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EX-31.1 - EX-31.1 - SIRIUS XM HOLDINGS INC.siri-ex311_24.htm
EX-32.2 - EX-32.2 - SIRIUS XM HOLDINGS INC.siri-ex322_27.htm
EX-31.2 - EX-31.2 - SIRIUS XM HOLDINGS INC.siri-ex312_25.htm
EX-21.1 - EX-21.1 - SIRIUS XM HOLDINGS INC.siri-ex211_1101.htm
EX-23.1 - EX-23.1 - SIRIUS XM HOLDINGS INC.siri-ex231_1102.htm
EX-10.29 - EX-10.29 - SIRIUS XM HOLDINGS INC.siri-ex1029_1260.htm
EX-10.22 - EX-10.22 - SIRIUS XM HOLDINGS INC.siri-ex1022_1254.htm
EX-10.23 - EX-10.23 - SIRIUS XM HOLDINGS INC.siri-ex1023_1255.htm
EX-32.1 - EX-32.1 - SIRIUS XM HOLDINGS INC.siri-ex321_26.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-K

 

 

þ

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015

OR

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO ________

COMMISSION FILE NUMBER 001-34295

 

SIRIUS XM HOLDINGS INC.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

38-3916511

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

1221 Avenue of the Americas, 36th Floor

 

 

New York, New York

 

10020

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (212) 584-5100

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class:

 

Name of Each Exchange on Which Registered:

Common Stock, par value $0.001 per share

 

The Nasdaq Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  þ        No  o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    Yes  o        No  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  þ        No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  þ        No  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer þ

 

Accelerated filer o

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

 

 

 

 

 

 

 

 

(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o        No  þ

The aggregate market value of the registrant’s common stock held by non-affiliates as of June 30, 2015 was $8,252,527,278.  All executive officers and directors of the registrant have been deemed, solely for the purpose of the foregoing calculation, to be “affiliates” of the registrant.

The number of shares of the registrant’s common stock outstanding as of January 29, 2016 was 5,095,994,772.

DOCUMENTS INCORPORATED BY REFERENCE

Information included in our definitive proxy statement for our 2016 annual meeting of stockholders scheduled to be held on Tuesday, May 24, 2016 is incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III of this report.

 

 

 

 


 

Table of Contents

 

 

SIRIUS XM HOLDINGS INC. AND SUBSIDIARIES

2015 FORM 10-K ANNUAL REPORT

TABLE OF CONTENTS

 

Item No.

 

Description

 

 

 

 

 

 

 

PART I

 

 

 

 

 

Item 1.

 

Business

2

Item 1A.

 

Risk Factors

10

Item 1B.

 

Unresolved Staff Comments

16

Item 2.

 

Properties

17

Item 3.

 

Legal Proceedings

17

Item 4.

 

Mine Safety Disclosures

18

 

 

 

 

 

 

PART II

 

 

 

 

 

Item 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

Item 6.

 

Selected Financial Data

21

Item 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

22

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

40

Item 8.

 

Financial Statements and Supplementary Data

40

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

40

Item 9A.

 

Controls and Procedures

41

Item 9B.

 

Other Information

41

 

 

 

 

 

 

PART III

 

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

41

Item 11.

 

Executive Compensation

42

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

42

Item 13.

 

Certain Relationships and Related Transactions and Director Independence

42

Item 14.

 

Principal Accountant Fees and Services

42

 

 

 

 

 

 

PART IV

 

 

 

 

 

Item 15.

 

Exhibits and Financial Statement Schedules

42

 

 

Signatures

43

 

 

 

 


Table of Contents

 

PART I

 

 

ITEM 1.

BUSINESS

This Annual Report on Form 10-K presents information for Sirius XM Holdings Inc. (“Holdings”).  The terms “we,” “us,” “our,” and “our company” as used herein and unless otherwise stated or indicated by context, refer to Sirius XM Radio Inc. (“Sirius XM”) and its subsidiaries.

Sirius XM Holdings Inc.

Sirius XM is a wholly-owned subsidiary of Holdings.  Holdings was incorporated in the State of Delaware on May 21, 2013.  Holdings has no operations independent of its subsidiary Sirius XM.

Relationship with Liberty Media

Liberty Media Corporation ("Liberty Media") beneficially owns, directly and indirectly, over 50% of the outstanding shares of Holdings’ common stock.  Liberty Media owns interests in a range of media, communications and entertainment businesses.

Sirius XM Radio Inc.

We transmit music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems.  Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over our Internet radio service, including through applications for mobile devices.  

As of December 31, 2015, we had approximately 29.6 million subscribers.  Our subscribers include:

 

·

subscribers under our regular and discounted pricing plans;

 

·

subscribers that have prepaid, including payments made or due from automakers for subscriptions included in the sale or lease price of a vehicle;

 

·

subscribers to our Internet services who do not also have satellite radio subscriptions; and

 

·

certain subscribers to our weather, traffic and data services who do not also have satellite radio subscriptions.

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 longer term subscription plans as well as discounts for multiple subscriptions.  We also derive revenue from the sale of advertising on select non-music channels, activation and other fees, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic and data services.

Our satellite radios are primarily distributed through automakers; retail stores nationwide; and through our website.  We have agreements with every major automaker to offer satellite radios in their vehicles.  Satellite radio services are also offered to customers of certain rental car companies.

We are also a leader in providing connected vehicle applications and services.  Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers.  Subscribers to our connected vehicle services are not included in our subscriber count or subscriber-based operating metrics.

Programming

We offer a dynamic programming lineup of commercial-free music plus sports, entertainment, comedy, talk, news, traffic and weather, including:

 

·

an extensive selection of music genres, ranging from rock, pop and hip-hop to country, dance, jazz, Latin and classical;

 

·

live play-by-play sports from major leagues and colleges;

 

·

a multitude of talk and entertainment channels for a variety of audiences;

 

·

a wide range of national, international and financial news;

 

·

exclusive limited run channels; and

 

·

local traffic and weather reports for 21 metropolitan markets throughout the United States.

 

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Our diverse spectrum of programming, including our lineup of exclusive material, is a significant differentiator from terrestrial radio and other audio entertainment providers.  We make changes to our programming lineup from time to time as we strive to attract new subscribers and offer content which appeals to a broad range of audiences and to our existing subscribers.  The channel line-ups for our services are available at siriusxm.com.

Internet Radio Service

We stream select music and non-music channels over the Internet.  Our Internet radio service also includes certain channels and features that are not available on our satellite radio service.  Access to our Internet radio service is offered to subscribers for a fee.  We also offer applications to allow consumers to access our Internet radio service on smartphones and tablet computers.

SiriusXM Internet Radio offers listeners enhanced programming discovery and the ability to connect with content currently playing across our commercial-free music, sports, comedy, news, talk and entertainment channels or available through SiriusXM On Demand.

We offer two innovative Internet-based products, SiriusXM On Demand and MySXM.  SiriusXM On Demand offers our Internet radio subscribers listening on our online media player and on smartphones the ability to choose their favorite episodes from a catalog of content whenever they want.  MySXM permits subscribers to personalize our existing commercial-free music and comedy channels to create a more tailored listening experience.  Channel-specific sliders allow users to create over 100 variations of each of more than 50 channels by adjusting characteristics like library depth, familiarity, music style, tempo, region, and multiple other channel-specific attributes.  SiriusXM On Demand and MySXM are offered to our Internet radio subscribers at no extra charge.

SXM17

We are developing a product, which we call “SXM17,” that combines our satellite and Internet services into a single, cohesive in-vehicle entertainment experience and is expected to allow us to take advantage of the automaker’s deployment of advanced in-dash infotainment systems.  SXM17 will leverage the ubiquitous signal coverage of our satellite infrastructure and low delivery costs with the two-way communication capability of wireless Internet service to provide consumers seamless access to all of our content, including our live channels, SiriusXM On Demand programing and more personalized music services.  The wireless Internet connection included in SXM17 will enable enhanced search and recommendations functions, making discovery of our content in the vehicle easier than ever.  SXM17 will allow consumers to manage many aspects of their subscriptions directly through their vehicles’ equipment.  We expect automakers to begin including our SXM17 product in vehicles as early as 2017.

Distribution of Radios

Automakers

We distribute satellite radios through the sale and lease of new vehicles.  We have agreements with every major automaker to offer satellite radios in their vehicles.  Satellite radios are available as a factory or dealer-installed option in substantially all vehicle makes sold in the United States.

Most automakers include a subscription to our radio service in the sale or lease of their new vehicles.  In certain cases, we receive subscription payments from automakers in advance of the activation of our service.  We share with certain automakers a portion of the revenues we derive from subscribers using vehicles equipped to receive our service.  We also reimburse various automakers for certain costs associated with the satellite radios installed in new vehicles, including in certain cases hardware costs, engineering expenses and promotional and advertising expenses.

Previously Owned Vehicles

We acquire subscribers through the sale and lease of previously owned vehicles with factory-installed satellite radios.  We have entered into agreements with many automakers to market subscriptions to purchasers and lessees of vehicles which include satellite radios sold through their certified pre-owned programs.  We also work directly with franchise and independent dealers on programs for non-certified vehicles.

We have developed systems and methods to identify purchasers and lessees of previously owned vehicles which include satellite radios and have established marketing plans to promote our services to these potential subscribers.

 

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Retail

We sell satellite radios directly to consumers through our website.  Satellite radios are also marketed and distributed through national and regional retailers.

Our Satellite Radio Systems

Our satellite radio systems are designed to provide clear reception in most areas despite variations in terrain, buildings and other obstructions.  We continually monitor our infrastructure and regularly evaluate improvements in technology.

Our satellite radio systems have three principal components:

 

·

satellites, terrestrial repeaters and other satellite facilities;

 

·

studios; and

 

·

radios.

Satellites, Terrestrial Repeaters and Other Satellite Facilities

Satellites.  We provide our service through a fleet of eight orbiting satellites, five in the Sirius system, FM-1, FM-2, FM-3, FM-5 and FM-6, and three in the XM system, XM-3, XM-4 and XM-5.  

Our constellation of three XM satellites operate in a geostationary, with XM-5 used as a spare for both the XM and Sirius constellations.  Our constellation of five Sirius satellites operate in two separate orbits.  Three of our Sirius satellites, FM-1, FM-2 and FM-3, operate in a highly inclined elliptical orbit.  The other two Sirius satellites, FM-5 and FM-6, operate in a geostationary orbit.  We plan to transition our Sirius constellation to solely a geostationary orbit using the FM-5 and FM-6 satellites.  As part of this transition, FM-1, FM-2 and FM-3 are expected to be moved into disposal orbits during 2016.  

Satellite Insurance.  We do not have in-orbit insurance policies covering our satellites, as we consider the premium costs to be uneconomical relative to the risk of satellite failure.

Terrestrial Repeaters.  In some areas with high concentrations of tall buildings, such as urban centers, signals from our satellites may be blocked and reception of satellite signals can be adversely affected.  In many of these areas, we have deployed terrestrial repeaters to supplement satellite coverage.  We operate over 1,100 terrestrial repeaters as part of our systems across the United States.

Other Satellite Facilities.  We control and communicate with our satellites from facilities in North America and maintain earth stations in Panama and Ecuador to control and communicate with three of our Sirius satellites, FM-1, FM-2 and FM-3. Our satellites are monitored, tracked and controlled by a third party satellite operator.

Studios

Our programming originates from studios in New York City and Washington D.C. and, to a lesser extent, from smaller studios in Los Angeles, Nashville and a variety of smaller venues across the country.  Our corporate headquarters is based in New York City.  Both our New York City and Washington D.C. offices house facilities for programming origination, programming personnel and facilities to transmit programming.

Radios

Radios are primarily manufactured in two principal configurations - as in-dash radios and dock & play radios.

We do not manufacture radios.  We have authorized manufacturers and distributors to produce and distribute radios, and have licensed our technology to various electronics manufacturers to develop, manufacture and distribute radios under certain brands.  We do manage various aspects of the production of satellite radios.  To facilitate the sale of radios, we may subsidize a portion of the radio manufacturing costs to reduce the hardware price to consumers.

 

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Connected Vehicle Services

We are a leader in providing connected vehicle services. Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers.  We offer a portfolio of location-based services through two-way wireless connectivity, including safety, security, convenience, maintenance and data services, remote vehicles diagnostics, stolen or parked vehicle locator services, and monitoring of vehicle emission systems.  Our connected vehicle business provides services to several automakers, including Acura, BMW, Honda, Hyundai, Infiniti, Lexus, Nissan and Toyota.

Subscribers to our connected vehicle services are not included in our subscriber count or subscriber-based operating metrics.

Canada

We own approximately 37% of the equity of Sirius XM Canada Holdings Inc. ("Sirius XM Canada"), the satellite radio provider in Canada.  Subscribers to the services offered by Sirius XM Canada are not included in our subscriber count.

Other Services

Commercial Accounts.  Our programming is available for commercial establishments.  Commercial subscription accounts are available through providers of in-store entertainment solutions and directly from us. Certain commercial subscribers are included in our subscriber count.

Satellite Television Service.  Certain of our music channels are offered as part of certain programming packages on the DISH Network satellite television service.  Subscribers to the DISH Network satellite television service are not included in our subscriber count.

Subscribers to the following services are not included in our subscriber count, unless the applicable service is purchased by the subscriber separately and not as part of a radio subscription to our services:

Travel Link.  We offer Travel Link, a suite of data services that includes graphical weather, fuel prices, sports schedules and scores and movie listings.

Real-Time Traffic Services.  We offer services that provide graphic information as to road closings, traffic flow and incident data to consumers with compatible in-vehicle navigation systems.

Real-Time Weather Services.  We offer several real-time weather services designed for improving situational awareness in vehicle, marine and/or aviation use.

Competition

Satellite Radio

We face significant competition for both listeners and advertisers in our satellite radio business, including from providers of radio or other audio services.  Our digital competitors are making in-roads into vehicles, where we are currently the prominent alternative to traditional AM/FM radio.

Traditional AM/FM Radio.  Our services compete with traditional AM/FM radio.  Several traditional radio companies are substantial entities owning large numbers of radio stations or other media properties.  The radio broadcasting industry is highly competitive.  Traditional AM/FM broadcasters are also aggressively pursuing Internet radio, wireless Internet-based distribution arrangements and data services.

Traditional AM/FM radio has a well-established demand for its services and offers free broadcasts paid for by commercial advertising rather than by subscription fees.  Many radio stations offer information programming of a local nature, such as local news and sports.  The availability of traditional free AM/FM radio reduces the likelihood that customers would be willing to pay for our subscription services and, by offering free broadcasts, it may impose limits on what we can charge for our services.

Internet Radio and Internet-Enabled Smartphones.  Internet radio services often have no geographic limitations and provide listeners with radio programming from across the country and around the world.  Major media companies and online providers, including Apple, Google Play, Pandora and iHeartRadio, make high fidelity digital streams available through the Internet for free or, in some cases, for less than the cost of a satellite radio subscription.  These services compete directly with our services, at home, in vehicles, and wherever audio entertainment is consumed.

 

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Smartphone applications are often free to the user and offer music and talk content.  Leading audio smartphone radio applications include Apple, Pandora, Spotify, and iHeartRadio.  Certain of these applications also include advanced functionality, such as personalization, and allow the user to access large libraries of content.  These services are easily integrated into vehicles.

Advanced In-Dash Infotainment Systems.  Nearly all automakers have deployed or are planning to deploy integrated multimedia systems in dashboards.  These systems combine control of audio entertainment from a variety of sources, including AM/FM/HD radio broadcasts, satellite radio, Internet radio, smartphone applications and stored audio, with navigation and other advanced applications such as restaurant bookings, movie show times and financial information.  Internet radio and other data are typically connected to the system via a bluetooth link to an Internet-enabled smartphone or wireless modem installed in the vehicle, and the entire system may be controlled by touchscreen or voice recognition.  These systems enhance the attractiveness of Internet-based competitors by making such applications more prominent, easier to access, and safer to use in the car. Similar systems are also available in the aftermarket and sold through retailers.

Direct Broadcast Satellite and Cable Audio.  A number of providers offer specialized audio services through either direct broadcast satellite or cable audio systems.  These services are targeted to fixed locations, mostly in-home.  The radio service offered by direct broadcast satellite and cable audio is often included as part of a package of digital services with video service, and video customers generally do not pay an additional monthly charge for the audio service.

Other Digital Media Services.  The audio entertainment marketplace continues to evolve rapidly, with a steady emergence of new media platforms that compete with our services now or that could compete with those services in the future.

Traffic News Services

A number of providers compete with our traffic news services.  In-dash navigation is threatened by smartphones that provide data services through a direct vehicle interface.  Most of these smartphones offer GPS mapping, often with turn-by-turn navigation.

Connected Vehicle Services

Our connected vehicle services business operates in a highly competitive environment and competes with several providers, including Verizon Telematics.  OnStar, a division of General Motors, also offers connected vehicle services in GM vehicles.  We also compete with wireless devices such as mobile phones, carriers of mobile communications and, to a lesser extent, with systems developed internally by automakers.  We compete against other connected vehicle service providers for automaker arrangements on the basis of service quality and reliability, technical capabilities and systems customization, scope of service, industry experience, past performance and price.

Government Regulation

As operators of a privately-owned satellite system, we are regulated by the FCC under the Communications Act of 1934, principally with respect to:

 

·

the licensing of our satellite systems;

 

·

preventing interference with or to other users of radio frequencies; and

 

·

compliance with FCC rules established specifically for U.S. satellites and satellite radio services.

Any assignment or transfer of control of our FCC licenses must be approved by the FCC.  The FCC's order approving the merger of our wholly-owned subsidiary, Vernon Merger Corporation, with and into XM Satellite Radio Holdings Inc. in July 2008 (the “Merger”) requires us to comply with certain voluntary commitments we made as part of the FCC Merger proceeding.  We believe we comply with those commitments.

In 1997, we were the winning bidders for FCC licenses to operate a satellite digital audio radio service and provide other ancillary services.  Our FCC licenses for our Sirius satellites expire in 2017 and 2022.  Our FCC licenses for our XM satellites expire in 2018, 2021 and 2022.  XM-1 is operating under Special Temporary Authority from the FCC and is in the process of being de-orbited.  We anticipate that, absent significant misconduct on our part, the FCC will renew our licenses to permit operation of our satellites for their useful lives, and grant licenses for any replacement satellites.

In some areas with high concentrations of tall buildings, such as urban centers, signals from our satellites may be blocked and reception can be adversely affected.  In many of these areas, we have installed terrestrial repeaters to supplement our satellite signal coverage.  The FCC has established rules governing terrestrial repeaters and has granted us a license through 2027 to operate our repeater network.

 

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Table of Contents

 

In many cases, we obtain FCC certifications for satellite radios, including satellite radios that include FM modulators.  We believe our radios that are in production comply with all applicable FCC rules.

We are required to obtain export licenses from the United States government to export certain ground control equipment, satellite communications/control services and technical data related to our satellites and their operations.  The delivery of such equipment, services and technical data to destinations outside the United States and to foreign persons is subject to strict export control and prior approval requirements from the United States government (including prohibitions on the sharing of certain satellite-related goods and services with China).

Changes in law or regulations relating to communications policy or to matters affecting our services could adversely affect our ability to retain our FCC licenses or the manner in which we operate.

Copyrights to Programming

In connection with our satellite radio music programming, we must negotiate and enter into royalty arrangements with two sets of rights holders:  Holders of copyrights in musical works (that is, the music and lyrics) and holders of copyrights in sound recordings (that is, the actual recording of a work).

Musical works rights holders, generally songwriters and music publishers, have been traditionally represented by performing rights organizations such as the American Society of Composers, Authors and Publishers (“ASCAP”), Broadcast Music, Inc. (“BMI”) and SESAC, Inc. (“SESAC”).  These organizations negotiate fees with copyright users, collect royalties and distribute them to the rights holders.  We have arrangements with all of these organizations.  However, the market for rights relating to musical works is changing rapidly.  Certain songwriters and music publishers have withdrawn from the traditional performing rights organizations, particularly ASCAP and BMI, and new entities have formed to represent rights holders.  In addition, the United States Justice Department is reviewing the consent decrees that have governed ASCAP and BMI since the 1940s and other aspects of the musical works market.  The changing market for musical works may have an adverse effect on us, including increasing our costs or limiting the musical works available to us.

Sound recording rights holders, typically large record companies, are primarily represented by SoundExchange, an organization which negotiates licenses, and collects and distributes royalties on behalf of record companies and performing artists.  Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we may negotiate royalty arrangements with the owners of sound recordings fixed after February 15, 1972, or if negotiation is unsuccessful, the royalty rate is established by the Copyright Royalty Board (the “CRB”) of the Library of Congress.

The CRB has issued its determination regarding the royalty rate payable by us under the statutory license covering the performance of sound recordings fixed after February 15, 1972 over our satellite digital audio radio service, and the making of ephemeral (server) copies in support of such performances, for the five-year period ending on December 31, 2017.  Under the terms of the CRB's decision, we will pay a royalty based on gross revenues, subject to certain exclusions, of 10.5% for 2016 and 11% for 2017.  The rate for 2015 was 10%.

The revenue subject to royalty includes subscription revenue from our U.S. satellite digital audio radio subscribers and advertising revenue from channels, other than those channels that make only incidental performances of sound recordings.  Exclusions from revenue subject to the statutory license fee include, among other things, revenue from channels, programming and products or other services offered for a separate charge where such channels make only incidental performances of sound recordings; revenue from equipment sales; revenue from current and future data services (including video and connected vehicle services) offered for a separate charge; intellectual property royalties received by us; credit card, invoice and fulfillment service fees; and bad debt expense.  The regulations also allow us to further reduce our monthly royalty fee in proportion to the percentage of our performances that feature pre-1972 recordings (which are not subject to federal copyright protection) as well as those that are licensed directly from the copyright holder, rather than through the statutory license.

To secure the rights to stream music content over the Internet, including to mobile devices, we also must obtain licenses from, and pay royalties to, copyright owners of musical compositions and sound recordings.  We have arrangements with ASCAP, SESAC and BMI to license the musical compositions we stream over the Internet.  The licensing of certain sound recordings fixed after February 15, 1972 for use on the Internet is also subject to the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998 on terms established by the CRB.  In 2015, we paid a per performance rate for the streaming of certain sound recordings on the Internet of $0.0024.  

 

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In December 2015, the CRB released the rates and terms for the use of sound recordings by non-interactive Internet services, such as our Internet radio service, for the period of 2016 through 2020.  Effective as of January 1, 2016, the CRB set a royalty rate at $0.0017 per performance for ad-supported services and a royalty rate at $0.0022 per performance for subscription-based services.  In accordance with the CRB’s decision, these royalty rates will increase during the period from 2017 through 2020 based on the consumer price index.

Our rights to perform certain copyrighted sound recordings (that is, the actual recording of a work) that were fixed after February 15, 1972 are governed by United States federal law, the Copyright Act.  In contrast, our rights to perform certain sound recordings that were fixed before February 15, 1972 are governed by state statutes and common law and are subject to litigation in five States.  See "Item 3. Legal Proceedings" below.

Trademarks

We have registered, and intend to maintain, the trademarks “Sirius”, “XM”, “SiriusXM” and “SXM” with the United States Patent and Trademark Office in connection with the services we offer. We are not aware of any material claims of infringement or other challenges to our right to use the “Sirius”, “XM”, “SiriusXM” or "SXM” trademarks in the United States.  We also have registered, and intend to maintain, trademarks for the names of certain of our channels.  We have also registered the trademarks “Sirius”, “XM” and "SiriusXM" in Canada. We have granted a license to use certain of our trademarks in Canada to Sirius XM Canada.

Personnel

As of December 31, 2015, we had 2,323 full-time employees.  In addition, we rely upon a number of part-time employees, consultants, other advisors and outsourced relationships. None of our employees are represented by a labor union, and we believe that our employee relations are good.

Corporate Information and Available Information

Our executive offices are located at 1221 Avenue of the Americas, 36th floor, New York, New York 10020 and our telephone number is (212) 584-5100.  Our internet address is www.siriusxm.com. Our annual, quarterly and current reports, and any amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), may be accessed free of charge through our website after we have electronically filed or furnished such material with the SEC.  Siriusxm.com (including any other reference to such address in this Annual Report) is an inactive textual reference only, meaning that the information contained on or accessible from the website is not part of this Annual Report on Form 10-K and is not incorporated in this report by reference.

Executive Officers of the Registrant

Certain information regarding our executive officers as of January 29, 2016 is provided below:

 

Name

Age

Position

James E. Meyer

61

Chief Executive Officer

Scott A. Greenstein

56

President and Chief Content Officer

David J. Frear

59

Senior Executive Vice President and Chief Financial Officer

Dara F. Altman

57

Executive Vice President and Chief Administrative Officer

James A. Cady

55

Executive Vice President, Operations, Products and Connected Vehicle

Stephen Cook

60

Executive Vice President, Sales and Automotive

Patrick L. Donnelly

54

Executive Vice President, General Counsel and Secretary

Katherine Kohler Thomson

49

Executive Vice President, Chief Marketing Officer

Joseph A. Verbrugge

46

Executive Vice President, Sales and Development

James E. Meyer has served as our Chief Executive Officer since December 2012.  From May 2004 to December 2012, Mr. Meyer was our President, Operations and Sales.  Prior to May 2004, Mr. Meyer was President of Aegis Ventures Incorporated, a consulting firm that provides general management services.  From December 2001 until 2002, Mr. Meyer served as special advisor to the Chairman of Thomson S.A., a leading consumer electronics company. From January 1997 until December 2001, Mr. Meyer served as the Senior Executive Vice President for Thomson as well as a member of the executive committee.  From 1992 until 1996, Mr. Meyer served as Thomson's Senior Vice President of Product Management.  Mr. Meyer is a director of ROVI Corporation.

 

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Scott A. Greenstein has served as our President and Chief Content Officer since May 2004.  Prior to May 2004, Mr. Greenstein was Chief Executive Officer of The Greenstein Group, a media and entertainment consulting firm.  From 1999 until 2002, he was Chairman of USA Films, a motion picture production, marketing and distribution company.  From 1997 until 1999, Mr. Greenstein was Co-President of October Films, a motion picture production, marketing and distribution company.  Prior to joining October Films, Mr. Greenstein was Senior Vice President of Motion Pictures, Music, New Media and Publishing at Miramax Films, and held senior positions at Viacom Inc.

David J. Frear has served as our Senior Executive Vice President and Chief Financial Officer since June 2015. From June 2003 to June 2015, served as our Executive Vice President and Chief Financial Officer.  From 1999 to 2003, Mr. Frear was Executive Vice President and Chief Financial Officer of Savvis Communications Corporation, a global managed service provider, delivering internet protocol applications for business customers. Mr. Frear also served as a director of Savvis.  From 1993 to 1998, Mr. Frear was Senior Vice President and Chief Financial Officer of Orion Network Systems Inc., an international satellite communications company that was acquired by Loral Space & Communications Ltd. in 1998.  From 1990 to 1993, Mr. Frear was Chief Financial Officer of Millicom Incorporated, a cellular, paging and cable television company.  Prior to joining Millicom, he was an investment banker at Bear, Stearns & Co., Inc. and Credit Suisse.

Dara F. Altman has served as our Executive Vice President and Chief Administrative Officer since September 2008.  From January 2006 until September 2008, Ms. Altman served as Executive Vice President, Business and Legal Affairs, of XM.  Ms. Altman was Executive Vice President of Business Affairs for Discovery Communications from 1997 to 2005.  From 1993 to 1997, Ms. Altman served as Senior Vice President and General Counsel of Reiss Media Enterprises, which owned Request TV, a national pay-per-view service. Before Request TV, Ms. Altman served as counsel for Home Box Office.  Ms. Altman started her career as an attorney at the law firm of Willkie Farr & Gallagher LLP.

James A. Cady has served as our Executive Vice President, Operations, Products and Connected Vehicle, since July 2015 and, prior to July 2015, served as Senior Vice President and General Manager of our Connected Services Platform since February 2014. Mr. Cady served as the Chief Executive Officer and President of Slacker, Inc., an internet music service provider, from August 2009 until February 2014. He was the President and Chief Operating Officer of Slacker, Inc. from May 2006 until August 2009. From September 2004 until May 2006, he served as the Chief Executive Officer and President of LightPointe Communications, Inc., a manufacturer of wireless data transmission equipment. Prior to that time, Mr. Cady served in a variety of roles at an assortment of technology companies, including WatchGuard Technologies Inc., a manufacturer of computer security solutions; Rio, a division of SONICblue, Incorporated; Diamond Multimedia Systems, a manufacturer of various multimedia components; Supra Corp., a producer of hardware for computers; Moore Company, a wholesale distributor of consumer electronics; and Atari Corp., a manufacturer of computer and video games.

Stephen Cook has served as our Executive Vice President, Sales and Automotive, since January 2013.  Mr. Cook served as our Group Vice President and General Manager, Automotive Division, from July 2008 until January 2013.  Mr. Cook served as Executive Vice President, Automotive, of XM from July 2006 to July 2008.  He also served as XM's Executive Vice President, Sales and Marketing, from January 2002 until July 2006, and as XM's Senior Vice President, Sales and Marketing, from February 1999 until January 2002.  Prior to joining XM, Mr. Cook was Chief Operating Officer for Conxus Communications.  From 1990 to 1997, Mr. Cook held management positions with GTE's cellular operations.  Prior to that time, Mr. Cook worked in brand management for Procter & Gamble.

Patrick L. Donnelly has served as our Executive Vice President, General Counsel and Secretary, since May 1998.  From June 1997 to May 1998, he was Vice President and Deputy General Counsel of ITT Corporation, a hotel, gaming and entertainment company that was acquired by Starwood Hotels & Resorts Worldwide, Inc. in February 1998.  From October 1995 to June 1997, he was assistant general counsel of ITT Corporation. Prior to October 1995, Mr. Donnelly was an attorney at the law firm of Simpson Thacher & Bartlett LLP.

Katherine Kohler Thomson has served as our Executive Vice President, Chief Marketing Officer, since December 2013.  Ms. Thomson was the President and Chief Operating Officer of the Los Angeles Times Media Group from May 2011 until November 2013.  She was also the Chief Operating Officer of Tribune Publishing Company, Inc. from April 2013 until November 2013.  Ms. Thomson served as Vice President, Business Operations of FLO TV, a division of Qualcomm Incorporated that delivered live television to mobile devices, from September 2009 until May 2011.  From September 2008 through September 2009, she was Executive Vice President and Chief of Staff at the Los Angeles Times Media Group.  She joined the Los Angeles Times Media Group from Energy Innovations, an affordable solar energy provider, where she was Chief Operating Officer from August 2007 until September 2008.  Prior to that time, she spent fourteen years in a variety of positions at DIRECTV, culminating in the role of Senior Vice President, Sales and Marketing Operations.

 

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Joseph A. Verbrugge has served as our Executive Vice President, Sales and Development, since December 2015.  Mr. Verbrugge previously served as our Senior Vice President and General Manager, Automotive Remarketing and Retail Sales, from April 2012 until December 2015; as our Senior Vice President, Automotive Remarketing, from February 2010 until April 2012; and as our Senior Vice President, Automotive Partnerships, from September 2008 until February 2010.  From January 2007 through September 2008, he was Senior Vice President, Automotive Accounts/Partnerships and International Operations, of XM; from May 2006 until January 2007, Mr. Verbrugge served as Senior Vice President, Administration and International Operations of XM; from January 2005 until May 2006, he was Vice President, International Operations, of XM; and from September 2004 until January 2005 he served as Vice President, Special Projects, of XM.  Prior to joining XM, Mr. Verbrugge was a consultant with The Dealy Strategy Group LLC, a management consulting firm specializing in international satellite communications and information services companies, from 1999 until 2004.  From 1992 until 1995, Mr. Verbrugge was a bond representative with Aetna Life and Casualty Company, an insurance company.

ITEM 1A.

RISK FACTORS

In addition to the other information in this Annual Report on Form 10-K, including the information under the caption Item 1. Business “Competition,” the following risk factors should be considered carefully in evaluating us and our business.  This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those set forth below and elsewhere in this Annual Report on Form 10-K.  See “Special Note Regarding Forward-Looking Statements” following this Item 1A. Risk Factors.

We face substantial competition and that competition is likely to increase over time.

We face substantial competition from other providers of radio and audio services.  Our ability to retain and attract subscribers depends on our success in creating and providing popular or unique music, entertainment, news and sports programming.  Our subscribers can obtain certain similar content for free through terrestrial radio stations, Internet radio services and Internet streaming services.  Audio content delivered via the Internet, including through mobile devices in vehicles, is increasingly competitive with our services.  A summary of various services that compete with us is contained in the section entitled “Item 1. Business-Competition” of this Annual Report on Form 10-K.

Competition could result in lower subscription, advertising or other revenue or an increase in our marketing, promotion or other expenses and, consequently, lower our earnings and free cash flow.  We cannot assure you we will be able to compete successfully with our existing or future competitors or that competition will not have a material adverse impact on our operations and financial condition.

Our ability to attract and retain subscribers in the future is uncertain.

Our ability to retain our subscribers, or increase the number of subscribers to our service, is uncertain and subject to many factors, including:

 

·

the production and sale or lease of new vehicles in the United States;

 

·

the price of our service;

 

·

the health of the economy;

 

·

the rate at which existing self-pay subscribers buy and sell new and used vehicles in the United States;

 

·

our ability to convince owners and lessees of new and previously owned vehicles that include satellite radios to purchase subscriptions to our service;

 

·

the effectiveness of our marketing programs;

 

·

the entertainment value of our programming;

 

·

our ability to respond to evolving consumer tastes, relative to the flexibility of our Internet-based competitors; and

 

·

actions by our competitors, such as terrestrial radio and other audio entertainment and information providers.

As part of our business, we experience, and expect to experience in the future, subscriber turnover (i.e., churn).  Some elements of our business strategy may result in churn increasing.  For example, our efforts to increase the penetration of satellite radios in new, lower priced vehicle lines may result in the growth of economy-minded subscribers; our work to acquire subscribers purchasing or leasing pre-owned vehicles may attract subscribers of more limited economic means; and our product and marketing efforts may attract more price sensitive subscribers.

 

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If we are unable to retain current subscribers at expected rates, or the costs of retaining subscribers are higher than expected, our financial performance and operating results could be adversely affected.  We cannot predict how successful we will be at retaining customers who purchase or lease vehicles that include a subscription to our satellite radio service.  We spend substantial amounts on advertising and marketing and in transactions with automakers, retailers and others to obtain and attract subscribers.

Our profitability could be adversely affected if we are unable to consistently attract new subscribers and retain our current subscribers at prices and margins consistent with our past performance.

Consumer protection laws and their enforcement could damage our business.

We engage in extensive marketing efforts to attract and retain subscribers to our services. We employ a wide variety of communications tools as part of our marketing campaigns, including telemarketing efforts and email solicitations.  Consumer protection laws cover nearly all aspects of our marketing efforts, including the content of our advertising, the terms of consumer offers and the manner in which we communicate with subscribers and prospective subscribers.  The nature of our business requires us to expend significant resources to try to ensure that our marketing activities comply with federal and state laws, rules and regulations relating to consumer protection, including laws relating to telemarketing activities and privacy.  There can be no assurance that these efforts will be successful or that we will not have to expend even greater resources towards compliance efforts.

We are subject to various claims under the Telephone Consumer Protection Act (the "TCPA") relating to telephone calls our call center vendors have made to consumers and subscribers, including calls to mobile phones.  Modifications to federal and state laws, rules and regulations concerning consumer protection, including decisions by federal and state courts and agencies interpreting these laws, could have an adverse impact on our ability to attract and retain subscribers to our services.  There can be no assurance that new laws or regulations will not be enacted or adopted, preexisting laws or regulations will not be more strictly enforced or that our varied operations will comply with all applicable laws, which could have a material adverse impact on our operations and financial condition.

The unfavorable outcome of pending or future litigation, including class actions alleging violations of the TCPA, could have a material adverse impact on our operations and financial condition.

We are parties to several legal proceedings arising out of various aspects of our business, including class actions seeking substantial damages for purported violations by us, or by our call center vendors acting on our behalf, of the TCPA.  The TCPA imposes significant restrictions on communications made using automatic telephone dialing systems (“ATDS”) or artificial or prerecorded voices.  The class actions against us allege, among other things, that we called mobile phones using an ATDS without the consumer’s prior consent or, alternatively, after the consumer revoked his or her prior consent, in violation of the TCPA.  Under the TCPA, such violations may result in statutory damages of up to five hundred dollars per call for inadvertent violations and up to fifteen hundred dollars per call for knowing or willful violations.  Given the significant number of communications our call center vendors make to consumers and our subscribers, a determination that we, or our call center vendors acting on our behalf, have violated the TCPA could expose us to statutory damages and, if incurred, could, individually or in the aggregate, have a material adverse impact on our operations and financial condition.  Further, if any indemnification claims we have against our call center vendors are unsuccessful, we may be required to pay the full amount of any damages.

The outcome of these proceedings may not be favorable, and one or more unfavorable outcomes could have a material adverse impact on our financial condition.  Beyond these current proceedings, if, going forward, we fail to ensure that the telemarketing efforts of our call center vendors are TCPA-compliant, and we are held responsible for their acts, we may be subject to further litigation and could be required to pay significant statutory damages.  See "Item 3. Legal Proceedings" below.

The market for music rights is changing and is subject to significant uncertainties.

We must maintain music programming royalty arrangements with, and pay license fees to, owners of rights in musical works.  Traditionally, BMI, ASCAP and SESAC have negotiated for these copyright users, collected royalties and distributed them to songwriters and music publishers.  These traditional arrangements are changing rapidly.  For example, owners of rights in musical works have withdrawn from BMI, ASCAP and SESAC, third parties have contacted us regarding the need to separately license works, the United States Justice Department is evaluating modifications to the Consent Decrees that have governed ASCAP and BMI since the 1940s, and Committees of Congress have held hearings on substantial revisions of the Copyright Act.  The fracturing of the traditional system for licensing rights in musical works may have significant consequences to our business, including increasing licensing costs and reducing the availability of certain pieces for use on our services.

 

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Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we also must pay royalties to copyright owners of sound recordings fixed after February 15, 1972.  Those royalty rates may be established through negotiation or, if negotiation is unsuccessful, by the CRB. Owners of copyrights in sound recordings have created SoundExchange, a collective organization, to collect and distribute royalties.  SoundExchange is exempt by statute from certain U.S. antitrust laws and exercises significant market power in the licensing of sound recordings.  Under the terms of the CRB's decision governing sound recording royalties for the five-year period ending on December 31, 2017, we will be required to pay a royalty based on our gross revenues, subject to certain exclusions, of 10.5% for 2016, and 11% for 2017.  The CRB proceeding to set royalty rates for the five year period beginning 2018 will begin later this year.  SoundExchange currently has a petition before the CRB, requesting an interpretation of the CRB's regulations related to sound recording royalties for the five year period ended December 31, 2012.  SoundExchange alleges that we underpaid royalties for statutory licenses within that time period.  See "Item 3. Legal Proceedings" below.

The right to perform certain copyrighted sound recordings that were fixed before February 15, 1972 is governed by state common law principles and, in certain instances, may be subject to state statutes.  We are a defendant in litigation in several States, regarding the alleged distribution, duplication and performance of certain copyrighted sound recordings that were fixed before February 15, 1972.  In 2015, we settled one such suit for $210 million.  The settling record companies claimed to own, control or otherwise have the right to settle with respect to approximately 85% of the pre-1972 recordings we have historically played.  See "Item 3. Legal Proceedings" below.  If courts ultimately hold that a performance right exists under various state copyright laws, we may be required to pay additional royalties to perform copyrighted sound recordings that were fixed before February 15, 1972 or remove those works from our service.

Our business depends in large part upon the auto industry.

A substantial portion of our subscription growth has come from purchasers and lessees of new and previously owned automobiles in the United States.  The sale and lease of vehicles with satellite radios is an important source of subscribers for our satellite radio service. We have agreements with every major automaker to include satellite radios in new vehicles, although these agreements do not require automakers to install specific or minimum quantities of radios in any given period.

Automotive production and sales are dependent on many factors, including the availability of consumer credit, general economic conditions, consumer confidence and fuel costs.  To the extent vehicle sales by automakers decline, or the penetration of factory-installed satellite radios in those vehicles is reduced, subscriber growth for our satellite radio services may be adversely impacted.

Sales of previously owned vehicles represent a significant source of new subscribers for us. We have agreements with auto dealers and companies operating in the used vehicle market to provide us with data on sales of previously owned satellite radio enabled vehicles. The continuing availability of this information is important to our future growth.

General economic conditions can affect our business.

The purchase of a satellite radio subscription is discretionary, and our business and our financial condition can be negatively affected by general economic conditions. Poor general economic conditions could adversely affect subscriber churn, conversion rates and vehicle sales.

If we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions and private litigation and our reputation could suffer.

The nature of our business involves the receipt and storage of personal information about our subscribers including, in many cases, credit and debit card information.  If we fail to protect the security of personal information about our customers or if we experience a data security breach, we could be exposed to costly government enforcement actions and private litigation and our reputation could suffer.  In addition, our subscribers and potential customers could lose confidence in our ability to protect their personal information, which could cause them to discontinue usage of our services.  Such events could lead to lost future sales and adversely affect our results of operations.

Other existing or future government laws and regulations could harm our business.

We are subject to many laws, including federal, state, local and foreign laws.  These laws and regulations cover issues such as user privacy, behavioral advertising, automatic renewal of agreements, pricing, fraud, electronic waste, mobile and electronic device communications, quality of products and services, taxation, advertising, intellectual property rights and information security.  The expansion of these laws, both in terms of their number and their applicability, could harm our business.  

 

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Failure of our satellites would significantly damage our business.

The lives of our satellites vary depending on a number of factors, including:

 

 

 

·

degradation and durability of solar panels;

 

·

quality of construction;

 

·

random failure of satellite components, which could result in significant damage to or loss of a satellite;

 

·

amount of fuel the satellite consumes; and

 

·

damage or destruction as a result of electrostatic storms, terrorist attacks, collisions with other objects in space or other events, such as nuclear detonations, occurring in space.

In the ordinary course of operation, satellites experience failures of component parts and operational and performance anomalies. Components on our in-orbit satellites have failed; and from time to time we have experienced anomalies in the operation and performance of these satellites. These failures and anomalies are expected to continue in the ordinary course, and we cannot predict if any of these possible future events will have a material adverse effect on our operations or the life of our existing in-orbit satellites. Any material failure of our satellites could cause us to lose customers and could materially harm our reputation and our operating results. We hold no in-orbit insurance for our satellites.  Additional information regarding our fleet of satellites is contained in the section entitled “Item 1. Business - Satellites, Terrestrial Repeaters and Other Satellite Facilities” of this Annual Report on Form 10-K.

We plan to transition our Sirius constellation of satellites to a geostationary orbit using our existing FM-5 and FM-6 satellites.  The transition of our Sirius constellation to a geostationary orbit will, in certain areas, affect the signal coverage for customers served by those satellites.

In addition, our Sirius network of terrestrial repeaters communicates with a single third-party satellite. Our XM network of terrestrial repeaters communicates with a single XM satellite. If the satellites communicating with the applicable repeater network fail unexpectedly, the services would be disrupted for several hours or longer.

Interruption or failure of our information technology and communications systems could negatively impact our results and our brand.

We operate a complex and growing business.  We offer a wide variety of subscription packages at different price points.  Our business is dependent on the operation and availability of our information technology and communication systems and those of certain third party service providers.  Any degradation in the quality, or any failure, of our systems could reduce our revenues, cause us to lose customers and damage our brand.  Although we have implemented practices designed to maintain the availability of our information technology systems and mitigate the harm of any unplanned interruptions, we cannot anticipate all eventualities. We occasionally experience unplanned outages or technical difficulties. We could also experience loss of data or processing capabilities, which could cause us to lose customers and could materially harm our reputation and our operating results.

We rely on internal systems and external systems maintained by manufacturers, distributors and service providers to take, fulfill and handle customer service requests and host certain online activities.  Any interruption or failure of our internal or external systems could prevent us from servicing customers or cause data to be unintentionally disclosed.

Our data centers and our information technology and communications systems are vulnerable to damage or interruption from natural disasters, malicious attacks, fire, power loss, telecommunications failures, computer viruses or other attempts to harm our systems.

We have a program in place to detect and respond to data security incidents.  However, because the techniques used to obtain unauthorized access, disable or degrade service, or sabotage systems change frequently and may be difficult to detect for long periods of time, we may be unable to anticipate these techniques or implement adequate preventive measures.  In addition, hardware, software, or applications we develop or procure from third parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security.  Unauthorized parties may also attempt to gain access to our systems or facilities, or those of third parties with whom we do business, through fraud, trickery, or other forms of deceiving our employees, contractors or other agents.

If hackers were able to circumvent our security measures, we could lose proprietary information or personal information or experience significant disruptions. If our systems become unavailable or suffer a security breach, we may be required to expend significant resources to address these problems, including notification under various federal and state data privacy regulations, and our reputation and operating results could suffer.

 

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We may not realize the benefits of acquisitions or other strategic initiatives.

Our business strategy may include selective acquisitions or other strategic initiatives that allow us to expand our business. The success of any acquisition depends upon effective integration of acquired businesses and assets into our operations, which is subject to risks and uncertainties, including realization of any anticipated synergies and cost savings, the ability to retain and attract personnel, the diversion of management’s attention for other business concerns, and undisclosed or potential legal liabilities of the acquired business or assets.

Rapid technological and industry changes could adversely impact our services.

The audio entertainment industry is characterized by rapid technological change, frequent product innovations, changes in customer requirements and expectations, and evolving standards. If we are unable to keep pace with these changes, our business may not succeed. Products using new technologies, or emerging industry standards, could make our technologies less competitive in the marketplace.

Failure of third parties to perform could adversely affect our business.

Our business depends, in part, on various third parties, including:

 

 

 

·

manufacturers that build and distribute satellite radios;

 

·

companies that manufacture and sell integrated circuits for satellite radios;

 

·

programming providers and on-air talent;

 

·

vendors that operate our call centers;

 

·

retailers that market and sell satellite radios and promote subscriptions to our services; and

 

·

vendors that have designed or built, and vendors that support or operate, other important elements of our systems.

If one or more of these third parties do not perform in a satisfactory or timely manner, our business could be adversely affected. In addition, a number of third parties on which we depend have experienced, and may in the future experience, financial difficulties or file for bankruptcy protection. Such third parties may not be able to perform their obligations to us in a timely manner, if at all, as a result of their financial condition or may be relieved of their obligations to us as part of seeking bankruptcy protection.

We design, establish specifications, source or specify parts and components, and manage various aspects of the logistics of the production of satellite radios. As a result of these activities, we may be exposed to liabilities associated with the design, manufacture and distribution of radios that the providers of an entertainment service would not customarily be subject to, such as liabilities for design defects, patent infringement and compliance with applicable laws, as well as the costs of returned product.

Our service may experience harmful interference from new and existing wireless operations.

The development of new applications and services in spectrum adjacent to the frequencies licensed to us for satellite radio and ancillary services, as well as the possible loss of service caused by the combination of signals in other frequencies, could cause harmful interference to our satellite radio service.  Certain operations or combination of operations permitted by the FCC in spectrum, other than our licensed frequencies, could result in the loss of signal to our service and the reception of our satellite radio service could be adversely affected in certain areas.  In certain cases, we are dependent on the FCC to assist us in preventing harmful interference to our service.

Failure to comply with FCC requirements could damage our business.

We hold FCC licenses and authorizations to operate commercial satellite radio services in the United States, including authorizations for satellites and terrestrial repeaters, and related authorizations. The FCC generally grants licenses and authorizations for a fixed term. Although we expect our licenses and authorizations to be renewed in the ordinary course upon their expiration, there can be no assurance that this will be the case. Any assignment or transfer of control of any of our FCC licenses or authorizations must be approved in advance by the FCC.

 

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The operation of our satellite radio systems is subject to significant regulation by the FCC under authority granted through the Communications Act of 1934 and related federal law. We are required, among other things, to operate only within specified frequencies; to meet certain conditions regarding the interoperability of our satellite radios with those of other licensed satellite radio systems; to coordinate our satellite radio services with radio systems operating in the same range of frequencies in neighboring countries; and to coordinate our communications links to our satellites with other systems that operate in the same frequency band. Noncompliance by us with these requirements or other conditions or with other applicable FCC rules and regulations could result in fines, additional license conditions, license revocation or other detrimental FCC actions. There is no guarantee that Congress will not modify the statutory framework governing our services, or that the FCC will not modify its rules and regulations in a manner that would have a material impact on our operations.

The terms of our licenses and the order of the FCC approving the Merger requires us to meet certain conditions. Non-compliance with these conditions could result in fines, additional license conditions, license revocation or other detrimental FCC actions.

We may from time to time modify our business plan, and these changes could adversely affect us and our financial condition.

We regularly evaluate our plans and strategy. These evaluations often result in changes to our plans and strategy, some of which may be material. These changes in our plans or strategy may include: the acquisition or termination of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions of other businesses, including acquisitions that are not directly related to our satellite radio business.

We have a significant amount of indebtedness, and our revolving credit facility contains certain covenants that restrict our current and future operations.

As of December 31, 2015, we had an aggregate principal amount of approximately $5.5 billion of indebtedness outstanding, $340 million of which was outstanding under a $1.75 billion Senior Secured Revolving Credit Facility.

Our indebtedness increases our vulnerability to general adverse economic and industry conditions; requires us to dedicate a portion of our cash flow from operations to payments on indebtedness, reducing the availability of cash flow to fund capital expenditures, marketing and other general corporate activities; limits our ability to borrow additional funds; limits our flexibility in planning for, or reacting to, changes in our business and the audio entertainment industry; and may place us at a competitive disadvantage compared to other competitors.

Our studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities.

An earthquake, hurricane, tornado, flood, terrorist attack or other catastrophic event could damage our studios, terrestrial repeater networks or satellite uplink facilities, interrupt our service and harm our business.

Any damage to the satellites that transmit to our terrestrial repeater networks would likely result in degradation of the affected service for some subscribers and could result in complete loss of service in certain or all areas.  Damage to our satellite uplink facilities could result in a complete loss of our services until we could transfer operations to suitable back-up facilities.

Our principal stockholder has significant influence, including over actions requiring stockholder approval, and its interests may differ from the interests of other holders of our common stock.

Liberty Media beneficially owns over 50% of Holdings’ common stock and has the ability to influence our affairs, policies and operations.  Two Liberty Media executives and one other member of the board of directors of Liberty Media are members of our board of directors.  Our board of directors currently has thirteen members.  Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of Holdings’ board of directors.  Our board of directors is responsible for, among other things, the appointment of management, future issuances of common stock or other securities, the payment of dividends, if any, the incurrence of debt, and the approval of various transactions.  

Liberty Media can also determine the outcome of all matters requiring general stockholder approval, including the election of the board of directors and changes to our certificate of incorporation or by-laws.  Liberty Media can also cause or prevent a change of control of Holdings and could preclude any unsolicited acquisition of our company.  The concentration of ownership could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might ultimately affect the market price of our common stock.  In certain cases, the interests of Liberty Media may not be aligned with the interests of other stockholders of Holdings.

 

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We are a “controlled company” within the meaning of the NASDAQ listing rules and, as a result, qualify for, and rely on, exemptions from certain corporate governance requirements.

We are a “controlled company” for the purposes of the NASDAQ Stock Market listing rules. As such, we have elected not to comply with certain NASDAQ corporate governance requirements. Although a majority of our board of directors consists of independent directors, we do not have a compensation committee and nominating and corporate governance committee that consist entirely of independent directors.

Our business may be impaired by third-party intellectual property rights.

Development of our systems has depended upon the intellectual property that we have developed, as well as intellectual property licensed from third parties. If the intellectual property that we have developed or use is not adequately protected, others will be permitted to and may duplicate portions of our systems or services without liability. In addition, others may challenge, invalidate, render unenforceable or circumvent our intellectual property rights, patents or existing licenses or we may face significant legal costs in connection with defending and enforcing those intellectual property rights. Some of the know-how and technology we have developed, and plan to develop, is not now, nor will it be, covered by U.S. patents or trade secret protections. Trade secret protection and contractual agreements may not provide adequate protection if there is any unauthorized use or disclosure. The loss of necessary technologies could require us to substitute technologies of lower quality performance standards, at greater cost or on a delayed basis, which could harm us.

Other parties may have patents or pending patent applications, which will later mature into patents or inventions that may block or put limits on our ability to operate our system or license technologies. We may have to resort to litigation to enforce our rights under license agreements or to determine the scope and validity of other parties’ proprietary rights in the subject matter of those licenses. This may be expensive and we may not succeed in any such litigation.

Third parties may assert claims or bring suit against us for patent, trademark or copyright infringement, or for other infringement or misappropriation of intellectual property rights. Any such litigation could result in substantial cost, and diversion of effort and adverse findings in any proceeding could subject us to significant liabilities to third parties; require us to seek licenses from third parties; block our ability to operate our systems or license our technology; or otherwise adversely affect our ability to successfully develop and market our satellite radio systems.

Special Note About Forward-Looking Statements

We have made various statements in this Annual Report on Form 10-K that may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may also be made in our other reports filed with or furnished to the SEC, in our press releases and in other documents. In addition, from time to time, we, through our management, may make oral forward-looking statements. Forward-looking statements are subject to risks and uncertainties, including those identified above, which could cause actual results to differ materially from such statements. The words “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “believe,” “intend,” “plan,” “may,” “should,” “could,” “would,” “likely,” “projection,” “outlook” and similar expressions are intended to identify forward-looking statements. We caution you that the risk factors described above are not exclusive. There may also be other risks that we are unable to predict at this time that may cause actual results to differ materially from those in forward-looking statements. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. We undertake no obligation to update publicly or revise any forward-looking statements, except as required by law.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

 

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Table of Contents

 

ITEM 2.

PROPERTIES 

Below is a list of the principal properties that we own or lease:

 

Location

 

Purpose

 

Own/Lease

New York, NY

 

Corporate headquarters, office facilities and studio/production facilities

 

Lease

Washington, DC

 

Office, studio/production facilities and data center

 

Own

Lawrenceville, NJ

 

Office and technical/engineering facilities

 

Lease

Deerfield Beach, FL

 

Office and technical/engineering facilities

 

Lease

Farmington Hills, MI

 

Office and technical/engineering facilities

 

Lease

Nashville, TN

 

Studio/production facilities

 

Lease

Vernon, NJ

 

Technical/engineering facilities

 

Own

Ellenwood, GA

 

Technical/engineering facilities

 

Lease

Los Angeles, CA

 

Studio/production facilities

 

Lease

Irving, TX

 

Office and engineering facilities/call center

 

Lease

We also own or lease other small facilities that we use as offices for our advertising sales personnel, studios and warehouse and maintenance space.  These facilities are not material to our business or operations.  We also lease properties in Panama and Ecuador that we use as earth stations to command and control satellites.

In addition, we lease or license space at approximately 730 locations for use in connection with the terrestrial repeater networks that support our satellite radio services.  In general, these leases and licenses are for space on building rooftops and communications towers.  None of these individual arrangements are material to our business or operations.

ITEM 3.

LEGAL PROCEEDINGS

In the ordinary course of business, we are a defendant or party to various claims and lawsuits, including those discussed below.  These claims are at various stages of arbitration or adjudication.

Telephone Consumer Protection Act Suits.  We are a defendant in several purported class action suits that allege that we, or call center vendors acting on our behalf, made calls which violate provisions of the TCPA.  The plaintiffs in these actions allege, among other things, that we called mobile phones using an automatic telephone dialing system without the consumer’s prior consent or, alternatively, after the consumer revoked his or her prior consent.  In one of the actions, the plaintiff also alleges that we violated the TCPA’s call time restrictions and in one of the other actions the plaintiff also alleges that we violated the TCPA’s do not call restrictions.  Our vendors make millions of calls each month to consumers, including our subscribers, as part of our customer service and marketing efforts. The plaintiffs in these suits are seeking various forms of relief, including statutory damages of five hundred dollars for each violation of the TCPA or, in the alternative, treble damages of up to fifteen hundred dollars for each knowing and willful violation of the TCPA, as well as payment of interest, attorneys’ fees and costs, and certain injunctive relief prohibiting any violations of the TCPA in the future.  

These purported class action cases are titled Erik Knutson v. Sirius XM Radio Inc., No. 12-cv-0418-AJB-NLS (S.D. Cal.), Francis W. Hooker v. Sirius XM Radio, Inc., No. 4:13-cv-3 (E.D. Va.), Yefim Elikman v. Sirius XM Radio, Inc. and Career Horizons, Inc., No. 1:15-cv-02093 (N.D. Ill.), and Anthony Parker v. Sirius XM Radio, Inc., No. 8:15-cv-01710-JSM-EAJ (M.D. Fla).  These actions were commenced in February 2012, January 2013, April 2015 and July 2015, respectively.  Information concerning each of these actions is publicly available in court filings under their docket numbers.  

We have notified certain of our call center vendors of these actions and requested that they defend and indemnify us against these claims pursuant to the provisions of their existing or former agreements with us.  We believe we have valid contractual claims against call center vendors in connection with these claims and intend to preserve and pursue our rights to recover from these entities; however, no assurance can be made as to our ability to fully recover all claims we may have against these entities.

Pre-1972 Sound Recording Matters. In August 2013, SoundExchange, Inc. filed a complaint in the United States District Court for the District of Columbia alleging that we underpaid royalties for statutory licenses during the 2007-2012 period in violation of the regulations established by the Copyright Royalty Board for that period.  SoundExchange principally alleges that we improperly reduced our calculation of gross revenues, on which the royalty payments are based, by deducting non-recognized revenue attributable to pre-1972 recordings and Premier package revenue that is not “separately charged” as required by the regulations.  SoundExchange is seeking compensatory damages of not less than $50 million and up to $100 million or more, payment of late fees and interest, and attorneys’ fees and costs.

 

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In August 2014, the United States District Court for the District of Columbia granted our motion to dismiss the complaint without prejudice on the grounds that the case properly should be pursued before the Copyright Royalty Board rather than the district court.  In December 2014, SoundExchange filed a petition with the Copyright Royalty Board requesting an order interpreting the applicable regulations.

This matter is titled SoundExchange, Inc. v. Sirius XM Radio, Inc., No.13-cv-1290-RJL (D.D.C.), and Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, United States Copyright Royalty Board, No. 2006-1 CRB DSTRA.  Information concerning each of these actions is publicly available in filings under their docket numbers.

In addition, since 2013, we have been named as a defendant in several suits, including putative class action suits, challenging our use and public performance via satellite radio and the Internet of sound recordings fixed prior to February 15, 1972 (“pre-1972 recordings”) under various state laws.  In June 2015, we settled the suit brought by Capitol Records LLC, Sony Music Entertainment, UMG Recordings, Inc., Warner Music Group Corp. and ABKCO Music & Records, Inc. relating to our use and public performance of pre-1972 recordings for $210 million, which amount was paid in July 2015.  These settling record companies claimed to own, control or otherwise have the right to settle with respect to approximately 85% of the pre-1972 recordings we have historically played.  We have also entered into certain direct licenses with other owners of pre-1972 recordings, which in many cases include releases of any claims associated with our use of pre-1972 recordings.

Several putative class actions suits challenging our use and public performance of other pre-1972 recordings under various state laws remain pending.  We believe we have substantial defenses to the claims asserted, we are defending these actions vigorously, and do not believe that the resolution of these remaining cases will have a material adverse effect on our business, financial condition or results of operations.

With respect to certain matters described above under the captions “Telephone Consumer Protection Act Suits” and “Pre-1972 Sound Recording Matters,” we have determined that the outcome of these matters is inherently unpredictable and subject to significant uncertainties, many of which are beyond our control.  No provision was made for losses to the extent such are not probable and estimable.  We believe we have substantial defenses to the claims asserted, and intend to defend these actions vigorously.

Other Matters.  In the ordinary course of business, we are a defendant in various other lawsuits and arbitration proceedings, including derivative actions; 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 matters, in our opinion, is likely to have a material adverse effect on our business, financial condition or results of operations.

ITEM 4.

MINE SAFETY DISCLOSURES

Not applicable.

 

 

 

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PART II

ITEM  5.

MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the NASDAQ Global Select Market under the symbol “SIRI.”  The following table sets forth the high and low per share sales price for our common stock, as reported by NASDAQ, for the periods indicated below:

 

 

 

High

 

 

Low

 

Year Ended December 31, 2014

 

 

 

 

 

 

 

 

First Quarter

 

$

3.89

 

 

$

3.09

 

Second Quarter

 

$

3.49

 

 

$

2.98

 

Third Quarter

 

$

3.65

 

 

$

3.28

 

Fourth Quarter

 

$

3.63

 

 

$

3.14

 

Year Ended December 31, 2015

 

 

 

 

 

 

 

 

First Quarter

 

$

4.04

 

 

$

3.33

 

Second Quarter

 

$

4.00

 

 

$

3.70

 

Third Quarter

 

$

4.01

 

 

$

3.31

 

Fourth Quarter

 

$

4.20

 

 

$

3.69

 

 

On January 29, 2016, the closing sales price of our common stock on the NASDAQ Global Select Market was $3.70 per share.  On January 29, 2016, there were approximately 9,560 record holders of our common stock.

Dividends

We currently do not pay dividends on our common stock.  Our ability to pay dividends is currently limited by covenants under our revolving credit facility.  In December 2012, we paid a special cash dividend.  Our board of directors has not made any determination whether similar special cash dividends will be paid in the future.

Issuer Purchases of Equity Securities

Since December 2012, our board of directors approved for repurchase an aggregate of $8.0 billion of our common stock.  Our board of directors did not establish an end date for this stock repurchase program.  Shares of common stock may be purchased from time to time on the open market, pursuant to pre-set trading plans meeting the requirements of Rule 10b5-1 under the Exchange Act, in privately negotiated transactions, including transactions with Liberty Media and its affiliates, or otherwise.  As of December 31, 2015, our cumulative repurchases since December 2012 under our stock repurchase program totaled 1.8 billion shares for $6.3 billion, and $1.7 billion remained available under our stock repurchase program.  The size and timing of our repurchases will be based on a number of factors, including price and business and market conditions.

The following table provides information about our purchases of equity securities registered pursuant to Section 12 of the Exchange Act during the quarter ended December 31, 2015:

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price Paid

Per Share (a)

 

 

Total Number of Shares

Purchased as Part of Publicly

Announced Plans or Programs

 

 

Approximate Dollar Value

of Shares that May Yet Be

Purchased Under the Plans

or Programs (a)

 

October 1, 2015 - October 31, 2015

 

 

29,667,244

 

 

$

3.93

 

 

 

29,667,244

 

 

$

1,951,440,398

 

November 1, 2015 - November 30, 2015

 

 

19,121,892

 

 

$

4.12

 

 

 

19,121,892

 

 

$

1,872,689,142

 

December 1, 2015 - December 31, 2015

 

 

42,816,509

 

 

$

4.06

 

 

 

42,816,509

 

 

$

1,698,860,143

 

Total

 

 

91,605,645

 

 

$

4.03

 

 

 

91,605,645

 

 

 

 

 

 

(a)

These amounts include fees and commissions associated with shares repurchased.  All of these repurchases were made pursuant to our share repurchase program.  

 

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COMPARISON OF CUMULATIVE TOTAL RETURNS

Set forth below is a graph comparing the cumulative performance of our common stock with the Standard & Poor's Composite-500 Stock Index, or the S&P 500, and the NASDAQ Telecommunications Index from December 31, 2010 to December 31, 2015. The graph assumes that $100 was invested on December 31, 2010 in each of our common stock, the S&P 500 and the NASDAQ Telecommunications Index. A dividend with respect to our common stock was declared in 2012 only.

 

Stockholder Return Performance Table

 

 

NASDAQ

Telecommunications Index

 

 

S&P 500 Index

 

 

Sirius XM Holdings Inc.

 

December 31, 2010

$

100.00

 

 

$

100.00

 

 

$

100.00

 

December 31, 2011

$

87.38

 

 

$

100.00

 

 

$

111.66

 

December 31, 2012

$

89.13

 

 

$

113.40

 

 

$

177.30

 

December 31, 2013

$

110.54

 

 

$

146.97

 

 

$

214.11

 

December 31, 2014

$

120.38

 

 

$

163.71

 

 

$

214.72

 

December 31, 2015

$

111.36

 

 

$

162.52

 

 

$

249.69

 

 

Equity Compensation Plan Information

 

Plan Category (shares in thousands)

 

Column (a)

Number of Securities to

be Issued upon Exercise

of Outstanding Options,

Warrants and Rights

 

 

Column (b)

Weighted-Average

Exercise Price of

Outstanding Options,

Warrants and Rights(1)

 

 

Column (c)

Number of Securities

Remaining Available for

Future Issuance under

Equity Compensation Plans

(excluding Securities

Reflected in Column (a))

 

Equity compensation plans approved by security holders

 

 

354,569

 

 

$

3.29

 

 

 

246,778

 

Equity compensation plans not approved by security holders

 

 

 

 

 

 

 

 

 

Total

 

 

354,569

 

 

$

3.29

 

 

 

246,778

 

__________

(1)

Excludes approximately 16,088 shares covering RSUs from the calculation of the weighted average exercise price.

 

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Table of Contents

 

ITEM 6.

SELECTED FINANCIAL DATA 

The operating and balance sheet data included in the following selected financial data for 2015 and 2014 have been derived from our audited consolidated financial statements.  Historical operating and balance sheet data included within the following selected financial data from 2011 through 2013 is derived from the audited Consolidated Financial Statements of Sirius XM and Holdings.  This selected financial data should be read in conjunction with the audited Consolidated Financial Statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K and “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this Annual Report on Form 10-K.

 

 

As of and for the Years Ended December 31,

 

(in thousands, except per share data)

2015

 

 

2014

 

 

2013 (1)

 

 

2012 (2)

 

 

2011

 

Statements of Comprehensive Income Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

$

4,570,058

 

 

$

4,181,095

 

 

$

3,799,095

 

 

$

3,402,040

 

 

$

3,014,524

 

Net income

$

509,724

 

 

$

493,241

 

 

$

377,215

 

 

$

3,472,702

 

 

$

426,961

 

Net income per share - basic

$

0.09

 

 

$

0.09

 

 

$

0.06

 

 

$

0.55

 

 

$

0.07

 

Net income per share - diluted

$

0.09

 

 

$

0.08

 

 

$

0.06

 

 

$

0.51

 

 

$

0.07

 

Weighted average common shares outstanding - basic

 

5,375,707

 

 

 

5,788,944

 

 

 

6,227,646

 

 

 

4,209,073

 

 

 

3,744,606

 

Weighted average common shares outstanding - diluted

 

5,435,166

 

 

 

5,862,020

 

 

 

6,384,791

 

 

 

6,873,786

 

 

 

6,500,822

 

Cash dividends declared per share

$

 

 

$

 

 

$

 

 

$

0.05

 

 

$

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

111,838

 

 

$

147,724

 

 

$

134,805

 

 

$

520,945

 

 

$

773,990

 

Restricted investments

$

9,888

 

 

$

5,922

 

 

$

5,718

 

 

$

3,999

 

 

$

3,973

 

Total assets (3)

$

8,046,662

 

 

$

8,369,065

 

 

$

8,826,959

 

 

$

9,024,800

 

 

$

7,452,738

 

Long-term debt, net of current portion (3)

$

5,443,614

 

 

$

4,487,419

 

 

$

3,088,701

 

 

$

2,400,943

 

 

$

2,969,093

 

Stockholders' (deficit) equity

$

(166,491

)

 

$

1,309,837

 

 

$

2,745,742

 

 

$

4,039,565

 

 

$

704,145

 

 

(1)

The selected financial data for 2013 includes the balances and approximately two months of activity related to the acquisition of the connected vehicle business of Agero, Inc. in November 2013.

(2)

For the year ended December 31, 2012, we had an income tax benefit of $2,998,234 due to the release of our valuation allowance.  A special cash dividend was paid during 2012.

(3)

The 2011 – 2015 balances reflect the adoption of Accounting Standards Update 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, and Accounting Standards Update 2015-15, Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Agreements.  As a result of our adoption of these ASUs, Total Assets was reduced by $7,155, $6,444, $17,821, $30,043 and $43,258 for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively, and Long-term debt, net of current portion, was reduced by $7,155, $6,444, $5,120, $30,043 and $43,258 for the years ended December 31, 2015, 2014, 2013, 2012 and 2011, respectively.

 

 

 

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ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 

This Annual Report on Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those described under “Item 1A - Risk Factors” and elsewhere in this Annual Report on Form 10-K. See “Special Note Regarding Forward-Looking Statements.”

(All amounts referenced in this Item 7 are in thousands, except per subscriber and per installation amounts, unless otherwise stated)

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Executive Summary

We transmit music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services, in the United States on a subscription fee basis through our two proprietary satellite radio systems.  Subscribers can also receive music and other channels, plus features such as SiriusXM On Demand and MySXM, over our Internet radio service, including through applications for mobile devices.  We are also a leader in providing connected vehicle services.  Our connected vehicle services are designed to enhance the safety, security and driving experience for vehicle operators while providing marketing and operational benefits to automakers and their dealers.  

We have agreements with every major automaker (“OEMs”) to offer satellite radios in their vehicles.  We also acquire subscribers through marketing to owners and lessees of previously owned vehicles that include factory-installed satellite radios that are not currently subscribing to our services.  Additionally, we distribute our satellite radios through retailers online and at locations nationwide and through our website.  Satellite radio services are also offered to customers of certain rental car companies.

As of December 31, 2015, we had approximately 29.6 million subscribers of which approximately 24.3 million were self-pay subscribers and approximately 5.3 million were paid promotional 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 for subscriptions included in the sale or lease price of a vehicle; subscribers to our Internet services who do not also have satellite radio subscriptions; and certain subscribers to our weather, traffic, and data services who do not also have satellite radio subscriptions.  Subscribers and subscription related revenues and expenses associated with our connected vehicle services are not included in our subscriber count or subscriber-based operating metrics.

Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly plan.  We offer discounts for prepaid, longer term subscription plans, as well as a multiple subscription discount.  We also derive revenue from activation and other fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic and data services.

In certain cases, a subscription to our radio services is included in the sale or lease price of new vehicles or previously owned vehicles. The length of these subscriptions varies but is typically three to twelve months.  We receive payments for these subscriptions from certain automakers.  We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.

Liberty Media beneficially owns, directly and indirectly, over 50% of the outstanding shares of our common stock.  As a result, we are a “controlled company” for the purposes of the NASDAQ corporate governance requirements.  Liberty Media owns interests in a range of media, communications and entertainment businesses.

We also have an approximate 37% equity interest in Sirius XM Canada which offers satellite radio services in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count.

 

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Results of Operations

Set forth below are our results of operations for the year ended December 31, 2015 compared with the year ended December 31, 2014 and the year ended December 31, 2014 compared with the year ended December 31, 2013.

 

 

 

For the Years Ended December 31,

 

 

2015 vs 2014 Change

 

 

2014 vs 2013 Change

 

 

 

2015

 

 

2014

 

 

2013

 

 

Amount

 

 

%

 

 

Amount

 

 

%

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subscriber revenue

 

$

3,824,793

 

 

$

3,554,302

 

 

$

3,284,660

 

 

$

270,491

 

 

 

8

%

 

$

269,642

 

 

 

8

%

Advertising revenue

 

 

122,292

 

 

 

100,982

 

 

 

89,288

 

 

 

21,310

 

 

 

21

%

 

 

11,694

 

 

 

13

%

Equipment revenue

 

 

110,923

 

 

 

104,661

 

 

 

80,573

 

 

 

6,262

 

 

 

6

%

 

 

24,088

 

 

 

30

%

Other revenue

 

 

512,050

 

 

 

421,150

 

 

 

344,574

 

 

 

90,900

 

 

 

22

%

 

 

76,576

 

 

 

22

%

Total revenue

 

 

4,570,058

 

 

 

4,181,095

 

 

 

3,799,095

 

 

 

388,963

 

 

 

9

%

 

 

382,000

 

 

 

10

%

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of services:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue share and royalties

 

 

1,034,832

 

 

 

810,028

 

 

 

677,642

 

 

 

224,804

 

 

 

28

%

 

 

132,386

 

 

 

20

%

Programming and content

 

 

293,091

 

 

 

297,313

 

 

 

290,323

 

 

 

(4,222

)

 

 

(1

%)

 

 

6,990

 

 

 

2

%

Customer service and billing

 

 

377,908

 

 

 

370,585

 

 

 

320,755

 

 

 

7,323

 

 

 

2

%

 

 

49,830

 

 

 

16

%

Satellite and transmission

 

 

94,609

 

 

 

86,013

 

 

 

79,292

 

 

 

8,596

 

 

 

10

%

 

 

6,721

 

 

 

8

%

Cost of equipment

 

 

42,724

 

 

 

44,397

 

 

 

26,478

 

 

 

(1,673

)

 

 

(4

%)

 

 

17,919

 

 

 

68

%

Subscriber acquisition costs

 

 

532,599

 

 

 

493,464

 

 

 

495,610

 

 

 

39,135

 

 

 

8

%

 

 

(2,146

)

 

 

0

%

Sales and marketing

 

 

354,189

 

 

 

336,480

 

 

 

291,024

 

 

 

17,709

 

 

 

5

%

 

 

45,456

 

 

 

16

%

Engineering, design and development

 

 

64,403

 

 

 

62,784

 

 

 

57,969

 

 

 

1,619

 

 

 

3

%

 

 

4,815

 

 

 

8

%

General and administrative

 

 

324,801

 

 

 

293,938

 

 

 

262,135

 

 

 

30,863

 

 

 

10

%

 

 

31,803

 

 

 

12

%

Depreciation and amortization

 

 

272,214

 

 

 

266,423

 

 

 

253,314

 

 

 

5,791

 

 

 

2

%

 

 

13,109

 

 

 

5

%

Total operating expenses

 

 

3,391,370

 

 

 

3,061,425

 

 

 

2,754,542

 

 

 

329,945

 

 

 

11

%

 

 

306,883

 

 

 

11

%

Income from operations

 

 

1,178,688

 

 

 

1,119,670

 

 

 

1,044,553

 

 

 

59,018

 

 

 

5

%

 

 

75,117

 

 

 

7

%

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net of amounts capitalized

 

 

(299,103

)

 

 

(269,010

)

 

 

(204,671

)

 

 

(30,093

)

 

 

(11

%)

 

 

(64,339

)

 

 

(31

%)

Loss on extinguishment of debt

   and credit facilities, net

 

 

 

 

 

 

 

 

(190,577

)

 

 

 

 

 

0

%

 

 

190,577

 

 

 

100

%

Loss on change in value of derivatives

 

 

 

 

 

(34,485

)

 

 

(20,393

)

 

 

34,485

 

 

 

100

%

 

 

(14,092

)

 

 

(69

%)

Other income

 

 

12,379

 

 

 

14,611

 

 

 

8,180

 

 

 

(2,232

)

 

 

(15

%)

 

 

6,431

 

 

 

79

%

Total other expense

 

 

(286,724

)

 

 

(288,884

)

 

 

(407,461

)

 

 

2,160

 

 

 

1

%

 

 

118,577

 

 

 

29

%

Income before income taxes

 

 

891,964

 

 

 

830,786

 

 

 

637,092

 

 

 

61,178

 

 

 

7

%

 

 

193,694

 

 

 

30

%

Income tax expense

 

 

(382,240

)

 

 

(337,545

)

 

 

(259,877

)

 

 

(44,695

)

 

 

(13

%)

 

 

(77,668

)

 

 

(30

%)

Net income

 

$

509,724

 

 

$

493,241

 

 

$

377,215

 

 

$

16,483

 

 

 

3

%

 

$

116,026

 

 

 

31

%

 

Our results of operations discussed below include the impact of purchase price accounting adjustments associated with the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (the “Merger”). The purchase price accounting adjustments related to the Merger, include the: (i) 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.  The deferred credits on executory contracts attributable to third party arrangements with an OEM included in revenue share and royalties, subscriber acquisition costs, and sales and marketing concluded with the expiration of the acquired contract during 2013.  The purchase price accounting adjustments related to programming providers concluded with the expiration of the acquired contract in June 2015.  The impact of these purchase price accounting adjustments is detailed in our Adjusted Revenues and Operating Expenses tables on pages 37 through 38 of our glossary.

Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, subscriber revenue was $3,824,793 and $3,554,302, respectively, an increase of 8%, or $270,491.  The increase was primarily attributable to an 8% increase in the daily weighted average number of subscribers and increases in certain of our self-pay subscription rates, partially offset by subscription discounts and limited channel plans offered in customer acquisition and retention programs.

 

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·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, subscriber revenue was $3,554,302 and $3,284,660, respectively, an increase of 8%, or $269,642.  The increase was primarily attributable to a 6% increase in the daily weighted average number of subscribers, the inclusion of a full year of subscription revenue generated by our connected vehicle business and the increase in certain of our subscription rates beginning in January 2014. These increases were partially offset by subscription discounts and limited channel plans offered in customer acquisition and retention programs, a change in an agreement with an automaker and a rental car company, and an increasing number of lifetime subscription plans that had reached full revenue recognition. 

We expect subscriber revenues to increase based on the growth of our subscriber base, including the increases in certain of our subscription rates and the sale of additional services to subscribers.

Advertising Revenue includes the sale of advertising on certain non-music channels.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, advertising revenue was $122,292 and $100,982, respectively, an increase of 21%, or $21,310.  The increase was primarily due to a greater number of advertising spots sold and transmitted as well as increases in rates charged per spot.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, advertising revenue was $100,982 and $89,288, respectively, an increase of 13%, or $11,694.  The increase was primarily due to a greater number of advertising spots sold and transmitted, as well as increases in rates charged per spot.

We expect our advertising revenue to continue to grow as more advertisers are attracted to our national platform and growing subscriber base and as we launch additional non-music channels.

Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, equipment revenue was $110,923 and $104,661, respectively, an increase of 6%, or $6,262.  The increase was driven by royalties from higher OEM production and sales to distributors, partially offset by lower direct to consumer sales.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, equipment revenue was $104,661 and $80,573, respectively, an increase of 30%, or $24,088.  The increase was driven by higher sales to distributors and royalties from OEM production, partially offset by lower per unit revenue on direct to consumer sales.

We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume of equipment sales in our aftermarket and direct to consumer business.

Other Revenue includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our connected vehicle business and our Canadian affiliate and ancillary revenues.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, other revenue was $512,050 and $421,150, respectively, an increase of 22%, or $90,900.  The increase was driven by revenues from the U.S. Music Royalty Fee as the number of subscribers subject to the 13.9% rate increased along with an overall increase in subscribers, higher revenue generated from our connected vehicle business, and increased revenue from our Canadian affiliate.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, other revenue was $421,150 and $344,574, respectively, an increase of 22%, or $76,576.  The increase was driven by revenues from the U.S. Music Royalty Fee as the number of subscribers subject to the 12.5% rate increased along with an overall increase in subscribers, by a change in an agreement with a rental car company and the inclusion of a full year of revenue generated by our connected vehicle business.

We expect other revenue to increase as our growing subscriber base drives higher U.S. Music Royalty Fees.

Operating Expenses

Revenue Share and Royalties include distribution and content provider revenue share, royalties for transmitting content and web streaming, and advertising revenue share.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, revenue share and royalties were $1,034,832 and $810,028, respectively, an increase of 28%, or $224,804, and increased as a percentage of total revenue.  The increase was primarily due to $128,256 in expense recorded during the year ended December 31, 2015 related to our settlements associated with our use of certain pre-1972 sound recordings through December 31, 2015.  Revenue share and royalties also increased due to greater revenues subject to royalty and revenue sharing arrangements and a 5.3% increase in the statutory royalty rate for the performance of post-1972 sound recordings.

 

24


Table of Contents

 

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, revenue share and royalties were $810,028 and $677,642, respectively, an increase of 20%, or $132,386, and increased as a percentage of total revenue.  The increase was primarily attributable to the elimination of the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger, greater revenues subject to royalty and/or revenue sharing arrangements, and a 5.6% increase in the statutory royalty rate for the performance of post-1972 sound recordings. For the year ended December 31, 2013, revenue share and royalties was positively impacted by a benefit of $122,534 to earnings from the amortization of deferred credits on executory contracts associated with the Merger. 

We expect our revenue share and royalty costs to increase as a result of the Capitol Records settlement and as our revenues grow and our post-1972 royalty rates increase.  We expect to recognize $83,250 in expense related to the Capitol Records settlement for the use of pre-1972 sound recordings for 2016 through 2017.  As determined by the Copyright Royalty Board, we have paid or will pay royalties for the use of certain post-1972 sound recordings on our satellite radio service of 9.0%, 9.5%, 10.0%, 10.5% and 11% in 2013, 2014, 2015, 2016 and 2017, respectively.

Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees and other amounts.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, programming and content expenses were $293,091 and $297,313, respectively, a decrease of 1%, or $4,222, and decreased as a percentage of total revenue.  The decrease was primarily due to the termination of certain programming agreements, partially offset by the addition of new programming arrangements and personnel-related costs.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, programming and content expenses were $297,313 and $290,323, respectively, an increase of 2%, or $6,990, but decreased as a percentage of total revenue.  The increase was primarily due to higher personnel costs, the reduction in the benefit to earnings from the purchase price accounting adjustments associated with the Merger and the early termination of certain programming agreements, partially offset by the renewal of certain licensing agreements at more cost effective terms.

We expect our programming and content expenses to increase as we offer additional programming, and renew or replace expiring agreements.

Customer Service and Billing includes costs associated with the operation and management of internal and third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, customer service and billing expenses were $377,908 and $370,585, respectively, an increase of 2%, or $7,323, but decreased as a percentage of total revenue.  The increase was primarily due to a higher subscriber base driving increased transaction fees, bad debt expense and personnel related costs, partially offset by efficiencies achieved from management’s strategic initiatives implemented at our call centers operated by our vendors.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, customer service and billing expenses were $370,585 and $320,755, respectively, an increase of 16%, or $49,830, but increased as a percentage of total revenue.  The increase was primarily due to the inclusion of a full year of costs associated with our connected vehicle services business, higher subscriber volume driving increased subscriber contacts and bad debt expense.

We expect our customer service and billing expenses to increase as our subscriber base grows.

Satellite and Transmission consists of costs associated with the operation and maintenance of our terrestrial repeater networks; satellites; satellite telemetry, tracking and control systems; satellite uplink facilities; studios; and delivery of our Internet streaming service.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, satellite and transmission expenses were $94,609 and $86,013, respectively, an increase of 10%, or $8,596, and remained flat as a percentage of total revenue.  The increase was primarily due to the loss on disposal of certain obsolete terrestrial repeaters and related parts of $7,384, and higher costs associated with our Internet streaming operations, partially offset by lower satellite insurance costs.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, satellite and transmission expenses were $86,013 and $79,292, respectively, an increase of 8%, or $6,721, and remained flat as a percentage of total revenue.  The increase was primarily due to increased personnel costs, costs associated with our Internet streaming operations, satellite insurance expense, and terrestrial repeater network costs.

 

25


Table of Contents

 

We expect satellite and transmission expenses, excluding losses from disposal of assets, to remain relatively unchanged as decreases in Internet streaming costs are offset by increases in terrestrial repeater network costs.

Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, cost of equipment was $42,724 and $44,397, respectively, a decrease of 4%, or $1,673, and decreased as a percentage of equipment revenue.  The decrease was primarily due to lower direct to consumer sales, partially offset by higher sales to distributors.  

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, cost of equipment was $44,397 and $26,478, respectively, an increase of 68%, or $17,919, and increased as a percentage of equipment revenue.  The increase was primarily due to higher sales to distributors, partially offset by lower costs per unit on direct to consumer sales.

We expect cost of equipment to fluctuate with changes in sales and inventory valuations.

Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers; subsidies paid for chipsets and certain other components used in manufacturing radios; device royalties for certain radios and chipsets; commissions paid to automakers and retailers; product warranty obligations; freight; 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 costs, marketing, loyalty payments to distributors and dealers of satellite radios or revenue share payments to automakers and retailers of satellite radios.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, subscriber acquisition costs were $532,599 and $493,464, respectively, an increase of 8%, or $39,135, and remained flat as a percentage of total revenue.  Increased costs related to a larger number of satellite radio installations in new vehicles were partially offset by improved OEM and chipset subsidy rates per vehicle.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, subscriber acquisition costs were $493,464 and $495,610, respectively, a decrease of less than 1%, or $2,146, and decreased as a percentage of total revenue.  Improved OEM subsidy rates per vehicle and a change in a contract with an automaker decreased subscriber acquisition costs. The decrease was partially offset by the elimination of the benefit to earnings in 2014 from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger and increased subsidy costs related to a larger number of satellite radio installations in new vehicles. For the year ended December 31, 2013, the benefit to earnings from amortization of deferred credits was $64,365.

We expect subscriber acquisition costs to fluctuate with OEM installations and aftermarket volume; however, the cost of subsidized radio components is expected to decline.  We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.

Sales and Marketing includes costs for marketing, advertising, media and production, including promotional events and sponsorships; cooperative marketing; and personnel. Marketing costs include expenses related to direct mail, outbound telemarketing and email communications.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, sales and marketing expenses were $354,189 and $336,480, respectively, an increase of 5%, or $17,709, but decreased as a percentage of total revenue.  The increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials and higher personnel-related costs.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, sales and marketing expenses were $336,480 and $291,024, respectively, an increase of 16%, or $45,456, and increased as a percentage of total revenue. The increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials, the inclusion of a full year of costs associated with our connected vehicle services business, increased personnel costs, and the elimination of the benefit to earnings in 2014 from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger; partially offset by lower loyalty costs due to a change in a contract with an automaker.  The benefit to earnings from the amortization of the deferred credit for acquired executory contracts for the year ended December 31, 2013 was $12,922.

We anticipate that sales and marketing expenses will increase as we expand programs to retain our existing subscribers, win back former subscribers, and attract new subscribers.

 

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Table of Contents

 

Engineering, Design and Development consists primarily of compensation and related costs to develop chipsets and new products and services, including streaming and connected vehicle services, research and development for broadcast information systems and costs associated with the incorporation of our radios into new vehicles manufactured by automakers.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, engineering, design and development expenses were $64,403 and $62,784, respectively, an increase of 3%, or $1,619, and remained flat as a percentage of total revenue.  The increase was driven primarily by additional costs associated with streaming development, partially offset by lower personnel costs.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, engineering, design and development expenses were $62,784 and $57,969, respectively, an increase of 8%, or $4,815, and remained flat as a percentage of total revenue.  The increase was driven primarily by the inclusion of a full year of costs associated with our connected vehicle services business and higher personnel costs.

We expect engineering, design and development expenses to increase in future periods as we continue to develop our infrastructure, products and services.

General and Administrative primarily consists of compensation and related costs for personnel and facilities, and include costs related to our finance, legal, human resources and information technologies departments.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, general and administrative expenses were $324,801 and $293,938, respectively, an increase of 10%, or $30,863, and remained flat as a percentage of total revenue.  The increase was driven primarily by higher personnel costs, reserves for consumer legal settlements and facilities costs, partially offset by insurance recoveries and lower professional fees related to the proposal made in January 2014 by Liberty Media to acquire the balance of our common stock not already owned by it.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, general and administrative expenses were $293,938 and $262,135, respectively, an increase of 12%, or $31,803, and remained flat as a percentage of total revenue.  The increase was primarily driven by the inclusion of a full year of costs associated with our connected vehicle services business, as well as higher legal, personnel and facilities costs.

We expect our general and administrative expenses to increase in future periods as a result of, among other things, enhanced information technology, on-going legal costs and personnel costs to support the growth of our business.

Depreciation and Amortization represents the 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.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, depreciation and amortization expense was $272,214 and $266,423, respectively, an increase of 2%, or $5,791, but decreased as a percentage of total revenue.  The increase was driven by additional software placed in-service, partially offset by a reduction of amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, property and equipment) through the end of their estimated service lives and certain satellites reaching the end of their estimated service lives.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, depreciation and amortization expense was $266,423 and $253,314, respectively, an increase of 5%, or $13,109, but decreased as a percentage of total revenue. Depreciation and amortization expense increased as a result of the inclusion of costs associated with our connected vehicle services business and additional assets placed in-service, including our FM-6 satellite which was placed in-service in late 2013. The increase was offset by a reduction of amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated useful lives and certain satellites reaching the end of their estimated useful lives.

Other Income (Expense)

Interest Expense, Net of Amounts Capitalized, includes interest on outstanding debt.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, interest expense was $299,103 and $269,010, respectively, an increase of 11%, or $30,093.  The increase was primarily due to higher average debt during the year ended December 31, 2015 compared to the year ended December 31, 2014.  The increase was partially offset by lower average interest rates resulting from the redemption and conversion of higher interest rate debt during 2014.  

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, interest expense was $269,010 and $204,671, respectively, an increase of 31%, or $64,339. The increase was primarily due to higher average debt and a

 

27


Table of Contents

 

 

reduction in interest capitalized following the launch of our FM-6 satellite.  The increase was partially offset by lower average interest rates resulting from the redemption or repayment of higher interest rate debt throughout 2013. 

We expect interest expense to increase in future periods to the extent the amount of our total debt outstanding increases.

Loss on Extinguishment of Debt and Credit Facilities, Net, includes losses incurred as a result of the conversion and retirement of certain debt.

 

·

2015 vs. 2014:  There was no loss on extinguishment of debt and credit facilities for the years ended December 31, 2015 and 2014.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, loss on extinguishment of debt and credit facilities, net, was $0 and $190,577, respectively.  During the year ended December 31, 2013, a loss was recorded on the extinguishment of our then outstanding 7.625% Senior Notes due 2018 and 8.75% Senior Notes due 2015.

Loss on Change in Value of Derivatives represents the change in fair value of the commitments under the share repurchase agreement with Liberty Media, which were are accounted for as a derivative.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, the loss on change in value of derivatives was $0 and $34,485, respectively.  The loss in 2014 resulted from a change in the market value of our common stock to be purchased under the share repurchase agreement with Liberty Media.  On April 25, 2014, we completed the final purchase installment under this share repurchase agreement and repurchased $340,000 of our shares of common stock from Liberty Media at a price of $3.66 per share.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, the loss on change in value of derivatives was $34,485 and $20,393, respectively.  The loss resulted from a change in the market value of our common stock to be purchased under the share repurchase agreement with Liberty Media.  On April 25, 2014, we completed the final purchase installment under this share repurchase agreement and repurchased $340,000 of our shares of common stock from Liberty Media at a price of $3.66 per share.

Other Income primarily includes realized gains and losses, interest income, and our share of the income or loss of Sirius XM Canada.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, other income was $12,379 and $14,611, respectively.  Other income for the year ended December 31, 2015 was driven by dividends received from Sirius XM Canada in excess of our investment.  Other income for the year ended December 31, 2014 was driven by our share of Sirius XM Canada’s net income and gain from the conversion of certain debentures into shares of Sirius XM Canada, partially offset by the amortization expense related to our equity method intangible assets.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, other income was $14,611 and $8,180, respectively.  The other income for the year ended December 31, 2014 was driven by dividends received from Sirius XM Canada, our share of Sirius XM Canada's net income and income from the conversion of certain debentures into shares of Sirius XM Canada, partially offset by the amortization expense related to our equity method intangible assets.  The other income for 2013 was primarily due to the inclusion of our share of Sirius XM Canada's net income, partially offset by the amortization expense related to our equity method intangible assets.  

Income Taxes

Income Tax Expense includes the change in our deferred tax assets, foreign withholding taxes and current federal and state tax expenses.

 

·

2015 vs. 2014:  For the years ended December 31, 2015 and 2014, income tax expense was $382,240 and $337,545, respectively.  Our annual effective tax rate for the year ended December 31, 2015 was 42.9%, which was impacted by tax law changes in the District of Columbia and New York City.  The tax law change in the District of Columbia will reduce our future taxes and use less of certain net operating losses in the future.  The District of Columbia tax law change resulted in a $44,392 increase in our valuation allowance during the year ended December 31, 2015.  The tax law change in New York City will increase certain net operating losses to be utilized in the future.  The New York City tax law change resulted in a $14,831 increase in our deferred tax asset during the year ended December 31, 2015.  Our effective tax rate for the year ended December 31, 2014 was 40.6% primarily due to the impact of the loss on change in fair value of the derivative related to the share repurchase agreement with Liberty Media.

 

·

2014 vs. 2013:  For the years ended December 31, 2014 and 2013, income tax expense was $337,545 and $259,877, respectively. Our annual effective tax rate for the year ended December 31, 2014 was 40.6% primarily due to the

 

28


Table of Contents

 

 

$34,485 loss on change in fair value of the derivatives related to the share repurchase agreement with Liberty Media.  Our annual effective tax rate for the year ended December 31, 2013 was 40.8%, primarily as a result of non-deductible expenses related to the loss on change in value of derivatives. 

Key Operating Metrics

In this section, we present certain financial and operating performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States (“Non-GAAP”).  These metrics include: average monthly revenue per subscriber, or ARPU; customer service and billing expenses, per average subscriber; subscriber acquisition cost, or SAC, per installation; free cash flow; and adjusted EBITDA. These measures exclude the impact of share-based payment expense and certain purchase price accounting adjustments related to the Merger, which include the: (i) 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.  Additionally, when applicable, our adjusted EBITDA and free cash flow metrics exclude the effect of any significant items that do not relate to the on-going performance of our business, such as settlements related to our historical use of pre-1972 sound recordings.  We use these Non-GAAP financial measures to manage our business, to set operational goals and as a basis for determining performance-based compensation for our employees.

Free cash flow is a metric that our management and board of directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity and significant items that do not relate to the on-going performance of our business.  In a capital intensive business, with significant investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business.  Free cash flow, which is reconciled to “Net cash provided by operating activities,” is a Non-GAAP financial measure.  This measure can be calculated by deducting amounts under the captions “Additions to property and equipment”, deducting or adding Restricted and other investment activity and the return of capital from investment in unconsolidated entity from “Net cash provided by operating activities” from the consolidated statements of cash flows, adjusted for any significant legal settlements.  Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies.  Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP.  Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current and projected cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition, and to compare our operating performance to other communications, entertainment and media companies.  We have excluded the $210,000 payment related to the pre-1972 sound recordings legal settlement from our free cash flow calculation in the year ended December 31, 2015.

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.

 

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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.  In addition, these Non-GAAP financial measures may not be comparable to similarly-titled measures by other companies.  Please refer to the glossary (pages 36 through 40) 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 adjusted results of operations for the years ended December 31, 2015, 2014 and 2013. Subscribers and subscription related revenues and expenses associated with our connected vehicle services are not included in our subscriber count or subscriber-based operating metrics:

 

 

 

Unaudited

 

 

 

For the Years Ended December 31,

 

 

 

2015

 

 

2014

 

 

2013

 

Self-pay subscribers

 

 

24,288

 

 

 

22,523

 

 

 

21,082

 

Paid promotional subscribers

 

 

5,306

 

 

 

4,788

 

 

 

4,477

 

Ending subscribers

 

 

29,594

 

 

 

27,311

 

 

 

25,559