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XM Satellite Radio Holdings 10-K 2010 Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
FORM 10-K
OR
FOR THE TRANSITION PERIOD FROM TO
DELAWARE
(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) 202-380-4000 (Registrants’ telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act:
Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Not Applicable
(Title of Classes)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
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 o 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):
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 on June 30, 2009 was $0.
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date.
DOCUMENTS INCORPORATED BY REFERENCE
THE REGISTRANTS MEET THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS I(1)(a) AND (b) OF FORM 10-K AND ARE THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FORM 10-K
Table of Contents
EXPLANATORY NOTE
This Annual Report on Form 10-K is a combined report being filed by two separate registrants:
XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. XM Satellite Radio Holdings Inc.’s
principal wholly owned subsidiary is XM Satellite Radio Inc. XM Satellite Radio Holdings Inc. also
fully and unconditionally guarantees certain of XM Satellite Radio Inc.’s debt securities. The two
companies’ information presented in this report has been combined. The combined report includes XM
Satellite Radio Holdings Inc.’s consolidated financial statements as the only set of financial
statements. An explanation of the differences between the companies is set forth in Note 1 to the
consolidated financial statements in Item 8 of this Annual Report on Form 10-K. Condensed
consolidating financial information regarding XM Satellite Radio Inc. is set forth in Note 16 to
the consolidated financial statements in Item 8 of this Annual Report on Form 10-K.
On July 28, 2008, Vernon Merger Corporation, a wholly owned subsidiary of Sirius XM Radio Inc.
merged with and into XM Satellite Radio Holdings Inc. and as a result XM Holdings became a wholly
owned subsidiary of SIRIUS (the “Merger”).
Unless otherwise indicated,
The SIRIUS satellite radio business is conducted by SIRIUS; and the XM satellite radio
business is conducted principally by XM. XM Holdings is primarily a holding company, although XM
Holdings owns the former corporate headquarters and data center of XM and leases these buildings to
XM; owns the XM-5 and portions of the XM-3 and XM-4 satellites; holds the investment in XM Canada;
and holds certain cash accounts.
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:
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.
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PART I
We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the
United States for a subscription fee through our proprietary satellite radio system. In July 2008,
SIRIUS’ wholly owned subsidiary, Vernon Merger Corporation, merged (the “Merger”) with and into us
and, as a result, we are now a wholly owned subsidiary of SIRIUS. Our system consists of four
in-orbit satellites, over 650 terrestrial repeaters that receive and retransmit signals, satellite
uplink facilities and studios. Subscribers can also receive certain of our music and other
channels over the Internet.
As of December 31, 2009, we had 9,749,100 subscribers. Our subscriber totals include:
Our primary source of revenue is subscription fees, with most of our customers subscribing to
an annual, semi-annual, quarterly or monthly plan. We offer discounts for prepaid and long-term
subscriptions as well as discounts for multiple subscriptions. Since the Merger, we have
introduced new programming packages and made certain changes to the pricing of our services. In
October 2008, we introduced “best of” programming to subscribers for an additional $4.04 per month.
In March 2009, we increased the price of our discounted second radio subscription plan from $6.99
to $8.99 per month. In March 2009, we began offering XM Online, our Internet service, to our
subscribers for an additional $2.99 per month. Effective July 29, 2009, we began adding a U.S.
Music Royalty Fee to subscriber invoices. The U.S. Music Royalty Fee is $1.98 a month on our base
$12.95 subscriptions and $.97 for base plans that are eligible for a second radio discount. 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 data and weather services.
Our satellite radios are primarily distributed through automakers (“OEMs”); nationwide through
retail locations; and through our website. We have agreements with several major automakers to
offer XM satellite radios as factory or dealer-installed equipment in their vehicles. XM radios
are also offered to customers of rental car companies.
XM Satellite Radio Inc. was incorporated on December 15, 1992 in the State of Delaware. XM
Satellite Radio Holdings Inc. was formed as a holding company for XM on May 16, 1997.
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-up for the XM service
is available at xmradio.com.
Our subscription packages allow most listeners to customize and enhance our standard
programming lineup. The “Best of SIRIUS” package offers to XM subscribers the Howard Stern
channels, Martha Stewart Living Radio, SIRIUS NFL Radio, SIRIUS NASCAR Radio, Playboy Radio and
play-by-play NFL games and college sports programming. Our “Best of XM” package offers to SIRIUS
subscribers Oprah Radio, The Virus, XM Public Radio, MLB Home Plate, NHL Home Ice, The PGA Tour
Network, and select play-by-play of NBA and NHL games and college sports programming.
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 that appeals to a broad range of audiences and to our existing
subscribers.
Music Programming
We offer 71 channels of commercial-free music. 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.
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Sports Programming
Live play-by-play sports is an important part of our programming strategy. We are the
Official Satellite Radio Partner of Major League Baseball (“MLB”), the NBA, NHL, and the 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 and UEFA Champions
League. We also air FIS Alpine Skiing and World Cup events and horse racing.
We offer many exclusive talk channels and programs such as MLB’s “Home Plate” and Chris “Mad
Dog” Russo’s Mad Dog Unleashed on Mad Dog Radio, as well as simulcasts of select ESPN television
shows, including SportsCenter.
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, most creating shows
that air exclusively on our service, including POTUS, Oprah Winfrey, Rosie O’Donnell, Opie and
Anthony and Bob Edwards.
News and Information Programming
We offer a wide range of national, international and financial news programming.
We also offer continuous, local traffic reports for 21 metropolitan markets throughout the
United States. We broadcast these reports, together with local and national weather reports from
The Weather Channel.
We also air a range of political call-in talk shows on a variety of channels including our
exclusive channel, POTUS.
Distribution of Radios
Automakers
Our primary means of distributing satellite radios is through the sale and lease of new
vehicles. We have agreements with several automakers — Acura/Honda, Ferrari, General Motors,
Hyundai, Infiniti/Nissan, Lexus, Toyota, Scion and Porsche— to offer XM satellite radios as
factory or dealer-installed equipment in their vehicles.
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.
Retail
We sell satellite radios directly to consumers through our website. 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 intend to develop 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 System
Our satellite radio system is designed to provide clear reception in most areas despite
variations in terrain, buildings and other obstructions. Subscribers can receive our transmissions
in all outdoor locations where the 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.
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The FCC has allocated the portion of the S-band located between 2320 MHz and 2345 MHz
exclusively for satellite radio. We use 12.5 MHz of this bandwidth to transmit our signal. Uplink
transmissions (from the ground to our satellites) use 12.5 MHz of bandwidth in the 7060-7072.5 MHz
band.
Our satellite radio system has three principal components:
Satellites, Terrestrial Repeaters and Other Satellite Facilities
Satellites. We own four orbiting satellites; two of which, XM-3 and XM-4, currently transmit
the XM signal and two of which, XM-1 and XM-2, serve as in-orbit spares. Each of these satellites
was manufactured by Boeing Satellite Systems International. The XM satellites were launched in
March 2001, May 2001, February 2005 and October 2006, respectively. The XM satellites are deployed
in geostationary orbits at 85° West Longitude and 115° West Longitude.
Space Systems/Loral is constructing a fifth satellite, XM-5, for use in our system. XM-5 is a
Loral FS-1300 model satellite. We have an agreement with International Launch Services to launch
XM-5 during the third quarter of 2010 on a Proton rocket.
Satellite Insurance. We currently have in-orbit insurance on XM-3 and XM-4, our primary
operating satellites, but do not carry insurance coverage for XM-1 and XM-2, our in-orbit spare
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 650 terrestrial repeaters.
Other Satellite Facilities. Our satellites are monitored, tracked and controlled by Telesat
Canada, a satellite operator. In addition, we operate backup stations in the United States.
Studios
The programming on our system originates principally from studios in New York City and
Washington D.C., and, to a lesser extent, from smaller studio facilities in Chicago and Nashville.
The New York City offices house SIRIUS’ corporate headquarters. Both the New York City and
Washington D.C. offices house facilities for programming origination, programming personnel and
facilities to transmit programming.
Satellite Radios
We design, establish specifications for, source or specify parts and components for, and
manage various aspects of the logistics and production of XM radios. We do not manufacture radios.
We have authorized manufacturers to produce and distribute XM brand radios, and have licensed our
technology to various electronics manufacturers to develop, manufacture and distribute radios under
various consumer brands. We directly import certain radios distributed through our website. To
facilitate the sale of XM radios, we often subsidize a portion of the radio manufacturing costs to
reduce the hardware price to consumers.
XM radios are manufactured in three principal configurations — as in-dash radios, Dock & Play
radios and portable or wearable radios.
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XM commercial audio systems are also available.
We have introduced an interoperable radio, called MiRGE, containing both SIRIUS and XM chip
sets. This radio has a unified control interface allowing for easy switching between the two
satellite radio networks. We have introduced the XM SkyDock, which connects to an Apple iPhone or
iPod touch and provides live XM satellite radio using the control capabilities of the iPhone or
iPod touch,
Internet Radio
We simulcast music channels and select non-music channels over the Internet. Access to XM
Online is offered to subscribers for a fee. We developed and introduced an application for the
Apple iPhone and iPod touch that permits consumers to access and XM Online on such devices. We
expect to introduce similar applications to allow consumers to access XM Online on other personal
mobile devices. Subscribers to XM Online are not included in our subscriber count, unless the
service is purchased separately and not as part of a subscription to the XM satellite radio
service.
Canada
XM Canada, a Canadian corporation in which we have an ownership interest, offers satellite
radio service in Canada. XM Canada offers 130 channels of music and news, sports, talk and
entertainment programming. Subscribers to the XM Canada service are not included in our subscriber
count.
Other Services
Commercial Accounts. The XM music service is also available for commercial establishments.
Commercial accounts are available through providers of in-store entertainment solutions and
directly from us. Commercial subscribers are included in our subscriber count.
XM Content Through Mobile Phone Carriers. We offer between 20 and 25 music and comedy
channels to mobile phone users through relationships with certain mobile phone carriers.
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 subscription to
the XM satellite radio service:
Real-Time Traffic Services. We 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
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 programming, public interest and qualified
entity channels, equipment, subscription rates, and other service commitments are summarized as
follows:
Programming
“Best of Both” Programming: We offer customers the ability to receive the best of SIRIUS
programming at a monthly cost of $16.99.
Mostly Music or News, Sports and Talk Programming: We offer customers an option of “mostly
music” programming or “mostly news, sports and talk” programming at a cost of $9.99 per month.
Discounted Family-Friendly Programming: We offer consumers a “family-friendly” version of XM
programming at a cost of $11.95 a month, representing a discount of $1.00 per month. We also offer
XM customers a family-friendly version of the “best of” programming. This programming costs $14.99
per month, representing a discount of $2.00 per month from the cost of the “best of” programming.
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Public Interest Channels
We agreed to set aside four percent of the full-time audio channels on the XM platform for
non-commercial, educational and informational programming within the meaning of the FCC rules that
govern similar obligations of direct broadcast satellite providers. We also committed not to
select a programmer to fill more than one non-commercial, educational or informational channel on
the XM platform as long as demand by programming providers for such channels exceeds available
supply.
Qualified Public Entity Channels
We agreed to enter into long-term leases or other agreements to provide to a Qualified Entity
or Entities, defined as an entity or entities that are majority-owned by persons who are African
American, not of Hispanic origin; Asian or Pacific Islanders; American Indians or Alaskan Natives;
or Hispanics, rights to four percent of the full-time audio channels on the XM platform. As
digital compression technology enables us to broadcast additional full-time audio channels, we will
ensure that four percent of full-time audio channels on the XM platform are reserved for a
Qualified Entity or Entities.
The Qualified Entity or Entities will not be required to make any lease payments for such
channels. We will have no editorial control over these channels. The FCC is expected to inform us
how it plans to select these Qualified Entities. In February 2009, the FCC commenced a proceeding
to determine the method to select these Qualified Entities but has not completed this proceeding.
We will implement our commitment to enter into long-term leases or other agreements to provide a
Qualified Entity or Entities audio channels on the XM platform when the FCC completes its pending
proceeding and directs us how to legally implement this requirement.
Equipment
We are required to provide, on commercially reasonable terms, our intellectual property
necessary to permit any device manufacturer to develop equipment that can deliver our satellite
radio services. Chip sets for satellite radios, which include the encryption, conditional access
and security technology necessary to access our satellite radio services, may be purchased by
licensees from manufacturers in negotiated transactions with such manufacturers. We have agreed
not to enter into any agreement that grants, or that would have the effect of granting, a device
manufacturer an exclusive right to manufacture, market and sell equipment that can deliver our
satellite radio services.
We have also agreed not to execute any agreement or take any other action that would bar, or
have the effect of barring, a car manufacturer or other third party from including non-interfering
HD radio chips, iPod compatibility, or other audio technology in an automobile or audio device.
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 or our new programming packages described above 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. The U.S. Music Royalty Fee is $1.98 a month on
our base $12.95 subscriptions and $.97 for base plans that are eligible for a second radio
discount. 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 website.
Interoperable Radios
We agreed to offer for sale an interoperable radio and began offering such radio in early
2009.
Local Programming and Advertising
We have committed not to originate local programming or advertising through our repeater
network.
Transactions between SIRIUS, XM Holdings and XM
Promptly following the Merger, SIRIUS and XM began to integrate their operations, and agreed
to share the costs of certain day-to-day functions. For example, XM transferred its employees to
SIRIUS, and SIRIUS, in turn, has agreed to provide various services to both companies necessary to
support their business, such as product development, sales, marketing, finance, accounting,
information technology, programming, human resources, public relations, investor relations, legal
and other general management services. XM and SIRIUS share equally the costs of these employees.
SIRIUS and XM also agreed to share programming and rationalize their channel line-ups, and to share
equally the costs of certain programming that appears on both platforms. In addition, SIRIUS and
XM have agreed to jointly market radios and coordinate rebate and warranty support programs to
subscribers who purchase radios at retail or via their websites. In general, SIRIUS and XM share
equally the costs of this marketing and sales coordination.
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SIRIUS and XM have also sought opportunities to jointly increase revenues. SIRIUS and XM have
agreed to offer their respective subscribers programming packages that include “best of”
programming from the other service. Each of SIRIUS and XM retains all the respective revenue
generated from its respective “best of” programming package. The companies have also made
arrangements to have XM radios offered in RadioShack, a retailer that was previously exclusive to
SIRIUS.
XM Holdings and XM are operated as unrestricted subsidiaries under the agreements governing
SIRIUS’ existing debt. As unrestricted subsidiaries, transactions among the companies are required
to comply with various contractual provisions in our respective debt instruments. The agreements
between XM and SIRIUS are intended to permit both companies to share in the benefits of the
inter-company arrangements in approximately equal proportion. The terms of the agreements between
XM and SIRIUS are intended to be no more favorable to one company or the other than those that
could be obtained at the time in an arm’s-length dealing with an unaffiliated firm or person.
Certain operations have not yet been integrated in any significant respect. SIRIUS and XM
expect to enter into additional arrangements as they continue to integrate their operations and
pursue opportunities to realize cost savings and increase revenues.
From time to time, we continue to evaluate options to further integrate SIRIUS and XM by
completing either or both of a merger between XM Holdings and XM or a merger between SIRIUS and XM
Holdings and/or XM.
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
We 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.
Unlike satellite radio, 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. Many radio stations offer information programming of a local nature, such as
local news and sports. By attracting listeners to their stations, traditional AM/FM radio reduces
the likelihood that customers would be willing to pay for our subscription services and by offering
free broadcasts they impose 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 have begun broadcasting digital signals, which have a 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, nearly 2,000 radio stations
are currently broadcasting primary signals with HD Radio technology and broadcasting approximately
1,000 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, 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 entering
Internet radio and wireless internet-based distribution arrangements. Approximately 15 automakers
have committed to installing HD Radio equipment as either a factory standard or factory option,
including Ford, Volkswagen, BMW, Mercedes-Benz, Kia and Hyundai.
Internet Radio
Internet radio broadcasts have no geographic limitations and can provide listeners with radio
programming from around the country and the world. Major media companies and online-only
providers, including 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. In addition, there has been wide proliferation of mobile Internet enabled
smartphones, many of which have the capability of interfacing with vehicles. These smartphones can
typically play recorded or cached content and access live Internet radio via browsers or dedicated
applications. Internet based radio products have also been announced for vehicles, although their
adoption is currently nascent. The past few years have seen a steady increase in the audio quality
of Internet radio streams and in the amount of audio content available via the Web, resulting in a
steady increase in Internet radio audience metrics. We expect that improvements from higher
bandwidths and wider programming selection are likely to continue making Internet radio an
increasingly significant competitor in the near future. These services already compete directly
with our Internet offerings and with our home line of products through the use of home stereo media
adapters, media-centric PCs, and specialized IP-based audio consoles.
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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.
Digital Media Services
We face increased competition from businesses that deliver or plan to deliver media content
through mobile phones and other wireless devices. The audio entertainment marketplace continues to
evolve rapidly, with a steady emergence of new media platforms and portable devices that compete
with our service now or that could compete with those services in the future.
Traffic News Services
A number of providers also compete with our traffic service. 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, the Motorola Droid, Google Nexus One, Palm Pre, and Apple
iPhone 3GS all include GPS functionality with turn-by-turn navigation—although these services
often require more expensive data plans or other fees.
Government Regulation
As an operator of a privately owned satellite system, we are regulated by the FCC under the
Communications Act of 1934, principally with respect to:
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 was 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 satellites expire in 2013
and 2014. 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.
In some areas with high concentrations of tall buildings, such as urban centers, signals from
our satellites may be blocked and reception can be adversely affected. In many of these areas, we
have installed terrestrial repeaters to supplement our satellite signal coverage. The FCC has not
yet established rules governing terrestrial repeaters. Rulemaking on the subject has been initiated
by the FCC and is still pending. Many comments have been filed as part of this and related
rulemakings. The comments cover many topics relating to the operation of our terrestrial
repeaters, but principally seek to protect adjoining wireless services from interference. We
cannot predict the outcome or timing of these FCC proceedings and the final rules adopted by the
FCC may limit our ability to deploy additional terrestrial repeaters, require us to reduce the
power of our existing terrestrial repeaters or fail to protect us from interference by adjoining
spectrum holders. In the interim, the FCC has granted us special temporary authority (“STA”) to
operate our terrestrial repeaters and offer service on a non-harmful interference basis to other
wireless services. Following the FCC’s review of whether certain repeaters had been operating at
variance to the specifications in their STAs, both XM and SIRIUS entered into consent decrees in
2008 requiring both remedial action and a voluntary contribution to the federal government. We
believe the repeaters operated by us comply with the consent decree, the STAs and applicable FCC
rules.
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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. Part 15 of the FCC’s
rules establish a number of requirements relating to FM modulators, including emissions and
frequency rules. Following the FCC’s review of whether the FM transmitters in certain XM radios
comply with the FCC’s emissions and frequency rules, we entered into consent decrees in 2008
requiring both remedial action and a voluntary contribution to the federal government. We believe
our radios that are in production comply with the consent decree and 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.
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 XM under the
statutory license covering the performance of sound recordings over its satellite radio service for
the six-year period starting January 1, 2007 and ending December 31, 2012. Our next rate setting
proceeding before the CRB is scheduled to commence in January 2011. Under the terms of the CRB’s
decision, we paid a royalty of 6.0%, 6.0% and 6.5% of gross revenues, subject to certain
exclusions, for 2007, 2008 and 2009, respectively. Under this decision, we will pay a royalty of
7.0% for 2010, 7.5% for 2011 and 8.0% for 2012.
Trademarks
We have registered, and intend to maintain, the trademark “XM” with the United States Patent
and Trademark Office in connection with the transmission services offered by us. We are not aware
of any material claims of infringement or other challenges to our right to use the “XM” trademark
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 trademark, “XM”, and the logo, in Canada. We
have granted a license to use our trademark in Canada to XM Canada.
Personnel
As of January 1, 2010, we did not have any employees. SIRIUS has agreed to provide various
services necessary to support our business, such as product development, sales, marketing, finance,
accounting, information technology, programming, human resources, public relations, investor
relations, legal and other general management services. We share equally with SIRIUS the costs of
these employees.
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Corporate Information
Our executive offices are located at 1500 Eckington Place, NE, Washington, DC 20002 and our
telephone number is (202) 380-4000. Our internet address is xmradio.com. Our annual, quarterly
and current reports, and amendments to those reports, filed or furnished pursuant to Section 14(a)
or 15(d) of the Securities Exchange Act of 1934 may be accessed free of charge through our website
after we have electronically filed such material with, or furnished it to, the SEC. XMradio.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.
Executive Officers of the Registrant
Certain information regarding our executive officers is provided below:
Mel Karmazin has served as our President since the Merger and has served as SIRIUS’ Chief
Executive Officer and a member of its board of directors since November 2004. Prior to joining
SIRIUS, Mr. Karmazin was President and Chief Operating Officer and a member of the board of
directors of Viacom Inc. from May 2000 until June 2004. Prior to joining Viacom, Mr. Karmazin was
President and Chief Executive Officer of CBS Corporation from January 1999 and a director of CBS
Corporation from 1997 until its merger with Viacom in May 2000. He was President and Chief
Operating Officer of CBS Corporation from April 1998 through December 1998. Mr. Karmazin joined CBS
Corporation in December 1996 as Chairman and Chief Executive Officer of CBS Radio and served as
Chairman and Chief Executive Officer of the CBS Station Group (Radio and Television) from May 1997
to April 1998. Prior to joining CBS Corporation, Mr. Karmazin served as President and Chief
Executive Officer of Infinity Broadcasting Corporation from 1981 until its acquisition by CBS
Corporation in December 1996. Mr. Karmazin served as Chairman, President and Chief Executive
Officer of Infinity from December 1998 until the merger of Infinity Broadcasting Corporation with
Viacom in February 2001.
David J. Frear has served as our Treasurer since the Merger and has served as SIRIUS’
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.
Patrick L. Donnelly has served as our Secretary since the Merger and has served as SIRIUS’
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.
Employment Agreements
Mel Karmazin
In June 2009, SIRIUS amended its employment agreement with Mel Karmazin. The amendment (i)
extended the term of his employment agreement through December 31, 2012, (ii) increased his base
salary from $1,250,000 per year to $1,500,000 per year beginning on January 1, 2010, and (iii)
provided for the grant of an option to purchase 120,000,000 shares of SIRIUS’ common stock, at an
exercise price of $0.430 per share (the closing price of SIRIUS’ common stock on the date of the
amendment).
These options vest in equal installments on each of December 31, 2010, December 31, 2011, June
30, 2012 and December 31, 2012. The vesting of these stock options accelerates upon the
termination of Mr. Karmazin’s employment by SIRIUS without cause, by him for good reason, upon his
death or disability and in the event of a change of control. These options will generally expire
on December 31, 2014; provided that if the parties subsequently agree to extend the term of his
employment agreement through December 31, 2013 or later, then the term of these options will
automatically extend until the later of (i) December 31, 2015 and (ii) the date that is one year
following the date that such new employment agreement expires.
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In the event that any payment SIRIUS makes, or benefit SIRIUS provides, to Mr. Karmazin would
require him to pay an excise tax under Section 280G of the Internal Revenue Code, SIRIUS has agreed
to pay Mr. Karmazin the amount of such tax and such additional amount as may be necessary to place
him in the exact same financial position that he would have been in if the excise tax was not
imposed.
David J. Frear
Mr. Frear has agreed to serve as SIRIUS’ Executive Vice President and Chief Financial Officer
through July 2011. SIRIUS pays Mr. Frear an annual salary of $750,000, and annual bonuses in an
amount determined each year by the Compensation Committee of its board of directors.
If Mr. Frear’s employment is terminated without cause or he terminates his employment for good
reason, SIRIUS is obligated to pay him a lump sum payment equal to the sum of his annual salary and
the annual bonus last paid to him and to continue his medical and life insurance benefits for one
year.
In the event that any payment we make, or benefit SIRIUS provides, to Mr. Frear would require
him to pay an excise tax under Section 280G of the Internal Revenue Code, SIRIUS has agreed to pay
Mr. Frear the amount of such tax and such additional amount as may be necessary to place him in the
exact same financial position that he would have been in if the excise tax was not imposed.
Patrick L. Donnelly
In January 2010, SIRIUS entered into a new employment agreement with Patrick L. Donnelly to
continue to serve as its Executive Vice President, General Counsel and Secretary, through January
13, 2014. The employment agreement provides for an initial base salary of $575,000, with specified
increases. If Mr. Donnelly’s employment is terminated without cause or he terminates his
employment for good reason, SIRIUS is obligated to pay him a lump sum payment equal to his then
annual salary and the cash value of the bonus last paid or payable to him in respect of the
preceding fiscal year and to continue his health and life insurance benefits for one year. SIRIUS’
obligations to pay the foregoing amounts are subject to Mr. Donnelly’s execution of a valid release
of claims against SIRIUS and his compliance with certain restrictive covenants. SIRIUS has also
agreed to indemnify Mr. Donnelly for any excise taxes that may be imposed on him under Section 280G
of the Internal Revenue Code.
In connection with the execution of the employment agreement, SIRIUS granted Mr. Donnelly an
option to purchase 13,163,495 shares of its common stock at an exercise price of $0.6669 per share
(the last sale price of SIRIUS’ common stock on the Nasdaq Global Select Market prior to the
execution of the employment agreement). The option will generally vest in four equal installments
on each of January 14, 2011, January 14, 2012, January 14, 2013 and January 14, 2014, subject to
earlier acceleration or termination under certain circumstances.
Additional information regarding the compensation for Messrs. Karmazin, Frear and Donnelly
will be included in SIRIUS’ definitive proxy statement for its 2010 annual meeting of stockholders
scheduled to be held on Thursday, May 27, 2010.
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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.”
Our business and our financial condition have been adversely affected by general economic
conditions.
The purchase of a satellite radio subscription is discretionary, and we believe that our
business and our financial condition have been adversely affected by general economic conditions.
In addition, the dramatic slowdown in auto sales negatively impacted our subscriber growth in 2008
and 2009.
Demand for our service is difficult to predict.
We cannot estimate with any certainty whether consumer demand for our service will be
sufficient for us to continue to increase the number of subscribers to our service. Our satellite
radio service has experienced a decrease in new subscriptions from retail subscribers and most new
subscription growth has come from new and used automobiles.
Failure of third parties to perform could adversely affect our business.
Our business depends in part on the efforts of various third parties, including:
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, 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.
Programming is an important part of our service, and the costs to renew our programming
arrangements may be more than anticipated.
Third-party content is an important part of our satellite radio service, and we compete with
many entities for content. We have entered into a number of important content arrangements,
including an agreement with Major League Baseball (“MLB”), which require us to pay substantial
sums. Our agreement with MLB expires at the end of the 2012 MLB season. As these agreements
expire, we may not be able to negotiate renewals of one or more of these agreements, or renew such
agreements at costs we believe are attractive.
In addition, we may not be able to obtain additional third-party content within the costs
contemplated by our business plans.
We employ, or independently contract with, on-air talent who maintain significant loyal
audiences in or across various demographic groups. There can be no assurance that this on-air
talent will remain with us or that we will be able to retain their respective audiences. If we
lose the services of one or more of them, or fail to attract qualified replacement personnel, it
could harm our business and future prospects.
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We must maintain and pay license fees for music rights.
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 we continue to operate
under an interim agreement with BMI. There can be no assurance that the BMI royalty fee will
remain at the current level when the pending agreement is finalized.
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. Our
next rate setting proceeding before the CRB is scheduled to commence in January 2011, and, if
negotiations prove unsuccessful, these royalty rates may not remain at their current levels
following the proceeding.
Higher than expected costs of attracting new subscribers, higher subscriber turnover or weaker than
expected advertising revenue could each adversely affect our financial performance and operating
results.
We are spending substantial funds on advertising and marketing and in transactions with
automakers, radio manufacturers, retailers and others to obtain and attract subscribers. If the
costs of attracting new subscribers are greater than expected, our financial performance and
operating results could be adversely affected.
We are experiencing, and expect to continue to experience, subscriber turnover, or churn. If
we are unable to retain our current subscribers, or the costs of retaining subscribers are higher
than we expect, 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 their satellite radio service. During 2009, we converted approximately
47.6% 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 2.03% per month.
We cannot predict the amount of churn we will experience over the longer term. Our inability
to retain customers who either purchase or lease new vehicles with our service beyond the
promotional period, or who purchase or lease a new vehicle that includes a prepaid subscription to
our services, and self-pay subscriber churn could adversely affect our financial performance and
results of operations.
Our ability to generate advertising revenues is directly affected by general economic
conditions, the number of subscribers to our service and the amount of time subscribers spend
listening to the talk and entertainment channels or the traffic and weather services. General
economic conditions are affecting our ad revenues. Our ability to generate advertising revenues
also depends on several factors, including the level and type of penetration of our services,
competition for advertising dollars from other media, and changes in the advertising industry and
the economy generally. We directly compete for audiences and advertising revenues with traditional
AM/FM radio stations and other media, some of which maintain longstanding relationships with
advertisers.
We may from time to time modify our business plan, and these changes could adversely affect us and
our financial condition.
We regularly evaluate our plans and strategy. These evaluations often result in changes to
our plans and strategy, some of which may be material and significantly change our cash
requirements. 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.
Our substantial indebtedness could adversely affect our ability to raise additional capital to fund
our operations and could limit our ability to react to changes in the economy or our industry.
As of December 31, 2009, we had an aggregate principal amount of approximately $1.7 billion of
indebtedness. Our substantial indebtedness has important consequences. For example, it:
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A substantial portion of our cash flows from operations is dedicated to the payment of
principal and interest on our indebtedness and will not be available for other purposes, including
our operations, capital expenditures, investments in new technologies and future business
opportunities.
The instruments governing our indebtedness contain covenants that, among other things,
restrict our ability to incur more debt, pay dividends, make distributions, make certain
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 contained in the indentures and agreements governing 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.
Our business might never become profitable.
As of December 31, 2009, we had an accumulated deficit of approximately $6.7 billion. We
expect our cumulative net losses to grow as we make payments under various contracts, incur
marketing and subscriber acquisition costs and make interest payments on existing debt. As of
December 31, 2009, we had total debt of approximately $1.7 billion. If we are unable ultimately to
consistently generate sufficient revenues to become profitable, we may not be able to make the
required payments on our indebtedness and could ultimately default on our commitments.
Our business depends in large part upon automakers, a number of whom have experienced a sharp
decline in sales, have reduced production and are experiencing extreme financial difficulties.
The sale and lease of vehicles with satellite radios is an important source of subscribers for
our satellite radio services. 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. Economic conditions, particularly the dramatic
slowdown in auto sales, negatively impacted subscriber growth for our services in 2008 and 2009.
Our subscription growth is dependent, in large part, on sales and vehicle production by
automakers. Automotive sales and production 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 continue to decline, or the penetration of
factory-installed satellite radios in those vehicles is reduced, and there is no offsetting growth
in vehicle sales or increased penetration by other automakers, subscriber growth for our satellite
radio services will be adversely impacted.
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.
Consumers could pirate our services.
Individuals who engage in piracy may be able to obtain or rebroadcast our satellite radio
service or access the internet transmission of our services without paying the subscription fee.
Although we use encryption technologies to mitigate the risk of signal theft, such technologies may
not be adequate to prevent theft of the signals. If signal theft becomes widespread, it could harm
our business.
Failure of our satellites would significantly damage our business and potential satellite losses
may not be covered by insurance.
We operate four in-orbit satellites, including two satellites that are used for backup
purposes only. The useful lives of these satellites will vary and depend on a number of factors,
including:
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We placed our XM-3 and XM-4 satellites into service during the second quarter of 2005 and
during the fourth quarter of 2006, respectively. Our XM-1 and XM-2 satellites 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 XM-1 and XM-2 satellites’ useful lives will end in 2011. An operational
failure or loss of XM-3 or XM-4 would, at least temporarily, affect the quality of our service, and
could interrupt the continuation of our service and harm our business. We expect to launch the
XM-5 satellite, which will serve as an in-orbit spare for the SIRIUS and XM services, in the third
quarter of 2010. In the event of any satellite failure prior to that time, we would need to rely
on our back-up satellites, XM-1 and XM-2. There can be no assurance that restoring service through
XM-1 and XM-2 would allow XM to maintain adequate broadcast signal strength through the date on
which XM-5 is brought into service, particularly if XM-1 or XM-2 were to suffer unanticipated
additional performance degradation or experience an operational failure.
In addition, our network of terrestrial repeaters communicates with our satellites. If the
satellites communicating with our 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 covering our primary satellites broadcasting our service, but
do not maintain insurance on our back-up satellites. 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 or our in-orbit spare 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 that may not be sufficient to cover losses.
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 network. 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 network would likely
result in degradation of our 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 our service until we could transfer our operations to our 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 Wireless Communications Service (“WCS”) users. The FCC is seeking comment on
proposals by certain WCS licensees for modification of rules regarding their operations in spectrum
adjacent to satellite radio, including rule changes to facilitate mobile broadband services in the
WCS frequencies. We are participating actively in this proceeding and have opposed the changes
requested by WCS licensees out of a concern for their impact on the reception of satellite radio
service. We cannot predict the outcome of the FCC proceeding, or the impact on satellite radio
reception.
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.
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The operation of our satellite radio system 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 decree
we entered into with the FCC require us to meet certain conditions. We have agreed to implement a
number of voluntary commitments, including programming, minority and public interest, equipment,
subscription rates and other service commitments. Non-compliance with these conditions could
result in fines, additional license conditions, license revocation or other detrimental FCC
actions.
The FCC has not yet issued final rules permitting us to operate and deploy terrestrial
repeaters to fill gaps in our satellite coverage. We are operating our terrestrial repeaters on a
“non-interference” basis pursuant to grants of special temporary authority from the FCC. The FCC’s
final terrestrial repeater rules may require us to reduce the power of our terrestrial repeaters or
limit our ability to deploy additional repeaters. If the FCC requires us to reduce significantly
the number or power of our terrestrial repeaters, this would have an adverse effect on the quality
of our service in certain markets and/or cause us to alter our terrestrial repeater infrastructure
at a substantial cost. If the FCC limits our ability to deploy additional terrestrial repeaters,
our ability to improve any deficiencies in our service quality that may be identified in the future
would be adversely affected.
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 service. We
employ a wide variety of communications tools as part of our marketing campaigns, including print,
television, radio and online advertising; telemarketing efforts; and email solicitations. The
United States Federal Trade Commission, the FCC and various states agencies have responsibility for
consumer protection and have jurisdiction over components of our consumer marketing efforts.
Consumer protection laws, rules and regulations are extensive and have developed rapidly.
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. 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 service. 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, or preexisting laws or regulations will not be more strictly enforced, which might
adversely affect our operations.
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.
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.
Our business may be impaired by third-party intellectual property rights.
Development of our system 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.
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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
system.
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 approximately 40% of
the issued and outstanding shares of SIRIUS’ 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 six members of SIRIUS’ fifteen-member 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 SIRIUS also may have the
effect of discouraging offers to acquire control of SIRIUS.
Our net operating loss carryforwards could be substantially limited if SIRIUS experiences an
ownership change as defined in the Internal Revenue Code.
We have generated a federal net operating loss carryforward of approximately $4 billion
through the year ended December 31, 2009, 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 our parent company, SIRIUS, undergoes an ownership change for purposes of Section 382 as a
result of future transactions involving SIRIUS’ common stock, including purchases or sales of stock
between 5% stockholders, SIRIUS’ ability to use its 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.
In April 2009, SIRIUS’ board of directors 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. SIRIUS has agreed
to submit this shareholder rights plan to a vote of its stockholders. If SIRIUS’ stockholders do
not approve this shareholder rights plan prior to June 30, 2010 it will terminate in accordance
with its terms.
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None.
Below is a list of the principal properties that we own or 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.
In addition, we lease space at approximately 700 locations for use in connection with the
terrestrial repeater network that supports our service. 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.
FCC Merger Order. On July 25, 2008, the FCC adopted an order approving the Merger. In
September 2008, Mt. Wilson FM Broadcasters, Inc. filed a Petition for Reconsideration of the FCC’s
merger order. This Petition for Reconsideration remains pending.
Advanced Recording Functionality Disputes/Atlantic Recording Corporation, BMG Music, Capital
Records, Inc., Elektra Entertainment Group Inc., Interscope Records, Motown Record Company, L.P.,
Sony BMG Music Entertainment, UMG Recordings, Inc., Virgin Records, Inc. and Warner Bros. Records
Inc. v. XM Satellite Radio Inc. Commencing in May 2006, holders of copyrights in sound recordings
and holders of copyrights in musical works brought actions against XM in connection with the
advanced recording functionality included in the XM Inno, the XM NeXus, the XM Helix and the XM
SkyFi3line of radios. The plaintiffs brought this action in the United States District Court for
the Southern District of New York, seeking monetary damages and equitable relief.
We have settled these claims with the major record companies and a significant number of music
publishers. We are in discussions to settle these claims with certain independent record companies
and other music publishers.
We believe that the distribution and use of our products do not violate applicable copyright
laws. There can be no assurance regarding the ultimate outcome of these matters and settlement
discussions, or the significance, if any, to our business, consolidated results of operations or
financial position.
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 cash flows, financial position or results of
operations.
Omitted pursuant to General Instructions I(2)(c) of Form 10-K.
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PART II
Prior to the completion of the Merger, our common stock was traded on the Nasdaq Global Select
Market under the symbol “XMSR.”
Our selected financial data set forth below with respect to the consolidated statements of
operations for the year ended December 31, 2009 and from August 1, 2008 through December 31, 2008
(the Successor Periods) and from January 1, 2008 through July 31, 2008 and for the year ended
December 31, 2007 (the Predecessor Periods) and with respect to the consolidated balance sheets at
December 31, 2009 and 2008, 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, 2006 and
2005, and with respect to the consolidated balance sheets at December 31, 2007, 2006 and 2005 are
derived from our predecessor 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 7 of this Annual
Report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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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 “Explanatory Note” and “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 our proprietary satellite radio system. On July
28, 2008, XM Satellite Radio Holdings Inc. merged with and into Vernon Merger Corporation, a wholly
owned subsidiary of SIRIUS; and as a result, XM Satellite Radio Holdings Inc. is now a wholly owned
subsidiary of SIRIUS. Our system consists of four in-orbit satellites, over 650 terrestrial
repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers
can also receive certain of our music and other channels over the Internet, including through an
application on the Apple iPhone.
Our satellite radios are primarily distributed through automakers (“OEMs”); nationwide through
retail locations; and through our website. We have agreements with major automakers to offer
satellite radios as factory or dealer-installed equipment in their vehicles. Our radios are also
offered to customers of rental car companies.
As of December 31, 2009, we had 9,749,100 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 prepaid
subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily
rental fleet programs; certain subscribers to XM Radio Online, our Internet service; and certain
subscribers to our weather, traffic and data 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 pre-paid and long-term
subscriptions as well as discounts for multiple subscriptions. We also derive revenue from
activation and other 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 data and
weather services.
In certain cases, automakers include a subscription to our radio services in the sale or lease
price of vehicles. The length of these prepaid subscriptions varies, but is typically three months.
We also reimburse various automakers for certain costs associated with satellite radios installed
in their vehicles.
We also have an interest in a satellite radio service offered in Canada. Subscribers to the
Canadian Satellite Radio Holdings Inc. (“XM Canada”) service are not included in our subscriber
count.
XM Satellite Radio Holdings Inc., together with its subsidiaries, operates as an unrestricted
subsidiary under the agreements governing SIRIUS’ existing indebtedness. As an unrestricted
subsidiary, transactions between the companies are required to comply with various contractual
provisions in our respective debt instruments.
Unaudited Actual and Pro Forma Information
Our discussion of our unaudited pro forma information includes non-GAAP financial results that
assume the Merger occurred on January 1, 2008. These financial results exclude the impact of
purchase price accounting adjustments and refinancing transactions related to the Merger. The
discussion also includes the following non-GAAP financial measures: average self-pay monthly churn;
conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or
SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as
adjusted, per average subscriber; free cash flow; and adjusted income (loss) from operations. We
believe this non-GAAP financial information provides meaningful supplemental information regarding
our operating performance and is used for internal management purposes, when publicly providing the
business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the
footnotes (pages 43 through 56) following our discussion of results of operations for the
definitions and a further discussion of the usefulness of such non-GAAP financial information and
reconciliation to GAAP.
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Unaudited Actual and Pro Forma Subscribers and Metrics. The following tables contain our
actual and pro forma subscriber and key operating metrics for the three months and two years ended
December 31, 2009 and 2008, respectively:
Note: See pages 43 through 56 for footnotes.
Subscribers. At December 31, 2009, we had 9,749,100 subscribers, a decrease of 101,641
subscribers, or 1%, from the 9,850,741 subscribers as of December 31, 2008. Net subscriber
additions increased 89,545, or 198%, in the three months ended December 31, 2009 compared to 2008.
Net subscriber additions in our OEM channel increased 92,638, or 169%, in the three months ended
December 31, 2009 compared to 2008. Net subscriber additions in our retail channel decreased
19,028, or 19%, in the three months ended December 31, 2009 compared to 2008. Deactivation rates
for self-pay subscriptions in the quarter increased to 2.0% per month reflecting reductions in
consumer discretionary spending, subscriber response to our increase in prices for
multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge
for our upgraded streaming service and the introduction of the U.S. Music Royalty Fee.
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ARPU. ARPU is derived from total earned subscriber revenue and net advertising revenue,
divided by the number of months in the period, divided by the daily weighted average number of
subscribers for the period. See accompanying footnotes for more details. For the three months ended
December 31, 2009 and 2008, total ARPU was $10.94 and $10.67, respectively. The increase was driven
mainly by the sale of “Best of” programming, increased rates on our multi-subscription packages and
revenues earned on our internet packages, partially offset by lower advertising revenue.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, 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 divided by the number of gross subscriber
additions for the period. See accompanying footnotes for more details. For the three months ended
December 31, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $57 and $61,
respectively. The decrease in SAC was primarily driven by fewer OEM installations relative to gross
subscriber additions and lower OEM subsidies, offset by onetime aftermarket product related charges
compared to 2008.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service
and billing expenses, as adjusted, per average subscriber is derived from total customer service
and billing expenses, excluding share-based payment expense, divided by the number of months in the
period, divided by the daily weighted average number of subscribers for the period. See
accompanying footnotes for more details. For the three months ended December 31, 2009 and 2008,
customer service and billing expenses, as adjusted, per weighted average subscriber was $1.11 and
$1.20, respectively. The decrease was primarily due to decreases in personnel costs and customer
call center expenses.
Adjusted Income (Loss) from Operations. We refer to net income (loss) before interest and
investment income; interest expense, net of amounts capitalized; income tax expense; loss on
extinguishment of debt and credit facilities, net; (gain) loss on investments; other expense
(income); restructuring, impairments and related costs; depreciation and amortization; and
share-based payment expense as adjusted income (loss) from operations. See accompanying footnotes
for more details. For the three months ended December 31, 2009 and 2008, our adjusted income (loss)
from operations was $82,360 and $25,657, respectively. Adjusted income (loss) from operations was
favorably impacted by an increase of 10%, or $32,932, in revenues and a decrease of 8%, or $23,771,
in total expenses included in adjusted income (loss) from operations. The increase in revenue was
due mainly to increased rates on multi-subscription packages, the introduction of the U.S. Music
Royalty Fee, revenues earned on internet packages and the sale of “Best of” programming, partially
offset by decreased equipment revenue. The decreases in expenses were primarily driven by lower
programming and content costs, lower customer service and billing expenses and lower legal and
consulting costs in general and administrative expenses.
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Note: See pages 43 through 56 for footnotes.
Subscribers. At December 31, 2009, we had 9,749,100 subscribers, a decrease of 101,641
subscribers, or 1%, from the 9,850,741 subscribers as of December 31, 2008. The decrease was
principally the result of 46,084 fewer paid promotional trials due to the decline in North American
auto sales and 55,557 fewer self-pay subscribers compared to December 31, 2008. Deactivation rates
for self-pay subscriptions in the year increased to 2.0% per month reflecting reductions in
consumer discretionary spending, subscriber response to our increase in prices for
multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge
for our upgraded streaming service and the introduction of the U.S. Music Royalty Fee.
ARPU. For the years ended December 31, 2009 and 2008, total ARPU was $10.81 and $10.57,
respectively. Increases in subscriber revenue were driven mainly by the sale of “Best of”
programming, increased rates on our multi-subscription packages and revenues earned on our internet
packages, partially offset by lower ad revenue.
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SAC, As Adjusted, Per Gross Subscriber Addition. For the years ended December 31, 2009 and
2008, SAC, as adjusted, per gross subscriber addition was $54 and $68, respectively. The decrease
was primarily driven by lower aftermarket inventory charges, fewer OEM installations relative to
gross subscriber additions and lower OEM subsidies in the year ended December 31, 2009 compared to
2008.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. For the year ended
December 31, 2009 and 2008, customer service and billing expenses, as adjusted, per weighted
average subscriber was $1.10 and $1.22, respectively. The decline was primarily due to decreases in
personnel costs and customer call center expenses.
Adjusted Income (Loss) from Operations. For the years ended December 31, 2009 and 2008, our
adjusted income (loss) from operations was $273,544 and ($78,822), respectively. Adjusted income
(loss) from operations was favorably impacted by an increase of 5%, or $67,504, in revenues and a
decrease of 21%, or $284,862, in total expenses included in adjusted income (loss) from operations.
The increase in revenue was due mainly to an increase in weighted average subscribers as well as
increased rates on multi-subscription packages, the introduction of the U.S. Music Royalty Fee,
revenues earned on internet packages 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 and lower legal and consulting
costs in general and administrative expenses.
Unaudited Pro Forma Results of Operations. Set forth below are certain pro forma items that
give effect to the Merger as if it had occurred on January 1, 2008. The pro forma information below
does not give effect to any adjustments as a result of the purchase price accounting for the
Merger. See footnote 8 (pages 44 to 45) and footnote 14 (pages 48 to 49) for a reconciliation of
net income (loss) to adjusted income (loss) from operations.
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Highlights for the Three Months Ended December 31, 2009. Our revenue grew 10%, or $32,932, in
the three months ended December 31, 2009 compared to 2008. Subscriber revenue increased 1%, or
$3,635, in the three months ended December 31, 2009 compared to 2008. The increase in subscriber
revenue was driven by the sale of “Best of” programming and the price increases to our
multi-subscription and internet packages. Advertising revenue increased 8%, or $387, in the three
months ended December 31, 2009 compared to 2008. Equipment revenue decreased 24%, or $3,748, in the
three months ended December 31, 2009 compared to 2008. The decrease in equipment revenue was driven
by a decrease in aftermarket manufacturing revenues and fewer component sales compared to the three
months ended December 31, 2008. Other revenue increased 437%, or $32,658, in the three months
ended December 31, 2009 compared to 2008. The increase in other revenue was driven by the U.S.
Music Royalty Fee introduced in the third quarter of 2009. The overall increase in revenue,
combined with a decrease of 8%, or $23,771, in adjusted operating costs (total operating expense
excluding restructuring, impairments and related costs, depreciation and amortization, impairment
of goodwill and share-based payment expense), resulted in improved adjusted income (loss) from
operations of $82,360 in the three months ended December 31, 2009 compared to $25,657 in 2008.
Satellite and transmission costs decreased 18%, or $2,988, in the three months ended December
31, 2009 compared to 2008 due to reductions in repeater maintenance costs and personnel costs. Programming
and content costs decreased 18%, or $8,588, in the three months ended December 31, 2009 compared to
2008, due mainly to reductions in personnel and on-air talent costs as well as savings on content
agreements. Revenue share and royalties decreased 5%, or $3,557, primarily due to decreases in our
royalties due to certain automakers, partially offset by an increase in the statutory royalty rate
for the performance of sound recordings. Customer service and billing costs decreased 9%, or
$3,223, in the three months ended December 31, 2009 compared to 2008 primarily due to decreases in
personnel costs and customer call center expenses. Cost of equipment decreased 43%, or $3,153, in
the three months ended December 31, 2009 as a result of a decrease in inventory write-downs, fewer
component sales and lower average cost per units sold.
Sales and marketing costs decreased 4%, or $2,056, in the three months ended December 31, 2009
compared to 2008 due to reduced advertising and cooperative marketing spend, as well as reductions
to personnel costs and third party distribution support expenses. Subscriber acquisition costs
increased $2,124, or 4%, in the three months ended December 31, 2009 compared to 2008. This
increase was driven by onetime aftermarket product related charges,
partially offset by fewer OEM installations relative to gross subscriber additions.
General and administrative costs decreased 4%, or $908 in the three months ended December 31,
2009 compared to 2008. Engineering, design and development costs decreased 26%, or $1,422, in the
three months ended December 31, 2009 compared to 2008, due to lower costs associated with
development, tooling and testing of radios as well as lower personnel costs.
Restructuring, impairments and related costs were $2,640 mainly due to charges related to
compensation incurred as part of the Merger integration.
Other expenses decreased 27%, or $20,366, in the three months ended December 31, 2009 compared
to 2008 driven mainly by decreases in loss on investments of $22,307.
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Highlights for the Year Ended December 31, 2009. Our revenue grew 5%, or $67,504, in the year
ended December 31, 2009 compared to 2008. Subscriber revenue grew 5%, or $56,357, in the year ended
December 31, 2009 compared to 2008. This revenue growth was driven by the sale of “Best of”
programming, rate increases on our multi-subscription and Internet packages. Advertising revenue
decreased 43%, or $14,045, in the year ended December 31, 2009 compared to 2008. The decrease in
advertising revenue was driven by the current economic environment. Equipment revenue decreased 9%,
or $2,814, in the year ended December 31, 2009 compared to 2008. The decrease in equipment revenue was driven by a decrease in
aftermarket manufacturing revenues and fewer component sales. Other revenue increased 76%, or $28,006, in the year ended
December 31, 2009 compared to 2008. The increase in other revenue was driven by the U.S. Music
Royalty Fee introduced in the third quarter of 2009. The overall increase in revenue, combined with
a decrease of 21%, or $284,862, in adjusted operating costs (total operating expenses excluding
restructuring, impairments and related costs, depreciation and amortization, impairment of goodwill
and share-based payment expense), resulted in improved adjusted income (loss) from operations of
$273,544 in the year ended December 31, 2009 compared to ($78,822) in 2008.
Satellite and transmission costs decreased 31%, or $22,758, in the year ended December 31,
2009 compared to 2008 due to reductions in maintenance costs and personnel costs. Programming and
content costs decreased 9%, or $16,405, in the year ended December 31, 2009 compared to 2008, due
mainly to reductions in personnel and on-air talent costs as well as savings on certain content
agreements. Revenue share and royalties decreased 4%, or $11,107, in the year ended December 31,
2009 compared to 2008, primarily due to decreases in our royalties due to certain automakers,
partially offset by an increase in the statutory royalty rate for the performance of sound
recordings. Customer service and billing costs decreased 9%, or $12,698, in the year ended December
31, 2009 compared to 2008 due to scale efficiencies. Cost of equipment decreased 50%, or $16,137,
in the year ended December 31, 2009 compared to 2008 as a result of a decrease in direct to
customer sales and lower inventory write-downs.
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Sales and marketing costs decreased 31%, or $60,516, in the year ended December 31, 2009
compared to 2008 due to reduced advertising and cooperative marketing spend as well as reductions
to personnel costs and third party distribution support expenses. Subscriber acquisition costs
decreased 31%, or $85,103, in the year ended December 31, 2009 compared to 2008. The decrease was
primarily driven by lower aftermarket inventory charges, fewer OEM installations relative to gross
subscriber additions and lower OEM subsidies in the year ended December 31, 2009. Subscriber
acquisition costs also decreased as a result of the 20% decline in gross additions during the year
ended December 31, 2009.
General and administrative costs decreased 36%, or $50,799, mainly due to the absence of
certain legal and regulatory charges incurred in 2008 and lower personnel costs. Engineering,
design and development costs decreased 33%, or $9,339, in the year ended December 31, 2009 compared
to 2008, due to lower costs associated with development, tooling and testing of radios as well as
lower personnel costs.
Restructuring, impairments and related costs increased $32,254, mainly due to a loss of
$24,196 on capitalized installment payments for the launch of a satellite which are expected to
provide no future benefit due to the counterparty’s bankruptcy filing, and to charges related to
revisions in estimated cash flows for vacated leases.
Other expenses increased 80%, or $159,828, in the year ended December 31, 2009 compared to
2008 driven mainly by an increase in the loss on extinguishment of debt and credit facilities of
$115,884 and an increase in interest expense of $79,690, partially offset by a decrease of $31,746
in loss on investments. The loss on the extinguishment of debt and credit facilities was incurred
on the full repayment of our Amended and Restated Credit Agreement, termination of our Second-Lien
Credit Agreement and a portion of our 10% Senior PIK Secured Notes due 2011. Interest expense
increased due primarily to the issuance of the 13% Senior Notes due 2013 and the 7% Exchangeable
Senior Subordinated Notes due 2014 in the third quarter of 2008 and the execution of the Amended
and Restated Credit Agreement in the first quarter of 2009.
Unaudited Actual Results of Operations
Our discussion of our results of operations, along with the selected financial information in
the tables that follow, includes the following non-GAAP financial measures: average self-pay
monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber
acquisition cost, or SAC, as adjusted, per gross subscriber addition; customer service and billing
expenses, as adjusted, per average subscriber; free cash flow; and adjusted income (loss) from
operations. We believe these non-GAAP financial measures provide meaningful supplemental
information regarding our operating performance and are used for internal management purposes, when
publicly providing the business outlook, and as a means to evaluate period-to-period comparisons.
Please refer to the footnotes (pages 43 through 56) following our discussion of results of
operations for the definitions and a further discussion of the usefulness of such non-GAAP
financial measures.
Unaudited Actual Subscribers and Metrics. The following tables contain our actual subscriber
and key operating metrics for the three months ended December 31, 2009 and 2008, respectively and
three years ended December 31, 2009, 2008 and 2007, respectively:
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Subscribers. At December 31, 2009, we had 9,749,100 subscribers, a decrease of 101,641
subscribers, or 1%, from the 9,850,741 subscribers as of December 31, 2008. Net subscriber
additions increased 89,545, or 198%, in the three months ended December 31, 2009 compared to 2008.
Net subscriber additions in our OEM channel increased 92,638, or 169%, in the three months ended
December 31, 2009 compared to 2008. Net subscriber additions in our retail channel decreased
19,028, or 19%, in the three months ended December 31, 2009 compared to 2008. Deactivation rates
for self-pay subscriptions in the quarter increased to 2.0% per month reflecting reductions in
consumer discretionary spending, subscriber response to our increase in prices for
multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge
for our streaming service and the introduction of the U.S. Music Royalty Fee.
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ARPU. For the three months ended December 31, 2009 and 2008, total ARPU was $10.74 and $9.98,
respectively. The increase was driven by the revenue earned for “Best of” programming, increased
rates on multi-subscription packages and internet subscriptions.
We expect ARPU to fluctuate based on promotion, rebates offered to
subscribers and corresponding take-rates, plan mix, subscription prices, advertising sales and the identification of additional revenue
from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. For each of the three months ended December
31, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $37.
We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of
subsidized components of XM radios decrease in the future. Our SAC, as adjusted, per gross
subscriber addition will continue to be impacted by changes in our mix of OEM and retail additions.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. For the three
months ended December 31, 2009 and 2008, customer service and billing expenses, as adjusted, per
weighted average subscriber was $1.11 and $1.20, respectively. The decrease was primarily due to
decreases in personnel costs and customer call center expenses.
We expect customer service and billing expenses, as adjusted, per average subscriber to
decrease on an annual basis as our subscriber base grows due to scale efficiencies in our call
centers and other customer care and billing operations.
Adjusted Income (Loss) from Operations. For the three months ended December 31, 2009 and 2008,
our adjusted income from operations was $137,587 and $66,015, respectively, an increase of $71,572.
The increase was primarily driven by improvements in operating expense areas, excluding
restructuring, impairments and related cost, depreciation and amortization, impairment of goodwill
and share-based payment expense, totaling $24,321 and an increase in total revenue of $47,251.
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Subscribers. At December 31, 2009, we had 9,749,100 subscribers, a decrease of 101,641
subscribers, or 1%, from the 9,850,741 subscribers as of December 31, 2008. The decrease was
principally the result of 46,084 fewer paid promotional trials due to the decline in North American
auto sales and 55,557 fewer self-pay subscribers compared to December 31, 2008. Deactivation rates
for self-pay subscriptions in the year increased to 2.0% per month reflecting reductions in
consumer discretionary spending, subscriber response to our increase in prices for
multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge
for our streaming service and the introduction of the U.S. Music Royalty Fee.
We ended 2008 with 9,850,741 subscribers, an increase of 823,904 subscribers, or 9%. Since
December 31, 2007, 278,374 net retail subscribers deactivated and 1,075,088 net OEM subscribers
activated, resulting in a decrease of 6% and an increase of 25% in retail and OEM subscribers,
respectively. Gross additions in our OEM channel continued to grow as automakers continued to
increase the portion of their vehicles which incorporates satellite radio.
ARPU. For the years ended December 31, 2009 and 2008, total ARPU was $10.41 and $10.24,
respectively. The increase was driven by the revenue earned for “Best of” programming, increased
rates on multi-subscription packages and internet subscriptions.
For the years ended December 31, 2008 and 2007, total ARPU was $10.24 and $10.83,
respectively. The decrease was driven by an increase in the mix of discounted OEM promotional
trials, subscriber win-back programs, second subscribers, the effects of purchase price accounting
adjustments and subscriber growth exceeding the growth in advertising revenues.
We expect ARPU to fluctuate based
on the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding
take-rates, plan mix, subscription prices, advertising sales and the identification of additional
revenue from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. For the years ended December 31, 2009 and
2008, SAC, as adjusted, per gross subscriber addition was $35 and $60, respectively. The decrease
was primarily driven by the effect of purchase price accounting adjustments, lower aftermarket
inventory charges, fewer OEM installations relative to gross subscriber additions and lower OEM
subsidies.
For the years ended December 31, 2008 and 2007, SAC, as adjusted, per gross subscriber
addition was $60 and $73, respectively. The decrease was primarily driven by the effect of purchase
price accounting adjustments and improved equipment margin.
We expect SAC, as adjusted, per gross subscriber addition to decline as the costs of
subsidized components of XM radios decrease in the future. Our SAC, as adjusted, per gross
subscriber addition will continue to be impacted by changes in our mix of OEM and retail additions.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. For the years
ended December 31, 2009 and 2008, customer service and billing expenses, as adjusted, per weighted
average subscriber was $1.10 and $1.22, respectively. The decline was primarily due to decreases in
personnel costs and customer call center expenses.
For the years ended December 31, 2008 and 2007, Customer service and billing expenses, as
adjusted, per average subscriber was $1.22 and $1.25, respectively. The decrease was
primarily due to efficiencies across a larger subscriber base.
We expect customer service and billing expenses, as adjusted, per average subscriber to
decrease on an annual basis as our subscriber base grows due to scale efficiencies in our call
centers and other customer care and billing operations.
Adjusted Income (Loss) from Operations. For the years ended December 31, 2009 and 2008, our
adjusted income from operations was $455,569 and ($18,727), respectively, an increase of $474,296.
The increase was primarily driven by improvements in operating expense areas, excluding
restructuring, impairments and related cost, depreciation and amortization, impairment of goodwill
and share-based payment expense, totaling $419,303 and an increase in total revenue of $54,993.
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For the years ended December 31, 2008 and 2007, adjusted income (loss) from operations was
($18,727) and ($238,042), respectively, a decrease of $219,315. The decrease was primarily driven
by an increase in subscriber revenue of $107,506 as a result of a 9% increase in our subscriber
base, a net benefit from the effect of purchase price accounting adjustments of $60,096 and
improvements in subscriber acquisition costs and general and administrative expenses of $20,195 and
$24,808, respectively.
Results of Operations
Set forth below are our actual results of operations for the three months ended December 31,
2009 and 2008 and three years ended December 31, 2009, 2008 and 2007. As a result of the
consummation of the Merger, the financial results have been presented separately for “Predecessor
Entity” period January 1, 2008 through July 31, 2008, and for the “Successor Entity” period August
31, 2008 through December 31, 2008. For comparative purposes, we combined the “Predecessor Entity”
and “Successor Entity” periods in our discussions below, as we believe this combination is useful
to provide the reader a more accurate comparison. This combination is not a GAAP measure and it is
provided to enhance the reader’s understanding of the results of operations for the periods
presented. See footnote 26 (page 56) for more details on this combination. See footnote 20 (pages
52 to 53) and footnote 25 (pages 54 to 55) for a reconciliation of net income (loss) to adjusted
income (loss) from operations.
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Highlights for the Three Months Ended December 31, 2009. Our revenue grew 15%, or $47,251, in
the three months ended December 31, 2009 compared to 2008. Subscriber revenue increased 6%, or
$17,941, in the three months ended December 31, 2009
compared to 2008. The increase in subscriber revenue was driven by the sale of “Best of”
programming and the rate increases to our multi-subscription and internet packages. Advertising
revenue increased 8%, or $387, in the three months ended December 31, 2009 compared to 2008.
Equipment revenue decreased 24%, or $3,748, in the three months ended December 31,
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2009 compared to
2008. The decrease in equipment revenue was driven by a decrease in aftermarket manufacturing
revenues and fewer component sales compared to the three months ended December 31, 2008. Other
revenue increased 579%, or $32,671, in the three months ended December 31, 2009 compared to 2008.
The increase in other revenue was driven by the U.S. Music Royalty Fee introduced in the third
quarter of 2009. The overall increase in revenue, combined with a decrease of 10%, or $24,321, in
adjusted operating costs (total operating expense excluding restructuring, impairments and related
costs, depreciation and amortization, impairment of goodwill and share-based payment expense),
resulted in improved adjusted income from operations of $137,587 in the three months ended December
31, 2009 compared to $66,015 in 2008.
Satellite and transmission costs decreased 22%, or $3,896, in the three months ended December
31, 2009 compared to 2008 due to reductions in maintenance costs and personnel costs. Programming
and content costs decreased 24%, or $7,070, in the three months ended December 31, 2009 compared to
2008, due mainly to reductions in personnel and on-air talent costs as well as savings on content
agreements. Revenue share and royalties decreased 16%, or $8,235, primarily due to decreases in our
royalties due to certain automakers, partially offset by an increase in the statutory royalty rate
for the performance of sound recordings. Customer service and billing costs decreased 9%, or
$3,397, in the three months ended December 31, 2009 compared to 2008 primarily due to decreases in
personnel costs and customer call center expenses. Cost of
equipment decreased 43%, or $3,153, in the three months ended December 31, 2009 as a result of a
decrease in inventory write-downs, fewer component sales, and lower average cost per units sold.
Sales and marketing costs decreased 7%, or $3,371, in the three months ended December 31, 2009
compared to 2008 due to reduced advertising and cooperative marketing spend, as well as reductions
to personnel costs and third party distribution support expenses. Subscriber acquisition costs
increased 9%, or $3,488, in the three months ended December 31, 2009 compared to 2008. This
increase was driven by onetime aftermarket product related charges partially offset by fewer OEM
installations relative to gross subscriber additions and lower OEM subsidies.
General and administrative costs decreased 22%, or $6,300, mainly due to the absence of
certain legal and regulatory costs incurred in 2008 and lower personnel costs. Engineering, design
and development costs decreased 25%, or $1,594, in the three months ended December 31, 2009
compared to 2008, due to lower costs associated with development, tooling and testing of radios as
well as lower personnel costs.
Restructuring, impairments and related costs were $2,640 mainly due to charges related to
compensation incurred as part of the Merger integration.
Other expenses decreased 446%, or $16,183, in the three months ended December 31, 2009
compared to 2008 driven mainly by a decrease of $22,307 in loss on investments, partially offset by
an increase of $3,553 in interest expense and a decrease of $1,955 in gain on change in value of
embedded derivative.
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Year Ended December 31, 2009 Compared with Year Ended December 31, 2008 and Year Ended December 31,
2008 Compared with Year Ended December 31, 2007
Total Revenue
Subscriber Revenue. Subscriber revenue includes subscription fees, activation and other fees
and the effects of rebates.
The following table contains a breakdown of our subscriber revenue for the periods presented
(in thousands):
Future subscriber revenue will be dependent upon, among other things, the growth of our
subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix,
subscription prices and the identification of additional revenue streams from subscribers.
Advertising Revenue. Advertising revenue includes the sale of advertising on our non-music
channels, net of agency fees. Agency fees are based on a contractual rate applied to gross billing
revenue.
Our advertising revenue is subject to fluctuation based on the national economic environment.
We believe general economic conditions have negatively affected our advertising revenue in recent
quarters. We expect advertising revenue to grow as our subscribers increase, as the economy
improves and as we increase the size and effectiveness of our advertising sales force.
Equipment Revenue. Equipment revenue includes revenue and royalties from the sale of radios,
components and accessories.
We expect equipment revenue to increase as we introduce new products and as sales grow through
our direct to consumer distribution channel.
Other Revenue. Other revenue consists primarily of U.S. Music Royalty Fees, revenue related to
various agreements with XM Canada, as well as other miscellaneous revenue that includes content
licensing fees, technology licensing fees and billing fees.
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Future other revenue will be dependent upon, among other things, the growth of subscriber
base, new content and technology agreements and the development of other sources of revenue.
Operating Expenses
Satellite and Transmission. Satellite and transmission expenses consist of costs associated
with the operation and maintenance of our satellites; satellite telemetry, tracking and control
system; terrestrial repeater network; satellite uplink facility; and broadcast studios.
We expect satellite and transmission expenses, excluding share-based payment expense, to
increase as we add to our in-orbit satellite fleet.
Programming and Content. Programming and content expenses include 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. Purchased advertising is recorded as a sales and marketing expense and the cost
of sharing advertising revenue is recorded as revenue share and royalties in the period the
advertising is broadcast.
Our programming and content expenses, excluding share-based payment expenses, are expected to
decrease as a result of the Merger, as we reduce duplicate programming and content costs.
Revenue Share and Royalties. Revenue share and royalties include distribution and content
provider revenue share, residuals and broadcast and web streaming royalties. Residuals are monthly
fees paid based upon the number of subscribers using radios purchased from retailers. Advertising
revenue share is recorded to revenue share and royalties in the period the advertising is
broadcast.
We expect these costs to increase as our revenues grow, as we expand our distribution of
radios through automakers and retailers, and as a result of increases in the royalty for the
performance of sound recordings.
Customer Service and Billing. Customer service and billing expenses include costs associated
with the operation of third party customer service centers and our subscriber management system as
well as bad debt expense.
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We expect our customer care and billing expenses to decrease on a per subscriber basis, but
increase overall as our subscriber base grows due to increased call center operating costs,
transaction fees and bad debt expense.
Cost of Equipment. Cost of equipment includes costs from the sale of our radios, components
and accessories.
We expect cost of equipment to vary in the future with changes in sales through our direct to
consumer distribution channel.
Sales and Marketing. Sales and marketing expenses include costs for advertising, media and
production, including promotional events and sponsorships; cooperative marketing; customer
retention and compensation. Cooperative marketing costs include fixed and variable payments to
reimburse retailers and automakers for the cost of advertising and other product awareness
activities.
We expect sales and marketing expenses, excluding share-based payment expense, to decrease as
we consolidate our advertising and promotional activities with SIRIUS, gain efficiencies in
marketing management and eliminate overlapping distribution support costs.
Subscriber Acquisition Costs. Subscriber acquisition costs include hardware subsidies paid to
radio manufacturers, distributors and automakers, including subsidies paid to automakers who
include our 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 our radios; product warranty obligations; and compensation costs
associated with stock-based awards granted in connection with certain distribution agreements. The
majority of subscriber acquisition costs are incurred and expensed in advance or concurrent with
acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments
to distributors and dealers of our radios and revenue share payments to automakers and retailers of
our radios.
We expect total subscriber acquisition costs to fluctuate as increases or decreases in our
gross subscriber additions are accompanied by continuing declines in the costs of subsidized
components of our radios. We intend to continue to offer subsidies, commissions and other
incentives to acquire subscribers.
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General and Administrative. General and administrative expenses include rent and occupancy,
finance, legal, human resources, information technology and investor relations costs.
We expect total general and administrative expenses, excluding share-based payment expense, to
decrease in future periods as we gain efficiencies in staff, facilities, and information technology
costs.
Engineering, Design and Development. Engineering, design and development expenses include
costs to develop our future generation of chip sets and new products, research and development for
broadcast information systems and costs associated with the incorporation of radios into vehicles
manufactured by automakers.
We expect engineering, design and development expenses, excluding share-based payment expense,
to increase in future periods as we increase development of our next generation chip sets.
Other Income (Expense)
Interest and Investment Income. Interest and investment income includes realized gains and
losses, dividends and interest income, including amortization of the premium and discount arising
at purchase.
Interest Expense. Interest expense includes interest on outstanding debt, reduced by interest
capitalized in connection with the construction of our new satellite and launch vehicle.
We expect interest expense to increase as a result of changes in the GAAP recognition and
reporting requirements for share lending arrangements which were adopted as of January 1, 2010.
EITF No. 09-1 will require us to recognize an aggregate increase of $257,000 in deferred financing
costs associated with our 7% Exchangeable Senior Subordinated Notes due 2014, which will be
amortized to interest expense over the six year life of the notes under the effective interest
method.
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Gain (loss) on change in value of embedded derivative. We are required to account for the
conversion feature of our exchangeable debt, which is exchangeable into SIRIUS common stock,
separately and recognize the changes in the fair value of these embedded derivatives in earnings.
The fair value of the derivative will be impacted by the value of the underlying SIRIUS common
shares.
Loss on extinguishment of debt and credit facilities, net. Loss on extinguishment of debt and
credit facilities, net includes losses incurred as a result of the conversion of certain of our
debt instruments.
Gain (loss) on investments. Gain (loss) on investments includes our share of XM Canada’s net
losses and losses recorded from our investment in XM Canada when the decrease in fair value was
determined to be other than temporary.
Income Taxes
Income Tax Expense. Income tax expense primarily represents the recognition of a deferred tax
liability related to the difference in accounting for our FCC license and trade name, which is
amortized over 15 years for tax purposes but not amortized for book purposes in accordance with
GAAP.
Liquidity and Capital Resources
Cash Flows for the Year Ended December 31, 2009 Compared with the Year Ended December 31, 2008 and
Year Ended December 31, 2008 Compared with the Year Ended December 31, 2007
As of December 31, 2009 and 2008, we had $212,155 and $206,740, respectively, in cash and cash
equivalents.
The following table presents a summary of our cash flow activity for the periods set forth
below (in thousands):
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Cash Flows Provided by (Used in) Operating Activities
Cash Flows (Used in) Provided by Investing Activities
We will incur significant capital expenditures to construct and launch our new satellite and
improve our terrestrial repeater network and broadcast and administrative infrastructure. These
capital expenditures will support our growth and the resiliency of our operations, and will also
support the delivery of future new revenue streams.
Cash Flows (Used in) Provided by Financing Activities
Financings and Capital Requirements
We have historically financed our operations through the sale of debt and equity securities.
The Certificate of Designations for SIRIUS’ Series B Preferred Stock provides that so long as
Liberty beneficially owns at least half of its initial equity investment, we need the consent of
Liberty for certain actions, including the grant or issuance of SIRIUS’ equity securities and the
incurrence of debt (other than, in general, debt incurred to refinance existing debt) in amounts
greater than a stated threshold.
Future Liquidity and Capital Resource Requirements
The 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 operate as unrestricted subsidiaries under the agreements governing SIRIUS’ existing
indebtedness. Under certain circumstances, SIRIUS may be unwilling or unable to contribute or loan
us capital to support our operations. To the extent our funds are insufficient to support our
business, we may be required to seek additional financing, which may not be available on favorable
terms, or at all. If we are unable to secure additional financing, our business and results of
operations may be adversely affected.
We regularly evaluate our plans and strategy. These evaluations often result in changes to our
plans and strategy, some of which may be material and significantly change our cash requirements.
These changes in our plans or strategy may include: the acquisition of unique or compelling
programming; the introduction of new features or services; significant new or enhanced distribution
arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and
acquisitions, including acquisitions that are not directly related to our satellite radio business.
In addition, our operations will also be affected by the FCC order approving the Merger which
imposed certain conditions upon, among other things, our ability to increase prices.
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Off-Balance Sheet Arrangements
We are required under the terms of certain agreements to deposit monies in escrow, which place
restrictions on our cash and cash equivalents. As of December 31, 2008, $120,000 was classified as
restricted investments as a result of obligations under escrow deposits. In February 2009, we
released to a programming provider $120,000 held in escrow in satisfaction of future obligations
under our agreement with them.
We do not have any significant off-balance sheet arrangements other than those disclosed in
Note 14 to our consolidated financial statements in Item 8 of this 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.
Contractual Cash Commitments
For a discussion of our “Contractual Cash Commitments” refer to Note 14 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 8 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 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 the consolidated financial
statements included in this report. We have identified the following policies, which were discussed
with the audit committee of our board of directors, as critical to our business and understanding
our results of operations.
Fair Value of Assets Acquired and Liabilities Assumed. On July 28, 2008, Vernon Merger
Corporation, a wholly-owned subsidiary of SIRIUS, merged with and into XM Holdings, with XM
Holdings becoming a wholly-owned subsidiary of SIRIUS. The application of purchase accounting
resulted in the transaction being valued at $5,836,363 and our recording of pushed down goodwill
totaling $6,601,046.
Long-Lived Assets. We carry our long-lived assets at cost less accumulated depreciation. We
review our long-lived assets for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset is not recoverable. At the time an impairment in value of a
long-lived asset is identified, the impairment is measured as the amount by which the carrying
amount of a long-lived asset exceeds its fair value. To determine fair value, we employ an expected
present value technique, which utilizes multiple cash flow scenarios that reflect the range of
possible outcomes and an appropriate discount rate.
We evaluate our indefinite life intangible assets for impairment on an annual basis. During
the year ended December 31, 2008, we recorded $6,601,046 of goodwill impairment. At December 31,
2009, our intangible assets with indefinite lives totaled $2,250,000, and the remaining unamortized
total basis of our intangible assets with definite lives was $361,461.
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. We operate four in-orbit satellites, two of which function as in-orbit
spares. The two in-orbit spare satellites were launched in 2001 while the other two satellites were
launched in 2005 and 2006. We estimate that the XM-3 and XM-4 satellites will meet their 15 year
predicted useful lives, and that XM-1 and XM-2 satellite’s useful lives will end in 2011. We are
constructing an additional XM satellite which is in storage awaiting its launch.
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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 2009 would have resulted in approximately $6,425 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.
In certain cases,
automakers include a subscription to our radio services in the sale
or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically three months. 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 a subscriber will use the
activated radio, estimated to be approximately 3.5 years during 2009. The estimated term of
subscriber equipment usage is based on historical experience. If we were to revise our estimate,
for example, a 10% decrease to the estimated term of a subscriber relationship during 2009 would
have resulted in approximately $1,162 of additional activation fees.
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.
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 necessary 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.
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Footnotes to Results of Operations
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There are material limitations associated with the use of a pro forma unadjusted results of
operations in evaluating our company compared with our GAAP results of operations, which
reflects overall financial performance. We use pro forma unadjusted results of operations to
supplement GAAP results to provide a more complete understanding of the factors and trends
affecting the business than GAAP results alone. Investors that wish to compare and evaluate our
operating results after giving effect for these costs, should refer to results of operations as
disclosed in our consolidated statements of operations. Since pro forma unadjusted results of
operations is a non-GAAP financial measure, our 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.
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As of December 31, 2009, we did not hold or issue any free-standing derivatives. Upon
completion of the Merger, the 7% Exchangeable Senior Subordinated Notes due 2014 became settleable
in SIRIUS common stock and were subsequently accounted for as embedded derivatives. In the event
the debt holders exercise their exchange option, SIRIUS intends to issue common stock to fulfill
the obligation.
We hold investments in marketable securities, which consist of certificates of deposit,
auction rate certificates and investment in debt and equity securities of other entities. We
classify our marketable securities as available-for-sale. We hold an investment in auction rate
certificates which are classified 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 and variable 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.
See Index to Consolidated Financial Statements contained in Item 15 herein.
None.
Controls and Procedures
As of December 31, 2009, an evaluation was performed under the supervision and with the
participation of our management, including Mel Karmazin, our President, and David J. Frear, our
Treasurer, of the effectiveness of the design and operation of our disclosure controls and
procedures. Based on that evaluation, our management, including our President and our Treasurer,
concluded that our disclosure controls and procedures were effective as of December 31, 2009. There
has been no change in our internal control over financial reporting that has materially affected,
or is reasonably likely to materially affect, our internal control over financial reporting during
the quarter ended December 31, 2009.
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
President and our Treasurer, of the effectiveness of our internal control over financial reporting.
Our management used the framework in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations to perform this evaluation. Based on that evaluation, our management,
including our President and Treasurer, concluded that our internal control over financial reporting
was effective as of December 31, 2009.
Audit Report of the Independent Registered Public Accounting Firm
The effectiveness of our internal control over financial reporting as of December 31, 2009 has
been audited by KPMG LLP, an independent registered public accounting firm, as stated in their
audit report appearing on page F-3 of this Annual Report on
Form 10-K.
None.
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PART III
Omitted pursuant to General Instructions I(2)(c) of Form 10-K.
Omitted pursuant to General Instructions I(2)(c) of Form 10-K.
Omitted pursuant to General Instructions I(2)(c) of Form 10-K.
Omitted pursuant to General Instructions I(2)(c) of Form 10-K.
Independent Registered Public Accounting Firm
During the fiscal years ended December 31, 2009 and 2008, our independent registered public
accounting firm, KPMG LLP, billed us the following fees:
All Audit-Related Fees were approved by the Audit Committee of SIRIUS. None of the hours
expended on KPMG’s engagement to audit our financial statements for the fiscal years ended
December 31, 2009 and December 31, 2008 were attributed to work performed by persons other than
KPMG’s full-time, permanent employees.
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PART IV
Schedule II — Valuation and Qualifying Accounts.
All other schedules for which provision is made in the applicable accounting regulations of
the Commission have been included in the Consolidated Financial Statements of Sirius XM Radio Inc.
or the notes thereto, are not required under the related instructions or are inapplicable, and
therefore have been omitted.
See Exhibit Index appearing on pages E-1 through E-6 for a list of exhibits filed or
incorporated by reference as part of this Annual Report on Form 10-K.
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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 25th day of February 2010.
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.
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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 25th day of February 2010.
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.
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of XM Satellite Radio Holdings Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of XM Satellite Radio Holdings
Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of
operations, stockholder’s deficit and comprehensive loss, and cash flows for the year ended
December 31, 2009 and the period from August 1, 2008 to December 31, 2008 (Successor periods), and
from January 1, 2008 to July 31, 2008 and for the year ended December 31, 2007 (Predecessor
periods). Our audits also included the financial statement schedule listed in the Index at
Item 15(a). 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 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 aforementioned consolidated financial statements present fairly,
in all material respects, the financial position of XM Satellite Radio Holdings Inc. and
subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for
the Successor periods and Predecessor periods 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.
As discussed in note 1 to the consolidated financial statements, effective July 28, 2008,
Vernon Merger Corporation, a wholly owned subsidiary of Sirius XM Radio Inc., acquired all of the
outstanding stock of, and merged into, XM Satellite Radio Holdings, Inc. in a business combination
accounted for as a purchase. As a result of the acquisition, the consolidated financial information
for the periods after the acquisition is presented on a different cost basis than that for the
periods before the acquisition and, therefore, is not comparable.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company’s internal control over financial reporting as of
December 31, 2009, based on criteria established in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February
25, 2010 expressed an unqualified opinion on the effectiveness of the Company’s internal control
over financial reporting.
/s/ KPMG LLP
McLean, VA
February 25, 2010
F-2
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholder of XM Satellite Radio Holdings Inc.:
We have audited XM Satellite Radio Holdings Inc and subsidiaries internal control over
financial reporting as of December 31, 2009, based on criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria). XM Satellite Radio Holdings 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 Item 9A.
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, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A 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, XM Satellite Radio Holdings Inc. maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2009, based on the COSO
criteria.
We also have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of XM Satellite Radio Holdings
Inc. and subsidiaries as of December 31, 2009 and 2008 and the related consolidated statements of
operations, stockholder’s deficit and comprehensive loss, and cash flows for the year ended
December 31, 2009 and the period from August 1, 2008 to December 31, 2008 (Successor periods), and
the period from January 1, 2008 to July 31, 2008 and for the year ended December 31, 2007
(Predecessor periods), and our report dated February 25, 2010 expressed an unqualified opinion on
those consolidated financial statements.
/s/
KPMG LLP
McLean, VA
February 25, 2010
F-3
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying Notes to the consolidated financial statements.
F-4
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying Notes to the consolidated financial statements.
F-5
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE LOSS
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