counsel for Home Box Office and started her career as a corporate and securities lawyer at Willkie, Farr & Gallagher LLP.
Stephen Cook has served as our Senior Vice President, Sales and Marketing since February 1999 and was promoted to Executive Vice President, Sales and Marketing in January 2002. Mr. Cook has served as Executive Vice President, Automotive since July 2006. Previously, Mr. Cook was Chief Operating Officer for Conxus Communications, where he successfully launched its portable voice messaging product, Pocketalk, in the top 12 United States markets. From 1990 to 1997, Mr. Cook held key management positions with GTEs cellular
operations, including VP of Marketing and President of the Southeast region. Prior to that time, Mr. Cook also spent five years in brand management with Procter & Gamble and has more than 24 years of experience with launching and marketing new consumer products.
Joseph J. Euteneuer has served as our Executive Vice President, Chief Financial Officer since June 2002. Previously, Mr. Euteneuer was Executive Vice President and Chief Financial Officer of Broadnet Europe, a subsidiary of Comcast Corporation, from 2000 to 2002. Mr. Euteneuer joined Comcast in 1989 and served as its Vice President & Corporate Controller prior to joining Broadnet Europe. Mr. Euteneuer is a certified public accountant.
Vernon Irvin has served as our Executive Vice President, Chief Marketing Officer since November 2006. Previously, Mr. Irvin was Executive Vice President and General Manager for the communications services group of Verisign from 2003 to 2006. From 2001 to 2003, Mr. Irvin served as Executive Vice President, Communications, Media and Entertainment for American Management Systems.
Stelios Patsiokas has served as our Senior Vice President, Technology since October 1998 and was promoted to Executive Vice President, Engineering and Technology in January 2002. Previously, Dr. Patsiokas was with Motorola, Inc., where he served in a variety of consumer electronics design and development roles since 1979. Since 1996, Dr. Patsiokas was Director of Product Development, for Motorolas Messaging Systems Product Group, where he was involved with developing the PageWriterTM 2000 two-way messaging device. Dr. Patsiokas holds 32 United States patents.
Joseph M. Titlebaum has served as our General Counsel and Secretary since September 1998. From 1990 to 1998, Mr. Titlebaum was an attorney with the law firm of Cleary, Gottlieb, Steen & Hamilton. With a specialty in telecommunications ventures, Mr. Titlebaum has expertise in structuring, negotiating and implementing corporate finance, intellectual property and mergers and acquisitions transactions.
Erik Logan Toppenberg has served as Executive Vice President of Programming since August 2004. Mr. Toppenberg is a 20-year radio industry veteran and served as President of Programming at Citadel Broadcasting from July 2003 to July 2004. Mr. Toppenberg was Vice President of Programming at Infinity Broadcasting from February 2003 through July 2003. Prior to his corporate position at Infinity, Mr. Toppenberg served as Vice President, Operations at Infinitys award-winning country radio station WUSN-FM in Chicago from April 2002 through January 2003, and was Operations Manager for various stations in Tampa, FL from 1998 through March 2002 leading WQYK-FM to the prestigious CMA Station of the Year honor in 2001. Mr. Toppenbergs resume includes programming stints in San Francisco, Seattle, Milwaukee and Oklahoma City. Mr. Toppenberg also is an active member of the Country Music Association board of directors and is currently serving his fifth term.
The audit committee, currently consisting of Ms. Amble (chair) and Messrs. Hartenstein, Shaw and Zients, reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters. These matters include the selection and oversight of our internal and external auditors and review of our accounting books, records and policies, our procedures for addressing material risks, our financial statements, the appropriateness of our accounting principles and related party transactions. The audit committee met nine times during 2007.
The NASDAQ Stock Market and the Securities and Exchange Commission impose strict independence requirements for all members of the audit committee. In addition to meeting NASDAQs tests for director independence generally, directors on audit committees must meet two basic criteria set forth in the SECs rules. First, audit committee members are barred from acceptingdirectly or indirectlyany consulting, advisory or other compensatory fee from the issuer or an affiliate of the issuer, other than in the members capacity as a
member of the board and any board committee. The second basic criterion for determining independence provides that a member of an audit committee may not be an affiliated person of the issuer or any subsidiary of the issuer apart from his or her capacity as a member of the board and any board committee. The Board has determined that each member of the Audit Committee meets these independence requirements, in addition to the independence criteria established by NASDAQ for listed company board members generally. The Board has determined that each of the Audit Committees members qualifies as an audit committee financial expert, as that term is defined under the SEC rules.
Our code of ethics sets forth our policies and expectations and applies to every XM director, officer and employee. Our code of ethics addresses a number of topics, including conflicts of interest, relationships with others, corporate payments, disclosure policy, compliance with laws, corporate opportunities and the protection and proper use of our assets. Our code of ethics is available on the Corporate Governance page of our website at http://www.xmradio.com.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than 10% of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other of our equity securities. Such reporting persons are required by rules of the SEC to furnish us with copies of all Section 16(a) reports they file. To our knowledge, based solely upon a review of Section 16(a) reports furnished to us for fiscal 2007 or written representations that no other reports were required, we believe that all filing requirements under Section 16 for fiscal 2007 were complied with on a timely basis, with the exception of Mr. Toppenberg, who inadvertently filed one late Form 4.
COMPENSATION DISCUSSION AND ANALYSIS
Our Compensation Philosophy and Objectives
We provide a satellite digital audio radio service in the United States and began commercial operations in late 2001. As a high growth but not yet profitable company, we strive to retain our existing executives and where needed attract new executive talent by paying at competitive levels including a significant upside opportunity through equity compensation. In addition, as previously disclosed, on February 19, 2007, we executed an Agreement and Plan of Merger with Sirius Satellite Radio Inc. As a result, and pursuant to the terms of the merger agreement, one focus for 2007 was to retain our senior management team, which includes each of the officers set forth in the Summary Compensation Table below, or the named executive officers (NEOs), through completion of the merger. Accordingly, our key compensation objectives during 2007 consisted of the following:
Our Compensation Committee is responsible for reviewing and approving the compensation paid to our executive officers, including each of the NEOs.
In reviewing the information below, investors should note that the variable portion of compensation, which is the most significant element of compensation, is granted after the end of each fiscal year when the results for that year are known, and the performance-based elements of the grant are focused on executive and company performance over the prior year. For 2007, the variable portion of compensation was awarded in early 2008. To the extent that annual equity compensation was based on performance, the relevant performance was during 2007.
Setting of Executive Compensation
Our Compensation Committee generally looks to both objective market data as well as internal, subjective reviews in setting each NEOs target overall level of compensation and reviews the individual components as well as each executives total compensation opportunity.
Market Data. In 2007, we obtained market comparison data from analyses of publicly-available information for a peer group of companies that is based on industry, revenues, market capitalization and geographic
location. Over the past several years, including 2007, this data has been provided by Aon Consulting as the Compensation Committees compensation consultant. The Committee has the authority to retain and dismiss its compensation consultants. The Committees consultant for 2008 is Towers Perrin.
Our management, with assistance from consultants, utilizes its business judgment in developing the appropriate peer group. Historically, we have used a peer group that has taken into account our belief that executives are more likely to receive or accept opportunities from within industries they know well, but that our executive officers have opportunities that are not solely limited to our industry or geographic location.
In 2007, we broadened our peer group of companies, reflecting managements view both that the relevant industry had expanded due to increased competition from adjacent technologies, and that, due to convergence within the communications area, companies focusing on media content or communications technologies were similar enough to XM to include in the peer group. In choosing the peer group companies, management considered the companies selected to share some or all of the following characteristics with XMcorporate culture, requisite skill sets, competitive intensity, operating requirements and capital intensity. Our broadened peer group also takes into greater account market capitalization, in addition to revenues, to better reflect what management perceived to be comparable opportunities for top management. Based on these considerations, our current peer group consists of:
Dun & Bradstreet
The Washington Post
Sirius Satellite Radio
While the Committee with the assistance of the consultant reviews the market data with respect to our various elements of compensation, we do not benchmark or target certain percentiles within the peer group in determining NEO compensation. Instead, the Committee uses the information to monitor the overall competitiveness of NEO compensation, and retains the flexibility described above to determine compensation packages.
Committee Review. As discussed above, the Compensation Committee believes that competitive alternatives vary from individual to individual and may extend beyond equivalent positions in the Companys industry or at other publicly traded or similarly-situated companies. As a result, the Compensation Committee primarily sets each NEOs compensation target and each compensation element based on a series of subjective and objective factors, including individual and team contribution and performance, corporate performance (including both actual growth and growth relative to our guidance), complexity and importance of role and responsibilities, position tenure, leadership and growth potential and internal pay relationship. The Committee also reviews the total compensation package of our NEOs, including current and future salary and bonus pay as well as accumulated realized and unrealized stock option and restricted stock gains.
Elements of Compensation
For 2007, we provided three types of compensation to our NEOsbase salary, annual cash bonuses and long-term equity awards in the form of service-based restricted stock. As noted above, equity awards are based in
part on retention and in part on the performance over the prior year. To the extent investors are seeking to compare executive compensation to Company performance, equity award levels in a particular year are more appropriately compared to Company performance in the prior year.
Base Salaries. Although we have emphasized variable components (bonus and equity) over fixed components of compensation (salary and benefits), our level of base pay to our NEOs is intended to be competitive with peer companies because we expect executives to hold much of their equity compensation for a number of years and recognize that executives value a cash component of compensation. Our Compensation Committee has the discretion to and will continually evaluate our fixed and variable components of compensation to ensure that we remain generally competitive including with our peer group as well as adequately address retention issues.
Base salaries of Nate Davis, our President and Chief Executive Officer, and Gary Parsons, our Chairman, are determined in accordance with their respective employment agreements. Our Compensation Committee reviews the compensation of our top executives by evaluating the responsibilities of the position, the experience and knowledge of the individual, and the competitive marketplace for executive talent, including a comparison to base salaries for comparable positions at peer public companies based on industry, market capitalization and geographic region. The employment agreements are described below under the heading Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table. Annual salary adjustments for the NEOs who do not have employment agreements have been recommended by the CEO and the Chairman in the first quarter of each year by evaluating the performance of each executive officer after considering the previous years performance and evaluating evolving responsibilities.
In 2007, the Compensation Committee delegated to our CEO and Chairman the power and responsibility to set compensation for other executive officers, including the other NEOs.
Individual performance evaluations take into account such factors as achievement of specific goals that are driven by the Companys strategic plan and attainment of specific individual objectives. The factors affecting base salary levels for 2007 include both Company performance, on an absolute basis and relative to prior objectives, and individual factors which vary from executive to executive as determined by the Compensation Committee, in the case of the CEO and Chairman, and as determined or recommended by the CEO and the Chairman, in the case of other NEOs. This consideration of both Company and individual factors results in a fair amount of flexibility in our compensation program, consistent with our objectives and as we believe is necessary given the expectations regarding growth of the Company.
Annual Bonuses. We adopted our 2007 XM Radio Bonus Compensation Plan to focus all of our employees above a specified level, including the NEOs, on achievement of operational and financial performance goals. Each participating employee, including each of the NEOs, had a target bonus opportunity for the year, which represented a percentage of his or her base salary paid during 2007. The target bonus is based on title, with the actual award based on the level of achievement, both by the individual and by the Company, of performance targets established each year, as well as an assessment of individual performance by the Compensation Committee for the CEO and the Chairman and by the CEO and Chairman for other NEOs. Individual goals are generally awarded up to 80% if partially achieved, 80-100% if fully achieved, and 100-120% if clearly exceeded, as interpreted by the Committee or the CEO and Chairman, respectively.
As described below under Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards TableEmployment Agreements, the employment agreements of Mr. Davis and Mr. Parsons contain provisions relating to bonuses. Under his employment agreement, Mr. Davis is eligible for a discretionary annual bonus with a target guideline of 100% of base salary. Mr. Parsons employment agreement provides that he is eligible for a discretionary annual bonus with a target guideline of 100-125% of base salary. The target bonus for each of the other NEOs for 2007 was 55% of base salary.
The corporate performance targets under our 2007 bonus plan were based on a sliding scale around our achieving during 2007 ending subscribers in the nine million range and adjusted operating loss in the $150 million range, as adjusted for various merger, legal, settlement and other extraordinary expenses as determined by the Compensation Committee. The Company performance portion of the bonus plan was achieved for 2007. Accordingly, bonuses were awarded to NEOs during February 2008 under the Companys 2007 bonus plan.
As the corporate performance goals were met in 2007, the bonuses for 2007, awarded in early 2008, included the corporate component. For comparative purposes, the Company did not achieve the corporate performance targets for 2006 and thus no corporate component was awarded for 2006. The Company achieved at least 96% of the corporate performance target of the bonus plan in 2003, 2004 and 2005.
Equity Compensation. As the Company is still seeking to generate enough revenue to reach positive cash flow, the Company has undertaken a risk/reward compensation philosophy of emphasizing equity components of compensation. In addition, consistent with our compensation objectives, we also use our equity compensation as a retention mechanism for our employees, including our NEOs. In light of the pending merger with Sirius, a portion of the May 2007 equity grants were for retention purposes and accordingly vest in full on the first anniversary of the date of grant, in contrast to our typical practice of restricted stock grants vesting over three years. There may also be performance measures included in equity compensation. For example, the employment agreement for Mr. Davis includes a restriction that he will not sell vested shares, other than to fund tax payments, until the first to occur of the average closing price for our Class A common stock over any seven consecutive trading days being at least 150% of the stock price on the grant date, or seven years having elapsed since the grant date.
Options. While we historically granted options to our executives, since 2005 we have primarily granted only service-based restricted stock to our executives. The Company continues to grant stock options to certain of its non-executive employees, and in prior years we have granted stock options to executives at the time of hire.
Restricted Stock. Since 2005, the Company has generally made its annual equity awards to executives including the NEOs in the form of restricted stock, in part because fewer shares are required, in part because of fluctuations in our stock price and in part because options and restricted stock no longer have the disparate accounting treatment that inclined many companies including XM to award options. All equity awards are subject to continuation of service vesting restrictions, so they are not immediately payable and are at risk of forfeiture until vesting requirements are met. Typically, restricted stock awards vest in equal portions over three years. Vesting occurs on the yearly anniversary of the date of grant, except that if the scheduled vesting date occurs during a trading blackout under our insider trading policy, then vesting is deferred until the first day of the next open window period.
In February 2008, we made our annual equity grants to our NEOs in the form of restricted stock. In May 2007, we made our annual equity grants to our NEOs in the form of restricted stock.
Timing of Equity Awards. We typically grant equity awards to the NEOs each year at a Compensation Committee meeting during the first quarter. Equity awards also are made to new executive officers by the Compensation Committee upon hire or promotion of the executive and upon an extension of his or her employment agreement. Equity also may be granted in response to competitive or retention issues. The Compensation Committee does not time equity grants to take advantage of information, either positive or negative, about the Company that has not been publicly disseminated. It is our practice that the exercise price for option grants is the closing market price on the date of grant, with the grant date being the date of Compensation Committee approval and date of hire for new employees.
Change in Control Arrangements
The terms of the merger agreement with Sirius Satellite Radio contemplated that our Compensation Committee would approve or establish various severance and retention arrangements for our employees, including our NEOs. In order to keep our management team intact during the pendency of the merger, in April 2007, we entered into amendments to the employment agreements of Messrs. Davis and Parsons and our former CEO and severance agreements for our other NEOs. As further described below under Potential Payments upon Termination or Change in Control, pursuant to each of their employment agreements, in the event of termination of employment of Mr. Davis or Mr. Parsons without cause, or if Mr. Davis or Mr. Parsons were to resign for good reason (which includes a change of control of the Company), we will pay each of them a lump sum equal to two times the sum of base salary and annual bonus and will continue to make available or pay annually in a lump sum all applicable benefits for two years from the date of termination. Each would be entitled to receive a pro-rated portion of his annual bonus for that year. In addition, all options granted to Mr. Davis and Mr. Parsons would vest immediately and remain exercisable for eighteen months. The limitation on sales of restricted stock prohibiting trading until our Class A common stock achieves a specified level or until seven years after the date of grant would lapse. Although our other NEOs do not have employment agreements, they do have severance agreements, and restricted stock and stock options held by our NEOs also have extended exercise periods, accelerated vesting and lapse of restrictions under certain change in control scenarios. See Potential Payments upon Termination or Change in Control for a further explanation, and estimated quantification of these amounts.
Compensation Committee Report
The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis with management. Based on the review and discussion referred to above, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the Companys Proxy Statement on Schedule 14A and Annual Report on Form 10-K.
Thomas J. Donohue
This report is not deemed filed with the SEC and is not incorporated by reference in any filing of our company under the Securities Act of 1933 or the Securities Exchange Act of 1934, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Summary Compensation Table
All Other Compensation
Grants of Plan-Based Awards
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table
Mr. Davis. Nate Davis is employed as our President and Chief Executive Officer and member of the Board of Directors for a term of three years under an employment agreement effective July 24, 2006 and amended in April 2007 and August 2007, at which later time Mr. Davis became our Chief Executive Officer. Mr. Davis generally participates in the same executive compensation plans and arrangements available to the other senior executives. Accordingly, his compensation also consists of annual base salary, annual bonus and long-term equity-linked compensation. Specifically, Mr. Davis employment agreement provides for an annual base salary of at least $650,000 annually, subject to increase by the Board of Directors. In addition, Mr. Davis is eligible for a discretionary annual bonus with a target guideline of 100% of his base salary based upon having met or having significantly exceeded the personal and corporate objectives established by the Board each year. See Compensation Discussion and Analysis for a discussion of Mr. Davis bonus opportunity in 2007.
Mr. Parsons. Gary Parsons is employed as our Chairman of the Board of Directors under an employment agreement effective August 6, 2004 and amended in April 2007 and February 2008, which extended the term to June 30, 2008. Mr. Parsons generally participates in the same executive compensation plans and arrangements available to the other senior executives. Accordingly, his compensation also consists of annual base salary, annual bonus and long-term equity-linked compensation. His employment agreement calls for Mr. Parsons to receive a base salary of at least $525,000 annually, subject to increase by the Board of Directors. The target amount of Mr. Parsons discretionary bonus ranges from 100-125% of base salary based upon having met or having significantly exceeded the personal and corporate objectives established by the Board each year and must be paid in cash or stock within 60 days of the end of the calendar year. See Compensation Discussion and Analysis for a discussion of Mr. Parsons bonus opportunity in 2007.
Outstanding Equity Awards at Fiscal Year-End
Option Exercises and Stock Vested
Potential Payments upon Termination or Change-in-Control
Pursuant to each of their employment agreements, Mr. Davis, our President and CEO, and Mr. Parsons, our Chairman, are entitled to certain incremental payments and benefits, further discussed below.
Termination without Cause or Resignation for Good Reason. In the event we terminate the employment of Mr. Davis or Mr. Parsons without cause or if Mr. Davis or Mr. Parsons were to resign for good reason during the term of his agreement, we will pay each of them a lump sum equal to two times the sum of base salary and annual bonus, if any, and will continue to make available or pay annually in a lump sum all applicable benefits for two years from the date of termination. Each would be entitled to receive a pro-rated portion of his annual bonus for that year. In addition, all options and restricted stock granted to Mr. Davis and Mr. Parsons would vest immediately and all options would remain exercisable for eighteen months. The limitation on sales of certain restricted stock grants prohibiting trading until our Class A common stock achieves a specified trading level or until seven years after the date of grant would lapse.
Pursuant to the employment agreements, good reason means
A change of control occurs where
Termination for Cause or Voluntary Resignation. In the event we terminate Mr. Davis or Mr. Parsons employment for cause or if either the individual voluntarily resigns during the term of his agreement, we will pay, in accordance with our then-prevailing executive payroll practices, all base compensation, benefits and other payments to which the individual was entitled through the effective date of termination. In the case of voluntary resignation only, the individual also will be entitled to exercise any of his vested options within three months after termination. All unvested options and vested options that are not exercised within three months of termination will be forfeited.
Death. If Mr. Davis or Mr. Parsons employment terminates because of his death during the term of his agreement, we will continue to pay his then current base salary and pro-rated annual bonus (based on the percentage of base salary awarded as an annual bonus in the prior year), and will continue to make all applicable benefits available, to his legal representatives, estate, beneficiaries or heirs, through the end of the third calendar month following his death. In addition, XM will continue any health, medical, dental, or similar benefits which members of his family were receiving for a period of one year from date of death for Mr. Parsons and fifteen months from date of death for Mr. Davis, or pay such family members an amount equal to their cost for obtaining equivalent coverage. All non-vested options will be forfeited. Legal representatives, estate, beneficiaries or heirs will be entitled to exercise any vested options within one year after the individuals death.
Disability. If we terminate Mr. Davis or Mr. Parsons employment because of disability (defined as being unable, by virtue of illness or physical or mental incapacity or disability, to perform the individuals essential job functions, whether with or without reasonable accommodation, in substantially the manner required prior to the commencement of the disability for more than ninety consecutive days) during the term of his agreement, we will continue to pay his then current base salary, and pro-rated annual bonus (based on the percentage of base salary awarded as an annual bonus in the prior year), and will continue to make all applicable benefits available, to the individual, through the end of the third calendar month following termination. In addition, we will continue any health, medical, dental, or similar benefits which the individual (and/or members of his family) were receiving for a period of one year from date of disability for Mr. Parsons and fifteen months from date of disability for Mr. Davis, or pay the individual an amount equal to the cost of obtaining equivalent coverage. All non-vested options will be forfeited. Vested options may be exercised within one year after termination.
Nonrenewal. If we offer to renew Mr. Davis or Mr. Parsons employment agreement, but their employment nevertheless terminates, and restricted stock and options scheduled to vest on the third anniversary of their employment agreements will immediately vest and all vested options, including those scheduled to vest on the third anniversary of their employment agreements, will remain exercisable for three months. All other non-vested options would be forfeited. If we do not offer to renew Mr. Davis or Mr. Parsons employment agreement, all restricted stock and options previously granted will vest immediately and options will remain exercisable for eighteen months.
Each of Mr. Davis and Mr. Parsons employment agreements restricts him from engaging in any business in the United States that resembles or competes with our company for a period of one year following termination of his employment.
Departure of Former CEO. Hugh Panero, our former CEO, left the Company in August 2007. Pursuant to Mr. Paneros employment agreement, the Company paid Mr. Panero a lump sum of approximately $4.8 million upon his departure, representing three times his then current salary and bonus opportunity (including a pro rata bonus for 2007) and five years of applicable benefits. Mr. Paneros employment agreement also provided that a
gross-up payment will be made to Mr. Panero to the extent of penalties imposed by Section 409A of the Internal Revenue Code. In addition, Mr. Paneros unvested stock awards, other than the awards granted in May 2007, vested upon his departure. The May 2007 awards vested in March 2008.
We have entered into severance agreements with each of our NEOs other than our Chairman and our President and CEO. The form of agreement provides, among other things, that if a change in control of the Company occurs and as a result the officer is either terminated or terminates his employment for good reason, the officer would receive a lump sum cash payment equal to two times the sum of the officers base salary and target annual bonus, a pro-rata target annual bonus in respect of the year of termination, continued health and insurance benefits for two years, outplacement services for two years and a gross-up payment to cover excise taxes. The limitation on sales of restricted stock prohibiting trading until our Class A common stock achieves a $30 trading level or until seven years after the date of grant would lapse.
A change in control occurs where
Good reason means
Each of the severance agreements for the NEOs other than Messrs. Davis and Parsons restricts him from engaging in any business in the United States that competes with our company for a period of one year following termination of his employment.
Acceleration of Equity Pursuant to Equity Plans
Restricted Stock. Pursuant to the XM Satellite Radio Holdings Inc. 1998 Shares Award Plan and 2007 Stock Incentive Plan, our restricted stock awards held by the NEOs will become 100% vested upon termination of service, if service terminates as a result of death or as the result of an involuntary termination within one year of a change of control (which has a substantially similar definition to that described above under Severance Agreements except that under the 1998 Shares Award Plan it also includes shareholder approval of a merger or consolidation transaction) or involuntary termination or resignation for good reason (which has a substantially similar definition to that described above under Severance Agreements) within one year of a consummated merger transaction. In the case of Mr. Davis and Mr. Parsons, the terms of their employment agreements, which are described above, control with respect to the restricted stock held by each.
Stock Options. Pursuant to our 1998 Shares Award Plan and 2007 Stock Incentive Plan, stock option awards held by the NEOs may be exercised for the following periods after the applicable termination:
Upon the optionees termination of employment, the option will be exercisable only to the extent that it was vested and exercisable as of the date of the optionees termination, except that in the case of the optionees death or involuntary termination within one year of a change of control, the option will vest immediately in full and be fully exercisable by the optionee or authorized representative. In the case of Mr. Davis and Mr. Parsons, the terms of their employment agreements, which are described above, control with respect to the options held by each.
Based upon a hypothetical termination date of December 31, 2007 and stock price equal to $12.24, the closing price of our Class A common stock on December 31, 2007, the payments and benefits payable to our NEOs would have been as follows:
Termination without cause
Termination upon death
Termination upon disability
In 2007, our independent directors (as determined by our Board of Directors) received an annual retainer fee of $15,000, $2,000 for every meeting attended in person and $500 for every meeting attended telephonically. We also reimbursed reasonable travel expenses incurred in connection with attendance at board meetings. Independent directors received $5,000 per year for each board committee on which they serve, $10,000 for serving as the chair of a committee and $15,000 for serving as the chair of the Audit Committee. Our director compensation and reimbursement policy has not changed for 2008. It has been our practice to make annual equity grants to our non-employee directors.
Compensation Committee Interlocks and Insider Participation
The current members of the Compensation Committee are Messrs. Donohue, Mohn and Shaw. None of the current members of the Compensation Committee is or has been an officer or an employee of the Company. There are no interlock relationships as defined in the applicable SEC rules. None of the current members of the Companys Compensation Committee had any relationship requiring disclosure as a related party transaction under the section entitled Certain Relationships and Related Transactions.
The information presented under Principal Stockholders and Security Ownership of Directors and Executive Officers below regarding beneficial ownership of the common stock has been presented in accordance with the rules of the SEC and is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership of common stock includes any shares as to which a person, directly or indirectly, has or shares voting power or investment power and also any shares as to which a person has the right to acquire such voting or investment power within 60 days through the exercise of any stock option or other right.
As of March 31, 2008, there were 319,496,266 shares of Class A common stock outstanding.
The following table presents, as of March 31, 2008, information based upon our records and filings with the SEC regarding each person known to us to be the beneficial owner of more than 5% of our Class A common stock:
Security Ownership of Directors and Executive Officers
The following table presents, as of March 31, 2008, information regarding the beneficial ownership of Class A common stock by each of our directors and executive officers named in the summary compensation table that appears below under the caption entitled Executive Compensation and Other Information and all of our directors and executive officers as a group:
Disclosure with Respect to our Equity Compensation Plans
The Company maintains the 2007 Stock Incentive Plan, as amended, which we refer to as the 2007 Plan, the 1998 Shares Award Plan, as amended, which we refer to as the 1998 Plan, the Talent Option Plan, which we refer to as the Talent Plan, and the Employee Stock Purchase Plan, which we refer to as the ESPP, pursuant to which it may grant equity awards to eligible persons. The 1998 Plan, the Talent Plan and the ESPP are described more fully below.
The following table gives information about equity awards under the 2007 Plan, the 1998 Plan, and the Talent Plan and the ESPP as of December 31, 2007:
Relationship with General Motors
We have a long-term distribution agreement with General Motors. During the term of the agreement, which expires in 2013, GM has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. In April 2006, we amended the distribution agreement pursuant to which we made a prepayment in May 2006 in the amount of $237 million to General Motors to retire at a discount approximately $320 million of the remaining fixed payment obligations that would have come due in 2007, 2008 and 2009. The April 2006 amendment eliminated our ability to make up to $35 million of subscriber acquisition payments in shares of our Class A common stock. In addition, our credit facility with General Motors, which is further described below, was increased from $100 million to $150 million.
In order to encourage the broad installation of XM radios in GM vehicles, we have agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to our service. We must also share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM radios, which percentage increases until there are more than eight million GM vehicles with installed XM radios (at which point the percentage remains constant). As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we must reimburse GM. The agreement is subject to renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radios service. The agreement is subject to renegotiation at two-year intervals, beginning in November 2005, if GM does not achieve and maintain specified installation levels of GM vehicles capable of receiving our service. The specified installation level of 1,240,000 units by November 2005 was achieved in 2004. The specified installation levels in future years are the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service industry. There can be no assurances as to the outcome of any such renegotiations. GMs exclusivity obligations will discontinue if, by November 2007 and at two-year intervals thereafter, we fail to achieve and maintain specified minimum share levels in the satellite digital radio service industry. We believe we were significantly exceeding the minimum levels at December 31, 2007.
GM Credit Facility. General Motors has provided us with a $150 million Senior Secured Credit Facility, maturing in December 2009, that enables us to make monthly draws to finance payments that become due under the distribution agreement and other GM payments. We amended this facility in January 2004 to permit us to repay and reborrow under the facility and reduce the interest rate from a rate of 10% over LIBOR to 8% over LIBOR. In February 2008, we entered into an amended and restated agreement with GM that folds together the previously separate distribution and credit agreements with GM. The amended and restated agreements terms remain substantially similar to those of the previously separate agreements, except for the establishment of a new minimum pre-marketing cash flow threshold for 2008 that we will need to meet in order to make draws under the GM credit facility in 2009. We and XM Satellite Radio Inc. are co-borrowers under this credit facility. We had no outstanding balance under this facility as of December 31, 2007. The facility will terminate, and all draws will become due, upon the earlier of December 31, 2009 and six months after the Company achieves investment grade status. We have the option to prepay all draws in cash in whole or in part at any time and re-borrow any prepaid amounts. We are required to prepay the amount of any outstanding advances in an amount equal to the lesser of (i) 50% of our excess cash and (ii) the amount necessary to prepay the draws in full.
The credit facility is unsecured until we draw, at which time it would then be secured on a second priority basis behind the secured indebtedness permitted to be incurred under our bank credit facility. XM Satellite Radio Inc.s subsidiary, XM Equipment Leasing LLC, guarantees our and XM Satellite Radio Inc.s obligations under this credit facility.
In order to make draws under the credit facility, we are required to have a certain minimum number of subscribers that are not originated by GM and a minimum pre-marketing cash flow. The full amount of the facility was available to us as of March 31, 2008.
In January 2003, as consideration for GM entering into the credit facility, we issued to GM a warrant to purchase 10 million shares of our Class A common stock at an exercise price equal to $3.18 per share, which GM exercised in April 2004. General Motors subsequently transferred these shares to the Sub-Trust of the General Motors Welfare Benefit Trust in December 2004.
We have agreed to make bandwidth available to OnStar Corporation for audio and data transmissions to owners of XM-enabled GM vehicles, regardless of whether they are XM subscribers. We can use the bandwidth until it is actually used by OnStar. OnStars 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 have also granted to OnStar a certain amount of time to use our studios on an annual basis. In addition, we have agreed to provide certain of our audio content for distribution on OnStars telematics services.
Relationship with American Honda
We have agreed to make a certain amount of our bandwidth available to American Honda. We can use the bandwidth until it is actually used by American Honda. American Hondas 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. In January 2007, we announced a 10-year extension to our arrangement with American Honda to be its supplier of satellite radio and related data services in Honda and Acura vehicles. We also have agreed to make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and share with American Honda a portion of the subscription revenue attributable to Honda and Acura vehicles with installed XM radios.
Director Designation Agreements
We are party to director designation agreements under which members selected by General Motors and American Honda have been elected to our Board of Directors. These provisions are described above under the caption Election of DirectorsDirector Designation Agreements.
Review and Approval of Transactions with Related Persons
We review all relationships and transactions in which the company and our directors and executive officers or their immediate family members are participants to determine whether such persons have a direct or indirect material interest. Our legal department is primarily responsible for the development and implementation of processes and controls to obtain information from the directors and executive officers with respect to related person transactions and for then determining, based on the facts and circumstances, whether the company or a related person has a direct or indirect material interest in the transaction. As required under SEC rules, transactions that are determined to be directly or indirectly material to the company or a related person are disclosed in our public filings. In addition, the Audit Committee reviews and approves or ratifies any related person transaction that is required to be disclosed.
The Board of Directors has determined that, with the exception of Messrs. Parsons and Davis, each of whom is an employee of XM Satellite Radio, and Messrs. Huber and Mendel, who are employees of General Motors
and American Honda, respectively, all of its members are independent directors as that term is defined in the listing standards of The NASDAQ Stock Market. With respect to Ms. Amble, the Board evaluated ordinary course transactions during the last three fiscal years between XM and the company for which she serves as an executive officer and found that the amount paid by XM to that company was less than 5% of that companys consolidated gross revenues during its last three fiscal years.
Independent Registered Public Accounting Firm
During the fiscal years ended December 31, 2007 and 2006, the Companys independent registered public accounting firm, KPMG LLP, billed the Company the following fees:
All Audit-Related Fees were approved by the Audit Committee. None of the hours expended on KPMGs engagement to audit the Companys financial statements for the fiscal year ended December 31, 2007 were attributed to work performed by persons other than KPMGs full-time, permanent employees.
Pre-Approval Policies and Procedures
The Audit Committees policy is to review and pre-approve, either pursuant to the Audit Committees pre-approval procedures or through a separate pre-approval by the Audit Committee, any engagement of the Companys independent public accountants to provide any audit or permissible non-audit service to the Company. Pursuant to the procedures, which are annually reviewed and reassessed by the Audit Committee, a list of specific services within certain categories of services, including audit, audit-related, tax and other services, are specifically pre-approved for the upcoming or current fiscal year. Any service that is not included in the approved list of services must be separately pre-approved by the Audit Committee. The Audit Committee has approved the engagement of the Companys public accountants from time to time to perform certain limited services in an amount not to exceed $50,000 per engagement, which services may include the issuance of consents relating to the public offering of securities, the review and attestation of managements calculations pursuant to debt, warrant and contractual covenants and related matters, participation in discussions with management and its advisors in connection with various proposed transactions and reviewing managements assessment of the appropriate accounting treatment of such transactions, and the review and comment on the Companys accounting policies. In the event that the independent public accountants estimate of fees for any such pre-approved service exceeds $50,000 per engagement, then the specific approval of the Audit Committee is to be obtained.
(a)(3) The following exhibits are either provided with this Form 10-K or are incorporated herein by reference:
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.
Date: April 29, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
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.
Date: April 29, 2008
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated: