XM Radio 2009 Annual Report Download - page 44

contributions made during the immediately preceding two years and certain other items) by (2) the federal
long-term tax-exempt interest rate in effect for the month of the “ownership change.” In calculating this annual
limit, numerous special rules and limitations apply and it is necessary to incorporate unpredictable factors,
such as the future aggregate value of our outstanding common stock and the federal long-term tax exempt
interest rate.
If we were to have taxable income in excess of the NOL utilization limitations following a subsequent
Section 382 “ownership change,” we would not be able to offset such excess taxable income with the NOLs.
Although any loss carryforwards not used as a result of any Section 382 limitation would remain available to
offset income in future years (again, subject to the Section 382 limitation), another “ownership change” could
significantly defer the utilization of the loss carryforwards, accelerate payment of federal income tax and/or
cause some of the NOLs to expire unused. It is impossible to predict with any accuracy the potential additional
annual limitation on the amount of our taxable income that could be offset by our net operating loss
carryforwards and credits were another “ownership change” to occur, but such limitation could be material.
Moreover, the amount and timing of our future taxable income, if any, cannot be accurately predicted,
and we cannot estimate the exact amount of NOLs that can ultimately be used to reduce our income tax
liability. Although we are unable to quantify an exact value, we believe the NOLs are a very valuable asset,
and our board of directors believes it is in our best interests to attempt to deter the imposition of additional
limitations on their use by adopting the Rights Plan.
Section 382 Ownership Calculations
Generally, an “ownership change” can occur through one or more acquisitions by which one or more
stockholders, each of whom owns or is deemed to own directly or indirectly 5% or more in value of a
corporation’s stock, increase their aggregate percentage ownership by more than 50 percentage points over the
lowest percentage of stock owned by such stockholders at any time during the preceding rolling three-year
period. The amount of the increase in the percentage of stock ownership (measured as a percentage of the
value of our outstanding shares rather than voting power) of each 5-percent stockholder is computed separately,
and each such increase is then added together with any other such increases to determine whether an
“ownership change” has occurred. In determining whether an “ownership change” has occurred, the rules of
Section 382 are very complex and are beyond the scope of this summary discussion.
Description of Rights Plan
The Rights Plan is intended to protect stockholder value by reducing the risk of a Section 382 ownership
change, thereby preserving our ability to use the NOLs. Although the Rights Plan is intended to reduce the
likelihood of an “ownership change” that could adversely affect us, we cannot assure that it would prevent all
transfers that could result in such an “ownership change.”
The Rights Plan is intended to act as a deterrent to any person or group (an “Acquiring Person”) acquiring
4.9% or more of our outstanding common stock (assuming for purposes of this calculation that all of our
outstanding convertible preferred stock is converted into common stock) without the approval of our board of
directors. The Rights Plan exempts future acquisitions of common stock by Liberty Radio, LLC and its
affiliates but does not in any respect alter the respective rights and obligations of the company and Liberty
Radio, LLC and its affiliates under the terms of the Investment Agreement dated as of February 17, 2009,
between the company and Liberty Radio, LLC. Any rights held by an Acquiring Person are void and may not
be exercised. Our board of directors may, in its sole discretion, exempt any person or group from being
deemed an Acquiring Person for purposes of the Rights Plan.
If you approve the Rights Plan, the rights and the Rights Plan would expire on August 1, 2011, unless the
rights and the Rights Plan expire earlier as provided in the Rights Plan (see “Description of Rights Plan —
Expiration”). As we describe below, if our board of directors determines that the Rights Plan is no longer
necessary for the protection of our NOLs, the Rights Plan would expire.
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