Quarterly report pursuant to Section 13 or 15(d)

Related Party Transactions

v2.3.0.15
Related Party Transactions
 9 Months Ended
Sep. 30, 2011
Related Party Transactions [Abstract]  
Related Party Transactions
(9) Related Party Transactions
          We had the following related party transaction balances at September 30, 2011 and December 31, 2010:
                                                                                 
    Related party     Related party     Related party     Related party     Related party  
    current assets     long-term assets     current liabilities     long-term liabilities     long-term debt  
    September 30,     December 31,     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
    2011*     2010     2011*     2010     2011*     2010     2011*     2010     2011*     2010  
Liberty Media
  $ —     $ —     $ 1,300     $ 1,571     $ 10,461     $ 9,765     $ —     $ —     $ 328,029     $ 325,907  
Sirius XM Canada
    5,228       —       68,643       —       6,080       —       22,435       —       —       —  
SIRIUS Canada
    —       5,613       —       —       —       1,805       —       —       —       —  
XM Canada
    —       1,106       —       31,904       —       4,275       —       24,517       —       —  
 
                                                           
Total
  $ 5,228     $ 6,719     $ 69,943     $ 33,475     $ 16,541     $ 15,845     $ 22,435     $ 24,517     $ 328,029     $ 325,907  
 
                                                           
 
*   SIRIUS Canada and XM Canada combined in June 2011. The combined entity now operates as Sirius XM Canada.
     Liberty Media
          In February 2009, we entered into an Investment Agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC (collectively, “Liberty Media”). Pursuant to the Investment Agreement, in March 2009 we issued to Liberty Radio, LLC 12,500,000 shares of our Convertible Perpetual Preferred Stock, Series B-1 (the “Series B Preferred Stock”), with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. Liberty Media has representatives on our board of directors.
          The Series B Preferred Stock is convertible into 2,586,976,000 shares of common stock. Liberty Media has agreed not to acquire more than 49.9% of our outstanding common stock prior to March 2012, except that Liberty Media may acquire more than 49.9% of our outstanding common stock at any time pursuant to any cash tender offer for all of the outstanding shares of our common stock that are not beneficially owned by Liberty Media or its affiliates at a price per share greater than the closing price of the common stock on the trading day preceding the earlier of the public announcement or commencement of such tender offer. The Investment Agreement also provides for certain other standstill provisions ending in March 2012.
          Liberty Media has advised us that as of September 30, 2011 and December 31, 2010 it owned the following amounts of our debt securities:
                 
    September 30,     December 31,  
    2011     2010  
8.75% Senior Notes due 2015
  $ 150,000     $ 150,000  
9.75% Senior Secured Notes due 2015
    50,000       50,000  
13% Senior Notes due 2013
    76,000       76,000  
7% Exchangeable Senior Subordinated Notes due 2014
    11,000       11,000  
7.625% Senior Notes due 2018
    50,000       50,000  
 
           
Total principal debt
    337,000       337,000  
Less: discounts
    8,971       11,093  
 
           
Total carrying value debt
  $ 328,029     $ 325,907  
 
           
          As of September 30, 2011 and December 31, 2010, we recorded $10,461 and $9,765, respectively, related to accrued interest with Liberty Media to Related party current liabilities and $1,300 and $1,571, respectively, related to deferred financing costs with Liberty Media to Related party long-term assets. We recognized Interest expense associated with debt held by Liberty Media of $8,934 and $10,574 for the three months ended September 30, 2011 and 2010, respectively, and $26,718 and $30,538 for the nine months ended September 30, 2011 and 2010, respectively.
Sirius XM Canada
     In June 2011, Canadian Satellite Radio Holdings Inc. (“CSR”), the parent company of XM Canada, and SIRIUS Canada completed a transaction to combine their operations (“the Canada Merger”). As a result of the Canada Merger, SIRIUS Canada became a wholly-owned subsidiary of CSR. The combined company operates as Sirius XM Canada. In connection with the transaction, we received:
  •   approximately 46,700,000 Class A shares of CSR, representing a 38.0% equity interest and a 25.0% voting interest;
 
  •   $53,781 in cash as repayment of the XM Canada credit facility ($38,815) and consideration for our preferred stock in SIRIUS Canada ($10,117 as a return of capital and $4,849 in dividends, net of foreign withholding taxes); and
 
  •   $5,207 in non-interest bearing notes of CSR, which primarily have a two year term.
          Our interest in Sirius XM Canada is accounted for under the equity method. The transaction was accounted for as a reverse acquisition whereby SIRIUS Canada was deemed to be the acquirer of CSR. As a result of the transaction, we recognized an $84,855 gain in Interest and investment income during the nine months ended September 30, 2011.
          The excess of the cost of our ownership interest in the equity of Sirius XM Canada over our share of the net assets is recognized as goodwill and intangible assets and is included in the carrying amount of our investment. Equity method goodwill is not amortized. We will periodically evaluate this investment to determine if there has been an other than temporary decline below carrying value. Equity method intangible assets are amortized over their respective useful lives, which is recorded in Interest and investment income. As of September 30, 2011, our investment balance in Sirius XM Canada was approximately $50,728, $30,000 of which represents equity method goodwill and intangible assets, and was recorded in Related party long-term assets. Sirius XM Canada is still evaluating the fair value allocation between goodwill and intangible assets; the final purchase price allocation is not expected to have a material effect on our financial statements.
          We provide Sirius XM Canada with chipsets and other services and we are reimbursed for these costs. As of September 30, 2011, amounts due for these costs totaled $5,228 and is reported as Related party current assets.
          As of September 30, 2011, amounts due from Sirius XM Canada also included $9,263 attributable to deferred programming costs and accrued interest, all of which is reported as Related party long-term assets.
          We hold an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by CSR, for which the embedded conversion feature is bifurcated from the host contract. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income (loss). As of September 30, 2011, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,445 and $0, respectively. As of December 31, 2010, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,302 and $11, respectively. The carrying values of the host contract and embedded derivative are recorded in Related party long-term assets.
          As of September 30, 2011, amounts due to Sirius XM Canada totaled $1,804 and is reported as Related party current liabilities.
          We recorded the following revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of operations:
         
    For the Three and Nine Months  
    Ended September 30,  
    2011*  
Royalty income
  $ 6,468  
Amortization of Sirius XM Canada deferred income
    694  
Licensing fee revenue
    1,500  
Advertising reimbursements
    —  
 
     
Total revenue from Sirius XM Canada
  $ 8,662  
 
     
 
*   Sirius XM Canada commenced operations on June 2011.
     Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of Sirius XM Canada’s net loss was $4,214 for the three and nine months ended September 30, 2011.
     SIRIUS Canada
          We had an equity interest of 49.9% in SIRIUS Canada until June 21, 2011 when the transaction between XM Canada and SIRIUS Canada closed. Our investment balance was zero as of December 31, 2010 as our investment balance was absorbed by our share of net losses generated by SIRIUS Canada.
          In 2005, we entered into a license and services agreement with SIRIUS Canada. Pursuant to such agreement, we are reimbursed for certain costs incurred to provide SIRIUS Canada service, including certain costs incurred for the production and distribution of radios, as well as information technology support costs. In consideration for the rights granted pursuant to this license and services agreement, we have the right to receive a royalty equal to a percentage of SIRIUS Canada’s gross revenues based on subscriber levels (ranging between 5% to 15%) and the number of Canadian-specific channels made available to SIRIUS Canada.
          We recorded the following revenue from SIRIUS Canada. Royalty income is included in other revenue and dividend income is included in Interest and investment income (loss) in our unaudited consolidated statements of operations:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011*     2010     2011*     2010  
Royalty income
  $ —     $ 3,163     $ 9,945     $ 6,603  
Dividend income
    —       232       460       689  
 
                       
Total revenue from SIRIUS Canada
  $ —     $ 3,395     $ 10,405     $ 7,292  
 
                       
 
*   SIRIUS Canada combined with XM Canada in June 2011.
          Receivables from royalty and dividend income were utilized to absorb a portion of our share of net losses generated by SIRIUS Canada. Total costs that have been or will be reimbursed by SIRIUS Canada for the three months ended September 30, 2010 were $2,498 and for the nine months ended September 30, 2011 and 2010 were $5,253 and $7,333, respectively.
          Our share of net earnings or losses of SIRIUS Canada is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of SIRIUS Canada’s net loss was $3,361 for the three months ended September 30, 2010 and $9,717 and $6,579 for the nine months ended September 30, 2011 and 2010, respectively. The payments received from SIRIUS Canada in excess of carrying value was $546 for the three months ended September 30, 2010 and $6,748 and $4,256 for the nine months ended September 30, 2011 and 2010, respectively.
     XM Canada
          We had an equity interest of 21.5% in XM Canada until June 21, 2011 when the transaction between XM Canada and SIRIUS Canada closed. Our investment balance was zero as of December 31, 2010 as our investment balance was absorbed by our share of net losses generated by XM Canada.
          In 2005, XM entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial ten year term and XM Canada has the unilateral option to extend the agreements for an additional five year term. We receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on XM’s system. Sirius XM Canada is obligated to pay us a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a ten year term. We recognize these payments on a gross basis as a principal obligor pursuant to the provisions of ASC 605, Revenue Recognition. The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, which is amortized on a straight-line basis through 2020, the end of the expected term of the agreements. As of September 30, 2011 and December 31, 2010, the carrying value of deferred revenue related to this agreement was $26,711 and $28,792, respectively.
          The Cdn$45,000 standby credit facility we extended to XM Canada was paid and terminated as a result of the Canada Merger. We received $38,815 in cash upon payment of this facility. As a result of the repayment of the credit facility and completion of the Canada Merger, we released a $15,649 valuation allowance related to the absorption of our share of the net loss from our investment in XM Canada as of June 21, 2011.
          As of December 31, 2010, amounts due from XM Canada also included $7,201 attributable to deferred programming costs and accrued interest, all of which is reported as Related party long-term assets.
          We recorded the following revenue from XM Canada as Other revenue in our unaudited consolidated statements of operations:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011*     2010     2011*     2010  
Amortization of XM Canada deferred income
  $ —     $ 693     $ 1,388     $ 2,081  
Subscriber and activation fee royalties
    —       2,594       5,483       7,599  
Licensing fee revenue
    —       750       3,000       3,000  
Advertising reimbursements
    —       —       833       667  
 
                       
Total revenue from XM Canada
  $ —     $ 4,037     $ 10,704     $ 13,347  
 
                       
 
*   XM Canada combined with SIRIUS Canada in June 2011.
          Our share of net earnings or losses of XM Canada is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of XM Canada’s net loss was $2,926 for the three months ended September 30, 2010 and $6,045 and $9,416 for the nine months ended September 30, 2011 and 2010, respectively.
     General Motors and American Honda
          We have a long-term distribution agreement with General Motors Company (“GM”). GM had a representative on our board of directors and was considered a related party through May 27, 2010. During the term of the agreement, GM has agreed to distribute the XM service. We subsidize a portion of the cost of satellite radios and make incentive payments to GM when the owners of GM vehicles with factory- or dealer- installed satellite radios become self-paying subscribers. We also share with GM a percentage of the subscriber revenue attributable to GM vehicles with factory- or dealer- installed satellite radios. As part of the agreement, GM provides certain call-center related services directly to subscribers who are also GM customers for which we reimburse GM.
          We make bandwidth available to OnStar LLC for audio and data transmissions to owners of enabled GM vehicles, regardless of whether the owner is a subscriber. OnStar’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. We also granted to OnStar a certain amount of time to use our studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.
          We have a long-term distribution agreement with American Honda. American Honda had a representative on our board of directors and was considered a related party through May 27, 2010. We have an agreement to make a certain amount of our bandwidth available to American Honda. American Honda’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. This agreement remains in effect so long as American Honda holds a certain amount of its investment in us. We make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying subscriber and we share with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed satellite radios.
          We recorded the following total related party revenue from GM and American Honda, primarily consisting of subscriber revenue, in connection with the agreements above:
         
    For the Nine Months  
    Ended September 30,  
    2010*  
GM
  $ 12,759  
American Honda
    4,990  
 
     
Total
  $ 17,749  
 
     
 
*   GM and American Honda were considered related parties through May 27, 2010.
          We incurred the following related party expenses with GM and American Honda:
                 
    For the Nine Months  
    Ended September 30, 2010*  
            American  
    GM     Honda  
Sales and marketing
  $ 13,374     $ —  
Revenue share and royalties
    15,823       3,167  
Subscriber acquisition costs
    17,514       1,969  
Customer service and billing
    125       —  
Interest expense, net of amounts capitalized
    1,421       —  
 
           
Total
  $ 48,257     $ 5,136  
 
           
 
*   GM and American Honda were considered related parties through May 27, 2010.