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, 2013
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
 
 
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
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 22, 2013)
COMMON STOCK, $0.001 PAR VALUE
 
6,135,513,195
SHARES




Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
Item No.
 
Description
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   1
 
 
 
 
 
 
   2
 
 
 
 
 
 
   3
 
 
 
 
 
 
   4
 
 
 
 
 
 
   6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2013
 
2012
 
2013
 
2012
Revenue:
 
 
 
 
 
 
 
Subscriber revenue
$
834,053

 
$
757,672

 
$
2,432,113

 
$
2,188,199

Advertising revenue
21,918

 
20,426

 
63,886

 
59,881

Equipment revenue
17,989

 
17,813

 
54,588

 
51,183

Other revenue
87,549

 
71,449

 
248,430

 
210,362

Total revenue
961,509

 
867,360

 
2,799,017

 
2,509,625

Operating expenses:
 
 
 
 
 
 
 
Cost of services:
 
 
 
 
 
 
 
Revenue share and royalties
162,627

 
141,834

 
467,017

 
409,371

Programming and content
72,322

 
69,938

 
217,313

 
205,203

Customer service and billing
76,322

 
77,768

 
237,006

 
212,635

Satellite and transmission
19,853

 
18,319

 
59,041

 
53,980

Cost of equipment
5,340

 
6,345

 
17,809

 
19,301

Subscriber acquisition costs
125,457

 
112,418

 
371,560

 
348,014

Sales and marketing
75,638

 
60,676

 
209,594

 
176,457

Engineering, design and development
13,007

 
13,507

 
42,901

 
32,468

General and administrative
67,881

 
68,235

 
184,613

 
193,786

Depreciation and amortization
58,533

 
66,571

 
192,966


199,481

Total operating expenses
676,980

 
635,611

 
1,999,820

 
1,850,696

Income from operations
284,529

 
231,749

 
799,197

 
658,929

Other income (expense):

 

 
 
 
 
Interest expense, net of amounts capitalized
(54,629
)
 
(70,035
)
 
(150,531
)
 
(219,777
)
Loss on extinguishment of debt and credit facilities, net
(107,971
)
 
(107,105
)
 
(124,348
)
 
(132,726
)
Interest and investment income (loss)
1,716

 
(321
)
 
3,648

 
(3,192
)
Other income (loss)
407

 
113

 
909

 
(637
)
Total other expense
(160,477
)
 
(177,348
)
 
(270,322
)
 
(356,332
)
Income before income taxes
124,052

 
54,401

 
528,875

 
302,597

Income tax (expense) benefit
(61,158
)
 
20,113

 
(216,857
)
 
3,013,860

Net income
$
62,894

 
$
74,514

 
$
312,018

 
$
3,316,457

Foreign currency translation adjustment, net of tax
(11
)
 

 
(292
)
 
(38
)
Total comprehensive income
$
62,883

 
$
74,514

 
$
311,726

 
$
3,316,419

Net income per common share:
 
 
 
 
 
 
 
Basic
$
0.01

 
$
0.01

 
$
0.05

 
$
0.52

Diluted
$
0.01

 
$
0.01

 
$
0.05

 
$
0.49

Weighted average common shares outstanding:
 
 
 
 

 


Basic
6,184,216

 
4,034,122

 
6,265,981

 
3,870,031

Diluted
6,287,353

 
6,577,654

 
6,446,082

 
6,848,230


See accompanying notes to the unaudited consolidated financial statements.

1

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 
September 30, 2013
 
December 31, 2012
(in thousands, except share and per share data)
(unaudited)
 
 
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
716,784

 
$
520,945

Accounts receivable, net
102,778

 
106,142

Receivables from distributors
80,819

 
104,425

Inventory, net
14,242

 
25,337

Prepaid expenses
130,794

 
122,157

Related party current assets
11,141

 
13,167

Deferred tax asset
887,182

 
923,972

Other current assets
7,525

 
12,037

Total current assets
1,951,265

 
1,828,182

Property and equipment, net
1,542,887

 
1,571,922

Long-term restricted investments
5,718

 
3,999

Deferred financing fees, net
29,377

 
38,677

Intangible assets, net
2,482,367

 
2,519,610

Goodwill
1,815,365

 
1,815,365

Related party long-term assets
29,385

 
44,954

Long-term deferred tax asset
1,036,708

 
1,219,256

Other long-term assets
13,240

 
12,878

Total assets
$
8,906,312

 
$
9,054,843

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued expenses
$
528,173

 
$
587,652

Accrued interest
53,918

 
33,954

Current portion of deferred revenue
1,522,513

 
1,474,138

Current portion of deferred credit on executory contracts
3,904

 
207,854

Current maturities of long-term debt
489,492

 
4,234

Current maturities of long-term related party debt
49,383

 

Related party current liabilities
6,121

 
6,756

Total current liabilities
2,653,504

 
2,314,588

Deferred revenue
145,656

 
159,501

Deferred credit on executory contracts
2,339

 
5,175

Long-term debt
3,161,372

 
2,222,080

Long-term related party debt
10,948

 
208,906

Related party long-term liabilities
16,884

 
18,966

Other long-term liabilities
80,941

 
86,062

Total liabilities
6,071,644

 
5,015,278

Commitments and contingencies (Note 15)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.001; 50,000,000 authorized at September 30, 2013 and December 31, 2012:
 
 
 
Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share); 0 and 6,250,100 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively

 
6

Common stock, par value $0.001; 9,000,000,000 shares authorized; 6,134,596,655 and 5,262,440,085 shares issued and outstanding at September 30, 2013 and December 31, 2012, respectively
6,135

 
5,263

Accumulated other comprehensive (loss) income, net of tax
(172
)
 
120

Additional paid-in capital
8,828,077

 
10,345,566

Accumulated deficit
(5,999,372
)
 
(6,311,390
)
Total stockholders’ equity
2,834,668

 
4,039,565

Total liabilities and stockholders’ equity
$
8,906,312

 
$
9,054,843


See accompanying notes to the unaudited consolidated financial statements.

2


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

 
Convertible Perpetual
Preferred Stock,
Series B-1
 
Common Stock
 
 
 
 
 
Treasury Stock
 
 
 
 
(in thousands, except share data)
Shares
 
Amount
 
Shares
 
Amount
 
Accumulated Other Comprehensive Income (Loss)
 
Additional
Paid-in
Capital
 
Shares
 
Amount
 
Accumulated
Deficit
 
Total
Stockholders’
Equity
Balance at December 31, 2012
6,250,100

 
$
6

 
5,262,440,085

 
$
5,263

 
$
120

 
$
10,345,566

 

 
$

 
$
(6,311,390
)
 
$
4,039,565

Comprehensive income, net of tax

 
$

 

 
$

 
$
(292
)
 
$

 

 
$

 
$
312,018

 
$
311,726

Share-based payment expense

 
$

 

 
$

 
$

 
$
49,774

 

 
$

 
$

 
$
49,774

Exercise of options and vesting of restricted stock units

 
$

 
27,505,245

 
$
28

 
$

 
$
19,251

 

 
$

 
$

 
$
19,279

Minimum withholding taxes on net share settlement of stock-based compensation

 
$

 

 
$

 
$

 
$
(28,413
)
 

 
$

 
$

 
$
(28,413
)
Conversion of preferred stock to common stock
(6,250,100
)
 
$
(6
)
 
1,293,509,076

 
$
1,293

 
$

 
$
(1,287
)
 

 
$

 
$

 
$

Conversion of Exchangeable Notes to common stock

 
$

 
27,687,850

 
$
28

 
$

 
$
45,069

 

 
$

 
$

 
$
45,097

Common stock repurchased

 
$

 

 
$

 
$

 
$

 
476,545,601

 
$
(1,602,360
)
 
$

 
$
(1,602,360
)
Common stock retired

 
$

 
(476,545,601
)
 
$
(477
)
 
$

 
$
(1,601,883
)
 
(476,545,601
)
 
$
1,602,360

 
$

 
$

Balance at September 30, 2013

 
$

 
6,134,596,655

 
$
6,135

 
$
(172
)
 
$
8,828,077

 

 
$

 
$
(5,999,372
)
 
$
2,834,668

See accompanying notes to the unaudited consolidated financial statements.

3


SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
For the Nine Months Ended September 30,
(in thousands)
2013
 
2012
Cash flows from operating activities:
 
 
 
Net income
$
312,018

 
$
3,316,457

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

 

Depreciation and amortization
192,966

 
199,481

Non-cash interest expense, net of amortization of premium
16,506

 
30,786

Provision for doubtful accounts
28,571

 
24,953

Amortization of deferred income related to equity method investment
(2,082
)
 
(2,082
)
Loss on extinguishment of debt and credit facilities, net
124,348

 
132,726

(Gain) loss on unconsolidated entity investments, net
(2,831
)
 
4,014

Dividend received from unconsolidated entity investment
17,707

 

Loss on disposal of assets
128

 
567

Share-based payment expense
49,774

 
46,361

Deferred income taxes
219,184

 
(3,017,021
)
Other non-cash purchase price adjustments
(206,786
)
 
(220,336
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,207
)
 
(26,211
)
Receivables from distributors
23,606

 
(2,956
)
Inventory
11,095

 
888

Related party assets
2,077

 
6,905

Prepaid expenses and other current assets
(6,665
)
 
(26,367
)
Other long-term assets
(363
)
 
24,454

Accounts payable and accrued expenses
(58,680
)
 
(27,384
)
Accrued interest
19,964

 
(5,940
)
Deferred revenue
34,530

 
52,777

Related party liabilities
(635
)
 
(1,314
)
Other long-term liabilities
(4,968
)
 
2,774

Net cash provided by operating activities
744,257

 
513,532

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(118,235
)
 
(73,546
)
Purchases of restricted and other investments
(1,719
)
 

Net cash used in investing activities
(119,954
)
 
(73,546
)
Cash flows from financing activities:
 
 
 
Proceeds from exercise of stock options
21,819

 
89,250

Taxes paid in lieu of shares issued for stock-based compensation
(27,913
)
 

Proceeds from long-term borrowings and revolving credit facility, net of costs
2,532,137

 
393,687

Payment of premiums on redemption of debt
(116,410
)
 
(100,615
)
Repayment of long-term borrowings and revolving credit facility
(1,085,737
)
 
(914,028
)
Repayment of related party long-term borrowings
(150,000
)
 
(126,000
)
Common stock repurchased and retired
(1,602,360
)
 

Net cash used in financing activities
(428,464
)
 
(657,706
)
Net increase (decrease) in cash and cash equivalents
195,839

 
(217,720
)
Cash and cash equivalents at beginning of period
520,945

 
773,990

Cash and cash equivalents at end of period
$
716,784

 
$
556,270

See accompanying notes to the unaudited consolidated financial statements.





4


SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Continued)
(UNAUDITED)
 
For the Nine Months Ended September 30,
(in thousands)
2013
 
2012
Supplemental Disclosure of Cash and Non-Cash Flow Information
 
 
 
Cash paid during the period for:
 
 
 
Interest, net of amounts capitalized
$
109,476

 
$
188,997

Non-cash investing and financing activities:

 

Capital lease obligations incurred to acquire assets
8,870

 
12,781

Conversion of Series B preferred stock to common stock
1,293

 
1,294

Conversion of 7% Exchangeable Notes to common stock, net of debt issuance and deferred financing costs
45,097

 

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 CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Dollar amounts in thousands, unless otherwise stated)


(1)
Business & Basis of Presentation
Business
We broadcast our music, sports, entertainment, comedy, talk, news, traffic and weather channels, as well as infotainment services in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive music and other channels, plus new features such as SiriusXM On Demand and MySXM, 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 from which we acquire a majority of our subscribers. We also acquire subscribers through marketing campaigns to owners of factory-installed satellite radios that are not currently subscribing to our services. Additionally, 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 longer term subscription plans, as well as discounts for multiple subscriptions. We also derive revenue from 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 and dealers include a subscription to our radio services in the sale or lease price of new or previously owned vehicles. The length of these trial subscriptions varies but is typically three to twelve months. We receive subscription payments for these trials from certain automakers. We also reimburse various automakers for certain costs associated with satellite radios installed in new vehicles.

On August 14, 2013, we entered into a Stock Purchase Agreement with Agero, Inc. ("Agero"), pursuant to which we agreed to acquire the connected vehicle business of Agero for an aggregate purchase price of approximately $530,000 in cash. Agero's connected vehicle business is a leader in implementing the next generation of connected vehicle services. The business offers a portfolio of location-based services through two-way wireless connectivity, including safety, security, convenience, maintenance and data services and remote vehicle diagnostics. The transaction is expected to close in the fourth quarter of 2013 subject to the expiration or early termination of the Hart-Scott-Rodino antitrust waiting period and other customary closing conditions.

Liberty Media Corporation beneficially owned as of September 30, 2013 , directly and indirectly, over 50% of the outstanding shares of our common stock. Liberty Media owns interests in a broad range of media, communications and entertainment businesses, including its subsidiaries, Atlanta National League Baseball Club, Inc. and TruePosition, Inc., its interests in Charter Communications, Live Nation and Barnes & Noble, and minority equity investments in Time Warner, Inc. and Viacom.
Principles of Consolidation
The accompanying consolidated financial statements of Sirius XM Radio Inc. and its 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. Certain information and footnote disclosures normally included in the financial statements presented in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.
Basis of Presentation
Certain numbers in our prior period consolidated financial statements have been reclassified to conform to our current period presentation. All significant intercompany transactions have been eliminated in consolidation. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012 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, 2012 , which was filed with the SEC on February 6, 2013.

6

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

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, 2013 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements. For a discussion of subsequent events refer to Note 17.

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 assessments of asset impairment, depreciable lives of our satellites, share-based payment expense and income taxes.

(2)
Summary of Significant Accounting Policies
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, 2013 and December 31, 2012 , the carrying value of our debt was $3,711,195 and $2,435,220 , respectively, and the fair value approximated $4,304,922 and $3,055,076 , respectively. The carrying value of our investment in Sirius XM Canada was $28,589 and $37,983 as of September 30, 2013 and December 31, 2012 , respectively; the fair value approximated $385,000 and $290,900 as of September 30, 2013 and December 31, 2012 , respectively.
Accumulated Other Comprehensive Income (Loss)
Accumulated other comprehensive loss of $172 was primarily comprised of the cumulative foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three months ended September 30, 2013 , we recorded a foreign currency translation adjustment loss of $11 , net of a tax benefit of $15 ; during the nine months ended September 30, 2013 , we recorded a foreign currency translation adjustment loss of $292 , net of a tax benefit of $155 .
Recent Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income , to require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. An entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income if the amount reclassified is required under GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under GAAP that provide additional detail about those amounts. This standard was effective for interim and annual periods beginning after December 15, 2012 and is to be applied on a prospective basis. We adopted ASU 2013-02 and will disclose significant amounts reclassified out of accumulated other comprehensive income as such transactions arise. ASU 2013-02 affects financial statement presentation only and has no impact on our results of operations or unaudited consolidated financial statements.

(3)
Earnings per Share

We utilize the two-class method in calculating basic net income per common share, as our Series B Preferred Stock was considered to be participating securities through January 18, 2013. On January 18, 2013, Liberty Media converted its remaining 6,250,100 outstanding shares of Series B Preferred Stock into 1,293,509,076 shares of common stock. Basic net income per common share is calculated by dividing the income available to common stockholders by the weighted average common shares outstanding during each reporting period. Diluted net income per common share adjusts the weighted average number of common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt, preferred stock, warrants, stock options and restricted stock units) were exercised or converted into common stock, calculated using the treasury stock method.


7

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

Common stock equivalents of approximately 323,615,000 and 451,577,000 for the three months ended September 30, 2013 and 2012 , respectively, and 354,938,000 and 144,014,000 for the nine months ended September 30, 2013 and 2012 , respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
(in thousands, except per share data)
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
Net income
$
62,894

 
$
74,514

 
$
312,018

  
$
3,316,457

Less:
 
 
 
 
 
 
 
Allocation of undistributed income to Series B Preferred Stock

 
(27,825
)
 
(4,190
)
 
(1,309,647
)
Net income available to common stockholders for basic net income per common share
$
62,894

 
$
46,689

 
$
307,828

 
$
2,006,810

Add back:
 
 
 
 
 
 
 
Allocation of undistributed income to Series B Preferred Stock

 
27,825

 
4,190

 
1,309,647

Effect of interest on assumed conversions of convertible debt

 

 

 
28,875

Net income available to common stockholders for diluted net income per common share
$
62,894

 
$
74,514

 
$
312,018

 
$
3,345,332

Denominator:
 
 
 
 
 
 
 
Weighted average common shares outstanding for basic net income per common share
6,184,216

 
4,034,122

 
6,265,981

  
3,870,031

Weighted average impact of assumed Series B Preferred Stock conversion

 
2,404,143

 
85,286

 
2,525,588

Weighted average impact of assumed convertible debt

 

 

 
293,333

Weighted average impact of other dilutive equity instruments
103,137

 
139,389

 
94,815

  
159,278

Weighted average shares for diluted net income per common share
6,287,353

 
6,577,654

 
6,446,082

  
6,848,230

Net income per common share:
 
 
 
 


 
 
Basic
$
0.01

 
$
0.01

 
$
0.05

  
$
0.52

Diluted
$
0.01

 
$
0.01

 
$
0.05

  
$
0.49


(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 is based upon our assessment of various factors. We consider historical experience, the age of the receivable balances, current economic conditions and other factors that may affect the counterparty’s ability to pay. Bad debt expense is included in Customer service and billing expense in our unaudited consolidated statements of comprehensive income.

Accounts receivable, net, consists of the following:
 
September 30,
2013
 
December 31,
2012
Gross accounts receivable
$
114,300

 
$
117,853

Allowance for doubtful accounts
(11,522
)
 
(11,711
)
Total accounts receivable, net
$
102,778

 
$
106,142



8

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

Receivables from distributors include billed and unbilled amounts due from OEMs for services included in the sale or lease price of vehicles, as well as billed amounts due from retailers. We have not established an allowance for doubtful accounts for our receivables from distributors as we have historically not experienced any significant collection issues with our OEMs. Receivables from distributors consist of the following:
 
September 30,
2013
 
December 31,
2012
Billed
$
30,583

  
$
53,057

Unbilled
50,236

  
51,368

Total
$
80,819

  
$
104,425


(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 or market. We record an estimated allowance for inventory that is considered slow moving or 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,
2013
 
December 31,
2012
Raw materials
$
12,505

 
$
17,717

Finished goods
16,800

 
23,779

Allowance for obsolescence
(15,063
)
 
(16,159
)
Total inventory, net
$
14,242

 
$
25,337


(6)
Goodwill

Goodwill represents the excess of the purchase price over the estimated fair value of the net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment is performed as of the fourth quarter of each year, and 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. If the carrying value of goodwill exceeds its fair value, an impairment loss is recognized.

As of September 30, 2013 , there were no indicators of impairment, and no impairment loss was recorded for goodwill during the three and nine months ended September 30, 2013 and 2012 . 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”). As of September 30, 2013 , the cumulative balance of goodwill impairments recorded since the Merger was $4,766,190 , which was recognized during the year ended December 31, 2008 .


9

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

(7)
Intangible Assets

As a result of the Merger, certain intangible assets formerly held by XM Satellite Radio Holdings Inc. were recorded at fair value. Intangible assets consist of the following:
 
 
 
September 30, 2013
 
December 31, 2012
 
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

 
(262,217
)
 
117,783

 
380,000

 
(233,317
)
 
146,683

Licensing agreements
9.1 years
 
78,289

 
(51,682
)
 
26,607

 
78,489

 
(44,161
)
 
34,328

Proprietary software
6 years
 
16,552

 
(13,236
)
 
3,316

 
16,552

 
(12,777
)
 
3,775

Developed technology
10 years
 
2,000

 
(1,033
)
 
967

 
2,000

 
(883
)
 
1,117

Leasehold interests
7.4 years
 
132

 
(92
)
 
40

 
132

 
(79
)
 
53

Total intangible assets
 
 
$
2,810,627

 
$
(328,260
)
 
$
2,482,367

 
$
2,810,827

 
$
(291,217
)
 
$
2,519,610


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
 
2021
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, 2013 , there were no legal, regulatory or contractual limitations associated with the XM trademark.

Our annual impairment assessment of our indefinite intangible assets is performed as of the fourth quarter of each year. 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. If the carrying value of the intangible assets exceeds its fair value, an

10

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

impairment loss is recognized. As of September 30, 2013 , 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, 2013 and 2012 .

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 $12,107 and $13,198 for the three months ended September 30, 2013 and 2012 , respectively, and $37,043 and $40,775 for the nine months ended September 30, 2013 and 2012 , respectively. Expected amortization expense for the remaining period in 2013, each of the fiscal years 2014 through 2017 and for periods thereafter is as follows:
Year ending December 31,
  
Amount
2013 (remaining)
  
$
10,278

2014
  
38,877

2015
  
35,561

2016
  
32,546

2017
  
19,582

Thereafter
  
11,869

Total definite life intangible assets, net
  
$
148,713


(8)
Interest Costs

We capitalized a portion of the interest on funds borrowed as part of the cost of constructing our satellites and related launch vehicle. We are currently capitalizing the interest associated with our FM-6 satellite and related launch vehicle and will continue to do so until the satellite is placed into operation. We also incur interest costs on 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,
 
2013
 
2012
 
2013
 
2012
Interest costs charged to expense
$
54,629

 
$
70,035

 
$
150,531

 
$
219,777

Interest costs capitalized
7,915

 
8,005

 
23,923

 
24,087

Total interest costs incurred
$
62,544

 
$
78,040

 
$
174,454

 
$
243,864


Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $5,574 and $9,755 for the three months ended September 30, 2013 and 2012 , respectively, and $16,506 and $30,786 for the nine months ended September 30, 2013 and 2012 , respectively.


11

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

(9)
Property and Equipment

Property and equipment, net, consists of the following:
 
September 30,
2013
 
December 31,
2012
Satellite system
$
1,943,537

 
$
1,943,537

Terrestrial repeater network
112,516

 
112,482

Leasehold improvements
46,070

 
44,938

Broadcast studio equipment
57,717

 
55,823

Capitalized software and hardware
257,419

 
232,753

Satellite telemetry, tracking and control facilities
63,790

 
62,734

Furniture, fixtures, equipment and other
66,345

 
76,028

Land
38,411

 
38,411

Building
58,011

 
57,816

Construction in progress
511,715

 
417,124

Total property and equipment
3,155,531

 
3,041,646

Accumulated depreciation and amortization
(1,612,644
)
 
(1,469,724
)
Property and equipment, net
$
1,542,887

 
$
1,571,922


Construction in progress consists of the following:
 
September 30,
2013
 
December 31,
2012
Satellite system
$
431,513

  
$
376,825

Terrestrial repeater network
24,888

  
17,224

Other
55,314

  
23,075

Construction in progress
$
511,715

  
$
417,124


Depreciation expense on property and equipment was $46,426 and $53,373 for the three months ended September 30, 2013 and 2012 , respectively, and $155,923 and $158,706 for the nine months ended September 30, 2013 and 2012 , respectively.

We retired property and equipment of $13,130 and $4,633 and recognized a loss on disposal of assets of $128 and $567 during the nine months ended September 30, 2013 and 2012 , respectively.


12

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

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
* Satellite was fully depreciated as of September 30, 2013 but is still in operation.

We own four orbiting satellites for use in the Sirius system. We own five orbiting satellites for use in the XM system. Four of these satellites were manufactured by Boeing Satellite Systems International, Inc., and five were manufactured by Space Systems/Loral.

During the three months ended September 30, 2013 and 2012 , we capitalized expenditures, including interest, of $28,608 and $8,219 , respectively, and $44,982 and $25,224 during the nine months ended September 30, 2013 and 2012 , 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, 2013 and December 31, 2012 :
 
Related party current assets
 
Related party long-term assets
 
Related party current liabilities
 
Related party long-term liabilities
 
Related party debt
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
 
September 30, 2013
 
December 31, 2012
Liberty Media
$

 
$

 
$
405

 
$
757

 
$
1,845

 
$
3,980

 
$

 
$

 
$
60,331

 
$
208,906

Sirius XM Canada
11,141

 
13,167

 
28,980

 
44,197

 
4,276

 
2,776

 
16,884

 
18,966

 

 

Total
$
11,141

 
$
13,167

 
$
29,385

 
$
44,954

 
$
6,121

 
$
6,756

 
$
16,884

 
$
18,966

 
$
60,331

 
$
208,906


Liberty Media

In February and March 2009, we entered into several transactions to borrow up to $530,000 from Liberty Media Corporation and its affiliates. All of these loans were repaid in 2009.

As part of the transactions with Liberty Media, in February 2009, we entered into an investment agreement (the “Investment Agreement”) with Liberty Radio, LLC, an indirect wholly-owned subsidiary of Liberty Media. Pursuant to the Investment Agreement, 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 the loan investments. The Series B Preferred Stock was convertible into approximately 40% of our outstanding shares of common stock (after giving effect to such conversion).

In September 2012, Liberty Radio, LLC converted 6,249,900 shares of the Series B Preferred Stock into 1,293,467,684 shares of our common stock. In January 2013, the Federal Communications Commission granted Liberty Media approval to acquire de jure control of us, and Liberty Radio, LLC converted its remaining Series B Preferred Stock into 1,293,509,076 shares of our common stock. In addition, Liberty Media, indirectly through its subsidiaries, purchased an additional 50,000,000 shares of our common stock. As a result of these conversions of Series B Preferred Stock and additional

13

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

purchases of shares of our common stock, Liberty Media beneficially owned, directly and indirectly, over 50% of our outstanding common stock as of September 30, 2013 .

Two current Liberty Media executives and one Liberty Media director are members of our board of directors. Gregory B. Maffei, the President and Chief Executive Officer of Liberty Media, is the Chairman of our board of directors.

Liberty Media has advised us that as of September 30, 2013 and December 31, 2012 it also owned the following:
 
September 30,
2013
 
December 31,
2012
7% Exchangeable Senior Subordinated Notes due 2014
$
11,000

  
$
11,000

8.75% Senior Notes due 2015

  
150,000

7.625% Senior Notes due 2018
50,000

  
50,000

Total principal debt
61,000

  
211,000

Less: discounts
669

  
2,094

Total carrying value of debt
$
60,331

  
$
208,906


During the three months ended September 30, 2013 , we redeemed $150,000 of our 8.75% Senior Notes due 2015 held by Liberty Media as part of the redemption of these Notes in their entirety. For a discussion of subsequent events refer to Note 17.

As of September 30, 2013 and December 31, 2012 , we recorded $1,845 and $3,980 , 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 $3,619 and $8,242 for the three months ended September 30, 2013 and 2012 , respectively, and $12,978 and $26,260 for the nine months ended September 30, 2013 and 2012 , respectively.

Sirius XM Canada
We own approximately 46,700,000 Class A shares on a converted basis of Sirius XM Canada Holdings Inc., the parent company of Sirius XM Canada, representing a 37.6% equity interest and a 25.0% voting interest.

We had the following Related party current asset balances attributable to Sirius XM Canada at September 30, 2013 and December 31, 2012 :
 
September 30,
2013
 
December 31,
2012
Deferred programming costs and accrued interest
$
3,390

 
$
4,350

Dividends receivable

 
6,176

Chip set and other services reimbursement
4,069

 
2,641

Fair value of host contract of debenture
3,682

 

Fair value of embedded derivative of debenture

 

Total
$
11,141

  
$
13,167


We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs.

We hold an investment in CAD $4,000 face value of 8% convertible unsecured subordinated debentures issued by Sirius XM Canada Holdings, Inc., for which the embedded conversion feature is bifurcated from the host contract. As of September 30, 2013 , the debentures are classified as a Related party current asset since they mature in September 2014. 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 income (loss).


14

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

Related party long-term asset balances attributable to Sirius XM Canada consisted of the following:    
 
September 30,
2013
 
December 31,
2012
Non-interest bearing note, principal
$
391

 
$
404

Fair value of host contract of debenture

 
3,877

Fair value of embedded derivative of debenture

 
9

Investment balance *
28,589

 
37,983

Deferred programming costs and accrued interest

 
1,924

Total
$
28,980

  
$
44,197

* The investment balance includes equity method goodwill and intangible assets of $26,524 and $27,615 as of September 30, 2013 and December 31, 2012 , respectively.

We hold a non-interest bearing note issued by Sirius XM Canada Holdings Inc. 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 income (loss).

In July 2013, Sirius XM Canada declared a quarterly cash dividend of CAD $0.1050 per Class A share and CAD $0.0350 per Class B share for shareholders of record on July 22, 2013. We received $4,727 and $12,209 of quarterly dividends which were recorded as a reduction of our investment balance in Sirius XM Canada for the three and nine months ended September 30, 2013 , respectively.

Related party liabilities attributable to Sirius XM Canada consisted of the following:
 
September 30,
2013
 
December 31,
2012
Deferred revenue for NHL licensing fees
$
1,500

 
$

Carrying value of deferred revenue
19,660

 
21,742

Total
$
21,160

  
$
21,742


In 2005, XM entered into agreements to provide XM Canada, now Sirius XM Canada, with the right to offer XM satellite radio service in Canada. The agreements have an initial ten -year term, and Sirius 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.


15

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

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,
 
2013
 
2012
 
2013
 
2012
Royalty income
$
8,611

 
$
7,924

 
$
26,081

 
$
23,425

Amortization of Sirius XM Canada deferred income
694

 
694

 
2,082

 
2,082

Licensing fee revenue
1,170

 
1,500

 
3,512

 
4,500

Advertising and other reimbursements
194

 

 
2,305

 
833

Total revenue from Sirius XM Canada
$
10,669

 
$
10,118

 
$
33,980

 
$
30,840


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 comprehensive income on a one month lag. Our share of Sirius XM Canada’s net income (loss) was $1,813 and $(182) for the three months ended September 30, 2013 and 2012 , respectively, and $3,922 and $(3,403) for the nine months ended September 30, 2013 and 2012 , respectively. We recorded amortization expense related to the equity method intangible assets of $364 and $363 for the three months ended September 30, 2013 and 2012 , respectively, and $1,091 and $611 for the nine months ended September 30, 2013 and 2012 , respectively.

(11)    Investments

Long Term Restricted Investments
Restricted investments relate to reimbursement obligations under letters of credit issued for the benefit of lessors of our office space. As of September 30, 2013 and December 31, 2012 , our Long-term restricted investments were $5,718 and $3,999 , respectively. During the three months ended September 30, 2013 , a new letter of credit for $1,719 associated with additional office space was issued for our benefit.


16

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

(12)    Debt

Our debt consists of the following:
 
Conversion
Price
(per share)
 
September 30,
2013
 
December 31,
2012
7% Exchangeable Senior Subordinated Notes due 2014
$
1.841

 
$
502,370

 
$
550,000

Less: discount
 
 
(2,374
)
 
(4,112
)
8.75% Senior Notes due 2015
N/A

 

 
800,000

Less: discount
 
 

 
(7,056
)
7.625% Senior Notes due 2018
N/A

 
539,551

 
700,000

Less: discount
 
 
(6,661
)
 
(9,647
)
4.25% Senior Notes due 2020
N/A

 
500,000

 

Less: discount
 
 
(5,366
)
 

5.875% Senior Notes due 2020
N/A

 
650,000

 

Less: discount
 
 
(7,296
)
 

5.75% Senior Notes due 2021
N/A

 
600,000

 

Less: discount
 
 
(5,644
)
 

5.25% Senior Notes due 2022
N/A

 
400,000

 
400,000

            Less: discount
 
 
(5,473
)
 
(5,826
)
4.625% Senior Notes due 2023
N/A

 
500,000

 

Less: discount
 
 
(5,459
)
 

Senior Secured Revolving Credit Facility
N/A

 
40,000

 

Other debt:
 
 
 
 
 
Capital leases
N/A

 
17,547

 
11,861

Total debt
 
 
3,711,195

 
2,435,220

Less: total current maturities *
 
 
538,875

 
4,234

Total long-term
 
 
3,172,320

 
2,430,986

Less: long-term related party
 
 
10,948

 
208,906

Total long-term, excluding related party
 
 
$
3,161,372

 
$
2,222,080

*This balance includes $49,383 in related party current maturities.

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 guarantee our obligations under the Exchangeable Notes on a senior subordinated basis.

The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of our common stock at an exchange rate of 543.1372 shares of common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.841 per share of common stock. 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 .

In connection with the fundamental change that occurred on January 17, 2013 and the subsequent offer that was made to each holder of the Exchangeable Notes on February 1, 2013, $47,630 in principal amount of the Exchangeable Notes were

17

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

converted resulting in the issuance of 27,687,850 shares of our common stock. As a result of this conversion, we retired $47,630 in principal amount of the Exchangeable Notes and recognized a proportionate share of unamortized discount and deferred financing fees of $2,533 to Additional paid-in capital. No loss was recognized as a result of the exchange.

During the three and nine months ended September 30, 2013 and the three months ended September 30, 2012 , the common stock reserved for conversion 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.

During the three and nine months ended September 30, 2013 , we purchased $59,799 and $160,449 , respectively, in aggregate principal amount of the 7.625% Notes for an aggregate purchase price, including premium and interest, of $66,782 and $179,351 , respectively. We recognized an aggregate loss on the extinguishment of these 7.625% Notes of $6,908 and $19,530 , during the three and nine months ended September 30, 2013 , respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.

On September 25, 2013, we called for the redemption of the remaining $539,551 outstanding principal balance of the 7.625% Notes on October 25, 2013. The 7.625% Notes have been classified as a current liability within our unaudited consolidated balance sheet as of September 30, 2013 . For a discussion of subsequent events refer to Note 17.

4.25% Senior Notes due 2020
In May 2013, we issued $500,000 aggregate principal amount of 4.25% Senior Notes due 2020 (the “ 4.25% Notes”). Interest is payable semi-annually in arrears on May 15 and November 15 of each year at a rate of 4.25%  per annum. The 4.25% Notes mature on May 15, 2020 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 4.25% Notes on a senior unsecured basis. The 4.25% Notes were issued for $494,375 , resulting in an aggregate original issuance discount of $5,625 .

5.875% Senior Notes due 2020
In September 2013, we issued $650,000 aggregate principal amount of 5.875% Senior Notes due 2020 (the " 5.875% Notes"). Interest is payable semi-annually in arrears on April 1 and October 1 of each year at a rate of 5.875% per annum. The 5.875% Notes mature on October 1, 2020 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 5.875% Notes on a senior unsecured basis. The 5.875% Notes were issued for $642,688 , resulting in an aggregate original issuance discount of $7,312 .

5.75% Senior Notes due 2021
In August 2013, we issued $600,000 aggregate principal amount of 5.75% Senior Notes due 2021 (the " 5.75% Notes"). Interest is payable semi-annually in arrears on February 1 and August 1 of each year at a rate of 5.75% per annum. The 5.75% Notes mature on August 1, 2021 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 5.75% Notes on a senior unsecured basis. The 5.75% Notes were issued for $594,263 , resulting in an aggregate original issuance discount of $5,737 .

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 on a senior unsecured basis.


18

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

4.625% Senior Notes due 2023
In May 2013, we issued $500,000 aggregate principal amount of 4.625% Senior Notes due 2023 (the “ 4.625% Notes”). Interest is payable semi-annually in arrears on May 15 and November 15 of each year at a rate of 4.625%  per annum. The 4.625% Notes mature on May 15, 2023 . Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 4.625% Notes on a senior unsecured basis. The 4.625% Notes were issued for $494,375 , resulting in an aggregate original issuance discount of $5,625 .

Senior Secured Revolving Credit Facility
In December 2012, we entered into a five -year Senior Secured Revolving Credit Facility (the “Credit Facility”) with a syndicate of financial institutions for $1,250,000 . Our obligations under the Credit Facility are guaranteed by certain of our material domestic subsidiaries and are secured by a lien on substantially all of our assets and the assets of our material domestic subsidiaries. Borrowings under the Credit Facility are used for working capital and other general corporate purposes, including dividends, financing of acquisitions and share repurchases. Interest on borrowings is payable on a quarterly basis and accrues at a rate based on LIBOR plus an applicable rate. We are also required to pay a variable fee on the average daily unused portion of the Credit Facility which is currently 0.35% per annum and is payable on a quarterly basis. The Credit Facility contains customary covenants, including a maintenance covenant, and events of default. The Credit Facility contains incremental facilities which would allow us to increase or obtain new commitments and/or incur new term loans, subject to the terms of the Credit Facility.

As of September 30, 2013 , $1,210,000 was available for future borrowing under the Credit Facility. Our outstanding borrowings under the Credit Facility are classified as Long-term debt within our unaudited consolidated balance sheet as of September 30, 2013 due to the long-term maturity of this debt.

Retired Debt

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”). The 8.75% Notes were issued for $786,000 , resulting in an aggregate original issuance discount of $14,000 . The 8.75% Notes would have matured on April 1, 2015 . Substantially all of our domestic wholly-owned subsidiaries guaranteed our obligations under the 8.75% Notes on a senior unsecured basis.

During the three and nine months ended September 30, 2013 , we purchased $770,987 and $800,000 , respectively, in aggregate principal amounts of the 8.75% Notes for an aggregate purchase price, including premium and interest, of $894,883 and $927,860 , respectively. We recognized an aggregate loss on the extinguishment of the 8.75% Notes of $101,063 and $104,818 during the three and nine months ended September 30, 2013 , respectively, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net.
9.75% Senior Secured Notes due 2015
During the three and nine months ended September 30, 2012 , we purchased $186,112 and $257,000 , respectively, of our then outstanding 9.75% Senior Secured Notes (the “ 9.75% Notes”) for an aggregate purchase price, including interest, of $204,258 and $281,698 , respectively. We recognized an aggregate loss on the extinguishment of these 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
During the three and nine months ended September 30, 2012 , we purchased $681,517 and $778,500 , respectively, of our then outstanding 13% Senior Notes due 2013 (the “ 13% Notes”) for an aggregate purchase price, including interest, of $765,907 and $879,133 , respectively. We recognized an aggregate loss on the extinguishment of these 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.


19

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

Covenants and Restrictions
Under the Credit Facility, we must comply with a maintenance covenant that we not exceed a total leverage ratio, calculated as total consolidated debt to consolidated operating cash flow, of 5.0 to 1.0 . Our 7.625% Notes and our 5.25% Notes generally require compliance with certain covenants that restrict our ability to, among other things, (i) incur additional 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.
Our 4.25% Notes, 4.625% Notes, 5.75% Notes and 5.875% Notes are subject to covenants that, among other things, (i) limit our ability and the ability of our subsidiaries to (x) create certain liens; and (y) enter into sale/leaseback transactions; and (ii) limit our ability to merge or consolidate. The indentures relating to our 4.25% Notes, 4.625% Notes, 5.75% Notes and 5.875% Notes restrict our non-guarantor subsidiaries' ability to create, assume, incur or guarantee additional indebtedness without such non-guarantor subsidiary guaranteeing each such series of Notes on a pari passu basis.

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, 2013 and December 31, 2012 , 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, 2013 and December 31, 2012 . There were 6,134,596,655 and 5,262,440,085 shares of common stock issued and outstanding as of September 30, 2013 and December 31, 2012 , respectively.

As of September 30, 2013 , approximately 574,620,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, warrants, incentive stock awards and common stock to be granted to third parties upon satisfaction of performance targets.

Stock Repurchase Program
In December 2012, our board of directors approved a $2,000,000 common stock repurchase program. Shares of common stock may be purchased from time to time on the open market or in privately negotiated transactions.

During the nine months ended September 30, 2013 , we repurchased 476,545,601 shares of our common stock for $1,602,360 , including fees and commissions, on the open market and in privately negotiated transactions. Liberty Media did not participate in the common stock repurchases during the nine months ended September 30, 2013 . All common stock repurchases settled and were retired as of September 30, 2013 .

As of September 30, 2013 , $397,640 remained available for purchase under our stock repurchase program approved in December 2012. For a discussion of subsequent events refer to Note 17.

Share Lending Arrangements
To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. and UBS AG London Branch in July 2008. All loaned shares were returned to us as of October 2011, and the share lending agreements were terminated.

We recorded interest expense related to the amortization of the costs associated with the share lending arrangement and other issuance costs for our Exchangeable Notes of $3,178 and $3,139 , respectively, for the three months ended

20

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

September 30, 2013 and 2012 , and $9,484 and $9,181 , respectively, for the nine months ended September 30, 2013 and 2012 , respectively. As of September 30, 2013 , the unamortized balance of the debt issuance costs was $15,962 , with $15,612 recorded in Deferred financing fees, net, and $350 recorded in Long-term related party assets. As of December 31, 2012 , the unamortized balance of the debt issuance costs was $27,652 , with $27,099 recorded in Deferred financing fees, net, and $553 recorded in Long-term related party assets. These costs will continue to be amortized until the debt is terminated. A portion of the unamortized debt issuance costs was recognized during the nine months ended September 30, 2013 in connection with the conversion of the Exchangeable Notes.
 
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, 2013 and December 31, 2012 , respectively.

There were 6,250,100 shares of Series B Preferred Stock issued and outstanding as of December 31, 2012 held by Liberty Media. In January 2013, Liberty Media converted its remaining shares of the Series B Preferred Stock into 1,293,509,076 shares of our common stock.

Warrants
We have issued warrants to purchase shares of our common stock in connection with distribution, programming and satellite purchase agreements. As of September 30, 2013 and December 31, 2012 , approximately 18,455,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested. Warrants were included in our calculation of diluted net income per common share as the effect was dilutive for the three and nine months ended September 30, 2013 . They were excluded from the calculation for the three and nine months ended September 30, 2012 as the effect would have been anti-dilutive. The warrants expire at various times through 2015. At September 30, 2013 and December 31, 2012 , the weighted average exercise price of outstanding warrants was $2.55 per share. We did not incur warrant related expenses during the three and nine months ended September 30, 2013 and 2012 .

(14)
Benefit Plans

We recognized share-based payment expense of $19,762 and $17,492 for the three months ended September 30, 2013 and 2012 , respectively, and $49,774 and $46,361 for the nine months ended September 30, 2013 and 2012 , 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, 2013 , approximately 85,319,000 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.


21

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(UNAUDITED)
(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,
 
2013
 
2012
 
2013
 
2012
Risk-free interest rate
1.5%
 
0.8%
 
1.4%
 
0.8%
Expected life of options — years
4.73
 
5.06
 
4.72
 
5.13
Expected stock price volatility
47%
 
49%
 
48%
 
53%
Expected dividend yield
0%
 
0%
 
0%
 
0%

There were no options granted to third parties during the three and nine months ended September 30, 2013 and 2012 . We do not intend to pay regular dividends on our common stock. Accordingly, the dividend yield percentage used in the Black-Scholes-Merton option value is zero for all periods.

The following table summarizes stock option activity under our share-based plans for the nine months ended September 30, 2013 (options in thousands):
 
Options
 
Weighted-
Average
Exercise
Price (1)
 
Weighted-Average
Remaining
Contractual Term
(Years)
 
Aggregate
Intrinsic
Value
Outstanding as of December 31, 2012
274,512

 
$
1.92

 
 
 
 
Granted
54,368

 
$
3.58

 
 
 
 
Exercised
(47,311
)
 
$
1.41

 
 
 
 
Forfeited, cancelled or expired
(4,934
)
 
$