Quarterly Report


Table Of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2012
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 RADIO INC.
(Exact name of registrant as specified in its charter)

Delaware
 
52-1700207
(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
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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
(Class)
 
(Outstanding as of October 25, 2012)
COMMON STOCK, $0.001 PAR VALUE
 
5,207,146,165
SHARES


Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Item No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
757,672

 
$
660,837

 
$
2,188,199

 
$
1,922,917

Advertising revenue, net of agency fees
20,426

 
18,810

 
59,881

 
53,595

Equipment revenue
17,813

 
15,504

 
51,183

 
48,392

Other revenue
71,449

 
67,399

 
210,362

 
205,882

Total revenue
867,360

 
762,550

 
2,509,625

 
2,230,786

Operating expenses:

 

 
 
 
 
Cost of services:

 

 
 
 
 
Revenue share and royalties
141,834

 
117,043

 
409,371

 
340,713

Programming and content
69,938

 
70,509

 
205,203

 
210,867

Customer service and billing
77,768

 
64,239

 
212,635

 
192,667

Satellite and transmission
18,319

 
19,681

 
53,980

 
57,238

Cost of equipment
6,345

 
5,888

 
19,301

 
19,894

Subscriber acquisition costs
112,418

 
107,279

 
348,014

 
317,711

Sales and marketing
60,676

 
55,210

 
176,457

 
154,471

Engineering, design and development
13,507

 
14,175

 
32,468

 
39,249

General and administrative
68,235

 
58,635

 
193,786

 
175,469

Depreciation and amortization
66,571


65,403

 
199,481

 
200,865

Total operating expenses
635,611

 
578,062

 
1,850,696

 
1,709,144

Income from operations
231,749

 
184,488

 
658,929

 
521,642

Other income (expense):

 


 
 
 
 
Interest expense, net of amounts capitalized
(70,035
)
 
(75,316
)
 
(219,777
)
 
(229,730
)
Loss on extinguishment of debt and credit facilities, net
(107,105
)
 

 
(132,726
)
 
(7,206
)
Interest and investment (loss) income
(321
)
 
292

 
(3,192
)
 
78,590

Other income (loss)
113

 
435

 
(637
)
 
2,235

Total other expense
(177,348
)
 
(74,589
)
 
(356,332
)
 
(156,111
)
Income before income taxes
54,401

 
109,899

 
302,597

 
365,531

Income tax benefit (expense)
20,113

 
(5,714
)
 
3,013,860

 
(9,907
)
Net income
$
74,514

 
$
104,185

 
$
3,316,457

 
$
355,624

Realized loss on XM Canada investment foreign currency adjustment, net of tax

 

 

 
6,072

Foreign currency translation adjustment, net of tax

 
110

 
(38
)
 
187

Comprehensive income
$
74,514

 
$
104,295

 
$
3,316,419

 
$
361,883

Net income per common share:

 


 
 
 
 
Basic
$
0.01

 
$
0.02

 
$
0.52

 
$
0.06

Diluted
$
0.01

 
$
0.02

 
$
0.49

 
$
0.05

Weighted average common shares outstanding:

 


 


 


Basic
4,034,122

 
3,747,381

 
3,870,031

 
3,742,309

Diluted
6,577,654

 
6,507,370

 
6,848,230

 
6,500,819


See accompanying notes to the unaudited consolidated financial statements.

1

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30, 2012
 
December 31, 2011
(in thousands, except share and per share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
556,270

 
$
773,990

Accounts receivable, net
102,963

 
101,705

Receivables from distributors
87,773

 
84,817

Inventory, net
35,823

 
36,711

Prepaid expenses
150,397

 
125,967

Related party current assets
8,221

 
14,702

Deferred tax asset
913,010

 
132,727

Other current assets
8,271

 
6,335

Total current assets
1,862,728

 
1,276,954

Property and equipment, net
1,601,363

 
1,673,919

Long-term restricted investments
3,973

 
3,973

Deferred financing fees, net
32,546

 
42,046

Intangible assets, net
2,532,455

 
2,573,638

Goodwill
1,815,673

 
1,834,856

Related party long-term assets
50,104

 
54,953

Long-term deferred tax asset
1,244,996

 

Other long-term assets
11,204

 
35,657

Total assets
$
9,155,042

 
$
7,495,996

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
514,479

 
$
543,193

Accrued interest
64,463

 
70,405

Current portion of deferred revenue
1,426,815

 
1,333,965

Current portion of deferred credit on executory contracts
275,567

 
284,108

Current maturities of long-term debt
4,326

 
1,623

Related party current liabilities
12,988

 
14,302

Total current liabilities
2,298,638

 
2,247,596

Deferred revenue
158,223

 
198,135

Deferred credit on executory contracts
6,243

 
218,199

Long-term debt
2,221,685

 
2,683,563

Long-term related party debt
208,742

 
328,788

Deferred tax liability

 
1,011,084

Related party long-term liabilities
19,660

 
21,741

Other long-term liabilities
85,676

 
82,745

Total liabilities
4,998,867

 
6,791,851

Commitments and contingencies (Note 15)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001; 50,000,000 authorized at September 30, 2012 and December 31, 2011:
 
 
 
Series A convertible preferred stock; no shares issued and outstanding at September 30, 2012 and December 31, 2011

 

Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share at September 30, 2012 and December 31, 2011); 6,250,100 and 12,500,000 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
6

 
13

Common stock, par value $0.001; 9,000,000,000 shares authorized at September 30, 2012 and December 31, 2011; 5,192,364,730 and 3,753,201,929 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively
5,192

 
3,753

Accumulated other comprehensive income, net of tax
33

 
71

Additional paid-in capital
10,618,579

 
10,484,400

Accumulated deficit
(6,467,635
)
 
(9,784,092
)
Total stockholders’ equity
4,156,175

 
704,145

Total liabilities and stockholders’ equity
$
9,155,042

 
$
7,495,996


See accompanying notes to the unaudited consolidated financial statements.

2


SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY


 
Series A
Convertible
Preferred Stock
 
Convertible Perpetual
Preferred Stock,
Series B-1
 
Common Stock
 
 
 
 
 
 
 
 
(in thousands, except share data)
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Other Comprehensive Income
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at December 31, 2011

 
$

 
12,500,000

 
$
13

 
3,753,201,929

 
$
3,753

 
$
71

 
$
10,484,400

 
$
(9,784,092
)
 
$
704,145

Comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
 
 
(38
)
 
 
 
3,316,457

 
3,316,419

Issuance of common stock to employees and employee benefit plans, net of forfeitures

 

 

 

 
1,385,591

 
1

 

 
3,010

 

 
3,011

Share-based payment expense

 

 

 

 

 

 

 
43,350

 

 
43,350

Exercise of stock options

 

 

 

 
144,309,526

 
144

 

 
89,106

 

 
89,250

Conversion of preferred stock to common stock




(6,249,900
)

(7
)

1,293,467,684


1,294




(1,287
)




Balance at September 30, 2012

 
$

 
6,250,100

 
$
6

 
5,192,364,730

 
$
5,192

 
$
33

 
$
10,618,579

 
$
(6,467,635
)
 
$
4,156,175

See accompanying notes to the unaudited consolidated financial statements.

3


SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
For the Nine Months Ended September 30,
(in thousands)
2012
 
2011
Cash flows from operating activities:
 
 
 
Net income
$
3,316,457

 
$
355,624

Adjustments to reconcile net income to net cash provided by operating activities:

 

Depreciation and amortization
199,481

 
200,865

Non-cash interest expense, net of amortization of premium
30,786

 
29,211

Provision for doubtful accounts
24,953

 
26,209

Amortization of deferred income related to equity method investment
(2,082
)
 
(2,082
)
Loss on extinguishment of debt and credit facilities, net
132,726

 
7,206

Gain on merger of unconsolidated entities

 
(84,855
)
Loss on unconsolidated entity investments, net
4,014

 
10,259

Loss on disposal of assets
567

 
269

Share-based payment expense
46,361

 
37,574

Deferred income taxes
(3,017,021
)
 
7,214

Other non-cash purchase price adjustments
(220,336
)
 
(203,630
)
Distribution from investment in unconsolidated entity

 
4,849

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(26,211
)
 
(1,456
)
Receivables from distributors
(2,956
)
 
(12,358
)
Inventory
888

 
(14,278
)
Related party assets
6,905

 
30,300

Prepaid expenses and other current assets
(26,367
)
 
(11,028
)
Other long-term assets
24,454

 
23,969

Accounts payable and accrued expenses
(27,384
)
 
(100,502
)
Accrued interest
(5,940
)
 
6,472

Deferred revenue
52,777

 
19,653

Related party liabilities
(1,314
)
 
696

Other long-term liabilities
2,774

 
(1,547
)
Net cash provided by operating activities
513,532

 
328,634

 
 
 
 
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(73,546
)
 
(115,065
)
Release of restricted investments

 
250

Return of capital from investment in unconsolidated entity

 
10,117

Net cash used in investing activities
(73,546
)
 
(104,698
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
89,250

 
9,045

Long-term borrowings, net of costs
393,687

 

Payment of premiums on redemption of debt
(100,615
)
 
(5,020
)
Repayment of long-term borrowings
(914,028
)
 
(210,060
)
Repayment of related party long-term borrowings
(126,000
)
 

Net cash used in financing activities
(657,706
)
 
(206,035
)
Net (decrease) increase in cash and cash equivalents
(217,720
)
 
17,901

Cash and cash equivalents at beginning of period
773,990

 
586,691

Cash and cash equivalents at end of period
$
556,270

 
$
604,592

See accompanying notes to the unaudited consolidated financial statements.

4


SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
 
For the Nine Months Ended September 30,
(in thousands)
2012
 
2011
Supplemental Disclosure of Cash and Non-Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
188,997

 
$
235,096

Non-cash investing and financing activities:
 
 
 
Conversion of Series B preferred stock to common stock
1,294

 

Capital lease obligations incurred to acquire assets
12,781

 

Common stock issuance upon exercise of warrants

 
7

Goodwill reduced for the exercise and vesting of certain stock awards
19,183

 


See accompanying notes to the unaudited consolidated financial statements.

5


SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(1)
Business

We broadcast our music, sports, entertainment, comedy, talk, news, traffic and weather channels in the United States on a subscription fee basis through two proprietary satellite radio systems. Subscribers can also receive certain of our music and other channels over the Internet, including through applications for mobile devices. We have agreements with every major automaker (“OEMs”) to offer satellite radios as factory- or dealer-installed equipment in their vehicles. We also acquire subscribers through the sale or lease of previously owned vehicles with factory-installed satellite radios. We distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.

Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscription plans, as well as discounts for multiple subscriptions on each platform. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our Internet radio, Backseat TV, data, traffic, and weather services.

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

(2)
Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements of Sirius XM Radio Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission ("SEC") for interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions have been eliminated in consolidation.

Basis of Presentation

In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of September 30, 2012 and for the three and nine months ended September 30, 2012 and 2011 have been made.

Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2011 , which was filed with the SEC on February 9, 2012.

We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2012 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and footnotes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates.

Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include asset impairment, depreciable lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets.


6

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

Income Taxes

Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

Deferred income taxes represent the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each reporting period, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. In determining the period in which related tax benefits are realized for book purposes, excess share-based compensation deductions included in net operating losses are realized after regular net operating losses are exhausted; excess tax compensation benefits are recorded off balance-sheet as a memo entry until the period the excess tax benefit is realized through a reduction of taxes payable. A valuation allowance is recognized or maintained when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized.

ASC 740, Income Taxes, requires a company to first determine whether it is more likely than not that a tax position will be sustained based on its technical merits as of the reporting date, assuming that taxing authorities will examine the position and have full knowledge of all relevant information. A tax position that meets this more likely than not threshold is then measured and recognized at the largest amount of benefit that is greater than fifty percent likely to be realized upon effective settlement with a taxing authority. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We record interest and penalties related to uncertain tax positions in Income tax expense in our unaudited consolidated statements of comprehensive income.

We report revenues net of any tax assessed by a governmental authority that is both imposed on, and concurrent with, a specific revenue-producing transaction between ourselves and a customer in our unaudited consolidated statements of comprehensive income.

Fair Value of Financial Instruments

The fair value for publicly traded instruments is determined using quoted market prices while the fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. As of September 30, 2012 and December 31, 2011 , the carrying value of our debt was $2,434,753 and $3,013,974 , respectively; and the fair value approximated $2,973,312 and $3,506,546 , respectively.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income of $33 at September 30, 2012 is comprised of foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three months ended September 30, 2012 , we recorded a foreign currency translation adjustment of $0 and during the nine months ended September 30, 2012 , we recorded a foreign currency translation adjustment loss of $38 , net of tax of $37 .

Recent Accounting Pronouncements

In May 2011, the FASB issued Accounting Standards Update No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (Topic 820) — Fair Value Measurement (“ASU 2011-04”), to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements particularly for Level 3 fair value measurements. This standard is effective for interim and annual periods beginning after December 15, 2011 and is applied on a prospective basis. We adopted ASU 2011-04 as of January 1, 2012 and the impact was not material to our unaudited consolidated financial statements.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income (“ASU 2011-05”), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in single continuous statements of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified

7

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

to net income. This standard is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The FASB has deferred the requirement to present reclassification adjustments for each component of accumulated other comprehensive income in both net income and other comprehensive income. Companies are required to either present amounts reclassified out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The effective date of this deferral will be consistent with the effective date of ASU 2011-05. We adopted ASU 2011-05 as of January 1, 2012 and disclosed comprehensive income in our unaudited consolidated statements of comprehensive income. ASU 2011-05 affects financial statement presentation and has no impact on our results of unaudited consolidated financial statements.

In July 2012, the FASB issued Accounting Standards Update 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment ("ASU 2012-02"). The guidance gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired. If the qualitative assessment supports that it is more likely than not the fair value of the asset exceeds its carrying amount, the company would not be required to perform a quantitative impairment test. If the qualitative assessment does not support the fair value of the asset, then a quantitative assessment is performed. ASU 2012-02 provides for public entities for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We early adopted ASU 2012-02 and will perform a qualitative assessment to determine whether our indefinite-lived intangible assets are impaired as of October 1, 2012, our annual impairment testing date.

(3)
Earnings per Share

We utilize the two-class method of calculating basic net income per common share, as our Series B Preferred Stock are considered participating securities. Basic net income per common share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net income per common share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt and preferred stock, warrants, stock options, restricted stock and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method. Common stock equivalents of approximately 451,577,000 and 417,427,000 for the three months ended September 30, 2012 and 2011 , respectively, and 144,014,000 and 407,649,000 for the nine months ended September 30, 2012 and 2011 , respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.

8

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2012
 
2011
 
2012
 
2011
Net income
$
74,514

  
$
104,185

 
$
3,316,457

 
$
355,624

Less:
 
 
 
 
 
 
 
Allocation of income to Series B Preferred Stock
(27,825
)
 
(42,550
)
 
(1,309,647
)
 
(145,355
)
Net income available to common stockholders for basic net income per common share
46,689

 
61,635

 
2,006,810

 
210,269

Add back:
 
 
 
 
 
 
 
Allocation of income to Series B Preferred Stock
27,825

 
42,550

 
1,309,647

 
145,355

Effect of interest on assumed conversions of convertible debt

 

 
28,875

 

Net income available to common stockholders for diluted net income per common share
$
74,514

 
$
104,185

 
$
3,345,332

 
$
355,624

Weighted average common shares outstanding for basic net income per common share
4,034,122

  
3,747,381

 
3,870,031

 
3,742,309

Weighted average impact of assumed Series B Preferred Stock conversion
2,404,143

 
2,586,977

 
2,525,588

 
2,586,977

Weighted average impact of assumed convertible debt

 

 
293,333

 

Weighted average impact of other dilutive equity instruments
139,389

  
173,012

 
159,278

 
171,533

Total shares for diluted net income per common share
6,577,654

  
6,507,370

 
6,848,230

 
6,500,819

Net income per common share
 
 
 
 


 


Basic
$
0.01

  
$
0.02

 
$
0.52

 
$
0.06

Diluted
$
0.01

  
$
0.02

 
$
0.49

 
$
0.05

 
We i dentified and corrected an immaterial error affecting the historical presentation of basic earnings per share. The adjustment reflects the Series B Preferred Stock held by an affiliate of Liberty Media as participating securities as the holder of such preferred stock may participate in dividends and distributions ratably with holders of our common stock on an as-converted basis.  Net income per common share-basic for the three and nine months ended September 30, 2011 was previously reported as $0.03 and $0.10 , respectively, and has been adjusted to be $0.02 and $0.06 for the three and nine months ended September 30, 2011 , respectively.  The effects of the error were not material to any previously reported quarterly or annual period. The related corrections are reflected in the applicable prior periods.
    
In September 2012, Liberty Media converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of common stock.

(4)
Accounts Receivable, net

Accounts receivable, net, are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, the age of certain receivable balances, current economic conditions and other factors that may affect the counterparty’s ability to pay.

Accounts receivable, net, consists of the following:
 
September 30,
2012
 
December 31,
2011
Gross accounts receivable
$
113,423

 
$
111,637

Allowance for doubtful accounts
(10,460
)
 
(9,932
)
Total accounts receivable, net
$
102,963

 
$
101,705



9

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

Receivables from distributors include billed and unbilled amounts due from OEMs for radio services included in the sale or lease price of vehicles, as well as billed amounts due from retailers. Receivables from distributors consist of the following:
 
September 30,
2012
 
December 31,
2011
Billed
$
45,187

  
$
44,618

Unbilled
42,586

  
40,199

Total
$
87,773

  
$
84,817


(5)
Inventory, net

Inventory consists of finished goods, refurbished goods, chip sets and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost, determined on a first-in, first-out basis, or market. We record an estimated allowance for inventory that is considered slow moving, obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of comprehensive income. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of comprehensive income.

Inventory, net, consists of the following:
 
September 30,
2012
 
December 31,
2011
Raw materials
$
20,781

 
$
24,134

Finished goods
30,951

 
28,007

Allowance for obsolescence
(15,909
)
 
(15,430
)
Total inventory, net
$
35,823

 
$
36,711


(6)
Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. We perform an annual assessment as of October 1st of each year to determine if goodwill is impaired. An assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

As of September 30, 2012 , there were no indicators of impairment and no impairment loss was recorded for goodwill during the three and nine months ended September 30, 2012 and 2011 .

During the nine months ended September 30, 2012 , with the release of the deferred income tax valuation allowance, we reduced goodwill by $19,183 related to the subsequent exercise of certain stock options and vesting of certain restricted stock units that were recorded at fair value in connection with the July 2008 merger between our wholly owned subsidiary, Vernon Merger Corporation, and XM Satellite Radio Holdings Inc. (the "Merger").


10

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

(7)
Intangible Assets

Intangible assets consisted of the following:
 
 
 
September 30, 2012
 
December 31, 2011
 
Weighted Average
Useful Lives
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
 
Gross
Carrying
Value
 
Accumulated
Amortization
 
Net Carrying
Value
Indefinite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
FCC licenses
Indefinite
 
$
2,083,654

 
$

 
$
2,083,654

 
$
2,083,654

  
$

 
$
2,083,654

Trademark
Indefinite
 
250,000

 

 
250,000

 
250,000

  

 
250,000

Definite life intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Subscriber relationships
9 years
 
380,000

 
(223,185
)
 
156,815

 
380,000

  
(191,201
)
 
188,799

Licensing agreements
9.1 years
 
78,489

 
(41,658
)
 
36,831

 
78,897

  
(34,145
)
 
44,752

Proprietary software
6 years
 
16,552

 
(12,622
)
 
3,930

 
16,552

  
(11,507
)
 
5,045

Developed technology
10 years
 
2,000

 
(833
)
 
1,167

 
2,000

  
(683
)
 
1,317

Leasehold interests
7.4 years
 
132

 
(74
)
 
58

 
132

  
(61
)
 
71

Total intangible assets
 
 
$
2,810,827

 
$
(278,372
)
 
$
2,532,455

 
$
2,811,235

  
$
(237,597
)
 
$
2,573,638


Indefinite Life Intangible Assets

We have identified our FCC licenses and the XM trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.

We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. The following table outlines the years in which each of our licenses expires:
FCC satellite licenses
 
Expiration year
SIRIUS FM-1
 
2017
SIRIUS FM-2
 
2017
SIRIUS FM-3
 
2017
SIRIUS FM-5
 
2017
SIRIUS FM-6 (1)
 

XM-1
 
2014
XM-2
 
2014
XM-3
 
2013
XM-4
 
2014
XM-5
 
2018
(1)
We hold an FCC license for our FM-6 satellite, which will expire eight years from when this satellite is launched and placed into operation.

Prior to expiration, we are required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost, which is expensed as incurred. Each of the FCC licenses authorizes us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.

In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of September 30, 2012 , there were no legal, regulatory or contractual limitations associated with the XM trademark.

We will perform an annual impairment assessment of our indefinite intangible assets as of October 1st of each year to determine if the fair value is less than the carrying amount. An assessment is performed at other times if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below its carrying value.

As of September 30, 2012 , there were no indicators of impairment and no impairment loss was recorded for intangible assets with indefinite lives during the three and nine months ended September 30, 2012 and 2011 .

11

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

Definite Life Intangible Assets

Subscriber relationships are amortized on an accelerated basis over 9 years , which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangible assets include certain licensing agreements, which are amortized over a weighted average useful life of 9.1 years on a straight-line basis.

Amortization expense for all definite life intangible assets was $13,198 and $14,570 for the three months ended September 30, 2012 and 2011 , respectively, and $40,775 and $44,833 for the nine months ended September 30, 2012 and 2011 , respectively.

Expected amortization expense for the remaining period in 2012 , each of the fiscal years 2013 through 2016 and for periods thereafter is as follows:
Year ending December 31,
  
Amount
2012
  
$
12,851

2013
  
47,330

2014
  
38,852

2015
  
37,526

2016
  
31,932

Thereafter
  
30,310

Total definite life intangible assets, net
  
$
198,801


(8)
Interest Costs

We capitalized a portion of the interest on funds borrowed to finance the construction costs of our FM-6 satellite and related launch vehicle. We will continue to capitalize the interest until the launch of our FM-6 satellite. We also incur interest costs on all of our debt instruments and on our satellite incentive agreements. The following is a summary of our interest costs:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
  
2011
Interest costs charged to expense
$
70,035

 
$
75,316

 
$
219,777

  
$
229,730

Interest costs capitalized
8,005

 
8,906

 
24,087

  
24,224

Total interest costs incurred
$
78,040

 
$
84,222

 
$
243,864

  
$
253,954


Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $9,755 and $9,977 for the three months ended September 30, 2012 and 2011 , respectively, and $30,786 and $29,211 for the nine months ended September 30, 2012 and 2011 , respectively.


12

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

(9)
Property and Equipment

Property and equipment, net, consists of the following:
 
September 30,
2012
 
December 31,
2011
Satellite system
$
1,943,537

 
$
1,943,537

Terrestrial repeater network
109,993

 
112,440

Leasehold improvements
44,588

 
43,455

Broadcast studio equipment
55,414

 
53,903

Capitalized software and hardware
215,067

 
193,301

Satellite telemetry, tracking and control facilities
62,270

 
60,539

Furniture, fixtures, equipment and other
74,684

 
60,283

Land
38,411

 
38,411

Building
57,415

 
57,185

Construction in progress
416,267

 
372,508

Total property and equipment
3,017,646

 
2,935,562

Accumulated depreciation and amortization
(1,416,283
)
 
(1,261,643
)
Property and equipment, net
$
1,601,363

 
$
1,673,919


Construction in progress consists of the following:
 
September 30,
2012
 
December 31,
2011
Satellite system
$
369,156

  
$
343,932

Terrestrial repeater network
19,267

  
19,194

Other
27,844

  
9,382

Construction in progress
$
416,267

  
$
372,508


Depreciation and amortization expense on property and equipment was $53,373 and $50,833 for the three months ended September 30, 2012 and 2011 , respectively, and $158,706 and $156,032 for the nine months ended September 30, 2012 and 2011 , respectively.

Satellites

We currently own a fleet of nine orbiting satellites. The chart below provides certain information on these satellites:
Satellite Designation
Year Delivered
 
Estimated End of
Depreciable Life
FM-1
2000
 
2013
FM-2
2000
 
2013
FM-3
2000
 
2015
FM-5
2009
 
2024
XM-1
2001
 
2013
XM-2
2001
 
2013
XM-3
2005
 
2020
XM-4
2006
 
2021
XM-5
2010
 
2025

We own four orbiting satellites for use in the Sirius system. We own five orbiting satellites for use in the XM system.

13

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

Four of these satellites were manufactured by Boeing Satellite Systems International and five were manufactured by Space Systems/Loral.

During the three months ended September 30, 2012 and 2011 , we capitalized expenditures, including interest, of $8,219 and $16,875 , respectively, and $25,224 and $67,576 during the nine months ended September 30, 2012 and 2011 , respectively, related to the construction of our FM-6 satellite and related launch vehicle.

(10)
Related Party Transactions

We had the following related party balances at September 30, 2012 and December 31, 2011 :
 
Related party current assets
 
Related party long-term assets
 
Related party current liabilities
 
Related party long-term liabilities
 
Related party long-term debt
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
 
September 30,
2012
 
December 31,
2011
Liberty Media
$

  
$

  
$
837

  
$
1,212

  
$
8,408

 
$
9,722

  
$

  
$

  
$
208,742

  
$
328,788

Sirius XM Canada
8,221

  
14,702

  
49,267

  
53,741

  
4,580

 
4,580

  
19,660

  
21,741

  

  

Total
$
8,221

  
$
14,702

  
$
50,104

  
$
54,953

  
$
12,988

 
$
14,302

  
$
19,660

  
$
21,741

  
$
208,742

  
$
328,788


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. In September 2012, Liberty Media converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of common stock. As of October 25, 2012, Liberty Media owned approximately 1,904,291,000 shares of our common stock.

Liberty Media has advised us that as of September 30, 2012 and December 31, 2011 , respectively, it also owned the following:
 
September 30,
2012
 
December 31,
2011
8.75% Senior Notes due 2015
$
150,000

  
$
150,000

9.75% Senior Secured Notes due 2015

  
50,000

13% Senior Notes due 2013

  
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
211,000

  
337,000

Less: discounts
2,258

  
8,212

Total carrying value of debt
$
208,742

  
$
328,788


During the three months ended September 30, 2012 , we redeemed Liberty Media's $50,000 of 9.75% Senior Secured Notes due 2015 and $76,000 of 13% Senior Notes due 2013 as part of the redemption of these Notes in their entirety.

As of September 30, 2012 and December 31, 2011 , we recorded $8,408 and $9,722 , respectively, related to accrued interest with Liberty Media to Related party current liabilities. We recognized Interest expense associated with debt held by Liberty Media of $8,242 and $8,934 for the three months ended September 30, 2012 and 2011 , respectively, and $26,260 and $26,718 for the nine months ended September 30, 2012 and 2011 , respectively.


14

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

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”). The combined company operates as Sirius XM Canada. We own approximately 46,700,000 Class A shares on a converted basis of CSR, representing a 38.0% equity interest and a 25.0% voting interest, and hold a non-interest bearing note, in a principal amount of $410 , issued by CSR.

We also 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 income (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 loss. As of September 30, 2012 , the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,747 and $16 , respectively. As of December 31, 2011 , the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,490 and $0 , respectively. The carrying values of the host contract and embedded derivative are recorded in Related party long-term assets.

Our interest in Sirius XM Canada is accounted for under the equity method. 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 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 loss. As of September 30, 2012 , our investment balance in Sirius XM Canada was approximately $42,107 , $27,978 of which represents equity method goodwill and intangible assets, and was recorded in Related party long-term assets. As of December 31, 2011 , our investment balance in Sirius XM Canada was approximately $45,061 , $28,589 of which represented equity method goodwill and intangible assets, and was recorded in Related party long-term assets.

We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs. As of September 30, 2012 and December 31, 2011 , amounts due for these costs totaled $5,046 and $7,404 , respectively, and is reported as Related party current assets.

As of September 30, 2012 , amounts due from Sirius XM Canada also included $6,162 attributable to deferred programming costs and accrued interest, $2,987 of which is reported as Related party long-term assets. As of December 31, 2011 , amounts due from Sirius XM Canada included $7,280 attributable to deferred programming costs and accrued interest, $4,780 of which was reported as Related party long-term assets.

As of September 30, 2012 and December 31, 2011 , the amounts due to Sirius XM Canada totaled $1,804 and $1,804 , respectively, 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 comprehensive income:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
  
2011
Royalty income
$
7,924

 
$
6,468

 
$
23,425

 
$
6,468

Amortization of Sirius XM Canada deferred income
694

 
694

 
2,082

 
694

Licensing fee revenue
1,500

 
1,500

 
4,500

 
1,500

Advertising reimbursements

 

 
833

 

Total revenue from Sirius XM Canada
$
10,118

 
$
8,662

 
$
30,840

 
$
8,662


Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment loss in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius XM Canada’s net loss was $182 for the three months ended September 30, 2012 and $3,403 for the nine months ended September 30, 2012 . We recorded amortization expense related to equity method intangible assets of $363 for the three months ended September 30, 2012 and $611 for the nine months ended September 30, 2012 . Our share of Sirius XM Canada's net loss was $4,214 for the three and

15

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

nine months ended September 30, 2011 .

Sirius Canada

We had an equity interest of 49% in Sirius Canada until June 21, 2011 when the Canada Merger closed.

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 loss in our unaudited consolidated statements of comprehensive income:
 
For the Nine Months Ended September 30,
 
2011
Royalty income
$
9,945

Dividend income
460

Total revenue from Sirius Canada
$
10,405


Receivables from royalty and dividend income were utilized to absorb a portion of our share of net losses generated by Sirius Canada. Total costs reimbursed by Sirius Canada were $5,253 for the nine months ended September 30, 2011 .

Our share of net earnings or losses of Sirius Canada was recorded to Interest and investment loss in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of Sirius Canada’s net loss was $9,717 for the nine months ended September 30, 2011 . The payments received from Sirius Canada in excess of carrying value were $6,748 for the nine months ended September 30, 2011 .

XM Canada

We had an equity interest of 21.5% in XM Canada until June 21, 2011 when the Canada Merger closed.

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, 2012 and December 31, 2011 , the carrying value of deferred revenue related to this agreement was $22,436 and $24,517 , 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.


16

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

We recorded the following revenue from XM Canada as Other revenue in our unaudited consolidated statements of comprehensive income:
 
For the Nine Months Ended September 30,
 
2011
Amortization of XM Canada deferred income
$
1,388

Subscriber and activation fee royalties
5,483

Licensing fee revenue
3,000

Advertising reimbursements
833

Total revenue from XM Canada
$
10,704


Our share of net earnings or losses of XM Canada is recorded to Interest and investment loss in our unaudited consolidated statements of comprehensive income on a one month lag. Our share of XM Canada’s net loss was $6,045 for the nine months ended September 30, 2011 .

(11)    Investments

Long Term Restricted Investments

Restricted investments relate to reimbursement obligations under letters of credit issued for the benefit of lessors of office space. As of September 30, 2012 and December 31, 2011 , our Long-term restricted investments were $ 3,973 .


17

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

(12)    Debt

Our debt consists of the following:
 
Conversion
Price
(per share)
 
September 30,
2012
 
December 31,
2011
8.75% Senior Notes due 2015
N/A

 
800,000

 
800,000

Less: discount
 
 
(7,754
)
 
(9,753
)
9.75% Senior Secured Notes due 2015
N/A

 

 
257,000

Less: discount
 
 

 
(8,356
)
13% Senior Notes due 2013
N/A

 

 
778,500

Less: discount
 
 

 
(39,504
)
7% Exchangeable Senior Subordinated Notes due 2014
$
1.875

 
550,000

 
550,000

Less: discount
 
 
(4,591
)
 
(5,956
)
7.625% Senior Notes due 2018
N/A

 
700,000

 
700,000

Less: discount
 
 
(9,970
)
 
(10,898
)
  5.25% Senior Notes due 2022
N/A

 
400,000

 

            Less: discount
 
 
(5,935
)
 

Other debt:
 
 
 
 
 
Capital leases
N/A

 
13,003

 
2,941

Total debt
 
 
2,434,753

 
3,013,974

Less: total current maturities non-related party
 
 
4,326

 
1,623

Total long-term
 
 
2,430,427

 
3,012,351

Less: related party
 
 
208,742

 
328,788

Total long-term, excluding related party
 
 
$
2,221,685

 
$
2,683,563


8.75% Senior Notes due 2015

In March 2010, we issued $800,000 aggregate principal amount of 8.75% Senior Notes due 2015 (the “ 8.75% Notes”). Interest is payable semi-annually in arrears on April 1 and October 1 of each year at a rate of 8.75%  per annum. The 8.75% Notes mature on April 1, 2015 . The 8.75% Notes were issued for $786,000 , resulting in an aggregate original issuance discount of $14,000 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 8.75% Notes on a senior unsecured basis.
  
7% Exchangeable Senior Subordinated Notes due 2014

In August 2008, we issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes are senior subordinated obligations and rank junior in right of payment to our existing and future senior debt and equally in right of payment with our existing and future senior subordinated debt. Substantially all of our domestic wholly-owned subsidiaries have guaranteed the Exchangeable Notes on a senior subordinated basis.

Interest is payable semi-annually in arrears on June 1 and December 1 of each year at a rate of 7%  per annum. The Exchangeable Notes mature on December 1, 2014 . The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of our common stock at an initial exchange rate of 533.3333 shares of common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of common stock. If a holder of the Exchangeable Notes elects to exchange the notes in connection with a corporate transaction that constitutes a fundamental change, the exchange rate will be increased by an additional number of shares of common stock determined by the applicable Indenture.


18

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

During the three months ended September 30, 2012 and three and nine months ended September 30, 2011 , the common stock reserved for exchange in connection with the Exchangeable Notes were considered to be anti-dilutive in our calculation of diluted net income per share. During the nine months ended September 30, 2012 , the Exchangeable Notes were considered to be dilutive.

7.625% Senior Notes due 2018

In October 2010, we issued $700,000 aggregate principal amount of 7.625% Senior Notes due 2018 (the “ 7.625% Notes”). Interest is payable semi-annually in arrears on May 1 and November 1 of each year at a rate of 7.625%  per annum. The 7.625% Notes mature on November 1, 2018 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 7.625% Notes.

5.25% Senior Notes due 2022

In August 2012, we issued $400,000 aggregate principal amount of 5.25% Senior Notes due 2022 (the “ 5.25% Notes”). Interest is payable semi-annually in arrears on February 15 and August 15 of each year at a rate of 5.25%  per annum. The 5.25% Notes mature on August 15, 2022 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 5.25% Notes.

Retired Debt Instruments

9.75% Senior Secured Notes due 2015

In August 2009, we issued $257,000 aggregate principal amount of 9.75% Senior Secured Notes due September 1, 2015 (the “ 9.75% Notes”). The 9.75% Notes were issued for $244,292 , resulting in an aggregate original issuance discount of $12,708 . Substantially all of our domestic wholly-owned subsidiaries guaranteed our obligations under the 9.75% Notes. The 9.75% Notes and related guarantees were secured by first-priority liens on substantially all of our assets and the assets of the guarantors.

During the three and nine months ended September 30, 2012 , we purchased $186,112 and $257,000 , respectively, in aggregate principal amounts of the 9.75% Notes for an aggregate purchase price, inclusive of interest, of $204,258 and $281,698 , respectively. We recognized an aggregate loss on the extinguishment of the 9.75% Notes of $14,352 and $22,184 during the three and nine months ended September 30, 2012 , respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.

13% Senior Notes due 2013

In July 2008, we issued $778,500 aggregate principal amount of 13% Senior Notes due 2013 (the “ 13% Notes”). The 13% Notes would have matured on August 1, 2013 . Substantially all of our domestic wholly-owned subsidiaries guaranteed our obligations under the 13% Notes.

During the three and nine months ended September 30, 2012 , we purchased $681,517 and $778,500 , respectively, in aggregate principal amounts of the 13% Notes for an aggregate purchase price, inclusive of interest, of $765,907 and $879,133 , respectively. We recognized an aggregate loss on the extinguishment of the 13% Notes of $92,753 and $110,542 , during the three and nine months ended September 30, 2012 , respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.

3.25% Convertible Notes due 2011

In February 2011, we purchased $94,148 of our then outstanding 3.25% Convertible Notes due 2011 (the " 3.25% Notes") at prices between 100.75% and 100.94% of the principal amount plus accrued interest. We recognized a loss on extinguishment of debt for the 3.25% Notes of $2,291 for the nine months ended September 30, 2011 , which consisted primarily of cash premiums paid, unamortized discount and deferred financing fees. The remainder of the 3.25% Notes was paid upon maturity in the fourth quarter of 2011.


19

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

11.25% Senior Secured Notes due 2013

In January 2011, we purchased the remaining portion of our outstanding 11.25% Senior Secured Notes due 2013 for an aggregate purchase price of $40,376 . A loss from extinguishment of debt of $4,915 associated with this purchase was recorded during the nine months ended September 30, 2011 .

Covenants and Restrictions

Our debt generally requires compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness unless our consolidated leverage would be no greater than 6.0 times consolidated operating cash flow after the incurrence of the indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions.

Under our debt agreements, the following generally constitute an event of default: (i) a default in the payment of interest; (ii) a default in the payment of principal; (iii) failure to comply with covenants; (iv) failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; (v) certain events of bankruptcy; (vi) a judgment for payment of money exceeding a specified aggregate amount; and (vii) voidance of subsidiary guarantees, subject to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.

At September 30, 2012 and December 31, 2011 , we were in compliance with our debt covenants.

(13)
Stockholders’ Equity

Common Stock, par value $0.001 per share

We were authorized to issue up to 9,000,000,000 shares of common stock as of September 30, 2012 and December 31, 2011 . There were 5,192,364,730 and 3,753,201,929 shares of common stock issued and outstanding as of September 30, 2012 and December 31, 2011 , respectively.

As of September 30, 2012 , approximately 1,954,599,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, preferred stock, warrants, incentive stock awards and common stock to be granted to third parties upon satisfaction of performance targets.

To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. (“MS”) and UBS AG London Branch (“UBS”) in July 2008, under which we loaned MS and UBS an aggregate of 262,400,000 shares of our common stock in exchange for a fee of $0.001 per share. During the third quarter of 2009, MS returned to us 60,000,000 shares of our common stock borrowed. In October 2011, MS and UBS returned the remaining 202,400,000 shares loaned. The returned shares were retired upon receipt and removed from outstanding common stock. The share lending agreements have been terminated. Under GAAP, the borrowed shares were not considered outstanding for the purpose of computing and reporting our net income (loss) per common share.

We recorded interest expense related to the amortization of the costs associated with the share lending arrangement and other issuance costs of $3,139 and $1,276 , respectively, for the three months ended September 30, 2012 and 2011 and $9,181 and $6,727 , respectively, for the nine months ended September 30, 2012 and 2011 . As of September 30, 2012 , the unamortized balance of the debt issuance costs was $30,873 , with $30,256 recorded in deferred financing fees, net, and $617 recorded in Long-term related party assets. As of December 31, 2011 , the unamortized balance of the debt issuance costs was $40,054 , with $39,253 recorded in deferred financing fees, net, and $801 recorded in Long-term related party assets. These costs will continue to be amortized until the debt is terminated.
 
In January 2004, Sirius Satellite Radio Inc. signed a seven -year agreement with a sports programming provider which expired in February 2011. Upon execution of this agreement, Sirius delivered 15,173,070 shares of common stock valued at $40,967 to that programming provider. These shares of common stock were subject to transfer restrictions which lapsed over time. We recognized share-based payment expense associated with these shares of $1,568 in the nine months ended September 30, 2011 .

20

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

Preferred Stock, par value $0.001 per share

We were authorized to issue up to 50,000,000 shares of undesignated preferred stock as of September 30, 2012 and December 31, 2011 . There were no shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of September 30, 2012 and December 31, 2011 .

There were 6,250,100 and 12,500,000 shares of Series B Preferred Stock issued and outstanding as of September 30, 2012 and December 31, 2011 , respectively. In September 2012, Liberty Media converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of common stock. The Series B Preferred Stock is convertible into shares of our common stock at the rate of 206.9581409 shares of common stock for each share of Series B Preferred Stock, representing approximately 20% of our outstanding shares of common stock (after giving effect to such conversion). As the holder of the Series B Preferred Stock, Liberty Radio LLC is entitled to a number of votes equal to the number of shares of our common stock into which such shares of Series B Preferred Stock are convertible. Liberty Radio LLC will also receive dividends and distributions ratably with our common stock, on an as-converted basis. With respect to dividend rights, the Series B Preferred Stock ranks evenly with our common stock and each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock. With respect to liquidation rights, the Series B Preferred Stock ranks evenly with each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock, and ranks senior to our common stock.

Warrants

We have issued warrants to purchase shares of common stock in connection with distribution, programming and satellite purchase agreements. As of September 30, 2012 and December 31, 2011 , approximately 22,506,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested. These warrants were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive. The warrants expire at various times through 2015. At September 30, 2012 and December 31, 2011 , the weighted average exercise price of outstanding warrants was $2.63 per share. We did not incur warrant related expenses during the three and nine months ended September 30, 2012 and 2011 .

In February 2011, Daimler AG exercised 16,500,000 warrants to purchase shares of common stock on a net settlement basis, resulting in the issuance of 7,122,951 shares of our common stock.

(14)
Benefit Plans

We recognized share-based payment expense of $17,492 and $13,983 for the three months ended September 30, 2012 and 2011 , respectively, and $46,361 and $36,006 for the nine months ended September 30, 2012 and 2011 , respectively.

2009 Long-Term Stock Incentive Plan

In May 2009, our stockholders approved the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (the “2009 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 2009 Plan. The 2009 Plan provides for the grant of stock options, restricted stock, restricted stock units and other stock-based awards that the compensation committee of our board of directors may deem appropriate. Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2009 Plan are generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of September 30, 2012 , approximately 142,977,000 shares of common stock were available for future grants under the 2009 Plan.

Other Plans

We maintain four other share-based benefit plans — the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM 1998 Shares Award Plan and the XM Talent Option Plan. No further awards may be made under these plans. Outstanding awards under these plans continue to vest.


21

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors:
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2012
 
2011
 
2012
 
2011
Risk-free interest rate
0.8%
 
1.1%
 
0.8%
 
1.1%
Expected life of options — years
5.06
 
5.27
 
5.13
 
5.27
Expected stock price volatility
49%
 
68%
 
53%
 
68%
Expected dividend yield
0%
 
0%
 
0%
 
0%

There were no options granted to third parties during the three and nine months ended September 30, 2012 and 2011 .

The following table summarizes stock option activity under our share-based payment plans for the nine months ended September 30, 2012 (options in thousands):
 
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2011
439,580

 
$
1.25

 
 
 
 
Granted
57,776

 
$
2.52

 
 
 
 
Exercised
(144,310
)
 
$
0.62

 
 
 
 
Forfeited, cancelled or expired
(8,217
)
 
$
3.26

 
 
 
 
Outstanding as of September 30, 2012
344,829

 
$
1.68

 
6.82
 
$
384,883

Exercisable, September 30, 2012
125,959

 
$
2.08

 
5.33
 
$
134,226


The weighted average grant date fair value of options granted during the nine months ended September 30, 2012 and 2011 was $1.08 and $1.04 , respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2012 and 2011 was $237,521 and $10,011 , respectively.

We recognized share-based payment expense associated with stock options of $16,660 and $13,201 for the three months ended September 30, 2012 and 2011 , respectively, and $43,350 and $33,098 for the nine months ended September 30, 2012 and 2011 , respectively.

There were no grants, exercises, forfeitures, cancellations or expirations of our shares of restricted stock or restricted stock units during the three and nine months ended September 30, 2012 . As of September 30, 2012 , we had 421 awards of nonvested restricted stock and restricted stock units outstanding which have a weighted average grant date fair value of $1.46 . These represent shares issued to members of the board of directors as part of our former director compensation program. The shares will vest on the first anniversary of the date the applicable person ceases to be a director.

We recognized share-based payment expense associated with restricted stock units and shares of restricted stock of $0 for the three months ended September 30, 2012 and 2011 and $0 and $543 for the nine months ended September 30, 2012 and 2011 , respectively.

Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units and shares granted to employees and members of our board of directors at September 30, 2012 and December 31, 2011 , net of estimated forfeitures, was $146,028 and $129,983 , respectively. The total unrecognized compensation costs at September 30, 2012 are expected to be recognized over a weighted-average period of three years.

401(k) Savings Plan

We sponsor the Sirius XM Radio 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees.


22

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

The Sirius XM Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. We match 50% of an employee’s voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of common stock. Employer matching contributions under the Sirius XM Plan vest at a rate of 33.33% for each year of employment and are fully vested after three years of employment for all current and future contributions. Share-based payment expense resulting from the matching contribution to the Sirius XM Plan was $832 and $782 for the three months ended September 30, 2012 and 2011 , respectively, and $3,011 and $2,365 for the nine months ended September 30, 2012 and 2011 , respectively.

We may also elect to contribute to the profit sharing portion of the Sirius XM Plan based upon the total eligible compensation of eligible participants. These additional contributions in the form of shares of common stock are determined by the compensation committee of our board of directors. Employees are only eligible to receive profit-sharing contributions during any year in which they are employed on the last day of the year. We did not contribute to the profit sharing portion of the Sirius XM Plan in 2011 and we do not plan to contribute in 2012.

(15)
Commitments and Contingencies

The following table summarizes our expected contractual cash commitments as of September 30, 2012 :
 
2012
 
2013
 
2014
 
2015
 
2016
 
Thereafter
 
Total
Long-term debt obligations
$
1,146

 
$
4,234

 
$
553,406

 
$
803,355

 
$
862

 
$
1,100,000

 
$
2,463,003

Cash interest payments
81,084

 
184,360

 
183,116

 
109,483

 
74,381

 
231,700

 
864,124

Satellite and transmission
3,675

 
55,106

 
14,927

 
13,157

 
3,597

 
19,154

 
109,616

Programming and content
44,719

 
201,146

 
171,456

 
163,409

 
13,388

 
1,125

 
595,243

Marketing and distribution
7,887

 
18,417

 
11,588

 
5,377

 
3,117

 
692

 
47,078

Satellite incentive payments
2,435

 
11,804

 
12,542

 
11,658

 
12,529

 
79,959

 
130,927

Operating lease obligations
9,403

 
38,017

 
31,947

 
34,572

 
24,501

 
224,861

 
363,301

Other
9,278

 
39,607

 
15,712

 
1,790

 
188

 

 
66,575

Total(1)
$
159,627

 
$
552,691

 
$
994,694

 
$
1,142,801

 
$
132,563

 
$
1,657,491

 
$
4,639,867


(1)
The table does not include our reserve for uncertain tax positions, which at September 30, 2012 totaled $1,565 , as the specific timing of any cash payments cannot be projected with reasonable certainty.

Long-term debt obligations.     Long-term debt obligations include principal payments on outstanding debt and capital lease obligations.

Cash interest payments.     Cash interest payments include interest due on outstanding debt and capital lease payments through maturity.

Satellite and transmission.     We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks. We have also entered into various agreements to design and construct a satellite and related launch vehicle for use in our systems.

Programming and content.     We have entered into various programming agreements. Under the terms of these agreements, our obligations include fixed payments, advertising commitments and revenue sharing arrangements.

Marketing and distribution.     We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.
 
Satellite incentive payments.     Boeing Satellite Systems International, Inc., the manufacturer of four of XM’s in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of XM’s satellites. As of September 30, 2012 , we have accrued $27,506 related to contingent in-orbit performance payments for our XM-3 and XM-4 satellites based

23

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Dollar amounts in thousands, unless otherwise stated)

on expected operating performance over their fifteen -year design life. Boeing may also be entitled to an additional $10,000 if our XM-4 satellite continues to operate above baseline specifications during the five years beyond the satellite’s fifteen -year design life.

Space Systems/Loral, the manufacturer of two of our in-orbit satellites, may be entitled to future in-orbit performance payments. As of September 30, 2012 , we have accrued $9,193 and $21,450 related to contingent performance payments for our FM-5 and XM-5 satellites, respectively, based on their expected operating performance over their fifteen -year design life.

Operating lease obligations.     We have entered into cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.

Other.     We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, including subscriber growth, and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar variable cost provisions.

We do not have any other significant off-balance sheet financing arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.

Legal Proceedings

In the ordinary course of business, we are a defendant in various lawsuits and arbitration proceedings, including derivative actions, actions filed by subscribers, both on behalf of themselves and on a class action basis, and actions filed by former employees, parties to contracts or leases, and owners of patents, trademarks, copyrights or other intellectual property. Our significant legal proceedings are discussed under Item I, Legal Proceedings, in Part II, Other Information.

(16)    Income Taxes

Income tax benefit (expense) for the three months ended September 30, 2012 and 2011 was $20,113 and $(5,714) , respectively and for the nine months ended September 30, 2012 and 2011 was $3,013,860 and $(9,907) , respectively.

For three months ended September 30, 2012 , we recorded a $24,000 discrete income tax benefit related to the release of the deferred tax valuation allowance for net operating losses we no longer expect to realize against income for the remainder of 2012.  We now expect to realize this benefit after 2012.  This benefit is due to a decrease in estimated income for 2012 as result of the loss on extinguishment of debt that was recorded during the three months ended September 30, 2012 . Including the $24,000 discrete item recorded in the quarter, for the nine months ended