UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2010
OR
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o | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number | | Exact name of Registrant As Specified in its Charter | | I.R.S. Employer Identification Number |
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333-39178 | | XM SATELLITE RADIO INC. | | 52-1805102 |
DELAWARE
(State or other jurisdiction of incorporation or organization)
1500 ECKINGTON PLACE, NE
WASHINGTON, DC 20002-2194
(Address of principal executive offices) (Zip code)
(202) 380-4000
(Registrant’s telephone number, including area code)
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. Yesþ Noo
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). Yeso Noo
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):
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Large accelerated filero | | Accelerated filero | | Non-accelerated filerþ | | Smaller reporting companyo |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ
Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date.
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(Class) | | (Outstanding as of October 29, 2010) |
XM SATELLITE RADIO INC. COMMON STOCK, $0.01 PAR VALUE (all shares are issued to Sirius XM Radio Inc.) | | 100 SHARES |
XM SATELLITE RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
XM SATELLITE RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
(in thousands, except per share data) | | 2010 | | 2009 | | 2010 | | 2009 |
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 320,808 | | | $ | 304,714 | | | $ | 938,711 | | | $ | 884,038 | |
Advertising revenue, net of agency fees | | | 6,247 | | | | 4,147 | | | | 15,362 | | | | 13,475 | |
Equipment revenue | | | 13,300 | | | | 5,657 | | | | 37,517 | | | | 17,681 | |
Other revenue | | | 41,902 | | | | 10,955 | | | | 114,270 | | | | 19,344 | |
| | | | | | | | |
Total revenue | | | 382,257 | | | | 325,473 | | | | 1,105,860 | | | | 934,538 | |
Operating expenses (depreciation and amortization shown separately below): | | | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | | | |
Revenue share and royalties | | | 49,444 | | | | 46,976 | | | | 138,296 | | | | 142,997 | |
Programming and content | | | 26,204 | | | | 27,811 | | | | 81,947 | | | | 84,353 | |
Customer service and billing | | | 33,415 | | | | 31,064 | | | | 95,623 | | | | 96,168 | |
Satellite and transmission | | | 11,812 | | | | 11,484 | | | | 35,299 | | | | 36,952 | |
Cost of equipment | | | 3,644 | | | | 5,142 | | | | 12,614 | | | | 12,049 | |
Subscriber acquisition costs | | | 38,674 | | | | 35,049 | | | | 109,691 | | | | 83,524 | |
Sales and marketing | | | 27,833 | | | | 26,055 | | | | 81,390 | | | | 84,565 | |
Engineering, design and development | | | 5,261 | | | | 5,413 | | | | 15,482 | | | | 16,798 | |
General and administrative | | | 19,107 | | | | 25,216 | | | | 74,035 | | | | 91,689 | |
Depreciation and amortization | | | 34,999 | | | | 41,587 | | | | 108,886 | | | | 146,462 | |
Restructuring, impairments and related costs | | | 197 | | | | 3,029 | | | | 900 | | | | 29,614 | |
| | | | | | | | |
Total operating expenses | | | 250,590 | | | | 258,826 | | | | 754,163 | | | | 825,171 | |
| | | | | | | | |
Income from operations | | | 131,667 | | | | 66,647 | | | | 351,697 | | | | 109,367 | |
Other income (expense): | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | | (51,834 | ) | | | (70,537 | ) | | | (168,714 | ) | | | (226,376 | ) |
Loss on extinguishment of debt and credit facilities, net | | | (256 | ) | | | (3,787 | ) | | | (4,881 | ) | | | (111,863 | ) |
Loss on change in value of embedded derivative | | | (45,796 | ) | | | (33,700 | ) | | | (94,399 | ) | | | (111,703 | ) |
Interest and investment loss | | | (1,748 | ) | | | (2,141 | ) | | | (5,652 | ) | | | (4,812 | ) |
Other income | | | 1,225 | | | | 1,324 | | | | 2,694 | | | | 2,548 | |
| | | | | | | | |
Total other expense | | | (98,409 | ) | | | (108,841 | ) | | | (270,952 | ) | | | (452,206 | ) |
| | | | | | | | |
Income (loss) before income taxes | | | 33,258 | | | | (42,194 | ) | | | 80,745 | | | | (342,839 | ) |
Income tax expense | | | (2,792 | ) | | | (578 | ) | | | (3,938 | ) | | | (1,733 | ) |
| | | | | | | | |
Net Income (loss) | | $ | 30,466 | | | $ | (42,772 | ) | | $ | 76,807 | | | $ | (344,572 | ) |
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See accompanying Notes to the unaudited consolidated financial statements.
1
XM SATELLITE RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| | | | | | | | |
| | September 30, 2010 | | | December 31, 2009 | |
(in thousands, except share and per share data) | | (unaudited) | | | | | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | �� | |
Cash and cash equivalents | | $ | 128,853 | | | $ | 212,155 | |
Accounts receivable, net | | | 57,372 | | | | 60,042 | |
Receivables from distributors | | | 11,165 | | | | — | |
Inventory, net | | | 5,870 | | | | 4,016 | |
Prepaid expenses | | | 128,688 | | | | 75,199 | |
Related party current assets | | | 585 | | | | 103,479 | |
Deferred tax asset | | | 67,415 | | | | 64,641 | |
Other current assets | | | 5,828 | | | | 4,585 | |
| | | | |
Total current assets | | | 405,776 | | | | 524,117 | |
Property and equipment, net | | | 898,313 | | | | 799,405 | |
Restricted investments | | | 250 | | | | 250 | |
Deferred financing fees, net | | | 63,238 | | | | 68,571 | |
Intangible assets, net | | | 2,561,177 | | | | 2,611,461 | |
Related party long-term assets | | | 28,771 | | | | 111,730 | |
Other long-term assets | | | 77,615 | | | | 25,529 | |
| | | | |
Total assets | | $ | 4.035,140 | | | $ | 4.141.063 | |
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LIABILITIES AND STOCKHOLDER’S DEFICIT | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable and accrued expenses | | $ | 219,317 | | | $ | 198,219 | |
Accrued interest | | | 42,788 | | | | 46,939 | |
Current portion of deferred revenue | | | 551,637 | | | | 506,441 | |
Current portion of deferred credit on executory contracts | | | 266,096 | | | | 252,831 | |
Current maturities of long-term debt | | | 4,131 | | | | 11,382 | |
Related party current liabilities | | | 115,518 | | | | 184,693 | |
| | | | |
Total current liabilities | | | 1,199,487 | | | | 1,200,505 | |
Deferred revenue | | | 152,348 | | | | 133,863 | |
Deferred credit on executory contracts | | | 580,161 | | | | 784,078 | |
Long-term debt | | | 1,508,598 | | | | 1,494,921 | |
Long-term related party debt | | | 161,479 | | | | 157,032 | |
Deferred tax liability | | | 922,192 | | | | 915,274 | |
Related party long-term liabilities | | | 25,211 | | | | 46,301 | |
Other long-term liabilities | | | 37,861 | | | | 38,851 | |
| | | | |
Total liabilities | | | 4,587,337 | | | | 4,770,825 | |
| | | | |
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Commitments and contingencies (Note 12) | | | | | | | | |
Stockholder’s deficit: | | | | | | | | |
Common stock, par value $0.010; 1,000 shares authorized; 100 shares issued and outstanding as of September 30, 2010 and December 31, 2009, respectively | | | — | | | | — | |
Accumulated other comprehensive loss, net of tax | | | (5,823 | ) | | | (6,581 | ) |
Additional paid-in capital | | | 6,060,660 | | | | 6,060,660 | |
Accumulated deficit | | | (6,607,034 | ) | | | (6,683,841 | ) |
| | | | |
Total stockholder’s deficit | | | (552,197 | ) | | | (629,762 | ) |
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Total liabilities and stockholder’s deficit | | $ | 4,035,140 | | | $ | 4,141,063 | |
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See accompanying Notes to the unaudited consolidated financial statements.
2
XM SATELLITE RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE INCOME
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | | | | | |
| | Common Stock | | Other | | Additional | | | | | | Total |
| | | | | | | | | | Comprehensive | | Paid-in | | Accumulated | | Stockholder’s |
(in thousands, except share data) | | Shares | | Amount | | Loss | | Capital | | Deficit | | Deficit |
Balance at December 31, 2009 | | | 100 | | | $ | - | | | $ | (6,581 | ) | | $ | 6,060,660 | | | $ | (6,683,841 | ) | | $ | (629,762 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income | | | - | | | | - | | | | - | | | | - | | | | 76,807 | | | | 76,807 | |
Other comprehensive income: | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale securities | | | - | | | | - | | | | 469 | | | | - | | | | - | | | | 469 | |
Foreign currency translation adjustment, net of tax of $91 | | | - | | | | - | | | | 289 | | | | - | | | | - | | | | 289 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total comprehensive income | | | | | | | | | | | | | | | | | | | | | | | 77,565 | |
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Balance at September 30, 2010 | | | 100 | | | $ | - | | | $ | (5,823 | ) | | $ | 6,060,660 | | | $ | (6,607,034 | ) | | $ | (552,197 | ) |
| | | | | | | | | | | | |
See accompanying Notes to the unaudited consolidated financial statements.
3
XM SATELLITE RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
| | | | | | | | |
| | For the Nine Months |
| | Ended September 30, |
(in thousands) | | 2010 | | 2009 |
Cash flows from operating activities: | | | | | | | | |
Net income (loss) | | $ | 76,807 | | | $ | (344,572 | ) |
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: | | | | | | | | |
Depreciation and amortization | | | 108,886 | | | | 146,462 | |
Non-cash interest expense, net of amortization of premium | | | 45,229 | | | | 67,820 | |
Provision for doubtful accounts | | | 11,545 | | | | 12,642 | |
Restructuring, impairments and related costs | | | 900 | | | | 26,401 | |
Amortization of deferred income related to equity method investment | | | (2,081 | ) | | | (2,082 | ) |
Loss on extinguishment of debt and credit facilities, net | | | 4,881 | | | | 111,863 | |
Loss on investments | | | 8,989 | | | | 6,660 | |
Share-based payment expense | | | 20,441 | | | | 32,539 | |
Deferred income taxes | | | 3,938 | | | | 1,733 | |
Loss on change in value of embedded derivative | | | 94,399 | | | | 111,703 | |
Other non-cash purchase price adjustments | | | (184,703 | ) | | | (142,487 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (7,654 | ) | | | (5,158 | ) |
Receivables from distributors | | | (3,350 | ) | | | - | |
Inventory | | | (1,854 | ) | | | 1,566 | |
Related party assets | | | (2,318 | ) | | | 17,223 | |
Prepaid expenses and other current assets | | | 44,141 | | | | 9,278 | |
Other long-term assets | | | 10,189 | | | | 47,465 | |
Accounts payable and accrued expenses | | | (28,814 | ) | | | (38,868 | ) |
Accrued interest | | | (2,922 | ) | | | 5,870 | |
Deferred revenue | | | 61,528 | | | | 57,098 | |
Related party liabilities | | | (48,426 | ) | | | 96,252 | |
Other long-term liabilities | | | (876 | ) | | | 9,210 | |
| | | | |
Net cash provided by operating activities | | | 208,875 | | | | 228,618 | |
| | | | |
| | | | | | | | |
Cash flows from investing activities: | | | | | | | | |
Additions to property and equipment | | | (172,317 | ) | | | (38,811 | ) |
Sale of available-for-sale securities | | | 9,450 | | | | - | |
| | | | |
Net cash used in investing activities | | | (162,867 | ) | | | (38,811 | ) |
| | | | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Long-term borrowings, net of costs | | | - | | | | 387,184 | |
Related party long-term borrowings, net of costs | | | - | | | | 95,093 | |
Payment of premiums on redemption of debt | | | (256 | ) | | | (17,075 | ) |
Repayment of long-term borrowings | | | (129,054 | ) | | | (435,727 | ) |
Repayment of related party long-term borrowings | | | - | | | | (100,000 | ) |
| | | | |
Net cash used in financing activities | | | (129,310 | ) | | | (70,525 | ) |
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Net (decrease) increase in cash and cash equivalents | | | (83,302 | ) | | | 119,282 | |
Cash and cash equivalents at beginning of period | | | 212,155 | | | | 206,740 | |
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Cash and cash equivalents at end of period | | $ | 128,853 | | | $ | 326,022 | |
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Supplemental Disclosure of Cash and Non-Cash Flow Information | | | | | | | | |
Cash paid during the period for: | | | | | | | | |
Interest, net of amounts capitalized | | $ | 118,728 | | | $ | 148,106 | |
Non-cash investing and financing activities: | | | | | | | | |
Non-cash capital contributions from SIRIUS XM | | | - | | | | 119,198 | |
Property acquired through capital leases | | | - | | | | 1,337 | |
Release of restricted investments | | | - | | | | 120,000 | |
See accompanying Notes to the unaudited consolidated financial statements.
4
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(1) Business
We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States for a subscription fee through our proprietary satellite radio system. Our system consists of five 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, and Blackberry and Android smartphones.
On July 28, 2008, XM Satellite Radio Holdings Inc. (“XM Holdings”) merged with and into Vernon Merger Corporation, a wholly owned subsidiary of Sirius Satellite Radio Inc. (the “Merger”) and, as a result, XM Holdings became a wholly owned subsidiary of Sirius XM Radio Inc. (“SIRIUS”). The accounting for the Merger has been “pushed-down” in the accompanying unaudited consolidated financial statements. On April 14, 2010, XM Holdings merged with and into XM Satellite Radio Inc. (“XM”). XM was the surviving corporation of the merger and, as a result, XM became a direct wholly-owned subsidiary of SIRIUS. XM, together with its subsidiaries, is operated as an unrestricted subsidiary under SIRIUS’ existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our debt instruments. For purposes of these Notes to unaudited consolidated financial statements, “we,” “us,” “our,” “the company,” and similar terms refer to XM Satellite Radio Inc. and its consolidated subsidiaries.
Our satellite radios are primarily distributed through automakers (“OEMs”), nationwide through retail locations and our website. We have agreements with major automakers to offer our satellite radios as factory- or dealer-installed equipment in their vehicles. Our radios are also offered to customers of certain daily rental car companies.
Subscription fees are our primary source of revenue, with most of our customers subscribing to an annual, semi-annual, quarterly or monthly plan. 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.
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 to twelve 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 through our affiliate, Canadian Satellite Radio Holdings Inc. (“XM Canada”).
(2) Principles of Consolidation and Basis of Presentation
Principles of Consolidation
The accompanying unaudited consolidated financial statements of XM Satellite Radio Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions have been eliminated in consolidation.
Basis of Presentation
In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 have been made.
XM operates as an unrestricted SIRIUS subsidiary under SIRIUS’s existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual restrictions in our existing debt instruments. SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs incurred by us benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements, which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously.
5
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on February 25, 2010.
We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the nine months ended September 30, 2010 and have determined no events have occurred that would require adjustment to our unaudited consolidated financial statements as presented.
Reclassifications
Certain amounts in our prior period unaudited consolidated financial statements have been reclassified to conform to our current period presentation.
(3) Summary of Significant Accounting Policies
Use of Estimates
In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the reported amounts and accompanying notes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates.
Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites, valuation of embedded derivatives and valuation allowances against deferred tax assets. Economic conditions in the United States could have a material impact on our accounting estimates.
Recent Accounting Pronouncements
The Financial Accounting Standards Board (“FASB”) updated Accounting Standards Codification (“ASC”) 470 to incorporate ASU 2009-15,Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance, into the ASC. This standard requires share-lending arrangements in an entity’s own shares to be initially measured at fair value and treated as an issuance cost, excluded from basic and diluted earnings per share, and requires an entity to recognize a charge to earnings if it becomes probable the counterparty will default on the arrangement. This guidance was adopted as of January 1, 2010 on a retrospective basis, as required, for all arrangements outstanding as of that date. The following table reflects the retrospective adoption of ASU 2009-15 on our December 31, 2009 consolidated balance sheet:
| | | | | | | | | | | | |
| | As Originally | | | Retrospective | | | As Currently | |
Balance Sheet Line Item: | | Reported | | | Adjustments | | | Reported | |
| | | | | | |
| | | | | | | | | | | | |
Deferred financing fees, net | | $ | 5,307 | | | $ | 63,264 | | | $ | 68,571 | |
Related party long-term assets, net of current portion | | | 110,439 | | | | 1,291 | | | | 111,730 | |
Long-term debt | | | 1,502,349 | | | | (7,428 | ) | | | 1,494,921 | |
Long-term related party debt | | | 157,183 | | | | (151 | ) | | | 157,032 | |
Additional paid-in capital | | | 5,989,700 | | | | 70,960 | | | | 6,060,660 | |
Accumulated deficit | | | (6,685,015 | ) | | | 1,174 | | | | (6,683,841 | ) |
The following table reflects the adoption of ASU 2009-15 on our three and nine months ended September 30, 2009 statement of operations:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months | | | For the Nine Months |
| | Ended September 30, 2009 | | | Ended September 30, 2009 |
| | As Originally | | | Retrospective | | | As Currently | | | As Originally | | | Retrospective | | | As Currently | |
Statement of Operations Line Item: | | Reported | | | Adjustments | | | Reported | | | Reported | | | Adjustments | | | Reported | |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | $ | (70,616 | ) | | $ | 79 | | | $ | (70,537 | ) | | $ | (226,935 | ) | | $ | 559 | | | $ | (226,376 | ) |
Net loss | | | (42,851 | ) | | | 79 | | | | (42,772 | ) | | | (345,131 | ) | | | 559 | | | | (344,572 | ) |
For the three and nine months ended September 30, 2010, we recorded $1,779 and $4,954, respectively, in interest expense related to the amortization of the costs associated with the share-lending arrangement and other issuance costs. As of September 30, 2010, the unamortized balance of the debt issuance costs was $62,261, with $61,016 recorded in deferred financing fees, net, and $1,245 recorded in long-term related party assets.
6
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
The issuance cost recorded relates to share-lending arrangements entered into by SIRIUS with third parties on XM’s behalf involving SIRIUS shares. The measured fair value of the loaned shares totaling $70,960 was pushed down by SIRIUS to XM as additional paid in capital. XM holds none of the outstanding shares.
Accounts Receivable
Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, the age of amounts due, current economic conditions and other factors that may affect the counterparty’s ability to pay.
Accounts receivable, net, consists of the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
Gross accounts receivable | | $ | 62,651 | | | $ | 65,399 | |
Allowance for doubtful accounts | | | (5,279 | ) | | | (5,357 | ) |
| | | | |
Total accounts receivable, net | | $ | 57,372 | | | $ | 60,042 | |
| | | | |
Receivables from distributors include billed and unbilled amounts due from OEM’s for radio services included in the sale or lease price of vehicles, as well as billed amounts due from retailers. Receivables from distributors consist of the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
Billed | | $ | 6,384 | | | $ | — | |
Unbilled | | | 4,781 | | | | — | |
| | | | | | |
Total | | $ | 11,165 | | | $ | — | |
| | | | | | |
Inventory
Inventory consists of finished goods, refurbished goods, and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or market. We record an estimated allowance for inventory that is considered slow moving, obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of operations. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of operations.
Inventory, net, consists of the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
Raw materials | | $ | 5,040 | | | $ | 5,002 | |
Finished goods | | | 8,964 | | | | 4,975 | |
Allowance for obsolescence | | | (8,134 | ) | | | (5,961 | ) |
| | | | |
Total inventory, net | | $ | 5,870 | | | $ | 4,016 | |
| | | | |
7
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(4) Intangible Assets
Intangible assets consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | September 30, 2010 | | | December 31, 2009 | |
| | Weighted Average | | | Gross Carrying | | | Accumulated | | | Net Carrying | | | Gross Carrying | | | Accumulated | | | Net Carrying | |
| | Useful Lives | | Value | | Amortization | | Value | | Value | | Amortization | | Value |
Indefinite life intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FCC licenses | | Indefinite | | $ | 2,000,000 | | | $ | - | | | $ | 2,000,000 | | | $ | 2,000,000 | | | $ | - | | | $ | 2,000,000 | |
Trademark | | Indefinite | | | 250,000 | | | | - | | | | 250,000 | | | | 250,000 | | | | - | | | | 250,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Definite life intangible assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Subscriber relationships | | 9 years | | $ | 380,000 | | | $ | (131,723 | ) | | $ | 248,277 | | | $ | 380,000 | | | $ | (91,186 | ) | | $ | 288,814 | |
Licensing agreements | | 9.1 years | | | 75,000 | | | | (21,267 | ) | | | 53,733 | | | | 75,000 | | | | (13,906 | ) | | | 61,094 | |
Proprietary software | | 6 years | | | 16,552 | | | | (9,045 | ) | | | 7,507 | | | | 16,552 | | | | (6,823 | ) | | | 9,729 | |
Developed technology | | 10 years | | | 2,000 | | | | (433 | ) | | | 1,567 | | | | 2,000 | | | | (283 | ) | | | 1,717 | |
Leasehold interests | | 7.4 years | | | 132 | | | | (39 | ) | | | 93 | | | | 132 | | | | (25 | ) | | | 107 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total intangible assets | | | | | | $ | 2,723,684 | | | $ | (162,507 | ) | | $ | 2,561,177 | | | $ | 2,723,684 | | | $ | (112,223 | ) | | $ | 2,611,461 | |
| | | | | | | | | | | | | | |
Indefinite Life Intangible Assets
We have identified our FCC licenses and our trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.
We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. Our FCC licenses for our satellites expire in 2013 and 2014. Prior to expiration, we will be required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost, which is expensed as incurred. Each of the FCC licenses authorizes us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
In connection with the Merger, $250,000 of the purchase price was allocated to our trademark. As of September 30, 2010, there were no legal, regulatory or contractual limitations associated with our trademark.
We evaluate our indefinite life intangible assets for impairment on an annual basis as of October 1st of each year. An assessment is performed at other times if events or circumstances indicate it is more likely than not that the assets have been impaired. During the three and nine months ended September 30, 2010 and 2009, there were no indicators of impairment and no impairment loss was recorded for intangible assets with indefinite lives.
Definite Life Intangible Assets
Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangible assets include certain licensing agreements, which are amortized over a weighted average useful life of 9.1 years on a straight-line basis.
Amortization expense for definite life intangible assets was $16,228 and $18,648 for the three months ended September 30, 2010 and 2009, respectively, $50,342 and $58,759 for the nine months ended September 30, 2010 and 2009, respectively. Expected amortization expense for each of the fiscal years through December 31, 2014 and for periods thereafter is as follows:
| | | | |
Year ending December 31, | | Amount | |
|
| | | | |
Remaining 2010 | | $ | 15,632 | |
2011 | | | 58,850 | |
2012 | | | 53,420 | |
2013 | | | 47,097 | |
2014 | | | 38,619 | |
Thereafter | | | 97,559 | |
| | |
| | | | |
Total definite life intangible assets, net | | $ | 311,177 | |
| | |
8
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(5) Subscriber Revenue
Subscriber revenue consists of subscription fees, revenue derived from agreements with daily rental fleet operators, non-refundable activation and other fees as well as the effects of rebates. Revenues received from certain OEMs for subscriptions included in the sale or lease price of vehicles are also included in subscriber revenue over the service period.
Subscriber revenue consists of the following:
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | | | | | | | | | |
Subscription fees | | $ | 319,106 | | | $ | 303,785 | | | $ | 934,176 | | | $ | 881,860 | |
Activation fees | | | 1,730 | | | | 963 | | | | 4,612 | | | | 2,351 | |
Other fees and rebates | | | (28 | ) | | | (34 | ) | | | (77 | ) | | | (173 | ) |
| | | | | | | | |
Total subscriber revenue | | $ | 320,808 | | | $ | 304,714 | | | $ | 938,711 | | | $ | 884,038 | |
| | | | | | | | |
(6) Interest Costs
We capitalize a portion of the interest on funds borrowed to finance the construction costs of our satellites. The following is a summary of our interest costs:
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | | | | | | | | | |
Interest costs charged to expense | | $ | 51,834 | | | $ | 70,537 | | | $ | 168,714 | | | $ | 226,376 | |
Interest costs capitalized | | | 14,295 | | | | 7,495 | | | | 37,391 | | | | 25,053 | |
| | | | | | | | |
Total interest costs incurred | | $ | 66,129 | | | $ | 78,032 | | | $ | 206,105 | | | $ | 251,429 | |
| | | | | | | | |
Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $15,271 and $16,777 for the three months ended September 30, 2010 and 2009, respectively and $45,229 and $67,820 for the nine months ended September 30, 2010 and 2009, respectively.
(7) Property and Equipment
Property and equipment, net, consists of the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
| | | | | | | | |
Satellite system | | $ | 490,135 | | | $ | 490,126 | |
Terrestrial repeater network | | | 41,583 | | | | 41,604 | |
Leasehold improvements | | | 7,250 | | | | 7,250 | |
Broadcast studio equipment | | | 8,489 | | | | 7,957 | |
Capitalized software and hardware | | | 54,798 | | | | 53,772 | |
Satellite telemetry, tracking and control facilities | | | 33,121 | | | | 32,877 | |
Furniture, fixtures, equipment and other | | | 28,089 | | | | 27,418 | |
Land | | | 38,100 | | | | 38,100 | |
Building | | | 53,969 | | | | 53,851 | |
Construction in progress | | | 377,766 | | | | 223,083 | |
| | | | |
Total property and equipment | | | 1,133,300 | | | | 976,038 | |
Accumulated depreciation and amortization | | | (234,987 | ) | | | (176,633 | ) |
| | | | |
Property and equipment, net | | $ | 898,313 | | | $ | 799,405 | |
| | | | |
Depreciation and amortization expense on property and equipment was $18,771 and $22,939 for the three months ended September 30, 2010 and 2009, respectively and $58,544 and $87,703 for the nine months ended September 30, 2010 and 2009, respectively.
9
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
Satellites
We own four orbiting satellites, XM-1 and XM-2 serve as in-orbit spares while XM-3 and XM-4 transmit our signal. Our satellites were launched in March 2001, May 2001, February 2005 and October 2006, respectively. On October 14, 2010, we launched XM-5 to serve as an in-orbit spare to the existing fleet of satellites.
During the nine months ended September 30, 2010, we capitalized interest and expenditures related to the construction of the satellites and related launch vehicle for XM-5 satellite.
(8) Related Party Transactions
We had the following related party balances at September 30, 2010 and December 31, 2009:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Related party | | Related party | | Related party | | Related party | | Related party |
| | current assets | | long-term assets | | current liabilities | | long-term liabilities | | long-term debt |
| | September 30, | | | December 31, | | | September 30, | | | December 31, | | | September 30, | | | December 31, | | | September 30, | | | December 31, | | | September 30, | | | December 31, | |
| | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 | | 2010 | | 2009 |
Liberty Media | | $ | - | | | $ | - | | | $ | 1,572 | | | $ | 1,937 | | | $ | 4,758 | | | $ | 4,589 | | | $ | - | | | $ | - | | | $ | 161,479 | | | $ | 157,032 | |
XM Canada | | | 585 | | | | 1,011 | | | | 27,199 | | | | 24,429 | | | | 4,276 | | | | 2,775 | | | | 25,211 | | | | 28,793 | | | | - | | | | - | |
General Motors | | | - | | | | 99,554 | | | | - | | | | 85,364 | | | | - | | | | 93,107 | | | | - | | | | 17,508 | | | | - | | | | - | |
American Honda | | | - | | | | 2,914 | | | | - | | | | - | | | | - | | | | 3,841 | | | | - | | | | - | | | | - | | | | - | |
SIRIUS | | | - | | | | - | | | | - | | | | - | | | | 106,484 | | | | 80,381 | | | | - | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 585 | | | $ | 103,479 | | | $ | 28,771 | | | $ | 111,730 | | | $ | 115,518 | | | $ | 184,693 | | | $ | 25,211 | | | $ | 46,301 | | | $ | 161,479 | | | $ | 157,032 | |
| | | | | | | | | | | | | | | | | | | | |
Neither General Motors nor American Honda are considered a related party following May 27, 2010, the date on which individuals nominated by General Motors and American Honda ceased to be members of SIRIUS’ board of directors.
Liberty Media
In February 2009, SIRIUS entered into an Investment Agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC (collectively, “Liberty Media”). Pursuant to the Investment Agreement, in March 2009 SIRIUS issued to Liberty Radio, LLC 12,500,000 shares of SIRIUS’ Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. Liberty Media has representatives on SIRIUS’ board of directors.
Liberty Media has advised us that as of September 30, 2010 and December 31, 2009, respectively, it owned the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
11.25% Senior Secured Notes due 2013 | | $ | 87,000 | | | $ | 87,000 | |
13% Senior Notes due 2013 | | | 76,000 | | | | 76,000 | |
7% Exchangeable Senior Subordinated Notes due 2014 | | | 11,000 | | | | 11,000 | |
| | | | |
Total principal debt | | | 174,000 | | | | 174,000 | |
Less: discounts | | | (15,533 | ) | | | (18,092 | ) |
Add: embedded derivatives | | | 3,012 | | | | 1,124 | |
| | | | |
Total carrying value debt | | $ | 161,479 | | | $ | 157,032 | |
| | | | |
In October 2010, Liberty Media tendered its $87,000 of the 11.25% Senior Secured Notes due 2013 and purchased $50,000 of XM’s 7.625% Senior Notes due 2018 at issuance.
As of September 30, 2010 and December 31, 2009, we recorded $4,758 and $4,589, respectively, related to accrued interest with Liberty Media to Related party current liabilities. We recognized Interest expense associated with debt held by Liberty Media of $6,169 and $6,609 for the three months ended September 30, 2010 and 2009, respectively, and $18,059 and $33,651 for the nine months ended September 30, 2010 and 2009, respectively.
10
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM Canada
In 2005, we entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial 10 year term and XM Canada has the unilateral option to extend the agreements for an additional five years. We receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on our system. XM Canada is obligated to pay us a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a 10-year term. The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, which is amortized on a straight-line basis through 2020, the expected term of the agreements. As of September 30, 2010 and December 31, 2009, the carrying value of deferred revenue related to XM Canada was $29,487 and $31,568, respectively.
XM guarantees certain advertising obligations of XM Canada to the NHL for each season. In September 2010, we were notified that XM Canada has fulfilled and paid the agreed advertising spend for the 2009-2010 season with the NHL. As a result, we reduced our amount due from XM Canada, which is reported as a Related party current asset, and the corresponding liability by $844 at September 30, 2010.
We have extended a Cdn$45,000 standby credit facility to XM Canada, which can be utilized to purchase terrestrial repeaters or finance royalty and activation fees payable to us. The facility matures on December 31, 2012 and bears interest at 17.75% per annum. We have the right to convert unpaid principal amounts into Class A subordinate voting shares of XM Canada at the price of Cdn$16.00 per share. As of September 30, 2010 and December 31, 2009, amounts drawn by XM Canada on this facility in lieu of payment of fees recorded in Related party long-term assets were $20,138, net of a $6,882 valuation allowance, and $18,429, respectively. The September 30, 2010 valuation allowance of $6,882 related to the absorption of our share of the net loss from our investment in XM Canada shares.
As of September 30, 2010 and December 31, 2009, amounts due from XM Canada also included $7,061 and $6,000, respectively, attributable to deferred programming costs and accrued interest (in addition to the amounts drawn on the standby credit facility), all of which is reported as Related party long-term assets.
We recorded the following revenue from XM Canada as Other revenue in our unaudited consolidated statements of operations:
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | | | | | | | | | |
Amortization of XM Canada deferred income | | $ | 693 | | | $ | 694 | | | $ | 2,081 | | | $ | 2,082 | |
Subscriber and activation fees royalties | | | 2,594 | | | | 225 | | | | 7,599 | | | | 499 | |
Licensing fee revenue | | | 750 | | | | 1,500 | | | | 3,000 | | | | 4,500 | |
Advertising reimbursements | | | - | | | | - | | | | 667 | | | | 733 | |
| | | | | | | | |
Total revenue from XM Canada | | $ | 4,037 | | | $ | 2,419 | | | $ | 13,347 | | | $ | 7,814 | |
| | | | | | | | |
General Motors and American Honda
We have a long-term distribution agreement with General Motors Company (“GM”). GM had a representative on SIRIUS’ board of directors and was considered a related party through May 27, 2010. During the term of the agreement, GM has agreed to distribute the XM service. We subsidize a portion of the cost of XM radios and make incentive payments to GM when the owners of GM vehicles with factory- or dealer- installed XM radios become self-paying subscribers to XM’s service. We also share with GM a percentage of the subscriber revenue attributable to GM vehicles with factory- or dealer- installed XM radios. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we reimburse GM.
We make bandwidth available to OnStar Corporation for audio and data transmissions to owners of XM-enabled GM vehicles, regardless of whether the owner is an XM subscriber. OnStar’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. We also granted to OnStar a certain amount of time to use our studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.
We have a long term distribution agreement with American Honda. American Honda had a representative on SIRIUS’ board of directors and was considered a related party through May 27, 2010. XM has an agreement to make a certain amount of its bandwidth available to American Honda. American Honda’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. This agreement remains in effect so long as
11
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
American Honda holds a certain amount of its investment in SIRIUS. We make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and shares with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed XM radios.
As of May 27, 2010, the following aggregate assets and liabilities related to GM and American Honda were reclassified from related party to non-related party:
Balance sheet line item:
| | | | |
|
Related party current assets | | $ | 107,908 | |
Related party long term assets | | | 73,016 | |
Related party current liabiilties | | | 57,996 | |
We recorded the following total related party revenue from GM and American Honda, primarily consisting of subscriber revenue, in connection with the agreements discussed above:
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010* | | 2009 | | 2010* | | 2009 |
| | | | | | | | | | | | | | | | |
General Motors | | $ | - | | | $ | 8,831 | | | $ | 12,759 | | | $ | 22,087 | |
American Honda | | | - | | | | 3,374 | | | | 4,990 | | | | 9,201 | |
| | | | | | | | |
Total | | $ | - | | | $ | 12,205 | | | $ | 17,749 | | | $ | 31,288 | |
| | | | | | | | |
| | |
* | | GM and American Honda were considered related parties through May 27, 2010. |
We have incurred the following expenses with GM and American Honda:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended September 30, | | | For the Nine Months Ended September 30, | |
| | 2010* | | 2009 | | 2010* | | 2009 |
| | General | | | American | | | General | | | American | | | General | | | American | | | General | | | American | |
| | Motors | | Honda | | Motors | | Honda | | Motors | | Honda | | Motors | | Honda |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales and marketing | | $ | - | | | $ | - | | | $ | 7,720 | | | $ | 1,647 | | | $ | 13,374 | | | $ | - | | | $ | 23,387 | | | $ | 4,391 | |
Revenue share and royalties | | | - | | | | - | | | | 15,008 | | | | 1,636 | | | | 15,823 | | | | 3,167 | | | | 46,664 | | | | 4,601 | |
Subscriber acquisition costs | | | - | | | | - | | | | 9,035 | | | | - | | | | 17,514 | | | | 1,969 | | | | 25,066 | | | | - | |
Customer service and billing | | | - | | | | - | | | | - | | | | - | | | | 125 | | | | - | | | | - | | | | - | |
Interest expense, net of amounts capitalized | | | - | | | | - | | | | - | | | | - | | | | 1,421 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | |
Total | | $ | - | | | $ | - | | | $ | 31,763 | | | $ | 3,283 | | | $ | 48,257 | | | $ | 5,136 | | | $ | 95,117 | | | $ | 8,992 | |
| | | | | | | | | | | | | | | | |
SIRIUS
As of September 30, 2010 and December 31, 2009, we owed SIRIUS $106,484 and $80,381, respectively.
SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs we incur benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously.
We recorded total advertising revenue allocated from SIRIUS of $6,111 and $2,473 for the three months ended September 30, 2010 and 2009, respectively, and $14,689 and $7,321 for the nine months ended September 30, 2010 and 2009, respectively.
We recognized total allocated net operating expenses with SIRIUS of $70,126 and $39,532 for the three months ended September 30, 2010 and 2009, respectively, and $131,494 and $129,502 for the nine months ended September 30, 2010 and 2009, respectively.
12
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(9) Investments
Investments consist of the following:
| | | | | | | | |
| | September 30, | | | December 31, | |
| | 2010 | | 2009 |
| | | | | | | | |
Investment in XM Canada | | $ | - | | | $ | 2,390 | |
Investment in XM Canada debentures | | | 3,323 | | | | 2,970 | |
Auction rate certificates | | | - | | | | 8,556 | |
Restricted investments | | | 250 | | | | 250 | |
| | | | |
Total investments | | $ | 3,573 | | | $ | 14,166 | |
| | | | |
XM Canada
Our investment in XM Canada is recorded using the equity method since we have significant influence, but do not control XM Canada. Under this method, our investment in XM Canada is adjusted quarterly to recognize our share of net earnings or losses as they occur, rather than at the time dividends or other distributions are received, limited to the extent of our investment in, advances to, and commitments to fund XM Canada. We have a 23.33% economic interest in XM Canada.
Our share of net earnings or losses of XM Canada is recorded (on a one-month lag) to Interest and investment income (loss) in our unaudited consolidated statements of operations. We evaluate our investment in XM Canada periodically and record an impairment charge to Interest and investment income (loss) in our unaudited consolidated statements of operations if we determine that decreases in fair value are considered to be other than temporary. In addition, any payments received from XM Canada in excess of the carrying value of our investments in, advances to and commitments to XM Canada is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations.
We recorded the following amounts to Interest and investment income (loss):
| | | | | | | | | | | | | | | | |
| | For the Three Months | | For the Nine Months |
| | Ended September 30, | | Ended September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | | | | | | | | | |
Share of XM Canada net loss | | $ | (2,926 | ) | | $ | (2,870 | ) | | $ | (9,416 | ) | | $ | (1,926 | ) |
Impairment of XM Canada | | | - | | | | - | | | | - | | | | (4,734 | ) |
Gain on sale of auction rate certificate | | | - | | | | - | | | | 425 | | | | - | |
| | | | | | | | |
Total | | $ | (2,926 | ) | | $ | (2,870 | ) | | $ | (8,991 | ) | | $ | (6,660 | ) |
| | | | | | | | |
In addition, during the three and nine months ended September 30, 2010, we recorded $35 and $144 as a foreign exchange gain to Accumulated other comprehensive loss, net of tax, related to our investment in XM Canada.
We hold an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by XM Canada, for which the embedded conversion feature is bifurcated from the host contract. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income (loss). As of September 30, 2010, the carrying value of the host contract and embedded derivative related to our investment in the debentures was $3,323 and $0, respectively. As of December 31, 2009, the carrying value of the host contract and embedded derivative related to our investment in the debentures was $2,961 and $9, respectively.
Auction Rate Certificates
Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We accounted for our investment in auction rate certificates as available-for-sale securities. In January 2010, our investment in the auction rate certificates was called by the issuer at par plus accrued interest, or $9,456, resulting in a gain of $425 in the nine months ended September 30, 2010.
13
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
Restricted Investments
Restricted investments relate to deposits placed into escrow for the benefit of third parties pursuant to programming agreements.
(10) Fair Value
The following table summarizes the fair value of our financial instruments at September 30, 2010:
| | | | | | | | | | | | | | | | |
| | Fair Value Measurements Using |
| | Quoted Prices in Active | | | Significant Other | | | Significant | | | | |
| | Markets for Identical | | | Observable | | | Unobservable | | | Carrying | |
(in thousands) | | Assets (Level 1) | | Inputs (Level 2) | | Inputs (Level 3) | | Value |
| | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | |
Host contract and embedded derivatives | | | N/A | | | | N/A | | | $ | 3,323 | | | $ | 3,323 | |
| | | | | | | | | | | | | | | | |
Liabilities: | | | | | | | | | | | | | | | | |
| | | | | | | | |
Debt-related embedded derivatives | | $ | - | | | $ | - | | | $ | 150,591 | | | $ | 150,591 | |
| | | | | | | | |
The following table presents the changes in the Level 3 fair-value category for the nine months ended September 30, 2010. We classify financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable, either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs. Fair values are determined using lattice models or market quotes. We recognized net unrealized losses in earnings of $45,711 and $33,666 for the three months ended September 30, 2010 and 2009, respectively, and $93,857 and $111,609 for the nine months ended September 30, 2010 and 2009, respectively.
| | | | | | | | | | | | |
| | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) |
| | Auction Rate | | | Debentures and | | | Debt-Related | |
| | Securities | | Embedded Derivatives | | Embedded Derivatives |
| | | | | | | | | | | | |
Balance at December 31, 2009 | | $ | 8,556 | | | $ | 2,970 | | | $ | 56,192 | |
|
Total gains and losses (realized /unrealized) | | | 425 | | | | 117 | | | | 94,399 | |
Included in other comprehensive income | | | 469 | | | | 236 | | | | - | |
Sale of assets | | | (9,450 | ) | | | - | | | | - | |
| | | | | | |
|
Balance at September 30, 2010 | | $ | - | | | $ | 3,323 | | | $ | 150,591 | |
| | | | | | |
As of September 30, 2010 and December 31, 2009, the aggregate carrying value of our debt was $1,523,617 and $1,607,143 (excludes embedded derivatives), respectively; while the aggregate fair value approximated $2,074,710 and $1,992,362, respectively. The fair value for publicly traded instruments is determined using quoted market prices and, for non-publicly traded instruments, fair value is based upon estimates from a market maker and brokerage firm.
14
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(11) Debt
Our debt consists of the following:
| | | | | | | | | | | | |
| | Conversion | | | | | | | |
| | Price (per | | | September 30, | | | December 31, | |
| | SIRIUS share) | | 2010 | | 2009 |
| | | | | | | | | | | | |
10% Senior PIK Secured Notes due 2011 (a) | | | N/A | | | $ | - | | | $ | 113,685 | |
Less: discount | | | | | | | - | | | | (7,711 | ) |
11.25% Senior Secured Notes due 2013 (b) | | | N/A | | | | 525,750 | | | | 525,750 | |
Less: discount | | | | | | | (26,483 | ) | | | (32,259 | ) |
13% Senior Notes due 2013 (c) | | | N/A | | | | 778,500 | | | | 778,500 | |
Less: discount | | | | | | | (64,113 | ) | | | (76,602 | ) |
9.75% Senior Notes due 2014 (d) | | | N/A | | | | - | | | | 5,260 | |
7% Exchangeable Senior Subordinated Notes due 2014 (e) | | $ | 1.875 | | | | 550,000 | | | | 550,000 | |
Less: discount | | | | | | | (244,354 | ) | | | (263,784 | ) |
Other debt: | | | | | | | | | | | | |
Capital leases | | | N/A | | | | 4,317 | | | | 14,304 | |
Embedded derivatives (f) | | | | | | | 150,591 | | | | 56,192 | |
| | | | | | |
Total debt | | | | | | | 1,674,208 | | | | 1,663,335 | |
Less: current maturities | | | | | | | 4,131 | | | | 11,382 | |
| | | | | | |
Total long-term | | | | | | | 1,670,077 | | | | 1,651,953 | |
Less: related party | | | | | | | 161,479 | | | | 157,032 | |
| | | | | | |
Total long-term, excluding related party | | | | | | $ | 1,508,598 | | | $ | 1,494,921 | |
| | | | | | |
(a) 10% Senior PIK Secured Notes due 2011
At December 31, 2009, XM had outstanding $113,685 aggregate principal amount of 10% Senior PIK Secured Notes due 2011 (the “PIK Notes”). On June 1, 2010, we redeemed all outstanding PIK Notes at a price of 100% plus accrued interest. We recognized an aggregate loss on extinguishment of the PIK Notes of $4,480, consisting primarily of unamortized discount, as a Loss on extinguishment of debt and credit facilities, net, in our unaudited consolidated statements of operations.
(b) 11.25% Senior Secured Notes due 2013
In June 2009, XM issued $525,750 aggregate principal amount of 11.25% Senior Secured Notes due 2013 (the “11.25% Notes”). Interest is payable semi-annually in arrears on June 15 and December 15 of each year at a rate of 11.25% per annum. The 11.25% Notes mature on June 15, 2013. The 11.25% Notes were issued for $488,398, resulting in an aggregate original issuance discount of $37,352. Substantially all the domestic wholly-owned subsidiaries of XM guarantee XM’s obligations under the 11.25% Notes. The 11.25% Notes and related guarantees were secured by first-priority liens on substantially all of the assets of XM and the guarantors.
On October 27, 2010, XM purchased $489,065 in aggregate principal amount of the 11.25% Notes. The aggregate purchase price for the 11.25% Notes, including the consent payments and accrued and unpaid interest, was $567,927. The purchases were made pursuant to the tender offer for the 11.25% Notes described in its Offer to Purchase and Consent Solicitation Statement dated October 13, 2010. Such tender offer for the 11.25% Notes is scheduled to expire on November 9, 2010 and XM may purchase additional 11.25% Notes tendered on or prior to that date pursuant to such tender offer. Concurrent with the tender offer for the 11.25% Notes, XM solicited consents to amend the 11.25% Notes and the related indenture and security documents to eliminate most of the restrictive covenants and certain events of default applicable to the 11.25% Notes and to release the security for, and guarantees of, the 11.25% Notes. The requisite consents to effect the amendments have been obtained and documentation giving effect to the amendments has been executed and delivered. Accordingly, the 11.25% Notes are no longer secured or guaranteed.
15
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(c) 13% Senior Notes due 2013
In July 2008, XM issued $778,500 aggregate principal amount of 13% Senior Notes due 2013 (the “13% Notes”). Interest is payable semi-annually in arrears on February 1 and August 1 of each year at a rate of 13% per annum. The 13% Notes are unsecured and mature on August 1, 2013. Substantially all of the domestic wholly-owned subsidiaries of XM guarantee XM’s obligations under the 13% Notes.
(d) 9.75% Senior Notes due 2014
On December 31, 2009, XM had outstanding $5,260 aggregate principal amount of 9.75% Senior Notes due 2014 (the “9.75% Notes”). On August 16, 2010, the Company redeemed all of the outstanding 9.75% Senior Notes plus accrued interest of $150 for $5,666. We recorded a loss on extinguishment on the 9.75% Notes of $256 due to the cash redemption premium paid, as a Loss on extinguishment of debt and credit facilities, net, in our unaudited consolidated statements of operations.
(e) 7% Exchangeable Senior Subordinated Notes due 2014
In August 2008, XM issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes are senior subordinated obligations of XM and rank junior in right of payment to its existing and future senior debt and equally in right of payment with its existing and future senior subordinated debt. Substantially all the domestic wholly-owned subsidiaries of XM guarantee the Exchangeable Notes on a senior subordinated basis.
Interest is payable semi-annually in arrears on June 1 and December 1 of each year at a rate of 7% per annum. The Exchangeable Notes mature on December 1, 2014. The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of SIRIUS’ common stock at an initial exchange rate of 533.3333 shares of SIRIUS common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of SIRIUS common stock.
(f) Embedded Derivatives
We issued the 7% Exchangeable Senior Subordinated Notes due 2014 containing a non-detachable exchange feature. Upon completion of the Merger, these debt agreements were amended such that the exchange feature is settled in shares of SIRIUS common stock.
The exchangeable feature is an embedded derivative, and subsequent to the Merger is required to be separated from the host contract for accounting purposes. The embedded derivatives are recorded as derivative liabilities and included in our debt balances in our statement of financial position and the changes in fair value of those derivatives are reported in the period in which the fair value changes. Due to the change in fair value of these embedded derivatives, we recognized $45,796 and $33,700 to Loss on change in value of embedded derivatives during the three months ended September 30, 2010 and 2009 and $94,399 and $111,703 for the nine months ended September 30, 2010 and 2009. The balance of derivative liabilities was $150,591 and $56,192 as of September 30, 2010 and December 31, 2009, respectively.
7.625% Senior Notes due 2018
In October 2010, XM issued $700,000 aggregate principal amount of 7.625% Senior Notes due 2018 (the “7.625% Senior Notes”). Interest is payable semi-annually in arrears on May 1 and November 1 of each year, commencing on May 1, 2011, at a rate of 7.625% per annum. A majority of the net proceeds were used to purchase $489,065 aggregate principal amount of our 11.25% Notes. The 7.625% Senior Notes mature on November 1, 2018. Substantially all of the domestic wholly-owned subsidiaries of XM guarantee XM’s obligations under the 7.625% Senior Notes.
Covenants and Restrictions
Our debt generally requires compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness unless SIRIUS’ consolidated leverage ratio would be no greater than 6.00 to 1.00 after the incurrence of the indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions. XM operates as an unrestricted subsidiary of SIRIUS for purposes of compliance with the covenants contained in SIRIUS’ debt instruments.
Under our debt agreements, the following generally constitute an event of default: (i) a default in the payment of interest; (ii) a default in the payment of principal; (iii) failure to comply with covenants; (iv) failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; (v) certain events of bankruptcy; (vi) judgment for payment of money exceeding a specified aggregate amount; and (vii) voidance of subsidiary guarantees, subject to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.
At September 30, 2010, we were in compliance with our debt covenants.
16
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
(12) Commitments and Contingencies
The following table summarizes our expected contractual cash commitments as of September 30, 2010:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Remaining | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2010 | | 2011 | | 2012 | | 2013 | | 2014 | | Thereafter | | Total |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt obligations | | $ | 1,488 | | | $ | 2,781 | | | $ | 46 | | | $ | 1,304,252 | | | $ | 550,000 | | | $ | - | | | $ | 1,858,567 | |
Cash interest payments | | | 48,929 | | | | 198,949 | | | | 198,852 | | | | 169,278 | | | | 38,500 | | | | - | | | | 654,508 | |
Lease obligations | | | 11,664 | | | | 11,811 | | | | 8,297 | | | | 6,106 | | | | 5,649 | | | | 4,264 | | | | 47,791 | |
Satellite and transmission | | | 1,836 | | | | 3,915 | | | | 91 | | | | 94 | | | | 97 | | | | 9,053 | | | | 15,086 | |
Programming and content | | | 10,786 | | | | 110,957 | | | | 98,480 | | | | 20,683 | | | | 10,350 | | | | 4,000 | | | | 255,256 | |
Satellite performance incentive payments | | | 1,124 | | | | 4,695 | | | | 5,030 | | | | 5,392 | | | | 5,784 | | | | 37,048 | | | | 59,073 | |
Marketing and distribution | | | 10,357 | | | | 9,445 | | | | 9,034 | | | | 3,000 | | | | 3,000 | | | | 1,500 | | | | 36,336 | |
Other | | | 1,129 | | | | 628 | | | | 163 | | | | 1 | | | | - | | | | - | | | | 1,921 | |
| | | | | | | | | | | | | | |
Total | | $ | 87,313 | | | $ | 343,181 | | | $ | 319,993 | | | $ | 1,508,806 | | | $ | 613,380 | | | $ | 55,865 | | | $ | 2,928,538 | |
| | | | | | | | | | | | | | |
Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt and capital lease obligations. Included in the chart above is the aggregate principal balance of $525,750 of the 11.25% Notes. On October 27, 2010, XM purchased $489,065 in aggregate principal amount of the 11.25% Notes. The aggregate purchase price for the 11.25% Notes, including the consent payments and accrued and unpaid interest, was $567,927. The purchases were made pursuant to the tender offer for the 11.25% Notes described in its Offer to Purchase and Consent Solicitation Statement dated October 13, 2010. Such tender offer for the 11.25% Notes is scheduled to expire on November 9, 2010 and XM may purchase additional 11.25% Notes tendered on or prior to such date pursuant to such tender offer. The table above continues to reflect the contractual payments of interest and principal for the 11.25% Notes. The above chart does not include the aggregate principal amount of $700,000 of the 7.625% Senior Notes due 2018 issued on October 27, 2010 and payments of interest and principal for these notes.
Cash interest payments.Cash interest payments include interest due on outstanding debt through maturity and does not give effect to the issuance of the 7.625% Senior Notes due 2018 issued on October 27, 2010 or the purchase of $489,065 in aggregate principal amount of the 11.25% Notes.
Operating lease obligations.We have entered into cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have unilateral renewal options. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.
Satellite and transmission.We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks. We have also entered into various agreements to design and construct satellites and related launch vehicles for use in our systems.
Programming and content.We have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may include fixed payments, advertising commitments and revenue sharing arrangements.
Satellite incentive payments.Boeing Satellite Systems International, Inc., the manufacturer of our four in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of our four satellites. As of September 30, 2010, we have accrued $28,599 related to contingent in-orbit performance payments for XM-3 and XM-4 based on expected operating performance over their fifteen year design life. Boeing may also be entitled to an additional $10,000 if XM-4 continues to operate above baseline specifications during the five years beyond the satellite’s fifteen year design life.
Marketing and distribution.We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.
17
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
Other.We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, including subscriber growth, and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar variable cost provisions.
We do not have any other significant off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Legal Proceedings
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. On October 19, 2010, the FCC released an Order dismissing this Petition for Reconsideration.
Advanced Recording Functionality Disputes. Commencing in May 2006, holders of copyrights in sound recordings and holders of copyrights in musical works brought three actions against XM for copyright infringement in the Federal District Court in the Southern District of New York; namely,Atlantic Recording Corp. et al. v. XM Satellite Radio Inc., Famous Music LLC, et al. v. XM Satellite Radio, Inc., and In re XM Satellite Radio Copyright Litigation.These actions sought monetary damages and equitable relief in connection with the advanced recording functionality included in the XM Inno, the XM NeXus, the XM Helix, the XM SkyFi3 line of satellite radios. As previously reported, XM settled these claims with the major record companies and a significant number of music publishers, resulting in the dismissal of two of the three actions. XM has also reached agreement with certain independent holders of sound recordings and musical works to settle the third action, a purported class action.
�� We believe that the distribution and use of their products do not violate applicable copyright laws or any other statutory or common 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.
State Consumer Investigations. In October 2010, a Multistate Working Group, led by the Attorney General of the State of Ohio and joined by the Offices of the Attorneys General of Arizona, Connecticut, Tennessee, Vermont and the District of Columbia, commenced a multi-jurisdictional investigation into certain of XM’s consumer practices. The investigation focuses on practices relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting customers.
A separate investigation into XM’s consumer-related practices is being conducted by the Attorney General of the State of Florida. In addition, in September 2010, the Attorney General of the State of Missouri commenced an action against us regarding our telemarketing practices to residents of the State of Missouri.
We are cooperating with these investigations and believe our consumer-related practices comply with all applicable federal and state laws and regulations.
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.
(13) Condensed Consolidating Financial Information
XM 1500 Eckington LLC, XM Investment LLC, XM Radio Inc., XM Equipment Leasing LLC and substantially all of our other wholly-owned subsidiaries (collectively, the “XM Guarantor Subsidiaries”) have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, certain of the debt issued by XM.
These condensed consolidating financial statements should be read in conjunction with the unaudited consolidated financial statements of XM Satellite Radio Inc. and Subsidiaries.
18
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
Basis of Presentation
In presenting our condensed consolidating financial statements of XM, the equity method of accounting has been applied to XM’s interests in the XM Guarantor Subsidiaries where applicable, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All intercompany balances and transactions between XM and the XM Guarantor Subsidiaries, XM Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”
Our accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries.
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Equipment | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | Leasing LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Revenue | | $ | 382,256 | | | $ | - | | | $ | - | | | $ | 2,566 | | | $ | 334 | | | $ | - | | | $ | (2,899 | ) | | $ | 382,257 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 124,516 | | | | 3 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 124,519 | |
Subscriber acquisition costs | | | 38,674 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 38,674 | |
Sales and marketing | | | 27,833 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 27,833 | |
Engineering, design and development | | | 5,261 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,261 | |
General and administrative | | | 20,936 | | | | - | | | | 11 | | | | 290 | | | | 71 | | | | - | | | | (2,201 | ) | | | 19,107 | |
Depreciation and amortization | | | 34,389 | | | | - | | | | - | | | | 508 | | | | 102 | | | | - | | | | - | | | | 34,999 | |
Restructuring, impairments and related costs | | | 197 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 197 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 251,806 | | | | 3 | | | | 11 | | | | 798 | | | | 173 | | | | - | | | | (2,201 | ) | | | 250,590 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 130,450 | | | | (3 | ) | | | (11 | ) | | | 1,768 | | | | 161 | | | | - | | | | (698 | ) | | | 131,667 | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | | (51,834 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (51,834 | ) |
Loss on extinguishment of debt and credit facilities, net | | | (256 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (256 | ) |
Gain (loss) on change in value of embedded derivative | | | (45,796 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (45,796 | ) |
Interest and investment income (loss) | | | 376 | | | | - | | | | - | | | | - | | | | - | | | | (95 | ) | | | (2,029 | ) | | | (1,748 | ) |
Other income (expense) | | | (2,214 | ) | | | 48,805 | | | | 2,834 | | | | - | | | | - | | | | 14,810 | | | | (63,010 | ) | | | 1,225 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) before income taxes | | | 30,726 | | | | 48,802 | | | | 2,823 | | | | 1,768 | | | | 161 | | | | 14,715 | | | | (65,737 | ) | | | 33,258 | |
Benefit from (provision for) income taxes | | | (260 | ) | | | (2,532 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,792 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 30,466 | | | $ | 46,270 | | | $ | 2,823 | | | $ | 1,768 | | | $ | 161 | | | $ | 14,715 | | | $ | (65,737 | ) | | $ | 30,466 | |
| | | | | | | | | | | | | | | | |
19
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Revenue | | $ | 325,473 | | | $ | - | | | $ | - | | | $ | 2,605 | | | $ | 333 | | | $ | - | | | $ | (2,938 | ) | | $ | 325,473 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 122,489 | | | | - | | | | (12 | ) | | | - | | | | - | | | | - | | | | - | | | | 122,477 | |
Subscriber acquisition costs | | | 35,049 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 35,049 | |
Sales and marketing | | | 26,055 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 26,055 | |
Engineering, design and development | | | 5,413 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 5,413 | |
General and administrative | | | 26,796 | | | | - | | | | 30 | | | | 292 | | | | 87 | | | | - | | | | (1,989 | ) | | | 25,216 | |
Depreciation and amortization | | | 39,862 | | | | - | | | | 1,114 | | | | 508 | | | | 103 | | | | - | | | | - | | | | 41,587 | |
Restructuring, impairments and related costs | | | 3,029 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,029 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 258,693 | | | | - | | | | 1,132 | | | | 800 | | | | 190 | | | | - | | | | (1,989 | ) | | | 258,826 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 66,780 | | | | - | | | | (1,132 | ) | | | 1,805 | | | | 143 | | | | - | | | | (949 | ) | | | 66,647 | |
|
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | | (70,537 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (70,537 | ) |
Loss on extinguishment of debt and credit facilities, net | | | (3,787 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,787 | ) |
Gain (loss) on change in value of embedded derivative | | | (33,700 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (33,700 | ) |
Interest and investment income (loss) | | | 1,540 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,681 | ) | | | (2,141 | ) |
Other income (expense) | | | (2,490 | ) | | | 46,185 | | | | 2,872 | | | | - | | | | - | | | | 14,637 | | | | (59,880 | ) | | | 1,324 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) before income taxes | | | (42,194 | ) | | | 46,185 | | | | 1,740 | | | | 1,805 | | | | 143 | | | | 14,637 | | | | (64,510 | ) | | | (42,194 | ) |
Benefit from (provision for) income taxes | | | (578 | ) | | | (578 | ) | | | - | | | | - | | | | - | | | | - | | | | 578 | | | | (578 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (42,772 | ) | | $ | 45,607 | | | $ | 1,740 | | | $ | 1,805 | | | $ | 143 | | | $ | 14,637 | | | $ | (63,932 | ) | | $ | (42,772 | ) |
| | | | | | | | | | | | | | | | |
20
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Revenue | | $ | 1,105,830 | | | $ | - | | | $ | - | | | $ | 7,729 | | | $ | 997 | | | $ | - | | | $ | (8,696 | ) | | $ | 1,105,860 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 363,772 | | | | 7 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 363,779 | |
Subscriber acquisition costs | | | 109,691 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 109,691 | |
Sales and marketing | | | 81,390 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 81,390 | |
Engineering, design and development | | | 15,482 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 15,482 | |
General and administrative | | | 79,358 | | | | 185 | | | | 23 | | | | 857 | | | | 216 | | | | - | | | | (6,604 | ) | | | 74,035 | |
Depreciation and amortization | | | 107,056 | | | | - | | | | - | | | | 1,523 | | | | 307 | | | | - | | | | - | | | | 108,886 | |
Restructuring, impairments and related costs | | | 900 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 900 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 757,649 | | | | 192 | | | | 23 | | | | 2,380 | | | | 523 | | | | - | | | | (6,604 | ) | | | 754,163 | |
| | | | | | | �� | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 348,181 | | | | (192 | ) | | | (23 | ) | | | 5,349 | | | | 474 | | | | - | | | | (2,092 | ) | | | 351,697 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | | (168,714 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (168,714 | ) |
Loss on extinguishment of debt and credit facilities, net | | | (4,881 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (4,881 | ) |
Gain (loss) on change in value of embedded derivative | | | (94,399 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (94,399 | ) |
Interest and investment income (loss) | | | 4,494 | | | | - | | | | - | | | | - | | | | - | | | | (263 | ) | | | (9,883 | ) | | | (5,652 | ) |
Other income (expense) | | | (7,624 | ) | | | 142,174 | | | | 8,484 | | | | - | | | | - | | | | 43,945 | | | | (184,285 | ) | | | 2,694 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) before income taxes | | | 77,057 | | | | 141,982 | | | | 8,461 | | | | 5,349 | | | | 474 | | | | 43,682 | | | | (196,260 | ) | | | 80,745 | |
Benefit from (provision for) income taxes | | | (250 | ) | | | (3,688 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,938 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 76,807 | | | $ | 138,294 | | | $ | 8,461 | | | $ | 5,349 | | | $ | 474 | | | $ | 43,682 | | | $ | (196,260 | ) | | $ | 76,807 | |
| | | | | | | | | | | | | | | | |
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Equipment | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | Leasing LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Revenue | | $ | 934,539 | | | $ | - | | | $ | - | | | $ | 7,740 | | | $ | 997 | | | $ | - | | | $ | (8,738 | ) | | $ | 934,538 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of services | | | 372,513 | | | | - | | | | 6 | | | | - | | | | - | | | | - | | | | - | | | | 372,519 | |
Subscriber acquisition costs | | | 83,524 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 83,524 | |
Sales and marketing | | | 84,565 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 84,565 | |
Engineering, design and development | | | 16,798 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 16,798 | |
General and administrative | | | 97,067 | | | | - | | | | 30 | | | | 938 | | | | 259 | | | | - | | | | (6,605 | ) | | | 91,689 | |
Depreciation and amortization | | | 138,150 | | | | - | | | | 6,554 | | | | 1,416 | | | | 342 | | | | - | | | | - | | | | 146,462 | |
Restructuring, impairments and related costs | | | 29,614 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 29,614 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total operating expenses | | | 822,231 | | | | - | | | | 6,590 | | | | 2,354 | | | | 601 | | | | - | | | | (6,605 | ) | | | 825,171 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Income (loss) from operations | | | 112,308 | | | | - | | | | (6,590 | ) | | | 5,386 | | | | 396 | | | | - | | | | (2,133 | ) | | | 109,367 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net of amounts capitalized | | | (226,376 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (226,376 | ) |
Loss on extinguishment of debt and credit facilities, net | | | (111,863 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (111,863 | ) |
Gain (loss) on change in value of embedded derivative | | | (111,703 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (111,703 | ) |
Interest and investment income (loss) | | | (1,131 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (3,681 | ) | | | (4,812 | ) |
Other income (expense) | | | (4,074 | ) | | | 132,925 | | | | 8,676 | | | | - | | | | - | | | | 43,530 | | | | (178,509 | ) | | | 2,548 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) before income taxes | | | (342,839 | ) | | | 132,925 | | | | 2,086 | | | | 5,386 | | | | 396 | | | | 43,530 | | | | (184,323 | ) | | | (342,839 | ) |
Benefit from (provision for) income taxes | | | (1,733 | ) | | | (1,733 | ) | | | - | | | | - | | | | - | | | | - | | | | 1,733 | | | | (1,733 | ) |
| | | | | | | | | | | | | | | | |
Net income (loss) | | $ | (344,572 | ) | | $ | 131,192 | | | $ | 2,086 | | | $ | 5,386 | | | $ | 396 | | | $ | 43,530 | | | $ | (182,590 | ) | | $ | (344,572 | ) |
| | | | | | | | | | | | | | | | |
21
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | | | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | XM Radio Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Current assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 116,387 | | | $ | — | | | $ | — | | | $ | 10,916 | | | $ | 1,550 | | | $ | — | | | $ | — | | | $ | 128,853 | |
Accounts receivable, net | | | 57,372 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 57,372 | |
Receivables from distributors | | | 11,165 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 11,165 | |
Due from subsidiaries/affiliates | | | 68,138 | | | | 922,420 | | | | 72,526 | | | | 51,493 | | | | 5,835 | | | | 821,392 | | | | (1,941,804 | ) | | | — | |
Inventory, net | | | 5,870 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 5,870 | |
Prepaid expenses | | | 128,688 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 128,688 | |
Related party current assets | | | 587 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (2 | ) | | | 585 | |
Deferred tax asset | | | 67,415 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 67.415 | |
Other current assets | | | 3,653 | | | | — | | | | 64 | | | | 330 | | | | — | | | | — | | | | 1,781 | | | | 5,828 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 459,275 | | | | 922,420 | | | | 72,590 | | | | 62,739 | | | | 7,385 | | | | 821,392 | | | | (1,940,025 | ) | | | 405,776 | |
Property and equipment, net | | | 830,467 | | | | — | | | | — | | | | 55,634 | | | | 12,212 | | | | — | | | | — | | | | 898,313 | |
Investment in subsidiaries/affiliates | | | 3,187,601 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (3,187,601 | ) | | | — | |
Restricted investments | | | 250 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 250 | |
Deferred financing fees, net | | | 63,238 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 63,238 | |
Intangible assets, net | | | 561,177 | | | | 2,000,000 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 2,561,177 | |
Related party long-term assets | | | 28,771 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 28,771 | |
Other long-term assets | | | 75,616 | | | | — | | | | — | | | | 1,999 | | | | — | | | | — | | | | — | | | | 77,615 | |
| | | | | | | | | | | | | | | | |
Total assets | | $ | 5,206,395 | | | $ | 2,922,420 | | | $ | 72,590 | | | $ | 120,372 | | | $ | 19,597 | | | $ | 821,392 | | | $ | (5,127,626 | ) | | $ | 4,035,140 | |
| | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 271,984 | | | $ | — | | | $ | 99 | | | $ | 9 | | | $ | — | | | $ | — | | | $ | (52,775 | ) | | $ | 219,317 | |
Accrued interest | | | 42,788 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 42,788 | |
Due to subsidiaries/affiliates | | | 1,878,350 | | | | — | | | | — | | | | 7,309 | | | | 804 | | | | 3,417 | | | | (1,889,880 | ) | | | — | |
Current portion of deferred revenue | | | 551,637 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 551,637 | |
Current portion of deferred credit on executory contracts | | | 266,096 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 266,096 | |
Current maturities of long-term debt | | | 4,131 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 4,131 | |
Related party current liabilities | | | 109,601 | | | | 4 | | | | 257 | | | | — | | | | — | | | | — | | | | 5,656 | | | | 115,518 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | 3,124,587 | | | | 4 | | | | 356 | | | | 7,318 | | | | 804 | | | | 3,417 | | | | (1,936,999 | ) | | | 1,199,487 | |
Deferred revenue | | | 152,348 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 152,348 | |
Deferred credit on executory contracts | | | 580,161 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 580,161 | |
Long-term debt | | | 1,508,598 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 1,508,598 | |
Long-term related party debt | | | 161,479 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 161,479 | |
Deferred tax liability | | | 164,006 | | | | 758,186 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 922,192 | |
Related party long-term liability | | | 25,211 | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 25,211 | |
Other long-term liabilities | | | 42,201 | | | | — | | | | — | | | | (1,315 | ) | | | — | | | | — | | | | (3,025 | ) | | | 37,861 | |
| | | | | | | | | | | | | | | | |
Total liabilities | | | 5,758,591 | | | | 758,190 | | | | 356 | | | | 6,003 | | | | 804 | | | | 3,417 | | | | (1,940,024 | ) | | | 4,587,337 | |
| | | | | | | | | | | | | | | | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholder’s equity (deficit): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital stock | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | |
Accumulated other comprehensive loss | | | (5,823 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | (5,823 | ) |
Additional paid-in-capital | | | 6,060,660 | | | | 1,781,641 | | | | 57,854 | | | | 99,348 | | | | 17,615 | | | | 691,811 | | | | (2,648,269 | ) | | | 6,060,660 | |
Retained earnings (deficit) | | | (6,607,033 | ) | | | 382,589 | | | | 14,380 | | | | 15,021 | | | | 1,178 | | | | 126,164 | | | | (539,333 | ) | | | (6,607,034 | ) |
| | | | | | | | | | | | | | | | |
Total stockholder’s equity (deficit) | | | (552,196 | ) | | | 2,164,230 | | | | 72,234 | | | | 114,369 | | | | 18,793 | | | | 817,975 | | | | (3,187,602 | ) | | | (552,197 | ) |
| | | | | | | | | | | | | | | | |
Total liabilities and stockholder’s equity(deficit) | | $ | 5,206,395 | | | $ | 2,922,420 | | | $ | 72,590 | | | $ | 120,372 | | | $ | 19,597 | | | $ | 821,392 | | | $ | (5,127,626 | ) | | $ | 4,035,140 | |
| | | | | | | | | | | | | | | | |
22
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | | | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | XM Radio Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Current assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 205,638 | | | $ | - | | | $ | 16 | | | $ | 5,615 | | | $ | 886 | | | $ | - | | | $ | - | | | $ | 212,155 | |
Accounts receivable, net | | | 60,042 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 60,042 | |
Receivables from distributors | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Due from subsidiaries/affiliates | | | 44,316 | | | | 784,768 | | | | 63,941 | | | | 48,768 | | | | 6,216 | | | | 774,293 | | | | (1,722,302 | ) | | | - | |
Inventory, net | | | 4,016 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,016 | |
Prepaid expenses | | | 75,199 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 75,199 | |
Related party current assets | | | 103,479 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 103,479 | |
Deferred tax asset | | | 64,641 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 64,641 | |
Other current assets | | | 4,325 | | | | - | | | | 64 | | | | 196 | | | | - | | | | - | | | | - | | | | 4,585 | |
| | | | | | | | | | | | | | | | |
Total current assets | | | 561,656 | | | | 784,768 | | | | 64,021 | | | | 54,579 | | | | 7,102 | | | | 774,293 | | | | (1,722,302 | ) | | | 524,117 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Property and equipment, net | | | 729,729 | | | | - | | | | - | | | | 57,157 | | | | 12,519 | | | | - | | | | - | | | | 799,405 | |
Investment in subsidiaries/affiliates | | | 2,991,341 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (2,991,341 | ) | | | - | |
Restricted investments | | | 250 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 250 | |
Deferred financing fees, net | | | 68,571 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 68,571 | |
Intangible assets, net | | | 611,461 | | | | 2,000,000 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,611,461 | |
Related party long-term assets | | | 111,730 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 111,730 | |
Other long-term assets | | | 23,478 | | | | - | | | | - | | | | 2,051 | | | | - | | | | - | | | | - | | | | 25,529 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total assets | | $ | 5,098,216 | | | $ | 2,784,768 | | | $ | 64,021 | | | $ | 113,787 | | | $ | 19,621 | | | $ | 774,293 | | | $ | (4,713,643 | ) | | $ | 4,141,063 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 241,981 | | | $ | - | | | $ | 105 | | | $ | 295 | | | $ | 72 | | | $ | - | | | $ | (44,234 | ) | | $ | 198,219 | |
Accrued interest | | | 46,939 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 46,939 | |
Due to subsidiaries/affiliates | | | 1,671,720 | | | | - | | | | - | | | | 4,810 | | | | 714 | | | | - | | | | (1,677,244 | ) | | | - | |
Current portion of deferred revenue | | | 506,441 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 506,441 | |
Current portion of deferred credit on executory contracts | | | 252,831 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 252,831 | |
Current maturities of long-term debt | | | 11,382 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 11,382 | |
Current maturities of long-term related party debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Related party current liabilities | | | 180,667 | | | | - | | | | 143 | | | | 977 | | | | 516 | | | | - | | | | 2,390 | | | | 184,693 | |
| | | | | | | | | | | | | | | | |
Total current liabilities | | | 2,911,961 | | | | - | | | | 248 | | | | 6,082 | | | | 1,302 | | | | - | | | | (1,719,088 | ) | | | 1,200,505 | |
Deferred revenue | | | 133,863 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 133,863 | |
Deferred credit on executory contracts | | | 784,078 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 784,078 | |
Long-term debt | | | 1,494,921 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,494,921 | |
Long-term related party debt | | | 157,032 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 157,032 | |
Deferred tax liability | | | 156,442 | | | | 758,832 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 915,274 | |
Related party long-term liability | | | 46,301 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 46,301 | |
Other long-term liabilities | | | 43,379 | | | | - | | | | - | | | | (1,315 | ) | | | - | | | | - | | | | (3,213 | ) | | | 38,851 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities | | | 5,727,977 | | | | 758,832 | | | | 248 | | | | 4,767 | | | | 1,302 | | | | - | | | | (1,722,301 | ) | | | 4,770,825 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commitments and contingencies | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Stockholder’s equity (deficit): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Capital stock | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Accumulated other comprehensive loss | | | (6,581 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (6,581 | ) |
Additional paid-in-capital | | | 6,060,659 | | | | 1,781,641 | | | | 57,853 | | | | 99,348 | | | | 17,615 | | | | 691,811 | | | | (2,648,267 | ) | | | 6,060,660 | |
Retained earnings (deficit) | | | (6,683,839 | ) | | | 244,295 | | | | 5,920 | | | | 9,672 | | | | 704 | | | | 82,482 | | | | (343,075 | ) | | | (6,683,841 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total stockholder’s equity (deficit) | | | (629,761 | ) | | | 2,025,936 | | | | 63,773 | | | | 109,020 | | | | 18,319 | | | | 774,293 | | | | (2,991,342 | ) | | | (629,762 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total liabilities and stockholder’s equity (deficit) | | $ | 5,098,216 | | | $ | 2,784,768 | | | $ | 64,021 | | | $ | 113,787 | | | $ | 19,621 | | | $ | 774,293 | | | $ | (4,713,643 | ) | | $ | 4,141,063 | |
| | | | | | | | | | | | | | | | |
23
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | XM Satellite | | | | | | | XM Equipment | | | XM 1500 | | | XM Investment | | | Other | | | | | | | Consolidated XM | |
(in thousands) | | Radio Inc. | | XM Radio Inc. | | Leasing LLC | | Eckington LLC | | LLC | | Subsidiaries | | Eliminations | | Satellite Radio Inc. |
Balance at December 31, 2009 | | $ | (629,761 | ) | | $ | 2,025,936 | | | $ | 63,773 | | | $ | 109,020 | | | $ | 18,319 | | | $ | 774,293 | | | $ | (2,991,342 | ) | | $ | (629,762 | ) |
Net income (loss) | | | 76,807 | | | | 138,294 | | | | 8,461 | | | | 5,349 | | | | 474 | | | | 43,682 | | | | (196,260 | ) | | | 76,807 | |
Other comprehensive loss: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale securities | | | 469 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 469 | |
Foreign currency translation adjustment | | | 289 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 289 | |
| | | | | | | | | | | | | | | | |
Comprehensive income (loss) | | | 77,565 | | | | 138,294 | | | | 8,461 | | | | 5,349 | | | | 474 | | | | 43,682 | | | | (196,260 | ) | | | 77,565 | |
| | | | | | | | | | | | | | | | |
Balance at September 30, 2010 | | $ | (552,196 | ) | | $ | 2,164,230 | | | $ | 72,234 | | | $ | 114,369 | | | $ | 18,793 | | | $ | 817,975 | | | $ | (3,187,602 | ) | | $ | (552,197 | ) |
| | | | | | | | | | | | | | | | |
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2010
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Net cash provided by (used in) operating activities | | $ | 202,926 | | | $ | - | | | $ | (16 | ) | | $ | 5,301 | | | $ | 664 | | | $ | - | | | $ | - | | | $ | 208,875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Additions to property and equipment | | | (172,317 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (172,317 | ) |
Sale of restricted and other investments | | | 9,450 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 9,450 | |
| | | | | | | | | | | | | | | | |
Net cash (used in) provided by investing activities | | | (162,867 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (162,867 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Payment of premiums on redemption of debt | | | (256 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (256 | ) |
Repayment of long-term borrowings | | | (129,054 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (129,054 | ) |
| | | | | | | | | | | | | | | | |
Net cash provided by (used in) financing activities | | | (129,310 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (129,310 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | (89,251 | ) | | | - | | | | (16 | ) | | | 5,301 | | | | 664 | | | | - | | | | - | | | | (83,302 | ) |
Cash and cash equivalents at beginning of period | | | 205,638 | | | | - | | | | 16 | | | | 5,615 | | | | 886 | | | | - | | | | - | | | | 212,155 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 116,387 | | | $ | - | | | $ | - | | | $ | 10,916 | | | $ | 1,550 | | | $ | - | | | $ | - | | | $ | 128,853 | |
| | | | | | | | | | | | | | | | |
24
XM SATELLITE RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued
(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | XM | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Equipment | | | XM 1500 | | | XM | | | | | | | | | | | Consolidated | |
| | XM Satellite | | | XM Radio | | | Leasing | | | Eckington | | | Investment | | | Other | | | | | | | XM Satellite | |
(in thousands) | | Radio Inc. | | Inc. | | LLC | | LLC | | LLC | | Subsidiaries | | Eliminations | | Radio Inc. |
Net cash provided by (used in) operating activities | | $ | 224,975 | | | $ | - | | | $ | (5 | ) | | $ | 3,088 | | | $ | 560 | | | $ | - | | | $ | - | | | $ | 228,618 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Additions to property and equipment | | | (38,811 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (38,811 | ) |
| | | | | | | | | | | | | | | | |
Net cash used in investing activities | | | (38,811 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (38,811 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term borrowings, net of costs | | | 387,184 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 387,184 | |
Related Party long-term borrowings, net of costs | | | 95,093 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 95,093 | |
Payment of premiums on redemption of debt | | | (17,075 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (17,075 | ) |
Repayment of long-term borrowings | | | (256,662 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | (179,065 | ) | | | (435,727 | ) |
Repayment of related party long-term bo | | | (100,000 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (100,000 | ) |
| | | | | | | | | | | | | | | | |
Net cash used in financing activities | | | 108,540 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (179,065 | ) | | | (70,525 | ) |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | | 294,704 | | | | - | | | | (5 | ) | | | 3,088 | | | | 560 | | | | - | | | | (179,065 | ) | | | 119,282 | |
Cash and cash equivalents at beginning of period | | | 205,861 | | | | - | | | | 15 | | | | 760 | | | | 104 | | | | - | | | | - | | | | 206,740 | |
| | | | | | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 500,565 | | | $ | - | | | $ | 10 | | | $ | 3,848 | | | $ | 664 | | | $ | - | | | $ | (179,065 | ) | | $ | 326,022 | |
| | | | | | | | | | | | | | | | |
25
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated.)
Special Note Regarding Forward-Looking Statements
We have included in this Quarterly Report on Form 10-Q, and from time to time, our management may make statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. 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 Quarterly Report on Form 10-Q 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.” For a discussion of other significant factors and risks that could affect our future results and financial condition, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2009.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
| • | | our dependence upon automakers, many of which have experienced a dramatic drop in sales, and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers; |
|
| • | | our substantial indebtedness; |
|
| • | | the useful life of our satellites, which have experienced component failures including, with respect to a number of satellites, failures on their solar arrays, and, in certain cases, are not insured; and |
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| • | | our competitive position versus other forms of audio entertainment including terrestrial radio, HD radio, Internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies. |
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. We may not be able to secure new programming arrangements with these providers, or enter into new agreements at costs that are acceptable to us. If we do not secure new programming arrangements with these providers, certain of our subscribers may elect to cancel or not to renew their subscriptions. We cannot quantify how many subscribers may cancel or elect not to renew their subscriptions if we fail to secure new programming arrangements with these providers; however, we have no reason to believe that any such subscriber loss will be material to our business or financial condition taken as a whole.
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.
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 a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
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. Our system consists of five in-orbit satellites, over 650 terrestrial repeaters that
26
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, and Blackberry and Android smartphones.
On July 28, 2008 XM Satellite Radio Holdings Inc. (“XM Holdings”) merged with and into Vernon Merger Corporation, a wholly owned subsidiary of Sirius Satellite Radio Inc. (the “Merger”) and, as a result, XM Holdings became a wholly owned subsidiary of Sirius XM Radio Inc. (“SIRIUS”). In April 2010, XM Holdings merged with and into XM Satellite Radio Inc. (“XM”). XM was the surviving corporation of the merger, and as a result, XM became a direct wholly-owned subsidiary of SIRIUS.
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 certain daily rental car companies.
As of September 30, 2010, we had 10,218,265 subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers and dealers for subscriptions included in the sale or lease price of a vehicle; activated radios in daily rental fleet vehicles; certain subscribers to 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 prepaid and long-term subscription plans as well as discounts for multiple subscriptions on our platform. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as data and weather services.
In certain cases, automakers include a subscription to our radio services in the sale or lease price of new and certified pre-owned vehicles. The length of these prepaid subscriptions varies, but is typically three 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 together with its subsidiaries, operates as an unrestricted subsidiary under the agreements governing SIRIUS’ existing indebtedness. As a result, transactions between the companies are required to comply with various contractual provisions in our respective debt agreements.
27
Actual Results of Operations
Set forth below are our results of operations for the three and nine months ended September 30, 2010 compared with the three and nine months ended September 30, 2009.
Total Revenue
Subscriber Revenueincludes subscription fees, activation and other fees and the effects of rebates.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, subscriber revenue was $320,808 and $304,714, respectively, an increase of 5%, or $16,094. The increase was primarily attributable to the 5% increase in daily weighted average subscribers, an increase in the sale of “Best of” programming, decreases in discounts on multi-subscription and internet packages and a $5,962 decrease in the impact of purchase price accounting adjustments attributable to deferred subscriber revenues, partially offset by an increase in the number of subscribers on promotional plans. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, subscriber revenue was $938,711 and $884,038, respectively, an increase of 6%, or $54,673. The increase was primarily attributable to the 3% increase in daily weighted average subscribers, an increase in the sale of “Best of” programming, decreases in discounts on multi-subscription and internet packages and a $28,894 decrease in the impact of purchase price accounting adjustments attributable to deferred subscriber revenues, partially offset by an increase in the number of subscribers on promotional plans. |
Future subscriber revenue will be dependent, among other things, upon the growth of our subscriber base, conversion and churn rates, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and the identification of additional revenue streams from subscribers. The impact of purchase price accounting adjustments attributable to subscriber deferred revenues will continue to decline in absolute amount and as a percentage of reported total subscriber revenues through 2013 as balances are earned over the subscription period.
Advertising Revenueincludes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising billing revenue.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, advertising revenue was $6,247 and $4,147, respectively, an increase of 51%, or $2,100. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, advertising revenue was $15,362 and $13,475, respectively, an increase of 14%, or $1,887. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising, partially offset by the expiration of a long-term contract. |
Our advertising revenue is subject to fluctuation based on the effectiveness of our sales efforts and the national economic environment. We expect advertising revenue to grow as our subscribers increase and the economy improves.
Equipment Revenueincludes revenue and royalties from the sale of radios, components and accessories.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, equipment revenue was $13,300 and $5,657, respectively, an increase of 135%, or $7,643. The increase was driven by royalties from increased OEM installations. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, equipment revenue was $37,517 and $17,681, respectively, an increase of 112%, or $19,836. The increase was driven by royalties from increased OEM installations. |
We expect equipment revenue to fluctuate based on OEM installations for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our direct to consumer business.
Other Revenueincludes the U.S. Music Royalty Fee, revenue from affiliates, content licensing fees and syndication fees.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, other revenue was $41,902 and $10,955, respectively. The $30,947 increase was primarily due to the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, other revenue was $114,270 and $19,344, respectively. The $94,926 increase was primarily due to the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
Future other revenues will be dependent, among other items, upon subscribers becoming subject to the U.S. Music Royalty Fee at subscription renewal dates, the growth of our subscribers, and the monthly fee assessed for the U.S. Music Royalty Fee. The FCC’s order approving the Merger allows us to pass through cost increases incurred since the filing of our FCC merger application as a result of statutorily or contractually required payments to the music, recording and publishing industries for the performance of musical works and sound recordings or for device recording fees.
Operating Expenses
Revenue Share and Royaltiesinclude 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 recognized as a component of revenue share and royalties in the period in which the advertising is broadcast.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, revenue share and royalties were $49,444 and $46,976, respectively, an increase of 5%, or $2,468. The increase was primarily attributable to a 8% increase in our revenues subject to royalty and/or revenue sharing arrangements and a 8% increase in the statutory royalty rate for the performance of sound recordings, partially offset by a decrease in the revenue sharing rate with an automaker and a $4,526 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, revenue share and royalties were $138,296 and $142,997, respectively, a decrease of 3%, or $4,701. The decrease was primarily attributable to a decrease in the revenue sharing rate with an automaker and a $13,663 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger, partially offset by a 8% increase in our revenues subject to royalty and/or revenue sharing arrangements and a 8% increase in the statutory royalty rate for the performance of sound recordings. |
We expect our revenue sharing and royalty costs to increase as our revenues grow, as we expand our distribution of our radios through automakers, and as a result of statutory increases in the royalty rate for the performance of sound recordings. Under the terms of the Copyright Royalty Board’s decision, we paid royalties of 6.5% and 7.0% of gross revenues, subject to certain exclusions, for 2009 and 2010, respectively, and will pay royalties of 7.5% and 8.0% for 2011 and 2012, respectively. Our next rate setting proceeding before the Copyright Royalty Board is scheduled to commence in January 2011 and the results of that proceeding may have an impact on our results of operations. The deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger are expected to provide increasing benefits to revenue share and royalties through the expiration of the executory contracts, principally in 2012 and 2013.
Programming and Contentincludes 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 recognized as a component of sales and marketing expense and the cost of sharing advertising revenue is recognized as a component of revenue share and royalties in the period in which the advertising is broadcast.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, programming and content expenses were $26,204 and $27,811, respectively, a decrease of 6%, or $1,607. The decrease was primarily due to savings in content agreements, partially offset by a $4,162 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on programming executory contracts. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, programming and content expenses were $81,947 and $84,353, respectively, a decrease of 3%, or $2,406. The decrease was primarily due to savings in content agreements and production costs, partially offset by increases in personnel costs, general operating expenses and a $11,903 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on programming executory contracts. |
Our programming and content expenses, excluding the impact of purchase price adjustments, are expected to decrease as various agreements expire and are renewed or replaced on more cost effective terms. The impact of purchase price accounting
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adjustments associated with the Merger attributable to the amortization of the deferred credit on programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content costs, through 2013 as programming contracts expire, principally in 2012 and 2013. Our agreements with third-party content providers are subject to contractual expiration dates. We may or may not be able to negotiate renewals of these agreements on cost effective terms or at all. See “Special Note Regarding Forward-Looking Statements” for a discussion of these risks.
Customer Service and Billingincludes costs associated with the operation of third party customer service centers and our subscriber management systems as well as bad debt expense.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, customer service and billing expenses were $33,415 and $31,064, respectively, an increase of 8%, or $2,351. The increase was primarily due to higher call volumes, partially offset by lower call center expenses as a result of moving calls to lower cost locations. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, customer service and billing expenses were $95,623 and $96,168, respectively, a decrease of 1%, or $545. The decrease was primarily due to lower call center expenses as a result of moving calls to lower cost locations. |
We expect our customer care and billing expenses to increase as our subscriber base grows due to increased call center operating costs, transaction fees and bad debt expense.
Satellite and Transmissionconsists 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.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, satellite and transmission expenses were $11,812 and $11,484, respectively, an increase of 3%, or $328. The increase was primarily due to increased repeater expenses and personnel costs. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, satellite and transmission expenses were $35,299 and $36,952, respectively, a decrease of 4%, or $1,653. The decrease was primarily due to savings in consulting expenses and repeater expenses, partially offset by increased personnel costs. |
We expect satellite and transmission expenses to decrease due to reductions in orbit satellite insurance and continuing cost reduction efforts, offset in part by the addition of XM-5 to our in-orbit satellite fleet.
Cost of Equipmentincludes costs from the sale of our radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, cost of equipment was $3,644 and $5,142, respectively, a decrease of 29%, or $1,498. The decrease was primarily due to lower inventory reserves offset by increased equipment sales to consumers. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, cost of equipment was $12,614 and $12,049, respectively, an increase of 5%, or $565. The increase was primarily due to increased component sales to manufacturers and distributors and equipment sales to consumers, partially offset by lower inventory reserves. |
We expect cost of equipment to vary with changes in sales, inventory, and inventory valuations.
Subscriber Acquisition Costsinclude hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include our radio and subscription to our service in the sale or lease price of a new or certified pre-owned vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as incentives to purchase, install and activate our radios; product warranty obligations; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with; acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of our radios and revenue share payments to automakers and retailers of our radios.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, subscriber acquisition costs were $38,674 and $35,049, respectively, an increase of 10%, or $3,625. The increase was primarily a result of the 15% increase in gross subscriber additions and higher subsidies related to the 27% increase in OEM installations, partially offset by a $1,559 increase in the benefit to earnings from the amortization of the deferred credit for executory contracts recognized in purchase price accounting associated with the Merger. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, subscriber acquisition costs were $109,691 and $83,524, respectively, an increase of 31%, or $26,167. The increase was primarily a result of the 20% increase in gross subscriber additions and higher subsidies related to the 66% increase in OEM installations, partially offset by a $15,546 increase in the benefit to earnings from the amortization of the deferred credit for executory contracts recognized in purchase price accounting associated with the Merger. |
We expect total subscriber acquisition costs to increase as OEM installations increase, which are primarily driven by manufacturing and penetration rates, offset in part by continuing declines in the costs of subsidized components of our radios. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit for executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition costs, through the expiration of the contracts, principally in 2013. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
Sales and Marketingincludes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, sales and marketing expenses were $27,833 and $26,055, respectively, an increase of 7%, or $1,778. The increase was primarily due to additional cooperative marketing and personnel costs, partially offset by reductions in consumer advertising, event marketing and third party distribution support expenses. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, sales and marketing expenses were $81,390 and $84,565, respectively, a decrease of 4%, or $3,175. The decrease was primarily due to reductions in consumer advertising, event marketing and third party distribution support expenses, partially offset by additional cooperative marketing and personnel costs. |
We expect sales and marketing expenses to increase as we increase our advertising, retention and promotional activities.
Engineering, Design and Developmentincludes costs to develop chip sets and new products, research and development for broadcast information systems and costs associated with the incorporation of our radios into vehicles manufactured by automakers.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, engineering, design and development expenses were $5,261 and $5,413, respectively, a decrease of 3%, or $152. The decrease was primarily due to savings in personnel costs. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, engineering, design and development expenses were $15,482 and $16,798, respectively, a decrease of 8%, or $1,316. The decrease was primarily due to savings in personnel costs. |
We expect engineering, design and development expenses to increase in future periods as we develop our next generation chip sets and products.
General and Administrativeincludes rent and occupancy, finance, legal, human resources, information technology and investor relations costs.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, general and administrative expenses were $19,107 and $25,216, respectively, a decrease of 24%, or $6,109. The decrease was primarily due to an insurance recovery of previously expensed legal charges, as well as lower consulting and office costs, partially offset by increased personnel. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, general and administrative expenses were $74,035 and $91,689, respectively, a decrease of 19%, or $17,654. The decrease was primarily due to lower share-based payment expense, an insurance recovery of previously expensed legal charges, consulting, accounting and office costs, partially offset by increased personnel costs. |
We expect our general and administrative expenses to increase in future periods primarily as a result of increased information technology and personnel costs to support the growth of our business, as well as rising legal costs.
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Depreciation and Amortizationrepresents the systematic recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.
| • | | Three Months:For the three months ended September 30, 2010 and 2009, depreciation and amortization expense was $34,999 and $41,587, respectively, a decrease of 16%, or $6,588. The decrease was primarily due to a $7,628 reduction in the charge to earnings attributable to the satellite constellation and subscriber relationships, partially offset by additional depreciation recognized on building improvements. |
| • | | Nine Months:For the nine months ended September 30, 2010 and 2009, depreciation and amortization expense was $108,886 and $146,462, respectively, a decrease of 26%, or $37,576. The decrease was primarily due to a $33,742 reduction in the charge to earnings attributable to the satellite constellation and subscriber relationships, partially offset by additional depreciation recognized on building improvements. |
We expect depreciation and amortization expenses to increase in future periods as we place our recently launched satellite, XM-5, into service, which will be partially offset by reduced depreciation and amortization associated with the stepped-up basis in assets (including intangible assets, satellites, property and equipment) through the end of their estimated service lives, principally through 2017.
Other Income (Expense)
Interest Expense, Net of Amounts Capitalized,includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of our satellites and related launch vehicles.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, interest expense was $51,834 and $70,537, respectively, a decrease of 27%, or $18,703. The decrease was primarily due to decreases in the weighted average interest rate on our outstanding debt in the three months ended September 30, 2010 compared to the three months ended September 30, 2009 and the redemption of our 10% Senior PIK Secured Notes due 2011 on June 1, 2010. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, interest expense was $168,714 and $226,376, respectively, a decrease of 25%, or $57,662. The decrease was primarily due to decreases in the weighted average interest rate on our outstanding debt in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009 and the redemption of our 10% Senior PIK Secured Notes due 2011 on June 1, 2010. |
Loss on Extinguishment of Debt and Credit Facilities, Net,includes losses incurred as a result of the conversion and retirement of certain debt.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, loss on extinguishment of debt and credit facilities, net, was $256 and $3,787, respectively, a decrease of 93%, or $3,531. During the three months ended September 30, 2010, the loss was incurred on the repayment of our 9.75% Senior Notes due 2014. During the three months ended September 30, 2009, the loss was incurred on the partial repayment of our 10% Convertible Senior Notes due 2009. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, loss on extinguishment of debt and credit facilities, net, was $4,881 and $111,863, respectively, a decrease of 96%, or $106,982. During the nine months ended September 30, 2010, the loss was incurred on the repayment of our 10% Senior PIK Secured Notes due 2011 and 9.75% Senior Notes due 2014. During the nine months ended September 30, 2009, the loss was incurred on the repayment of our Amended and Restated Credit Agreement due 2011, the partial repayment of our 10% Convertible Senior Notes due 2009 and the termination of our Second Lien Credit Agreement. |
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.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, we recorded a loss on change in value of embedded derivative of $45,796 and $33,700, respectively, an increase of 36%, or $12,096. As a result of the Merger, we recorded derivative liabilities reflecting the fair value of the embedded derivative as of the Merger date. During the three months ended September 30, 2010 and 2009, the SIRIUS stock price increased resulting in an increased fair value and a loss on the change in value of the derivative. Because the change in the stock price during the three months ended September 30, 2010 was greater than the change in the stock price during the three months ended September 30, 2009, we recorded a larger loss. |
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| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, we recorded a loss on change in value of embedded derivative of $94,399 and $111,703, respectively, a decrease of 15%, or $17,304. As a result of the Merger, we recorded derivative liabilities reflecting the fair value of the embedded derivative as of the Merger date. During the nine months ended September 30, 2010 and 2009, the SIRIUS stock price increased resulting in an increased fair value and a loss on the change in value of the derivative. Because the change in the stock price during the nine months ended September 30, 2010 was less than the change in the stock price during the nine months ended September 30, 2009, we recorded a smaller loss. |
Interest and Investment Income (Loss)includes realized gains and losses, dividends, interest income, our share of XM Canada’s net income (loss) and losses recorded from our investment in, as well as debt instruments issued by XM Canada, when the fair value falls below carrying value and the decline is determined to be other than temporary.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, interest and investment loss was $1,748 and $2,141, respectively, a decrease of 18%, or $393. The decrease was primarily attributable to increased interest income on higher average cash balances. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, interest and investment loss was $5,652 and $4,812, respectively, an increase of 17%, or $840. The increase was primarily attributable to higher net losses at XM Canada during the nine months ended September 30, 2010, partially offset by an impairment charge recorded during the nine months ended September 30, 2009 and increased interest income on higher average cash balances. |
Income Taxes
Income Tax Expenseprimarily represents the deferred tax liability related to the difference in accounting for our FCC licenses, which are amortized over 15 years for tax purposes but not amortized for book purposes in accordance with GAAP.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, income tax expense was $2,792 and $578, respectively, an increase of 383%, or $2,214. The increase was primarily attributable to an increase in the applicable tax rate. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, income tax expense was $3,938 and $1,733, respectively, an increase of 127%, or $2,205. The increase was primarily attributable to an increase in the applicable tax rate. |
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Subscriber Data
The following table contains actual subscriber data for the three and nine months ended September 30, 2010 and 2009, respectively:
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
| | | | | | | | | | | | | | | | |
Beginning subscribers | | | 10,057,380 | | | | 9,641,800 | | | | 9,749,100 | | | | 9,850,741 | |
Gross subscriber additions | | | 956,471 | | | | 833,684 | | | | 2,751,252 | | | | 2,289,360 | |
Deactivated subscribers | | | (795,586 | ) | | | (770,598 | ) | | | (2,282,087 | ) | | | (2,435,215 | ) |
| | | | | | | | |
Net additions | | | 160,885 | | | | 63,086 | | | | 469,165 | | | | (145,855 | ) |
| | | | | | | | |
Ending subscribers | | | 10,218,265 | | | | 9,704,886 | | | | 10,218,265 | | | | 9,704,886 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Retail | | | 3,346,642 | | | | 3,777,646 | | | | 3,346,642 | | | | 3,777,646 | |
OEM | | | 6,738,464 | | | | 5,840,637 | | | | 6,738,464 | | | | 5,840,637 | |
Rental | | | 133,159 | | | | 86,603 | | | | 133,159 | | | | 86,603 | |
| | | | | | | | |
Ending subscribers | | | 10,218,265 | | | | 9,704,886 | | | | 10,218,265 | | | | 9,704,886 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Self-pay | | | 9,362,495 | | | | 8,897,480 | | | | 9,362,495 | | | | 8,897,480 | |
Paid promotional | | | 855,770 | | | | 807,406 | | | | 855,770 | | | | 807,406 | |
| | | | | | | | |
Ending subscribers | | | 10,218,265 | | | | 9,704,886 | | | | 10,218,265 | | | | 9,704,886 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Retail | | | (95,005 | ) | | | (175,144 | ) | | | (312,862 | ) | | | (541,986 | ) |
OEM | | | 259,957 | | | | 237,950 | | | | 750,316 | | | | 397,913 | |
Rental | | | (4,067 | ) | | | 280 | | | | 31,711 | | | | (1,782 | ) |
| | | | | | | | |
Net additions | | | 160,885 | | | | 63,086 | | | | 469,165 | | | | (145,855 | ) |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Self-pay | | | 127,867 | | | | (23,551 | ) | | | 322,473 | | | | (198,099 | ) |
Paid promotional | | | 33,018 | | | | 86,637 | | | | 146,692 | | | | 52,244 | |
| | | | | | | | |
Net additions | | | 160,885 | | | | 63,086 | | | | 469,165 | | | | (145,855 | ) |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Daily weighted average number of subscribers | | | 10,147,115 | | | | 9,691,620 | | | | 9,935,054 | | | | 9,682,252 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Average self-pay monthly churn (1) | | | 1.9 | % | | | 2.0 | % | | | 1.9 | % | | | 2.1 | % |
| | | | | | | | |
| | | | | | | | | | | | | | | | |
Conversion rate (2) | | | 47.7 | % | | | 48.6 | % | | | 46.7 | % | | | 47.6 | % |
| | | | | | | | |
| | |
Note: See pages 43 through 49 for footnotes. | | |
Subscribers.At September 30, 2010, we had 10,218,265 subscribers, an increase of 513,379 subscribers, or 5%, from the 9,704,886 subscribers as of September 30, 2009.
| • | | Three Months: For the three months ended September 30, 2010 and 2009, net additions were 160,885 and 63,086, respectively, an increase in net additions of 97,799. The improvement was due to the 15% increase in gross subscriber additions, primarily resulting from an increase in new vehicle penetration along with an increase in returning activations, partially offset by a 3% increase in deactivations resulting from higher promotional churn due to an increase in the volume of trial subscriptions. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, net additions were 469,165 and (145,855), respectively, an increase in net additions of 615,020. The improvement was due to the 20% increase in gross subscriber additions, primarily resulting from an increase in new vehicle penetration along with an increase in returning activations from previously inactive vehicles, and the 6% decline in deactivations resulting from improvements in the conversion rate in paid promotional trials and average self-pay monthly churn. |
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Average Self-pay Monthly Churnis derived by dividing the monthly average of self-pay deactivations for the quarter by the average self-pay subscriber balance for the quarter. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, our average self-pay monthly churn rate was 1.9% and 2.0%, respectively. The decrease was due to an improving economy, the success of retention and win-back programs and reductions in non-pay cancellation rates. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, our average self-pay monthly churn rate was 1.9% and 2.1%, respectively. The decrease was due to an improving economy, the success of retention and win-back programs and reductions in non-pay cancellation rates. |
Conversion Rateis the percentage of vehicle owners and lessees that receive our service and convert to become self-paying subscribers after an initial promotional period. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, our conversion rate was 47.7% and 48.6%, respectively. The decrease in conversion rate is primarily due to an increase in the mix of lower converting models in the three months ended September 30, 2010, compared to the three months ended September 30, 2009. |
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, our conversion rate was 46.7% and 47.6%, respectively. The decrease in conversion rate is primarily due to an increase in the mix of lower converting models in the nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. |
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The discussion of operating results below excludes the effects of stock-based compensation and purchase accounting adjustments associated with the Merger. Financial measures and metrics previously reported as “pro forma” have been renamed “adjusted.”
Adjusted Results of Operations
In this report, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, per gross subscriber addition; customer service and billing expenses, per average subscriber; free cash flow; and adjusted EBITDA. These measures exclude the impact of certain purchase price accounting adjustments. We use these Non-GAAP financial measures to manage our business, set operational goals and as a basis for determining performance-based compensation for our employees.
The purchase price accounting adjustments include the elimination of the earnings benefit of deferred revenue associated with the investment in XM Canada, the recognition of subscriber revenues not recognized in purchase price accounting and the elimination of the earnings benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. The purchase price accounting adjustments to EBITDA do not include the incremental depreciation and amortization for certain property, equipment and intangible assets reported on a stepped up basis.
Our adjusted EBITDA also reallocates share-based payment expense from functional operating expense line items to a separate line within operating expenses. We believe the exclusion of share-based payment expense from functional operating expenses is useful given the significant variation in expense that can result from changes in the fair market value of SIRIUS’ common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs.
We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial performance measures useful in evaluating our core trends because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors understanding of our business and our results of operations. These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. Please refer to the footnotes (pages 43 through 49) for a further discussion of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
The following table contains our key operating metrics based on our unaudited adjusted results of operations for the three and nine months ended September 30, 2010 and 2009, respectively:
| | | | | | | | | | | | | | | | |
| | Unaudited Adjusted |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
(in thousands, except for per subscriber amounts) | | 2010 | | 2009 | | 2010 | | 2009 |
|
ARPU (3) | | $ | 12.07 | | | $ | 11.18 | | | $ | 11.91 | | | $ | 10.85 | |
SAC, per gross subscriber addition (4) | | $ | 52 | | | $ | 65 | | | $ | 52 | | | $ | 53 | |
Customer service and billing expenses, per average subscriber (5) | | $ | 1.09 | | | $ | 1.06 | | | $ | 1.06 | | | $ | 1.09 | |
Free cash flow (6) | | $ | 41,530 | | | $ | 92,524 | | | $ | 46,008 | | | $ | 189,807 | |
Adjusted total revenue (8) | | $ | 387,246 | | | $ | 336,424 | | | $ | 1,123,426 | | | $ | 980,998 | |
Adjusted EBITDA (7) | | $ | 112,374 | | | $ | 66,327 | | | $ | 307,919 | | | $ | 191,184 | |
| | |
Note: | | See pages 43 through 49 for footnotes. |
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ARPUis derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, total ARPU was $12.07 and $11.18, respectively. The increase was driven primarily by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, increased revenues from the sale of “Best of” programming and decreases in discounts on multi-subscription and internet packages, partially offset by an increase in the number of subscribers on promotional plans. |
|
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, total ARPU was $11.91 and $10.85, respectively. The increase was driven primarily by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, increased revenues from the sale of “Best of” programming and decreases in discounts on multi-subscription and internet packages, partially offset by an increase in the number of subscribers on promotional plans. |
SAC, Per Gross Subscriber Additionis derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, SAC, per gross subscriber addition was $52 and $65, respectively. The decrease was primarily due to lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from radio manufacturers compared to the three months ended September 30, 2009, partially offset by a 27% increase in OEM production with factory-installed satellite radios. |
|
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, SAC, per gross subscriber addition was $52 and $53, respectively. The decrease was primarily due to lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from radio manufacturers compared to the nine months ended September 30, 2009, partially offset by a 66% increase in OEM production with factory-installed satellite radios. |
Customer Service and Billing Expenses, Per Average Subscriberis derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, customer service and billing expenses, per average subscriber was $1.09 and $1.06, respectively. The increase was primarily due to higher call volumes, partially offset by lower call center expenses as a result of moving calls to lower cost locations. |
|
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, customer service and billing expenses, per average subscriber was $1.06 and $1.09, respectively. The decrease was primarily due to lower call center expense as a result of moving calls to lower cost locations. |
Free Cash Flowincludes the net cash provided by (used in) operations, additions to property and equipment, merger related costs and restricted and other investment activity. (See accompanying footnotes on pages 43 through 49 for more details.)
| • | | Three Months: For the three months ended September 30, 2010 and 2009, free cash flow was $41,530 and $92,524, respectively, a decrease of $50,994. Net income plus non-cash operating activities increased 690%, to $78,965, from $9,998, principally as a result of improvements in our adjusted EBITDA. Changes in our operating assets and liabilities decreased by $100,808 compared to the three months ended September 30, 2009. The decrease was primarily due to decreases in cash flows from operations resulting from the periodic payment of related party liabilities in the current period compared to a deferral of such payments in the three months ended September 30, 2009 and the routine amortization of prepaid programming costs and release of credit card hold-backs included in other long-term assets in the three months ended September 30, 2009. The decrease was partially offset by increases in cash flows from operations resulting from higher collections of amounts due from subscribers and distributors during the three months ended September 30, 2010 as compared to the three months ended September 30, 2009. As a result of these transactions, net cash provided by operating activities decreased $31,841 to $95,373 in the three months ended September 30, 2010 compared to the $127,214 provided by operations in the three months ended September 30, 2009. In addition, capital expenditures in the three months ended September 30, 2010 increased $19,153 to $53,843 compared to $34,690 expended in the three months ended September 30, 2009, primarily due to increased satellite and related launch vehicle spending. |
37
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, free cash flow was $46,008 and $189,807, respectively, a decrease of $143,799. Net income plus non-cash operating activities increased 560%, to $189,231, from $28,682, principally as a result of improvements in our adjusted EBITDA. Changes in our operating assets and liabilities decreased by $180,292 compared to the nine months ended September 30, 2009. The decrease was primarily due to pay-downs of related party liabilities deferred in 2009 and employee bonus payments in the first quarter of 2010 where no bonus payments were made in 2009 and the release of credit card funds during the nine months ended September 30, 2009. As a result of these transactions, net cash provided by operating activities decreased $19,743 to $208,875 in the nine months ended September 30, 2010 compared to the $228,618 provided by operations in the nine months ended September 30, 2009. In addition, capital expenditures in the nine months ended September 30, 2010 increased $133,506 to $172,317 compared to $38,811 expended in the nine months ended September 30, 2009, primarily due to increased satellite and related launch vehicle spending, offset by $9,450 of proceeds from the sale of investment securities in the nine months ended September 30, 2010. |
Adjusted Total Revenue.Set forth below are our adjusted total revenue for the three and nine months ended September 30, 2010 and 2009. Our adjusted total revenue includes the recognition of deferred subscriber revenues that are not recognized in our results under purchase price accounting and the elimination of the benefit in earnings from deferred revenue associated with our investment in XM Canada. (See the accompanying footnotes on pages 43 through 49 for details.)
| | | | | | | | | | | | | | | | |
| | Unaudited |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
(in thousands) | | 2010 | | 2009 | | 2010 | | 2009 |
|
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 320,808 | | | $ | 304,714 | | | $ | 938,711 | | | $ | 884,038 | |
Advertising revenue, net of agency fees | | | 6,247 | | | | 4,147 | | | | 15,362 | | | | 13,475 | |
Equipment revenue | | | 13,300 | | | | 5,657 | | | | 37,517 | | | | 17,681 | |
Other revenue | | | 41,902 | | | | 10,955 | | | | 114,270 | | | | 19,344 | |
Purchase price accounting adjustments: | | | | | | | | | | | | | | | | |
Subscriber revenue | | | 3,176 | | | | 9,138 | | | | 12,128 | | | | 41,022 | |
Other revenue | | | 1,813 | | | | 1,813 | | | | 5,438 | | | | 5,438 | |
| | | | | | | | |
Adjusted total revenue | | $ | 387,246 | | | $ | 336,424 | | | $ | 1,123,426 | | | $ | 980,998 | |
| | | | | | | | |
| • | | Three Months: Our adjusted total revenue grew 15%, or $50,822, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. Subscriber revenue increased 5%, or $16,094, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase in subscriber revenue was driven by the increase in subscribers as well as an increase in the sale of “Best of” programming and the decreases in discounts on multi-subscription and internet packages, partially offset by an increase in the number of subscribers on promotional plans. Advertising revenue increased 51%, or $2,100, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase in advertising revenue was driven by more effective sales efforts and improvements in the national market for advertising. Equipment revenue increased 135%, or $7,643, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase in equipment revenue was driven by increased royalties from OEM installations and aftermarket production. Other revenue increased $30,947, in the three months ended September 30, 2010 compared to the three months ended September 30, 2009. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
| • | | Nine Months:Our adjusted total revenue grew 15%, or $142,428, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. Subscriber revenue increased 6%, or $54,673, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in subscriber revenue was driven by the increase in subscribers as well as an increase in the sale of “Best of” programming and the decreases in discounts on multi-subscription and internet packages, partially offset by an increase in the number of subscribers on promotional plans. Advertising revenue increased 14%, or $1,887, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in advertising revenue was driven by more effective sales efforts and improvements in the national market for advertising. Equipment revenue increased 112%, or $19,836, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in equipment revenue was driven by increased royalties from OEM installations and aftermarket production. Other revenue increased $94,926, in the nine months ended September 30, 2010 compared to the nine months ended September 30, 2009. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009. |
38
Adjusted EBITDA.EBITDA is defined as net income (loss) before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. Adjusted EBITDA also removes the impact of other income and expense, losses on extinguishment of debt as well as certain non-cash charges, such as, goodwill impairment; restructuring, impairments and related costs; certain purchase price accounting adjustments and share-based payment expense. Our adjusted EBITDA for the three and nine months ended September 30, 2010 compared with the three and nine months ended September 30, 2009 is as follows (see the accompanying footnotes on pages 43 through 49 for more details):
| | | | | | | | | | | | | | | | |
| | Unaudited Adjusted |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
(in thousands) | | 2010 | | 2009 | | 2010 | | 2009 |
|
Adjusted EBITDA | | $ | 112,374 | | | $ | 66,327 | | | $ | 307,919 | | | $ | 191,184 | |
| | | | | | | | | | | | |
| • | | Three Months: For the three months ended September 30, 2010 and 2009, adjusted EBITDA was $112,374 and $66,327, respectively, an increase of 69%, or $46,047. The increase was primarily due to an increase of 15%, or $50,822 in revenues, partially offset by an increase of 2%, or $4,775, in expenses included in adjusted EBITDA. The increase in revenue was primarily due to the increase in our subscriber base and the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, as well as increased equipment revenue, decreases in discounts on multi-subscription and internet packages, and an increase in the sale of “Best of” programming, partially offset by an increase in the number of subscribers on promotional plans. The increase in expenses was primarily driven by higher subscriber acquisition costs related to the 15% increase in gross additions and higher revenue share and royalties expenses associated with growth in revenues subject to revenue sharing and royalty arrangements, partially offset by a decrease in programming and content expenses. |
|
| • | | Nine Months: For the nine months ended September 30, 2010 and 2009, adjusted EBITDA was $307,919 and $191,184, respectively, an increase of 61%, or $116,735. The increase was primarily due to an increase of 15%, or $142,428, in revenues, partially offset by an increase of 3%, or $25,693, in total expenses included in adjusted EBITDA. The increase in revenue was primarily due to the increase in our subscriber base and the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, as well as increased equipment revenue, decreases in discounts on multi-subscription and internet packages, and an increase in the sale of “Best of” programming, partially offset by an increase in the number of subscribers on promotional plans. The increase in expenses was primarily driven by higher subscriber acquisition costs related to the 20% increase in gross additions and higher revenue share and royalties expenses associated with growth in revenues subject to revenue sharing and royalty arrangements, partially offset by a decrease in programming and content expenses and general and administrative expenses. |
39
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 2010 Compared with the Nine Months Ended September 30, 2009
As of September 30, 2010 and December 31, 2009, we had $128,853 and $212,155, 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):
| | | | | | | | | | | | |
| | For the Nine Months | | | |
| | Ended September 30, | | | |
| | 2010 | | 2009 | | 2010 vs. 2009 |
Net cash provided by operating activities | | $ | 208,875 | | | $ | 228,618 | | | $ | (19,743 | ) |
Net cash used in investing activities | | | (162,867 | ) | | | (38,811 | ) | | | (124,056 | ) |
Net cash used in financing activities | | | (129,310 | ) | | | (70,525 | ) | | | (58,785 | ) |
| | | | | | |
Net (decrease) increase in cash and cash equivalents | | | (83,302 | ) | | | 119,282 | | | | (202,584 | ) |
Cash and cash equivalents at beginning of period | | | 212,155 | | | | 206,740 | | | | 5,415 | |
| | | | | | |
Cash and cash equivalents at end of period | | $ | 128,853 | | | $ | 326,022 | | | $ | (197,169 | ) |
| | | | | | |
Cash Flows Provided by Operating Activities
| • | | Nine Months: Net cash provided by operating activities decreased $19,743, to $208,875, for the nine months ended September 30, 2010 from $228,618 for the nine months ended September 30, 2009. The decrease was primarily due to pay-downs of related party liabilities deferred in 2009 and employee bonus payments in the first quarter of 2010 where no bonus payments were made in 2009 and the release of credit card funds during the nine months ended September 30, 2009, partially offset by improvements in our income from operations. |
Cash Flows Used in Investing Activities
| • | | Nine Months: Net cash used in investing activities increased $124,056, to $162,867, for the nine months ended September 30, 2010 from $38,811 for the nine months ended September 30, 2009. The increase was primarily the result of an increase of $133,506 in capital expenditures for construction of our satellites and related launch vehicles, partially offset by $9,450 of proceeds from the sale of investment securities. |
We will incur significant capital expenditures to construct and launch our new satellites and improve our terrestrial repeater network and broadcast and administrative infrastructure. We have entered into various agreements to design, construct, and launch our satellites in the normal course of business. These capital expenditures will support our growth and the resiliency of our operations, and will also support the delivery of new revenue streams.
Cash Flows Used in Financing Activities
| • | | Nine Months: Net cash used in financing activities increased $58,785, to $129,310, for the nine months ended September 30, 2010 from $70,525 for the nine months ended September 30, 2009. The increase in cash used in financing activities was primarily due to a decrease of $482,277 in net proceeds from the issuance of debt, partially offset by a decrease of $406,673 in repayments of debt. During the nine months ended September 30, 2009, we received net proceeds of $482,277, from the issuance of our 11.25% Senior Secured Notes due 2013. During the nine months ended September 30, 2010, we made debt repayments of $129,054, principally to holders of our 10% Senior PIK Secured Notes due 2011 and 9.75% Senior Notes due 2014. During the nine months ended September 30, 2009, we made debt repayments of $535,727, principally to holders of our Amended and Restated Credit Agreement due 2011 and 10% Convertible Senior Notes due 2009. During the nine months ended September 30, 2010 and 2009, we paid $256 and $17,075 in premiums on the redemption of debt, respectively. |
40
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 Media beneficially owns at least half of its initial equity investment, Liberty Media’s consent is required for certain actions, including the grant or issuance of SIRIUS’ equity securities and the incurrence of debt (other than, in general, debt incurred to refinance existing debt) in amounts greater than $10,000 in any calendar year.
Future Liquidity and Capital Resource Requirements
We have entered into various agreements to design, construct, and launch our satellites in the normal course of business. As disclosed in Note 12 in our unaudited condensed consolidated financial statements as of September 30, 2010, we expect to incur capital expenditures of approximately $1,836 and $3,915 during the remainder of 2010 and in 2011, respectively, and an additional $9,335 over the next five years.
Based upon our current plans, we believe that we have sufficient cash, cash equivalents and marketable securities to cover its estimated funding needs. We expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our debt with existing cash and cash flow from operations, and we believe that we will be able to generate sufficient revenues to meet our cash requirements.
Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained. Our financial projections are based on assumptions, which we believe are reasonable but contain significant uncertainties.
We operate as an unrestricted subsidiary 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 business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business. In addition, our operations are affected by the FCC order approving the Merger, which imposed certain conditions upon, among other things, our program offerings and our ability to increase prices.
Debt Covenants
The indentures governing our debt include restrictive covenants. As of September 30, 2010, we were in compliance with all our debt covenants.
For a discussion of our debt covenants see Note 11 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements other than those disclosed in Note 12 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q 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 12 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
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Related Party Transactions
For a discussion of “Related Party Transactions,” refer to Note 8 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
For a discussion of our “Critical Accounting Policies and Estimates,” refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 3 to our unaudited consolidated financial statements in Item 1 of this Form 10-Q.
There have been no material changes to our critical accounting policies and estimates since December 31, 2009.
42
Footnotes
(1) | | Average self-pay monthly churn represents the monthly average of self-pay deactivations for the quarter divided by the average number of self-pay subscribers for the quarter. |
|
(2) | | We measure the percentage of vehicle owners and lessees that receive our service and convert to become self-paying subscribers after the initial promotion period. We refer to this as the “conversion rate.” At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive three month trial subscriptions. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. |
|
(3) | | ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee, which was initially charged to subscribers in the third quarter of 2009. Purchase price accounting adjustments include the recognition of deferred subscriber revenues not recognized in purchase price accounting associated with the Merger. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| | | | | | | | | | | | | | | | |
| | Unaudited | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
|
Subscriber revenue (GAAP) | | $ | 320,808 | | | $ | 304,714 | | | $ | 938,711 | | | $ | 884,038 | |
Net advertising revenue (GAAP) | | | 6,247 | | | | 4,147 | | | | 15,362 | | | | 13,475 | |
Other subscription-related revenue (GAAP) | | | 37,175 | | | | 7,146 | | | | 98,756 | | | | 7,146 | |
Purchase price accounting adjustment | | | 3,176 | | | | 9,138 | | | | 12,128 | | | | 41,022 | |
| | | | | | | | |
| | $ | 367,406 | | | $ | 325,145 | | | $ | 1,064,957 | | | $ | 945,681 | |
Daily weighted average number of subscribers | | | 10,147,115 | | | | 9,691,620 | | | | 9,935,054 | | | | 9,682,252 | |
| | | | | | | | |
ARPU | | $ | 12.07 | | | $ | 11.18 | | | $ | 11.91 | | | $ | 10.85 | |
| | | | | | | | |
(4) | | Subscriber acquisition cost, per gross subscriber addition (or SAC, per gross subscriber addition) is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to an OEM. SAC, per gross subscriber addition, is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| | | | | | | | | | | | | | | | |
| | Unaudited | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
|
Subscriber acquisition costs (GAAP) | | $ | 38,674 | | | $ | 35,049 | | | $ | 109,691 | | | $ | 83,524 | |
Less: margin from direct sales of radios and accessories (GAAP) | | | (9,656 | ) | | | (515 | ) | | | (24,903 | ) | | | (5,632 | ) |
Add: purchase price accounting adjustments | | | 20,889 | | | | 19,330 | | | | 58,855 | | | | 43,309 | |
| | | | | | | | |
| | $ | 49,907 | | | $ | 53,864 | | | $ | 143,643 | | | $ | 121,201 | |
Gross subscriber additions | | | 956,471 | | | | 833,684 | | | | 2,751,252 | | | | 2,289,360 | |
| | | | | | | | |
SAC, per gross subscriber addition | | $ | 52 | | | $ | 65 | | | $ | 52 | | | $ | 53 | |
| | | | | | | | |
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(5) | | Customer service and billing expenses, per average subscriber, is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments associated with the Merger, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber, is useful given the significant variation in expense that can result from changes in the fair market value of SIRIUS’ common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Purchase price accounting adjustments include the elimination of the benefit associated with incremental share-based payment arrangements recognized at the Merger date. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts): |
| | | | | | | | | | | | | | | | |
| | Unaudited | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
Customer service and billing expenses (GAAP) | | $ | 33,415 | | | $ | 31,064 | | | $ | 95,623 | | | $ | 96,168 | |
Less: share-based payment expense, net of purchase price accounting adjustments | | | (212 | ) | | | (460 | ) | | | (879 | ) | | | (1,436 | ) |
Add: purchase price accounting adjustment | | | 54 | | | | 115 | | | | 226 | | | | 358 | |
| | | | | | | | |
| | $ | 33,257 | | | $ | 30,719 | | | $ | 94,970 | | | $ | 95,090 | |
Daily weighted average number of subscribers | | | 10,147,115 | | | | 9,691,620 | | | | 9,935,054 | | | | 9,682,252 | |
| | | | | | | | |
Customer service and billing expenses, per average subscriber | | $ | 1.09 | | | $ | 1.06 | | | $ | 1.06 | | | $ | 1.09 | |
| | | | | | | | |
(6) | | Free cash flow is calculated as follows (in thousands): |
| | | | | | | | | | | | | | | | |
| | Unaudited | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
Net cash provided by operating activities | | $ | 95,373 | | | $ | 127,214 | | | $ | 208,875 | | | $ | 228,618 | |
Additions to property and equipment | | | (53,843 | ) | | | (34,690 | ) | | | (172,317 | ) | | | (38,811 | ) |
Restricted and other investment activity | | | - | | | | - | | | | 9,450 | | | | - | |
| | | | | | | | |
Free cash flow | | $ | 41,530 | | | $ | 92,524 | | | $ | 46,008 | | | $ | 189,807 | |
| | | | | | | | |
(7) | | EBITDA is defined as net income (loss) before interest and investment income (loss); interest expense, net of amounts capitalized; taxes expense and depreciation and amortization. We adjust EBITDA to remove the impact of other income and expense, loss on extinguishment of debt as well as certain non-cash charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) goodwill impairment, (iii) restructuring, impairments, and related costs, (iv) depreciation and amortization and (v) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to make investment decisions. Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We believe the exclusion of restructuring, impairments and related costs is useful given the nature of these expenses. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair market value of SIRIUS' common stock. |
44
Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income (loss) as disclosed in our consolidated statements of operations. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income (loss) to the adjusted EBITDA is calculated as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Unaudited | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
Net income (loss) (GAAP) | | $ | 30,466 | | | $ | (42,772 | ) | | $ | 76,807 | | | $ | (344,572 | ) |
Add back items excluded from Adjusted EBITDA: | | | | | | | | | | | | | | | | |
Purchase price accounting adjustments: | | | | | | | | | | | | | | | | |
Revenues (see pages 46-49) | | | 4,989 | | | | 10,951 | | | | 17,566 | | | | 46,460 | |
Operating Expenses (see pages 46-49) | | | (66,438 | ) | | | (64,619 | ) | | | (193,904 | ) | | | (177,006 | ) |
Depreciation and amortization (GAAP) | | | 34,999 | | | | 41,587 | | | | 108,886 | | | | 146,462 | |
Restructuring, impairments and related costs (GAAP) | | | 197 | | | | 3,029 | | | | 900 | | | | 29,614 | |
Share-based payment expense, net of purchase price accounting adjustments (see pages 46-49) | | | 6,960 | | | | 8,732 | | | | 22,774 | | | | 36,287 | |
Interest expense, net of amounts capitalized (GAAP) | | | 51,834 | | | | 70,537 | | | | 168,714 | | | | 226,376 | |
Loss on extinguishment of debt and credit facilities, net (GAAP) | | | 256 | | | | 3,787 | | | | 4,881 | | | | 111,863 | |
Loss on change in value of embedded derivative (GAAP) | | | 45,796 | | | | 33,700 | | | | 94,399 | | | | 111,703 | |
Interest and investment loss (GAAP) | | | 1,748 | | | | 2,141 | | | | 5,652 | | | | 4,812 | |
Other income (GAAP) | | | (1,225 | ) | | | (1,324 | ) | | | (2,694 | ) | | | (2,548 | ) |
Income tax expense (GAAP) | | | 2,792 | | | | 578 | | | | 3,938 | | | | 1,733 | |
| | | | | | | | |
Adjusted EBITDA | | $ | 112,374 | | | $ | 66,327 | | | $ | 307,919 | | | $ | 191,184 | |
| | | | | | | | |
45
(8) The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses:
| | | | | | | | | | | | | | | | |
| | Unaudited For the Three Months Ended September 30, 2010 | |
| | | | | | Purchase Price | | | Allocation of | | | | |
(in thousands) | | As Reported | | Accounting | | | Share-based | | | Adjusted |
| | | | | | Adjustments | | Payment Expense | | | | |
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 320,808 | | | $ | 3,176 | | | $ | - | | | $ | 323,984 | |
Advertising revenue, net of agency fees | | | 6,247 | | | | - | | | | - | | | | 6,247 | |
Equipment revenue | | | 13,300 | | | | - | | | | - | | | | 13,300 | |
Other revenue | | | 41,902 | | | | 1,813 | | | | - | | | | 43,715 | |
| | | | | | | | |
Total revenue | | $ | 382,257 | | | $ | 4,989 | | | $ | - | | | $ | 387,246 | |
| | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | | | |
Revenue share and royalties | | | 49,444 | | | | 27,499 | | | | - | | | | 76,943 | |
Programming and content | | | 26,204 | | | | 13,955 | | | | (925 | ) | | | 39,234 | |
Customer service and billing | | | 33,415 | | | | 54 | | | | (212 | ) | | | 33,257 | |
Satellite and transmission | | | 11,812 | | | | 272 | | | | (179 | ) | | | 11,905 | |
Cost of equipment | | | 3,644 | | | | - | | | | - | | | | 3,644 | |
Subscriber acquisition costs | | | 38,674 | | | | 20,889 | | | | - | | | | 59,563 | |
Sales and marketing | | | 27,833 | | | | 3,506 | | | | (1,100 | ) | | | 30,239 | |
Engineering, design and development | | | 5,261 | | | | 93 | | | | (348 | ) | | | 5,006 | |
General and administrative | | | 19,107 | | | | 170 | | | | (4,196 | ) | | | 15,081 | |
Depreciation and amortization (a) | | | 34,999 | | | | - | | | | - | | | | 34,999 | |
Restructuring, impairments and related costs | | | 197 | | | | - | | | | - | | | | 197 | |
Share-based payment expense (b) | | | - | | | | - | | | | 6,960 | | | | 6,960 | |
| | | | | | | | |
Total operating expenses | | $ | 250,590 | | | $ | 66,438 | | | $ | - | | | $ | 317,028 | |
| | | | | | | | |
|
(a) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended September 30, 2010 was $16,000. |
|
(b) Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content | | $ | 844 | | | $ | 81 | | | $ | - | | | $ | 925 | |
Customer service and billing | | | 158 | | | | 54 | | | | - | | | | 212 | |
Satellite and transmission | | | 128 | | | | 51 | | | | - | | | | 179 | |
Sales and marketing | | | 1,020 | | | | 80 | | | | - | | | | 1,100 | |
Engineering, design and development | | | 255 | | | | 93 | | | | - | | | | 348 | |
General and administrative | | | 4,026 | | | | 170 | | | | - | | | | 4,196 | |
| | | | | | | | |
Total share-based payment expense | | $ | 6,431 | | | $ | 529 | | | $ | - | | | $ | 6,960 | |
| | | | | | | | |
46
(8) The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses (continued):
| | | | | | | | | | | | | | | | |
| | Unaudited For the Three Months Ended September 30, 2009 | |
| | | | | | Purchase Price | | | Allocation of | | | | |
(in thousands) | | As Reported | | Accounting | | | Share-based | | | Adjusted |
| | | | Adjustments | | Payment Expense | | |
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 304,714 | | | $ | 9,138 | | | $ | - | | | $ | 313,852 | |
Advertising revenue, net of agency fees | | | 4,147 | | | | - | | | | - | | | | 4,147 | |
Equipment revenue | | | 5,657 | | | | - | | | | - | | | | 5,657 | |
Other revenue | | | 10,955 | | | | 1,813 | | | | - | | | | 12,768 | |
| | | | | | | | |
Total revenue | | $ | 325,473 | | | $ | 10,951 | | | $ | - | | | $ | 336,424 | |
| | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | | | |
Revenue share and royalties | | | 46,976 | | | | 22,973 | | | | - | | | | 69,949 | |
Programming and content | | | 27,811 | | | | 18,117 | | | | (1,024 | ) | | | 44,904 | |
Customer service and billing | | | 31,064 | | | | 115 | | | | (460 | ) | | | 30,719 | |
Satellite and transmission | | | 11,484 | | | | 331 | | | | (384 | ) | | | 11,431 | |
Cost of equipment | | | 5,142 | | | | - | | | | - | | | | 5,142 | |
Subscriber acquisition costs | | | 35,049 | | | | 19,330 | | | | - | | | | 54,379 | |
Sales and marketing | | | 26,055 | | | | 3,155 | | | | (1,397 | ) | | | 27,813 | |
Engineering, design and development | | | 5,413 | | | | 224 | | | | (738 | ) | | | 4,899 | |
General and administrative | | | 25,216 | | | | 374 | | | | (4,729 | ) | | | 20,861 | |
Depreciation and amortization (a) | | | 41,587 | | | | - | | | | - | | | | 41,587 | |
Restructuring, impairments and related costs | | | 3,029 | | | | - | | | | - | | | | 3,029 | |
Share-based payment expense (b) | | | - | | | | - | | | | 8,732 | | | | 8,732 | |
| | | | | | | | |
Total operating expenses | | $ | 258,826 | | | $ | 64,619 | | | $ | - | | | $ | 323,445 | |
| | | | | | | | |
|
(a) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended September 30, 2009 was $24,000. |
|
(b) Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content | | $ | 859 | | | $ | 165 | | | $ | - | | | $ | 1,024 | |
Customer service and billing | | | 345 | | | | 115 | | | | - | | | | 460 | |
Satellite and transmission | | | 273 | | | | 111 | | | | - | | | | 384 | |
Sales and marketing | | | 1,261 | | | | 136 | | | | - | | | | 1,397 | |
Engineering, design and development | | | 514 | | | | 224 | | | | - | | | | 738 | |
General and administrative | | | 4,355 | | | | 374 | | | | - | | | | 4,729 | |
| | | | | | | | |
Total share-based payment expense | | $ | 7,607 | | | $ | 1,125 | | | $ | - | | | $ | 8,732 | |
| | | | | | | | |
47
(8) The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses (continued):
| | | | | | | | | | | | | | | | |
| | Unaudited For the Nine Months Ended September 30, 2010 | |
| | | | | | Purchase Price | | | Allocation of | | | | |
(in thousands) | | As Reported | | Accounting | | | Share-based | | | Adjusted |
| | | | Adjustments | | Payment Expense | | |
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 938,711 | | | $ | 12,128 | | | $ | - | | | $ | 950,839 | |
Advertising revenue, net of agency fees | | | 15,362 | | | | - | | | | - | | | | 15,362 | |
Equipment revenue | | | 37,517 | | | | - | | | | - | | | | 37,517 | |
Other revenue | | | 114,270 | | | | 5,438 | | | | - | | | | 119,708 | |
| | | | | | | | |
Total revenue | | $ | 1,105,860 | | | $ | 17,566 | | | $ | - | | | $ | 1,123,426 | |
| | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | | | |
Revenue share and royalties | | | 138,296 | | | | 79,271 | | | | - | | | | 217,567 | |
Programming and content | | | 81,947 | | | | 42,805 | | | | (2,789 | ) | | | 121,963 | |
Customer service and billing | | | 95,623 | | | | 226 | | | | (879 | ) | | | 94,970 | |
Satellite and transmission | | | 35,299 | | | | 897 | | | | (817 | ) | | | 35,379 | |
Cost of equipment | | | 12,614 | | | | - | | | | - | | | | 12,614 | |
Subscriber acquisition costs | | | 109,691 | | | | 58,855 | | | | - | | | | 168,546 | |
Sales and marketing | | | 81,390 | | | | 10,692 | | | | (3,551 | ) | | | 88,531 | |
Engineering, design and development | | | 15,482 | | | | 427 | | | | (1,561 | ) | | | 14,348 | |
General and administrative | | | 74,035 | | | | 731 | | | | (13,177 | ) | | | 61,589 | |
Depreciation and amortization (a) | | | 108,886 | | | | - | | | | - | | | | 108,886 | |
Restructuring, impairments and related costs | | | 900 | | | | - | | | | - | | | | 900 | |
Share-based payment expense (b) | | | - | | | | - | | | | 22,774 | | | | 22,774 | |
| | | | | | | | |
Total operating expenses | | $ | 754,163 | | | $ | 193,904 | | | $ | - | | | $ | 948,067 | |
| | | | | | | | |
|
(a) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the nine months ended September 30, 2010 was $52,000. |
|
(b) Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content | | $ | 2,420 | | | $ | 369 | | | $ | - | | | $ | 2,789 | |
Customer service and billing | | | 653 | | | | 226 | | | | - | | | | 879 | |
Satellite and transmission | | | 581 | | | | 236 | | | | - | | | | 817 | |
Sales and marketing | | | 3,207 | | | | 344 | | | | - | | | | 3,551 | |
Engineering, design and development | | | 1,134 | | | | 427 | | | | - | | | | 1,561 | |
General and administrative | | | 12,446 | | | | 731 | | | | - | | | | 13,177 | |
| | | | | | | | |
Total share-based payment expense | | $ | 20,441 | | | $ | 2,333 | | | $ | - | | | $ | 22,774 | |
| | | | | | | | |
48
(8) The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses (continued):
| | | | | | | | | | | | | | | | |
| | Unaudited For the Nine Months Ended September 30, 2009 | |
| | | | | | Purchase Price | | | Allocation of | | | | |
(in thousands) | | As Reported | | Accounting | | | Share-based | | | Adjusted |
| | | | Adjustments | | Payment Expense | | |
Revenue: | | | | | | | | | | | | | | | | |
Subscriber revenue, including effects of rebates | | $ | 884,038 | | | $ | 41,022 | | | $ | - | | | $ | 925,060 | |
Advertising revenue, net of agency fees | | | 13,475 | | | | - | | | | - | | | | 13,475 | |
Equipment revenue | | | 17,681 | | | | - | | | | - | | | | 17,681 | |
Other revenue | | | 19,344 | | | | 5,438 | | | | - | | | | 24,782 | |
| | | | | | | | |
Total revenue | | $ | 934,538 | | | $ | 46,460 | | | $ | - | | | $ | 980,998 | |
| | | | | | | | |
Operating expenses | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Cost of services: | | | | | | | | | | | | | | | | |
Revenue share and royalties | | | 142,997 | | | | 65,608 | | | | - | | | | 208,605 | |
Programming and content | | | 84,353 | | | | 54,708 | | | | (3,869 | ) | | | 135,192 | |
Customer service and billing | | | 96,168 | | | | 358 | | | | (1,436 | ) | | | 95,090 | |
Satellite and transmission | | | 36,952 | | | | 1,013 | | | | (1,424 | ) | | | 36,541 | |
Cost of equipment | | | 12,049 | | | | - | | | | - | | | | 12,049 | |
Subscriber acquisition costs | | | 83,524 | | | | 43,309 | | | | - | | | | 126,833 | |
Sales and marketing | | | 84,565 | | | | 9,986 | | | | (4,375 | ) | | | 90,176 | |
Engineering, design and development | | | 16,798 | | | | 772 | | | | (2,809 | ) | | | 14,761 | |
General and administrative | | | 91,689 | | | | 1,252 | | | | (22,374 | ) | | | 70,567 | |
Depreciation and amortization (a) | | | 146,462 | | | | - | | | | - | | | | 146,462 | |
Restructuring, impairments and related costs | | | 29,614 | | | | - | | | | - | | | | 29,614 | |
Share-based payment expense (b) | | | - | | | | - | | | | 36,287 | | | | 36,287 | |
| | | | | | | | |
Total operating expenses | | $ | 825,171 | | | $ | 177,006 | | | $ | - | | | $ | 1,002,177 | |
| | | | | | | | |
|
(a) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the nine months ended September 30, 2009 was $86,000. |
|
(b) Amounts related to share-based payment expense included in operating expenses were as follows: |
|
Programming and content | | $ | 3,368 | | | $ | 501 | | | $ | - | | | $ | 3,869 | |
Customer service and billing | | | 1,077 | | | | 359 | | | | - | | | | 1,436 | |
Satellite and transmission | | | 1,073 | | | | 351 | | | | - | | | | 1,424 | |
Sales and marketing | | | 3,862 | | | | 513 | | | | - | | | | 4,375 | |
Engineering, design and development | | | 2,037 | | | | 772 | | | | - | | | | 2,809 | |
General and administrative | | | 21,122 | | | | 1,252 | | | | - | | | | 22,374 | |
| | | | | | | | |
Total share-based payment expense | | $ | 32,539 | | | $ | 3,748 | | | $ | - | | | $ | 36,287 | |
| | | | | | | | |
(9) The following table reconciles our GAAP Net cash provided by operating activities to our Net income plus non-cash operating activities (in thousands):
| | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended |
| | September 30, | | September 30, |
| | 2010 | | 2009 | | 2010 | | 2009 |
Net cash provided by operating activities | | $ | 95,373 | | | $ | 127,214 | | | $ | 208,875 | | | $ | 228,618 | |
Less: Changes in operating assets and liabilities, net | | | (16,408 | ) | | | (117,216 | ) | | | (19,644 | ) | | | (199,936 | ) |
| | | | | | | | |
Net income plus non cash operating activities | | $ | 78,965 | | | $ | 9,998 | | | $ | 189,231 | | | $ | 28,682 | |
| | | | | | | | |
49
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
As of September 30, 2010, 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, and investment in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale. These securities are consistent with the investment objectives contained within our investment policy. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield.
Our debt includes fixed rate instruments and the fair market value of our debt is sensitive to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.
ITEM 4 CONTROLS AND PROCEDURES
Controls and Procedures
As of September 30, 2010, 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 (as that term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on that evaluation, our management, including our President and our Treasurer, concluded that our disclosure controls and procedures were effective as of September 30, 2010. There has been no change in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
50
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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. On October 19, 2010, the FCC released an Order dismissing this Petition for Reconsideration.
Advanced Recording Functionality Disputes. Commencing in May 2006, holders of copyrights in sound recordings and holders of copyrights in musical works brought three actions against XM for copyright infringement in the Federal District Court in the Southern District of New York, namely,Atlantic Recording Corp. et al. v. XM Satellite Radio Inc., Famous Music LLC, et al. v. XM Satellite Radio, Inc., and In re XM Satellite Radio Copyright Litigation. These actions sought monetary damages and equitable relief in connection with the advanced recording functionality included in the XM Inno, the XM NeXus, the XM Helix, the XM SkyFi3 line of satellite radios. As previously reported, XM settled these claims with the major record companies and a significant number of music publishers, resulting in the dismissal of two of the three actions. XM has also reached agreement with certain independent holders of sound recordings and musical works to settle the third action, a purported class action.
State Consumer Investigations. In October 2010, a Multistate Working Group, led by the Attorney General of the State of Ohio and joined by the Offices of the Attorneys General of Arizona, Connecticut, Tennessee, Vermont and the District of Columbia, commenced a multi-jurisdictional investigation into certain of XM’s consumer practices. The investigation focuses on practices relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting consumers.
A separate investigation into XM’s consumer-related practices is being conducted by the Attorney General of the State of Florida. In addition, in September 2010, the Attorney General of the State of Missouri commenced an action against us regarding our telemarketing practices to residents of the State of Missouri.
We are cooperating with these investigations and believe our consumer-related practices comply with all applicable federal and state laws and regulations.
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.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors previously disclosed in response to Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
See Exhibits Index attached hereto.
51
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 4th day of November 2010.
| | | | |
| XM Satellite Radio Inc. | |
| By: | /s/David J. Frear | |
| | David J. Frear | |
| | Treasurer (Principal Financial Officer and Principal Accounting Officer) | |
52
EXHIBIT INDEX
| | |
Exhibit | | Description |
3.1 | | Certificate of Ownership and Merger, dated April 14, 2010 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on April 16, 2010). |
| | |
4.1 | | Indenture, dated as of October 27, 2010, among the Company, the guarantors thereto and U.S. Bank National Association, as trustee, relating to the 7.625% Senior Notes due 2018 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed on October 28, 2010). |
| | |
4.2 | | Supplemental Indenture, dated as of October 27, 2010, among the Company, the guarantors thereto and U.S. Bank National Association, as trustee , relating to the 11.25% Senior Secured Notes due 2013 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed on October 28, 2010). |
| | |
31.1 | | Certificate of Mel Karmazin, President of XM Satellite Radio Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
31.2 | | Certificate of David J. Frear, Treasurer of XM Satellite Radio Inc., pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). |
| | |
32.1 | | Certificate of Mel Karmazin, President and David J. Frear, Treasurer of XM Satellite Radio Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). |