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SIRIUS XM HOLDINGS INC. 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.1
  5. Ex-32.2
  6. Ex-32.2
e10vq
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, 2011
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 31, 2011)
     
COMMON STOCK, $0.001 PAR VALUE   3,750,481,308 SHARES
 
 

 


 

SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
                 
Item No.     Description        
 
               
       
 
       
Item 1.          
       
 
       
            1  
       
 
       
            2  
       
 
       
            3  
       
 
       
            4  
       
 
       
            6  
       
 
       
Item 2.       24  
       
 
       
Item 3.       45  
       
 
       
Item 4.       45  
       
 
       
               
       
 
       
Item 1.       45  
       
 
       
Item 1A.       46  
       
 
       
Item 2.       46  
       
 
       
Item 3.       46  
       
 
       
Item 4.       46  
       
 
       
Item 5.       46  
       
 
       
Item 6.       46  
       
 
       
            47  
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
(in thousands, except per share data)   2011     2010     2011     2010  
Revenue:
                               
Subscriber revenue
  $ 660,837     $ 612,119     $ 1,922,917     $ 1,793,258  
Advertising revenue, net of agency fees
    18,810       15,973       53,595       46,296  
Equipment revenue
    15,504       17,823       48,392       50,625  
Other revenue
    67,399       71,633       205,882       190,914  
 
                       
Total revenue
    762,550       717,548       2,230,786       2,081,093  
Operating expenses:
                               
Cost of services:
                               
Revenue share and royalties
    117,043       114,482       340,713       320,567  
Programming and content
    70,509       78,143       210,867       228,595  
Customer service and billing
    64,239       60,613       192,667       175,238  
Satellite and transmission
    19,681       20,844       57,238       60,944  
Cost of equipment
    5,888       6,463       19,894       22,187  
Subscriber acquisition costs
    107,279       105,984       317,711       305,745  
Sales and marketing
    55,210       51,519       154,471       156,813  
Engineering, design and development
    14,175       12,526       39,249       35,209  
General and administrative
    58,635       54,188       175,469       170,935  
Depreciation and amortization
    65,403       67,450       200,865       206,945  
Restructuring, impairments and related costs
          2,267             4,071  
 
                       
Total operating expenses
    578,062       574,479       1,709,144       1,687,249  
 
                       
Income from operations
    184,488       143,069       521,642       393,844  
Other income (expense):
                               
Interest expense, net of amounts capitalized
    (75,316 )     (68,559 )     (229,730 )     (223,230 )
Loss on extinguishment of debt and credit facilities, net
          (256 )     (7,206 )     (34,695 )
Interest and investment income (loss)
    292       (4,305 )     78,590       (7,197 )
Other income
    435       1,108       2,235       1,837  
 
                       
Total other expense
    (74,589 )     (72,012 )     (156,111 )     (263,285 )
 
                       
Income before income taxes
    109,899       71,057       365,531       130,559  
Income tax expense
    (5,714 )     (3,428 )     (9,907 )     (6,060 )
 
                       
Net income
  $ 104,185     $ 67,629     $ 355,624     $ 124,499  
 
                       
Net income per common share:
                               
 
                               
Basic
  $ 0.03     $ 0.02     $ 0.10     $ 0.03  
 
                       
Diluted
  $ 0.02     $ 0.01     $ 0.05     $ 0.02  
 
                       
Weighted average common shares outstanding:
                               
Basic
    3,747,381       3,689,245       3,742,309       3,686,312  
 
                       
Diluted
    6,507,370       6,369,831       6,500,819       6,361,090  
 
                       
See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    September 30, 2011     December 31, 2010  
(in thousands, except share and per share data)   (unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 604,592     $ 586,691  
Accounts receivable, net
    96,905       121,658  
Receivables from distributors
    79,934       67,576  
Inventory, net
    36,196       21,918  
Prepaid expenses
    146,946       134,994  
Related party current assets
    5,228       6,719  
Deferred tax asset
    58,493       44,787  
Other current assets
    4,908       7,432  
 
           
Total current assets
    1,033,202       991,775  
Property and equipment, net
    1,702,566       1,761,274  
Long-term restricted investments
    3,146       3,396  
Deferred financing fees, net
    45,093       54,135  
Intangible assets, net
    2,587,855       2,632,688  
Goodwill
    1,834,856       1,834,856  
Related party long-term assets
    69,943       33,475  
Other long-term assets
    48,176       71,487  
 
           
Total assets
  $ 7,324,837     $ 7,383,086  
 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 473,472     $ 593,174  
Accrued interest
    78,925       72,453  
Current portion of deferred revenue
    1,276,996       1,201,346  
Current portion of deferred credit on executory contracts
    286,056       271,076  
Current maturities of long-term debt
    25,588       195,815  
Related party current liabilities
    16,541       15,845  
 
           
Total current liabilities
    2,157,578       2,349,709  
Deferred revenue
    219,344       273,973  
Deferred credit on executory contracts
    288,036       508,012  
Long-term debt
    2,677,550       2,695,856  
Long-term related party debt
    328,029       325,907  
Deferred tax liability
    935,805       914,637  
Related party long-term liabilities
    22,435       24,517  
Other long-term liabilities
    81,048       82,839  
 
           
Total liabilities
    6,709,825       7,175,450  
 
           
Commitments and contingencies (Note 14)
               
Stockholders’ equity:
               
Preferred stock, par value $0.001; 50,000,000 authorized at September 30, 2011 and December 31, 2010:
               
Series A convertible preferred stock; no shares issued and outstanding at September 30, 2011 and December 31, 2010
           
Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share at September 30, 2011 and December 31, 2010); 12,500,000 shares issued and outstanding at September 30, 2011 and December 31, 2010
    13       13  
Convertible preferred stock, series C junior; no shares issued and outstanding at September 30, 2011 and December 31, 2010
           
Common stock, par value $0.001; 9,000,000,000 shares authorized at September 30, 2011 and December 31, 2010; 3,951,945,992 and 3,933,195,112 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively
    3,952       3,933  
Accumulated other comprehensive income (loss), net of tax
    398       (5,861 )
Additional paid-in capital
    10,466,078       10,420,604  
Accumulated deficit
    (9,855,429 )     (10,211,053 )
 
           
Total stockholders’ equity
    615,012       207,636  
 
           
Total liabilities and stockholders’ equity
  $ 7,324,837     $ 7,383,086  
 
           
See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
                                                                                 
    Series A     Convertible Perpetual                                            
    Convertible     Preferred Stock,                     Accumulated                      
    Preferred Stock     Series B-1     Common Stock     Other     Additional             Total  
                                                    Comprehensive     Paid-in     Accumulated     Stockholders’  
(in thousands, except share and per share data)   Shares     Amount     Shares     Amount     Shares     Amount     Income (loss)     Capital     Deficit     Equity  
Balance at December 31, 2010
        $       12,500,000     $ 13       3,933,195,112     $ 3,933     $ (5,861 )   $ 10,420,604     $ (10,211,053 )   $ 207,636  
Net income
                                                                    355,624       355,624  
Other comprehensive income:
                                                                               
Realized loss on XM Canada investment foreign currency translation adjustment
                                        6,072                   6,072  
Foreign currency translation adjustment, net of tax of $5
                                        187                   187  
 
                                                                             
Total comprehensive income
                                                          361,883  
Issuance of common stock to employees and employee benefit plans, net of forfeitures
                            1,562,496       2             2,805             2,807  
Share-based payment expense
                                              33,641             33,641  
Exercise of options and vesting of restricted stock units
                            10,065,433       10             9,035             9,045  
Common stock issuance upon exercise of warrants
                              7,122,951       7             (7 )            
 
                                                           
Balance at September 30, 2011
        $       12,500,000     $ 13       3,951,945,992     $ 3,952     $ 398     $ 10,466,078     $ (9,855,429 )   $ 615,012  
 
                                                           
See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    For the Nine Months Ended September 30,  
(in thousands)   2011     2010  
Cash flows from operating activities:
               
Net income
  $ 355,624     $ 124,499  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    200,865       206,945  
Non-cash interest expense, net of amortization of premium
    29,211       32,983  
Provision for doubtful accounts
    26,209       23,300  
Restructuring, impairments and related costs
          4,071  
Amortization of deferred income related to equity method investment
    (2,082 )     (2,081 )
Loss on extinguishment of debt and credit facilities, net
    7,206       34,695  
Gain on merger of unconsolidated entities
    (84,855 )      
Loss on unconsolidated entity investments, net
    10,259       8,990  
Loss on disposal of assets
    269       927  
Share-based payment expense
    37,574       50,944  
Deferred income taxes
    7,214       6,060  
Other non-cash purchase price adjustments
    (203,630 )     (184,703 )
Distribution from investment in unconsolidated entity
    4,849        
Changes in operating assets and liabilities:
               
Accounts receivable
    (1,456 )     (18,890 )
Receivables from distributors
    (12,358 )     (22,430 )
Inventory
    (14,278 )     (1,843 )
Related party assets
    30,300       (2,654 )
Prepaid expenses and other current assets
    (11,028 )     41,794  
Other long-term assets
    23,969       11,765  
Accounts payable and accrued expenses
    (100,502 )     (69,629 )
Accrued interest
    6,472       5,244  
Deferred revenue
    19,653       92,864  
Related party liabilities
    696       (50,940 )
Other long-term liabilities
    (1,547 )     (865 )
 
           
Net cash provided by operating activities
    328,634       291,046  
 
           
 
               
Cash flows from investing activities:
               
Additions to property and equipment
    (115,065 )     (257,374 )
Sale of restricted and other investments
          9,454  
Release of restricted investments
    250        
Return of capital from investment in unconsolidated entity
    10,117        
 
           
Net cash used in investing activities
    (104,698 )     (247,920 )
 
           
 
               
Cash flows from financing activities:
               
Proceeds from exercise of stock options
    9,045       4,906  
Long-term borrowings, net of costs
          637,406  
Related party long-term borrowings, net of costs
          147,094  
Payment of premiums on redemption of debt
    (5,020 )     (24,321 )
Repayment of long-term borrowings
    (210,060 )     (820,224 )
Repayment of related party long-term borrowings
          (55,221 )
 
           
Net cash used in financing activities
    (206,035 )     (110,360 )
 
           
Net increase (decrease) in cash and cash equivalents
    17,901       (67,234 )
Cash and cash equivalents at beginning of period
    586,691       383,489  
 
           
Cash and cash equivalents at end of period
  $ 604,592     $ 316,255  
 
           
See accompanying notes to the unaudited consolidated financial statements.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS — Continued
                 
    For the Nine Months Ended September  
(in thousands)   2011     2010  
Supplemental Disclosure of Cash and Non-Cash Flow Information
               
Cash paid during the period for:
               
Interest, net of amounts capitalized
  $ 235,096     $ 172,417  
Non-cash investing and financing activities:
               
Sale-leaseback of equipment
  $     $ 5,305  
Common stock issuance upon exercise of warrants
  $ 7     $  
Conversion of Series A preferred stock to common stock
  $     $ 25  
See accompanying notes to the unaudited consolidated financial statements.

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Table of Contents

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, news, talk, entertainment, traffic and weather channels in the United States on a subscription fee basis through our two proprietary satellite radio systems. Subscribers can also receive certain of our music and other channels over the Internet, including through applications for Apple, Blackberry and Android-powered mobile devices.
     In October 2011, we launched an expanded channel lineup, including new music, sports, comedy channels as well as Sirius XM Latino, a suite of Latin channels. These channels, available online and over certain new radios, are the first phase of Sirius XM 2.0, an upgrade and evolution of our satellite and Internet delivered service that will ultimately span hardware, software, audio, and data services. This new technology effectively delivers 25% more bandwidth capacity, which will allow us to expand our audio and data services without affecting the broadcast quality of existing channels.
     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 fees, the sale of advertising on select non-music channels, the direct sale of satellite radios and accessories, and other ancillary services, such as our weather, traffic, data and Backseat TV services.
     Our satellite radios are primarily distributed through automakers (“OEMs”); nationwide through retail locations; and through our website. We have agreements with every major automaker to offer satellite radios as factory or dealer-installed equipment in their vehicles. Satellite radio services are also offered to customers of certain daily rental car companies.
     In July 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged (the “Merger”) with and into XM Satellite Radio Holdings Inc. In January 2011, XM Satellite Radio Inc., our wholly-owned subsidiary, merged with and into us. All outstanding debt instruments held by XM Satellite Radio Inc. were assumed by us in the merger.
(2) Principles of Consolidation and Basis of Presentation
   Principles of Consolidation
     The accompanying unaudited 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 the fair presentation of our unaudited consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 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, 2010, which was filed with the SEC on February 16, 2011.
     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, 2011 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements.

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Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(3) Summary of Significant Accounting Policies
    Use of Estimates
     In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the reported amounts and accompanying notes. Estimates, by their nature, are based on judgment and available information at this time. Actual results could differ materially from those estimates.
     Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets. Economic conditions in the United States could have a material impact on our accounting estimates.
    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. The amendments are not expected to have a significant impact on companies that apply U.S. GAAP. This standard is effective for interim and annual periods beginning after December 15, 2011 and will be applied prospectively. The impact of our pending adoption of ASU 2011-04 will not be material to our 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 a single continuous statement 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 to net income. This standard is effective for interim and annual periods beginning after December 15, 2011 and will be applied retrospectively. ASU 2011-05 affects financial statement presentation only and will have no impact on our results of operations.
         Earnings per Share (“EPS”)
     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 417,427,000 and 727,496,000 for the three months ended September 30, 2011 and 2010, respectively, and 407,649,000 and 735,091,000 for the nine months ended September 30, 2011 and 2010, 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     For the Nine Months  
    Ended September 30,     Ended September 30,  
(in thousands, except per share data)   2011     2010     2011     2010  
Net income available to common stockholders
  $ 104,185     $ 67,629     $ 355,624     $ 124,499  
Effect of assumed conversions
                       
 
                       
Net income available to common stockholders and assumed conversions
  $ 104,185     $ 67,629     $ 355,624     $ 124,499  
 
                               
Average common shares outstanding-basic
    3,747,381       3,689,245       3,742,309       3,686,312  
Dilutive effect of equity instruments
    2,759,989       2,680,586       2,758,510       2,674,778  
 
                       
Average common shares outstanding-diluted
    6,507,370       6,369,831       6,500,819       6,361,090  
 
                       
Net income per common share
                               
Basic
  $ 0.03     $ 0.02     $ 0.10     $ 0.03  
 
                       
Diluted
  $ 0.02     $ 0.01     $ 0.05     $ 0.02  
 
                       

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    Accounts Receivable
     Accounts receivable, net, is stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, the age of amounts due, current economic conditions and other factors that may affect the counterparty’s ability to pay.
     Accounts receivable, net, consists of the following:
                 
    September 30,     December 31,  
    2011     2010  
Gross accounts receivable
  $ 111,562     $ 131,880  
Allowance for doubtful accounts
    (14,657 )     (10,222 )
 
           
Total accounts receivable, net
  $ 96,905     $ 121,658  
 
           
     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,     December 31,  
    2011     2010  
Billed
  $ 42,095     $ 30,456  
Unbilled
    37,839       37,120  
 
           
Total
  $ 79,934     $ 67,576  
 
           
    Inventory
     Inventory consists of finished goods, refurbished goods, chip sets and other raw materials and components used in manufacturing radios. Inventory is stated at the lower of cost, determined on a first-in, first-out or market basis. 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 operations. 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 operations.
     Inventory, net, consists of the following:
                 
    September 30,     December 31,  
    2011     2010  
Raw materials
  $ 26,198     $ 18,181  
Finished goods
    31,276       24,492  
Allowance for obsolescence
    (21,278 )     (20,755 )
 
           
Total inventory, net
  $ 36,196     $ 21,918  
 
           
   Fair Value of Financial Instruments
     The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. As of September 30, 2011 and December 31, 2010, the carrying amounts of cash and cash equivalents, accounts and other receivables, and accounts payable approximated fair value due to the short-term nature of these 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, 2011 and December 31, 2010, the carrying value of our debt was $3,031,167 and $3,217,578, respectively; and the fair value approximated $3,409,272 and $3,722,905, respectively.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
    Reclassifications
     Certain amounts in our prior period consolidated financial statements have been reclassified to conform to our current period presentation.
(4) 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. Our annual impairment assessment is performed as of October 1st of each year, and an assessment is performed at other times if events or circumstances indicate it is more likely than not that the asset is impaired. During the three and nine months ended September 30, 2011 and 2010, there were no indicators of impairment and no impairment loss was recorded to our goodwill.
(5) Intangible Assets
     Intangible assets consist of the following:
                                                         
            September 30, 2011     December 31, 2010  
            Gross                     Gross              
    Weighted Average     Carrying     Accumulated     Net Carrying     Carrying     Accumulated     Net Carrying  
    Useful Lives     Value     Amortization     Value     Value     Amortization     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       (179,976 )     200,024       380,000       (144,325 )     235,675  
Licensing agreements
  9.1 years     78,897       (31,641 )     47,256       78,897       (24,130 )     54,767  
Proprietary software
  6 years     16,552       (11,073 )     5,479       16,552       (9,566 )     6,986  
Developed technology
  10 years     2,000       (633 )     1,367       2,000       (483 )     1,517  
Leasehold interests
  7.4 years     132       (57 )     75       132       (43 )     89  
 
                                                       
 
                                         
Total intangible assets
          $ 2,811,235     $ (223,380 )   $ 2,587,855     $ 2,811,235     $ (178,547 )   $ 2,632,688  
 
                                         
    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 license   Expiration year
SIRIUS FM-1 satellite
  2017
SIRIUS FM-2 satellite
  2017
SIRIUS FM-3 satellite
  2017
SIRIUS FM-4 satellite(1)
  2017
SIRIUS FM-5 satellite
  2017
SIRIUS FM-6 satellite
  (2)
XM-1 satellite
  2014
XM-2 satellite
  2014
XM-3 satellite
  2013
XM-4 satellite
  2014
XM-5 satellite
  2018
 
(1)   In 2010, we retired our FM-4 ground spare satellite. We still maintain the FCC license for this satellite.
 
(2)   We hold an FCC license for our FM-6 satellite, which will expire eight years from launch of this satellite.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
          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, 2011, 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 October 1st of each year. An assessment is made at other times if events or changes in circumstances indicate that it is more likely than not that the assets have been impaired. As of September 30, 2011, 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, 2011 and 2010.
     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 definite life intangible assets was $14,570 and $16,228 for the three months ended September 30, 2011 and 2010, respectively, and $44,833 and $50,342 for the nine months ended September 30, 2011 and 2010, respectively. Expected amortization expense for the remaining period in 2011, each of the years 2012 through 2015 and for periods thereafter is as follows:
         
Year ending December 31,   Amount  
Remaining 2011
  $ 14,232  
2012
    53,680  
2013
    47,357  
2014
    38,879  
2015
    37,553  
Thereafter
    62,500  
 
     
Total definite life intangibles assets, net
  $ 254,201  
 
     
(6) Subscriber Revenue
     Subscriber revenue consists of subscription fees, revenue derived from agreements with certain daily rental fleet operators, non-refundable activation and other fees. Revenues received from OEMs for subscriptions included in the sale or lease price of vehicles are also included in subscriber revenue over the service period.
     Subscriber revenue consists of the following:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Subscription fees
  $ 657,245     $ 607,738     $ 1,912,787     $ 1,780,557  
Activation fees
    3,592       4,381       10,130       12,701  
 
                       
Total subscriber revenue
  $ 660,837     $ 612,119     $ 1,922,917     $ 1,793,258  
 
                       

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(7) Interest Costs
          We capitalized a portion of the interest on funds borrowed to finance the construction costs of our satellites and related launch vehicles for our FM-6 satellite in 2011 and for our FM-6 and XM-5 satellites in 2010. We also incur interest costs on all of our debt instruments and certain contingent incentive payments due pursuant to our satellite construction agreements. The following is a summary of our interest costs:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Interest costs charged to expense
  $ 75,316     $ 68,559     $ 229,730     $ 223,230  
Interest costs capitalized
    8,906       19,040       24,224       49,470  
 
                       
Total interest costs incurred
  $ 84,222     $ 87,599     $ 253,954     $ 272,700  
 
                       
     Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees, of $9,977 and $10,689 for the three months ended September 30, 2011 and 2010, respectively, and $29,211 and $32,983 for the nine months ended September 30, 2011 and 2010, respectively.
(8) Property and Equipment
          Property and equipment, net, consists of the following:
                 
    September 30,     December 31,  
    2011     2010  
Satellite system
  $ 1,943,537     $ 1,943,537  
Terrestrial repeater network
    111,880       109,582  
Leasehold improvements
    43,392       43,567  
Broadcast studio equipment
    52,554       51,985  
Capitalized software and hardware
    181,712       163,689  
Satellite telemetry, tracking and control facilities
    57,917       57,665  
Furniture, fixtures, equipment and other
    64,673       63,265  
Land
    38,411       38,411  
Building
    56,952       56,685  
Construction in progress
    365,827       297,771  
 
           
Total property and equipment
    2,916,855       2,826,157  
Accumulated depreciation and amortization
    (1,214,289 )     (1,064,883 )
 
           
Property and equipment, net
  $ 1,702,566     $ 1,761,274  
 
           
     Construction in progress consists of the following:
                 
    September 30,     December 31,  
    2011     2010  
Satellite system
  $ 330,320     $ 262,744  
Terrestrial repeater network
    19,306       19,239  
Other
    16,201       15,788  
 
           
Construction in progress
  $ 365,827     $ 297,771  
 
           
          Depreciation and amortization expense on property and equipment was $50,833 and $51,222 for the three months ended September 30, 2011 and 2010, respectively, and $156,032 and $156,603 for the nine months ended September 30, 2011 and 2010, respectively.
     Satellites
          We own four orbiting satellites for use in the SIRIUS system. Space Systems/Loral is constructing a fifth satellite, FM-6, for use in this system. We have an agreement with International Launch Services to launch this satellite on a Proton rocket.
          We own five orbiting satellites for use in the XM system. Four of these satellites were manufactured by Boeing Satellite Systems International and one was manufactured by Space Systems/Loral.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
     During the three and nine months ended September 30, 2011, we capitalized expenditures, including interest, of $16,875 and $67,576, respectively, related to the construction of our FM-6 satellite and related launch vehicle. In the three and nine months ended September 30, 2010, we capitalized $38,397 and $161,851, respectively, of expenditures, including interest, which also related to our FM-6 and XM-5 satellites.
      
(9) Related Party Transactions
          We had the following related party transaction balances at September 30, 2011 and December 31, 2010:
                                                                                 
    Related party     Related party     Related party     Related party     Related party  
    current assets     long-term assets     current liabilities     long-term liabilities     long-term debt  
    September 30,     December 31,     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,     September 30,     December 31,  
    2011*     2010     2011*     2010     2011*     2010     2011*     2010     2011*     2010  
Liberty Media
  $     $     $ 1,300     $ 1,571     $ 10,461     $ 9,765     $     $     $ 328,029     $ 325,907  
Sirius XM Canada
    5,228             68,643             6,080             22,435                    
SIRIUS Canada
          5,613                         1,805                          
XM Canada
          1,106             31,904             4,275             24,517              
 
                                                           
Total
  $ 5,228     $ 6,719     $ 69,943     $ 33,475     $ 16,541     $ 15,845     $ 22,435     $ 24,517     $ 328,029     $ 325,907  
 
                                                           
 
*   SIRIUS Canada and XM Canada combined in June 2011. The combined entity now operates as Sirius XM Canada.
     Liberty Media
          In February 2009, we entered into an Investment Agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC (collectively, “Liberty Media”). Pursuant to the Investment Agreement, in March 2009 we issued to Liberty Radio, LLC 12,500,000 shares of our Convertible Perpetual Preferred Stock, Series B-1 (the “Series B Preferred Stock”), with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. Liberty Media has representatives on our board of directors.
          The Series B Preferred Stock is convertible into 2,586,976,000 shares of common stock. Liberty Media has agreed not to acquire more than 49.9% of our outstanding common stock prior to March 2012, except that Liberty Media may acquire more than 49.9% of our outstanding common stock at any time pursuant to any cash tender offer for all of the outstanding shares of our common stock that are not beneficially owned by Liberty Media or its affiliates at a price per share greater than the closing price of the common stock on the trading day preceding the earlier of the public announcement or commencement of such tender offer. The Investment Agreement also provides for certain other standstill provisions ending in March 2012.
          Liberty Media has advised us that as of September 30, 2011 and December 31, 2010 it owned the following amounts of our debt securities:
                 
    September 30,     December 31,  
    2011     2010  
8.75% Senior Notes due 2015
  $ 150,000     $ 150,000  
9.75% Senior Secured Notes due 2015
    50,000       50,000  
13% Senior Notes due 2013
    76,000       76,000  
7% Exchangeable Senior Subordinated Notes due 2014
    11,000       11,000  
7.625% Senior Notes due 2018
    50,000       50,000  
 
           
Total principal debt
    337,000       337,000  
Less: discounts
    8,971       11,093  
 
           
Total carrying value debt
  $ 328,029     $ 325,907  
 
           
          As of September 30, 2011 and December 31, 2010, we recorded $10,461 and $9,765, respectively, related to accrued interest with Liberty Media to Related party current liabilities and $1,300 and $1,571, respectively, related to deferred financing costs with Liberty Media to Related party long-term assets. We recognized Interest expense associated with debt held by Liberty Media of $8,934 and $10,574 for the three months ended September 30, 2011 and 2010, respectively, and $26,718 and $30,538 for the nine months ended September 30, 2011 and 2010, respectively.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Sirius XM Canada
     In June 2011, Canadian Satellite Radio Holdings Inc. (“CSR”), the parent company of XM Canada, and SIRIUS Canada completed a transaction to combine their operations (“the Canada Merger”). As a result of the Canada Merger, SIRIUS Canada became a wholly-owned subsidiary of CSR. The combined company operates as Sirius XM Canada. In connection with the transaction, we received:
    approximately 46,700,000 Class A shares of CSR, representing a 38.0% equity interest and a 25.0% voting interest;
 
    $53,781 in cash as repayment of the XM Canada credit facility ($38,815) and consideration for our preferred stock in SIRIUS Canada ($10,117 as a return of capital and $4,849 in dividends, net of foreign withholding taxes); and
 
    $5,207 in non-interest bearing notes of CSR, which primarily have a two year term.
          Our interest in Sirius XM Canada is accounted for under the equity method. The transaction was accounted for as a reverse acquisition whereby SIRIUS Canada was deemed to be the acquirer of CSR. As a result of the transaction, we recognized an $84,855 gain in Interest and investment income during the nine months ended September 30, 2011.
          The excess of the cost of our ownership interest in the equity of Sirius XM Canada over our share of the net assets is recognized as goodwill and intangible assets and is included in the carrying amount of our investment. Equity method goodwill is not amortized. We will periodically evaluate this investment to determine if there has been an other than temporary decline below carrying value. Equity method intangible assets are amortized over their respective useful lives, which is recorded in Interest and investment income. As of September 30, 2011, our investment balance in Sirius XM Canada was approximately $50,728, $30,000 of which represents equity method goodwill and intangible assets, and was recorded in Related party long-term assets. Sirius XM Canada is still evaluating the fair value allocation between goodwill and intangible assets; the final purchase price allocation is not expected to have a material effect on our financial statements.
          We provide Sirius XM Canada with chipsets and other services and we are reimbursed for these costs. As of September 30, 2011, amounts due for these costs totaled $5,228 and is reported as Related party current assets.
          As of September 30, 2011, amounts due from Sirius XM Canada also included $9,263 attributable to deferred programming costs and accrued interest, all of which is reported as Related party long-term assets.
          We hold an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by CSR, for which the embedded conversion feature is bifurcated from the host contract. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income (loss). As of September 30, 2011, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,445 and $0, respectively. As of December 31, 2010, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,302 and $11, respectively. The carrying values of the host contract and embedded derivative are recorded in Related party long-term assets.
          As of September 30, 2011, amounts due to Sirius XM Canada totaled $1,804 and is reported as Related party current liabilities.
          We recorded the following revenue from Sirius XM Canada as Other revenue in our unaudited consolidated statements of operations:
         
    For the Three and Nine Months  
    Ended September 30,  
    2011*  
Royalty income
  $ 6,468  
Amortization of Sirius XM Canada deferred income
    694  
Licensing fee revenue
    1,500  
Advertising reimbursements
     
 
     
Total revenue from Sirius XM Canada
  $ 8,662  
 
     
 
*   Sirius XM Canada commenced operations on June 2011.
     Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of Sirius XM Canada’s net loss was $4,214 for the three and nine months ended September 30, 2011.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
     SIRIUS Canada
          We had an equity interest of 49.9% in SIRIUS Canada until June 21, 2011 when the transaction between XM Canada and SIRIUS Canada closed. Our investment balance was zero as of December 31, 2010 as our investment balance was absorbed by our share of net losses generated by SIRIUS Canada.
          In 2005, we entered into a license and services agreement with SIRIUS Canada. Pursuant to such agreement, we are reimbursed for certain costs incurred to provide SIRIUS Canada service, including certain costs incurred for the production and distribution of radios, as well as information technology support costs. In consideration for the rights granted pursuant to this license and services agreement, we have the right to receive a royalty equal to a percentage of SIRIUS Canada’s gross revenues based on subscriber levels (ranging between 5% to 15%) and the number of Canadian-specific channels made available to SIRIUS Canada.
          We recorded the following revenue from SIRIUS Canada. Royalty income is included in other revenue and dividend income is included in Interest and investment income (loss) in our unaudited consolidated statements of operations:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011*     2010     2011*     2010  
Royalty income
  $     $ 3,163     $ 9,945     $ 6,603  
Dividend income
          232       460       689  
 
                       
Total revenue from SIRIUS Canada
  $     $ 3,395     $ 10,405     $ 7,292  
 
                       
 
*   SIRIUS Canada combined with XM Canada in June 2011.
          Receivables from royalty and dividend income were utilized to absorb a portion of our share of net losses generated by SIRIUS Canada. Total costs that have been or will be reimbursed by SIRIUS Canada for the three months ended September 30, 2010 were $2,498 and for the nine months ended September 30, 2011 and 2010 were $5,253 and $7,333, respectively.
          Our share of net earnings or losses of SIRIUS Canada is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of SIRIUS Canada’s net loss was $3,361 for the three months ended September 30, 2010 and $9,717 and $6,579 for the nine months ended September 30, 2011 and 2010, respectively. The payments received from SIRIUS Canada in excess of carrying value was $546 for the three months ended September 30, 2010 and $6,748 and $4,256 for the nine months ended September 30, 2011 and 2010, respectively.
     XM Canada
          We had an equity interest of 21.5% in XM Canada until June 21, 2011 when the transaction between XM Canada and SIRIUS Canada closed. Our investment balance was zero as of December 31, 2010 as our investment balance was absorbed by our share of net losses generated by XM Canada.
          In 2005, XM entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial ten year term and XM Canada has the unilateral option to extend the agreements for an additional five year term. We receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on XM’s system. Sirius XM Canada is obligated to pay us a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a ten year term. We recognize these payments on a gross basis as a principal obligor pursuant to the provisions of ASC 605, Revenue Recognition. The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, which is amortized on a straight-line basis through 2020, the end of the expected term of the agreements. As of September 30, 2011 and December 31, 2010, the carrying value of deferred revenue related to this agreement was $26,711 and $28,792, respectively.
          The Cdn$45,000 standby credit facility we extended to XM Canada was paid and terminated as a result of the Canada Merger. We received $38,815 in cash upon payment of this facility. As a result of the repayment of the credit facility and completion of the Canada Merger, we released a $15,649 valuation allowance related to the absorption of our share of the net loss from our investment in XM Canada as of June 21, 2011.
          As of December 31, 2010, amounts due from XM Canada also included $7,201 attributable to deferred programming costs and accrued interest, all of which is reported as Related party long-term assets.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
          We recorded the following revenue from XM Canada as Other revenue in our unaudited consolidated statements of operations:
                                 
    For the Three Months     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011*     2010     2011*     2010  
Amortization of XM Canada deferred income
  $     $ 693     $ 1,388     $ 2,081  
Subscriber and activation fee royalties
          2,594       5,483       7,599  
Licensing fee revenue
          750       3,000       3,000  
Advertising reimbursements
                833       667  
 
                       
Total revenue from XM Canada
  $     $ 4,037     $ 10,704     $ 13,347  
 
                       
 
*   XM Canada combined with SIRIUS Canada in June 2011.
          Our share of net earnings or losses of XM Canada is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations on a one month lag. Our share of XM Canada’s net loss was $2,926 for the three months ended September 30, 2010 and $6,045 and $9,416 for the nine months ended September 30, 2011 and 2010, respectively.
     General Motors and American Honda
          We have a long-term distribution agreement with General Motors Company (“GM”). GM had a representative on our board of directors and was considered a related party through May 27, 2010. During the term of the agreement, GM has agreed to distribute the XM service. We subsidize a portion of the cost of satellite radios and make incentive payments to GM when the owners of GM vehicles with factory- or dealer- installed satellite radios become self-paying subscribers. We also share with GM a percentage of the subscriber revenue attributable to GM vehicles with factory- or dealer- installed satellite radios. As part of the agreement, GM provides certain call-center related services directly to subscribers who are also GM customers for which we reimburse GM.
          We make bandwidth available to OnStar LLC for audio and data transmissions to owners of enabled GM vehicles, regardless of whether the owner is a subscriber. OnStar’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. We also granted to OnStar a certain amount of time to use our studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.
          We have a long-term distribution agreement with American Honda. American Honda had a representative on our board of directors and was considered a related party through May 27, 2010. We have an agreement to make a certain amount of our bandwidth available to American Honda. American Honda’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. This agreement remains in effect so long as American Honda holds a certain amount of its investment in us. We make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying subscriber and we share with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed satellite radios.
          We recorded the following total related party revenue from GM and American Honda, primarily consisting of subscriber revenue, in connection with the agreements above:
         
    For the Nine Months  
    Ended September 30,  
    2010*  
GM
  $ 12,759  
American Honda
    4,990  
 
     
Total
  $ 17,749  
 
     
 
*   GM and American Honda were considered related parties through May 27, 2010.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
          We incurred the following related party expenses with GM and American Honda:
                 
    For the Nine Months  
    Ended September 30, 2010*  
            American  
    GM     Honda  
Sales and marketing
  $ 13,374     $  
Revenue share and royalties
    15,823       3,167  
Subscriber acquisition costs
    17,514       1,969  
Customer service and billing
    125        
Interest expense, net of amounts capitalized
    1,421        
 
           
Total
  $ 48,257     $ 5,136  
 
           
 
*   GM and American Honda were considered related parties through May 27, 2010.
(10) Investments
     Auction Rate Certificates
          Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We accounted for our investment in auction rate certificates as available-for-sale securities. In January 2010, our investment in the auction rate certificates was called by the issuer at par plus accrued interest, or $9,456, resulting in a gain of $425 in the nine months ended September 30, 2010.
     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, 2011 and December 31, 2010, our Long-term restricted investments were $3,146 and $3,396, respectively. During the nine months ended September 30, 2011, $250 of obligations relating to these letters of credit was terminated.
(11) Debt
          Our debt consists of the following:
                         
    Conversion              
    Price     September 30,     December 31,  
    (per share)     2011     2010  
3.25% Convertible Notes due 2011 (a)
  $ 5.30     $ 23,866     $ 191,979  
Less: discount
            (3 )     (515 )
8.75% Senior Notes due 2015 (b)
    N/A       800,000       800,000  
Less: discount
            (10,389 )     (12,213 )
9.75% Senior Secured Notes due 2015 (c)
    N/A       257,000       257,000  
Less: discount
            (8,814 )     (10,116 )
11.25% Senior Secured Notes due 2013 (d)
    N/A             36,685  
Less: discount
                  (1,705 )
13% Senior Notes due 2013 (e)
    N/A       778,500       778,500  
Less: discount
            (44,843 )     (59,592 )
7% Exchangeable Senior Subordinated Notes due 2014 (f)
  $ 1.875       550,000       550,000  
Less: discount
            (6,388 )     (7,620 )
7.625% Senior Notes due 2018 (g)
    N/A       700,000       700,000  
Less: discount
            (11,196 )     (12,054 )
Other debt:
                       
Capital leases
    N/A       3,434       7,229  
 
                   
Total debt
            3,031,167       3,217,578  
Less: total current maturities non-related party
            25,588       195,815  
 
                   
Total long-term
            3,005,579       3,021,763  
Less: related party
            328,029       325,907  
 
                   
Total long-term, excluding related party
          $ 2,677,550     $ 2,695,856  
 
                   

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
     (a) 3.25% Convertible Notes due 2011
          In October 2004, we issued $230,000 in aggregate principal amount of 3.25% Convertible Notes due October 15, 2011 (the “3.25% Notes”), which are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000 principal amount, or $5.30 per share of common stock, subject to certain adjustments. Interest is payable semi-annually on April 15 and October 15 of each year. The obligations under the 3.25% Notes are not secured by any of our assets.
          In 2011, we purchased $168,113 of the outstanding 3.25% Notes at prices between 100.75% and 101% 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 consists primarily of cash premiums paid, unamortized discount and deferred financing fees. The remaining $23,866 in principal amount of the 3.25% Notes was paid in October 2011 upon maturity.
     (b) 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.
     (c) 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”). Interest is payable semi-annually in arrears on March 1 and September 1 of each year at a rate of 9.75% per annum. 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 guarantee our obligations under the 9.75% Notes. The 9.75% Notes and related guarantees are secured by first-priority liens on substantially all of our assets and the assets of the guarantors.
     (d) 11.25% Senior Secured Notes due 2013
          In June 2009, we issued $525,750 aggregate principal amount of 11.25% Senior Secured Notes due 2013 (the “11.25% Notes”). The 11.25% Notes were issued for $488,398, resulting in an aggregate original issuance discount of $37,352.
          In October 2010, we purchased $489,065 in aggregate principal amount of the 11.25% Notes. The aggregate purchase price for the 11.25% Notes was $567,927. We recorded an aggregate loss on extinguishment of the 11.25% Notes of $85,216, consisting primarily of unamortized discount, deferred financing fees and repayment premium to Loss on extinguishment of debt and credit facilities, net, in our 2010 consolidated statement of operations. The remainder of the 11.25% Notes of $36,685 was purchased in January 2011 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.
     (e) 13% Senior Notes due 2013
          In July 2008, we issued $778,500 aggregate principal amount of 13% Senior Notes due 2013 (the “13% Notes”). Interest is payable semi-annually in arrears on February 1 and August 1 of each year at a rate of 13% per annum. The 13% Notes mature on August 1, 2013. Substantially all of our domestic wholly-owned subsidiaries guarantee the obligations under the 13% Notes.
     (f) 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. During the second quarter of 2011, the common stock reserved for exchange in connection with the Exchangeable Notes were considered to be dilutive in our calculation of diluted net income per common share since our stock price was greater than the exchange price. Our stock price

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
as of September 30, 2011 was below the exchange price and therefore these shares were excluded from the calculation of diluted net income per common share for the three and nine months ended September 30, 2011 as the effect would have been anti-dilutive.
     (g) 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% Senior 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. A majority of the net proceeds were used to purchase $489,065 aggregate principal amount of the 11.25% Notes. The 7.625% Senior Notes mature on November 1, 2018. Substantially all of our domestic wholly-owned subsidiaries guarantee our obligations under the 7.625% Senior Notes.
     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 ratio would be no greater than 6.00 to 1.00 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, 2011, we were in compliance with our debt covenants.
(12) 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, 2011 and December 31, 2010. There were 3,951,945,992 and 3,933,195,112 shares of common stock issued and outstanding as of September 30, 2011 and December 31, 2010, respectively.
          As of September 30, 2011, approximately 3,354,649,000 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 July 2008, which were retired upon receipt. As of September 30, 2011, there were 202,400,000 shares loaned under the facilities. In October 2011, MS and UBS returned the remaining 202,400,000 shares loaned. The returned shares were retired upon receipt and will be removed from outstanding common stock in the fourth quarter of 2011.
          Once borrowed shares are returned to us, they may not be re-borrowed under the share lending agreements.
          The shares we loaned to the share borrowers were issued and outstanding for corporate law purposes through October 2011, and holders of borrowed shares (other than the share borrowers) had the same rights under those shares as holders of any of our other outstanding common shares. 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 $1,276 and $2,555, respectively, for the three months ended September 30, 2011 and 2010 and $6,727 and $7,473, respectively, for the nine months ended September 30, 2011 and 2010. As of September 30, 2011, the unamortized balance of the debt issuance costs was $42,961, with $42,101 recorded in deferred financing fees, net, and $859 recorded in long-term related party assets. As of December 31, 2010, the unamortized balance of the debt issuance costs was $51,243, with $50,218 recorded in deferred financing fees, net, and $1,025 recorded in long-term related party assets. As of September 30, 2011 and December 31, 2010, the

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
estimated fair value of the remaining 202,400,000 loaned shares was approximately $305,624 and $329,912, respectively. These costs will continue to be amortized until the debt is terminated.
          In January 2004, SIRIUS 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 $0 and $1,641 in the three months ended September 30, 2011 and 2010, respectively, and $1,568 and $3,501 in the nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011 and December 31, 2010, there was $0 and $1,568 remaining balance of common stock value included in other current assets, respectively.
     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, 2011 and December 31, 2010.
          There were no shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of September 30, 2011 and December 31, 2010.
          There were 12,500,000 shares of Series B Preferred Stock issued and outstanding as of September 30, 2011 and December 31, 2010. 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 40% 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 will rank senior to our common stock.
          There were no shares of Preferred Stock, Series C Junior (the “Series C Junior Preferred Stock”), issued and outstanding as of September 30, 2011 and December 31, 2010. In 2009, our board of directors created and reserved for issuance in accordance with the Rights Plan (as described below) 9,000 shares of the Series C Junior Preferred Stock. The shares of Series C Junior Preferred Stock are not redeemable and rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of our preferred stock, unless the terms of such series shall so provide. The Rights Plan expired on August 1, 2011.
     Warrants
          We have issued warrants to purchase shares of common stock in connection with distribution, programming and satellite purchase agreements and certain debt issuances. As of September 30, 2011, approximately 24,346,000 warrants to acquire an equal number of shares of common stock with an average exercise price of $2.96 per share were outstanding and fully vested and expire at various times through 2015. During the nine months ended September 30, 2011, 1,575,000 of these warrants expired.
          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.
     Rights Plan
     In April 2009, our board of directors adopted a rights plan. The terms of the rights and the rights plan are set forth in a Rights Agreement dated as of April 29, 2009 (the “Rights Plan”). The Rights Plan was intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding common stock (assuming for purposes of this calculation that all of our outstanding convertible preferred stock is converted into common stock) without the approval of our board of directors. The Rights Plan expired on August 1, 2011.
     (13) Benefits Plans
          We recognized share-based payment expense of $13,983 and $16,220 for the three months ended September 30, 2011 and 2010, respectively, and $36,006 and $47,443 for the nine months ended September 30, 2011 and 2010, respectively. We did not realize any income tax benefits from share-based benefits plans during the three and nine months ended September 30, 2011 and 2010 as a result of the full valuation allowance that is maintained for substantially all net deferred tax assets.

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     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, 2011, approximately 196,121,000 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 are being continued.
          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     For the Nine Months  
    Ended September 30,     Ended September 30,  
    2011     2010     2011     2010  
Risk-free interest rate
    1.1 %     1.5 %     1.1 %     1.7 %
Expected life of options — years
    5.27       5.33       5.27       5.28  
Expected stock price volatility
    68 %     85 %     68 %     85 %
Expected dividend yield
    0 %     0 %     0 %     0 %
          There were no options granted to third parties during the three and nine months ended September 30, 2011 and 2010.
     We estimate fair value of awards granted using the hybrid approach for volatility, which weights observable historical volatility and implied volatility of qualifying actively traded options on our common stock. In 2010, due to the lack of qualifying actively traded options on our common stock, we utilized a 100% weighting to observable historical volatility.
     The following table summarizes stock option activity under our share-based payment plans for the nine months ended September 30, 2011 (shares in thousands):
                                 
                    Weighted-Average    
                    Remaining   Aggregate
            Weighted-Average   Contractual Term   Intrinsic
    Shares   Exercise Price   (Years)   Value
Outstanding, December 31, 2010
    401,870     $ 1.32                  
Granted
    77,451     $ 1.80                  
Exercised
    (9,965 )   $ 0.91                  
Forfeited, cancelled or expired
    (24,288 )   $ 4.32                  
 
                               
Outstanding, September 30, 2011
    445,068     $ 1.25       6.60     $ 278,467  
 
                               
Exercisable, September 30, 2011
    145,867     $ 1.89       5.49     $ 81,314  
 
                               
          The weighted average grant date fair value of options granted during the nine months ended September 30, 2011 and 2010 was $1.04 and $0.66, respectively. The total intrinsic value of stock options exercised during the nine months ended September 30, 2011 and 2010 was $10,011 and $5,611, respectively.
          We recognized share-based payment expense associated with stock options of $13,201 and $11,679 for the three months ended September 30, 2011 and 2010, respectively, and $33,098 and $32,459 for the nine months ended September 30, 2011 and 2010, respectively.

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
          The following table summarizes the nonvested restricted stock and restricted stock unit activity under our share-based payment plans for the nine months ended September 30, 2011 (shares in thousands):
                 
            Weighted-Average
            Grant Date
    Shares   Fair Value
Nonvested, December 31, 2010
    2,397     $ 2.57  
Granted
        $  
Vested restricted stock awards
    (1,854 )   $ 3.30  
Vested restricted stock units
    (101 )   $ 3.08  
Forfeited
    (21 )   $ 3.05  
 
               
Nonvested, September 30, 2011
    421     $ 1.46  
 
               
          There were no restricted stock awards or restricted stock units granted during the nine months ended September 30, 2011 and 2010. The total intrinsic value of restricted stock and restricted stock units that vested during the nine months ended September 30, 2011 and 2010 was $3,178 and $3,923, respectively.
          We recognized share-based payment expense associated with restricted stock units and shares of restricted stock of $0 and $1,385 for the three months ended September 30, 2011 and 2010, respectively, and $543 and $6,059 for the nine months ended September 30, 2011 and 2010, 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, 2011 and December 31, 2010, net of estimated forfeitures, was $145,460 and $108,170, respectively. The weighted-average period over which the compensation expense for these awards is expected to be recognized is three years as of September 30, 2011.
     401(k) Savings Plan
          We sponsor the Sirius XM Radio 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees.
          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 331/3% 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 $782 and $724 for the three months ended September 30, 2011 and 2010, respectively, and $2,365 and $2,649 for the nine months ended September 30, 2011 and 2010, 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 currently do not anticipate contributing to the profit sharing portion of the Sirius XM Plan in 2011. Profit-sharing contribution expense was $0 and $2,432 for the three months ended September 30, 2011 and 2010, respectively, and $0 and $6,276 for the nine months ended September 30, 2011 and 2010, respectively.

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(14) Commitments and Contingencies
          The following table summarizes our expected contractual cash commitments as of September 30, 2011:
                                                         
    Remaining                                      
    2011     2012     2013     2014     2015     Thereafter     Total  
Long-term debt obligations (1)
  $ 24,363     $ 1,623     $ 779,636     $ 550,178     $ 1,057,000     $ 700,000     $ 3,112,800  
Cash interest payments (1)
    81,399       288,338       288,208       186,935       113,433       160,128       1,118,441  
Satellite and transmission
    9,760       55,680       4,782       13,250       13,156       22,093       118,721  
Programming and content
    47,561       227,048       178,953       151,931       145,531       3,750       754,774  
Marketing and distribution
    28,570       25,070       17,725       12,816       11,644       11,809       107,634  
Satellite incentive payments
    2,826       11,608       12,693       12,901       12,049       87,601       139,678  
Operating lease obligations
    8,522       32,819       28,335       21,973       13,851       5,428       110,928  
Other
    15,119       25,921       9,883       659       268       182       52,032  
 
                                         
Total (2)
  $ 218,120     $ 668,107     $ 1,320,215     $ 950,643     $ 1,366,932     $ 990,991     $ 5,515,008  
 
                                         
 
(1)   Includes captial lease obligations.
 
(2)   The table does not include our reserve for uncertain tax positions, which at September 30, 2011 totaled $1,496, as the specific timing of any cash payments relating to this obligation cannot be projected with reasonable certainty.
          Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt and capital lease obligations. We paid $23,866 of the 2011 remaining obligations of $24,363 in October 2011 upon the maturity of the 3.25% Notes.
          Cash interest payments. Cash interest payments include interest due on outstanding debt 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.
          We have an agreement with Space Systems/Loral to design and construct a fifth satellite, FM-6, for use in the SIRIUS system. In January 2008, we entered into an agreement with International Launch Services (ILS) to secure a satellite launch on a Proton rocket for this satellite.
          Programming and content. We have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may 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 our satellites. As of September 30, 2011, we have accrued $28,498 related to contingent in-orbit performance payments for XM-3 and XM-4 based on expected operating performance over their fifteen year design life. Boeing may also be entitled to an additional $10,000 if XM-4 continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life.
          Space Systems/Loral may be entitled to future in-orbit performance payments. As of September 30, 2011, we have accrued $11,190 and $21,450 related to contingent performance payments for our FM-5 and XM-5 satellites, respectively, based on 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

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SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 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; 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 1, Legal Proceedings in Part II, Other Information.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
          (All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
          The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time, particularly the risk factors described under “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010 and “Management’s Discussion and Analysis of Financial Condition and Results or Operations” herein and in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2010.
          Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
    our competitive position versus other forms of audio and video entertainment, including terrestrial radio, HD radio, Internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies;
 
    our ability to retain subscribers and maintain our average monthly revenue per subscriber;
 
    our dependence upon automakers and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers;
 
    potential economic recessionary trends and uncertain economic outlook;
 
    our substantial indebtedness; and
 
    the useful life of our satellites, which, in most cases, are not insured.
          Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. For purposes of this document, we limited forward-looking statements to the next four consecutive quarters.
Executive Summary
          We broadcast our music, sports, news, talk, entertainment, 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 an application on Apple, Blackberry and Android-powered mobile devices.
          In October 2011, we launched an expanded channel lineup, including new music, sports, comedy channels as well as Sirius XM Latino, a suite of Latin channels. These channels, available online and over certain new radios, are the first phase of Sirius XM 2.0, an upgrade and evolution of our satellite and Internet delivered service that will ultimately span hardware, software, audio, and data services. This new technology effectively delivers 25% more bandwidth capacity, which will allow us to expand our audio and data services without affecting the broadcast quality of existing channels.
          We have agreements with every major automaker (“OEMs”) to offer satellite radios as factory- or dealer-installed equipment in their vehicles. We also 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.
          As of September 30, 2011, we had 21,349,858 subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers and dealers for subscriptions included in the sale or lease price of a vehicle; activated radios in daily rental fleet vehicles; certain subscribers to our Internet services; and certain subscribers to our weather, traffic, data and video services.

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          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 either the XM or Sirius networks. 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, technology royalties and other ancillary services, such as our Backseat TV, data and weather services.
          In certain cases, automakers include a subscription to our radio services in the sale or lease price of new and certified pre-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.
          We also have an interest in the satellite radio services offered in 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”). Following the Canada Merger, we own approximately 38% of the equity of CSR, which operates as Sirius XM Canada.
Actual Results of Operations
          Set forth below are our results of operations for the three and nine months ended September 30, 2011 compared with the three and nine months ended September 30, 2010.
                                                                 
    Unaudited     2011 vs 2010 Change     2011 vs 2010 Change  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,     Three Months     Nine Months  
    2011     2010     2011     2010     Amount     %     Amount     %  
Revenue:
                                                               
Subscriber revenue
  $ 660,837     $ 612,119     $ 1,922,917     $ 1,793,258     $ 48,718       8 %   $ 129,659       7 %
Advertising revenue, net of agency fees
    18,810       15,973       53,595       46,296       2,837       18 %     7,299       16 %
Equipment revenue
    15,504       17,823       48,392       50,625       (2,319 )     (13 %)     (2,233 )     (4 %)
Other revenue
    67,399       71,633       205,882       190,914       (4,234 )     (6 %)     14,968       8 %
 
                                               
Total revenue
    762,550       717,548       2,230,786       2,081,093       45,002       6 %     149,693       7 %
Operating expenses:
                                                               
Revenue share and royalties
    117,043       114,482       340,713       320,567       2,561       2 %     20,146       6 %
Programming and content
    70,509       78,143       210,867       228,595       (7,634 )     (10 %)     (17,728 )     (8 %)
Customer service and billing
    64,239       60,613       192,667       175,238       3,626       6 %     17,429       10 %
Satellite and transmission
    19,681       20,844       57,238       60,944       (1,163 )     (6 %)     (3,706 )     (6 %)
Cost of equipment
    5,888       6,463       19,894       22,187       (575 )     (9 %)     (2,293 )     (10 %)
Subscriber acquisition costs
    107,279       105,984       317,711       305,745       1,295       1 %     11,966       4 %
Sales and marketing
    55,210       51,519       154,471       156,813       3,691       7 %     (2,342 )     (1 %)
Engineering, design and development
    14,175       12,526       39,249       35,209       1,649       13 %     4,040       11 %
General and administrative
    58,635       54,188       175,469       170,935       4,447       8 %     4,534       3 %
Depreciation and amortization
    65,403       67,450       200,865       206,945       (2,047 )     (3 %)     (6,080 )     (3 %)
Restructuring, impairments and related costs
          2,267             4,071       (2,267 )     (100 %)     (4,071 )     (100 %)
 
                                               
Total operating expenses
    578,062       574,479       1,709,144       1,687,249       3,583       1 %     21,895       1 %
 
                                               
Income from operations
    184,488       143,069       521,642       393,844       41,419       29 %     127,798       32 %
Other income (expense):
                                                               
Interest expense, net of amounts capitalized
    (75,316 )     (68,559 )     (229,730 )     (223,230 )     (6,757 )     (10 %)     (6,500 )     (3 %)
Loss on extinguishment of debt and credit facilities, net
          (256 )     (7,206 )     (34,695 )     256       100 %     27,489       79 %
Interest and investment income (loss)
    292       (4,305 )     78,590       (7,197 )     4,597       107 %     85,787     nm  
Other income
    435       1,108       2,235       1,837       (673 )     (61 %)     398       22 %
 
                                               
Total other expense
    (74,589 )     (72,012 )     (156,111 )     (263,285 )     (2,577 )     (4 %)     107,174       41 %
 
                                               
Income before income taxes
    109,899       71,057       365,531       130,559       38,842       55 %     234,972       180 %
Income tax expense
    (5,714 )     (3,428 )     (9,907 )     (6,060 )     (2,286 )     (67 %)     (3,847 )     (63 %)
 
                                               
Net income
  $ 104,185     $ 67,629     $ 355,624     $ 124,499     $ 36,556       54 %   $ 231,125       186 %
 
                                               
 
nm- not meaningful
     Total Revenue
          Subscriber Revenue includes subscription fees, activation and other fees.
    Three Months: For the three months ended September 30, 2011 and 2010, subscriber revenue was $660,837 and $612,119, respectively, an increase of 8%, or $48,718. The increase was primarily attributable to an increase of 8% in daily weighted average subscribers and an increase in sales of premium services, including Premier packages, data services and streaming, partially offset by the impact of subscription discounts offered through customer acquisition and retention programs.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, subscriber revenue was $1,922,917 and $1,793,258, respectively, an increase of 7%, or $129,659. The increase was primarily attributable to an increase of 8% in daily weighted average subscribers and an increase in sales of premium services, including Premier packages, data services and streaming, partially offset by the impact of subscription discounts offered through customer acquisition and retention programs.

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          The growth of future subscriber revenue will be dependent upon the growth of our subscriber base, conversion and churn rates, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and the identification of additional revenue streams from subscribers. In September 2011, we announced an increase in certain of our subscription rates beginning January 2012.
          Advertising Revenue includes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a contractual percentage of the gross advertising billing revenue.
    Three Months: For the three months ended September 30, 2011 and 2010, advertising revenue was $18,810 and $15,973, respectively, an increase of 18%, or $2,837. The increase was primarily due to more effective sales efforts and greater demand for audio advertising resulting in increases in the number of advertising spots sold as well as the rate charged per spot.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, advertising revenue was $53,595 and $46,296, respectively, an increase of 16%, or $7,299. The increase was primarily due to more effective sales efforts and greater demand for audio advertising resulting in increases in the number of advertising spots sold as well as the rate charged per spot.
          Our advertising revenue is subject to fluctuation based on the effectiveness of our sales efforts and the national economic environment. We expect advertising revenue to grow as advertisers are attracted by the growth in our subscriber base.
          Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.
    Three Months: For the three months ended September 30, 2011 and 2010, equipment revenue was $15,504 and $17,823 respectively, a decrease of 13%, or $2,319. The decrease was driven by a reduction in aftermarket hardware subsidies earned.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, equipment revenue was $48,392 and $50,625, respectively, a decrease of 4%, or $2,233. The decrease was driven by a reduction in aftermarket hardware subsidies earned, partially offset by increased OEM production.
          We expect equipment revenue to fluctuate based on OEM production for which we receive royalty payments for our technology and, to a lesser extent, on the volume and mix of equipment sales in our direct to consumer business.
          Other Revenue primarily includes amounts collected from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.
    Three Months: For the three months ended September 30, 2011 and 2010, other revenue was $67,399 and $71,633, respectively, a decrease of 6%, or $4,234. The decrease was primarily due to a reduction in the U.S. Music Royalty Fee rate, which was partially offset by increased royalty revenue from Sirius XM Canada and an increase in subscribers subject to the U.S. Music Royalty Fee.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, other revenue was $205,882 and $190,914, respectively, an increase of 8%, or $14,968. The increase was primarily due to an increase in subscribers subject to the U.S. Music Royalty Fee, which was partially offset by a rate reduction to that fee and increased royalty revenue from Sirius XM Canada.
          Other revenues are dependent upon the amount of the U.S. Music Royalty Fee and revenues from our Canadian affiliate. We expect other revenue will grow as our subscribers subject to the U.S. Music Royalty Fee grow and as our Canadian affiliate grows.
     Operating Expenses
          Revenue Share and Royalties include distribution and content provider revenue share, advertising revenue share, residuals and broadcast and web streaming royalties. Residuals are monthly fees paid based upon the number of subscribers using satellite radios purchased from retailers. Advertising revenue share is recognized in revenue share and royalties in the period in which the advertising is broadcast.
    Three Months: For the three months ended September 30, 2011 and 2010, revenue share and royalties were $117,043 and $114,482, respectively, an increase of 2%, or $2,561 but decreased as a percentage of total revenue. The increase was primarily attributable to a 12% increase in our revenues subject to royalty and/or revenue sharing arrangements and a 7% increase in the statutory royalty rate for the performance of sound recordings, partially offset by a $4,794 increase in the

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      benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, revenue share and royalties were $340,713 and $320,567, respectively, an increase of 6%, or $20,146 and remained flat as a percentage of total revenue. The increase was primarily attributable to a 16% increase in our revenues subject to royalty and/or revenue sharing arrangements and a 7% increase in the statutory royalty rate for the performance of sound recordings, partially offset by a $14,088 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger.
          We expect our revenue share and royalty costs to increase as our revenues grow and as a result of statutory increases in the royalty rate for the performance of sound recordings. Under the terms of the Copyright Royalty Board’s decision, we paid royalties of 7.5% and 7.0% of gross revenues, subject to certain exclusions, for the nine months ended September 30, 2011 and 2010, respectively, and will pay royalties of 8.0% for 2012. The deferred credits on executory contracts initially recognized in purchase price accounting associated with the Merger are expected to provide increasing benefits to revenue share and royalties through the expiration of the acquired executory contracts, principally in 2012 and 2013.
          Programming and Content includes costs to acquire, create, promote and produce content. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees, share advertising revenue; purchase advertising on media properties owned or controlled by the licensor and pay other guaranteed amounts.
    Three Months: For the three months ended September 30, 2011 and 2010, programming and content expenses were $70,509 and $78,143, respectively, a decrease of 10%, or $7,634, and decreased as a percentage of total revenue. The decrease was primarily due to savings in content agreements and general operating costs, partially offset by increases in personnel costs and a $1,921 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, programming and content expenses were $210,867 and $228,595, respectively, a decrease of 8%, or $17,728, and decreased as a percentage of total revenue. The decrease was primarily due to savings in content agreements and general operating costs, partially offset by increases in personnel costs and a $6,160 reduction in the benefit to earnings from purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts.
          Based on our current programming offerings, we expect our programming and content expenses to decrease as agreements expire and are renewed or replaced on more cost effective terms. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content costs, through 2013.
          Customer Service and Billing includes costs associated with the operation and management of third party customer service centers, and our subscriber management systems as well as billing and collection costs, transaction fees and bad debt expense.
    Three Months: For the three months ended September 30, 2011 and 2010, customer service and billing expenses were $64,239 and $60,613, respectively, an increase of 6%, or $3,626, and remained flat as a percentage of total revenue. The increase was primarily attributable to an 8% increase in daily weighted average subscribers which drove higher call volume, billing and collection costs, and transaction fees, as well as increased agent rates and personnel costs, partially offset by lower general operating costs.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, customer service and billing expenses were $192,667 and $175,238, respectively, an increase of 10%, or $17,429 and remained flat as a percentage of total revenue. The increase was primarily attributable to an 8% increase in daily weighted average subscribers which drove higher call volume, billing and collection costs, and transaction fees, as well as increased handle time per call and personnel costs, partially offset by lower agent rates and general operating costs.
          We expect our customer service and billing expenses to increase as our subscriber base grows due to increased call center operating costs, billing and collection costs and bad debt expense.
          Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; broadcast studios; and delivery of our internet streaming service.

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    Three Months: For the three months ended September 30, 2011 and 2010, satellite and transmission expenses were $19,681 and $20,844, respectively, a decrease of 6%, or $1,163, and decreased as a percentage of total revenue. The decrease was primarily due to savings in repeater expenses from site reductions and favorable lease renewals, as well as savings in personnel costs.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, satellite and transmission expenses were $57,238 and $60,944, respectively, a decrease of 6%, or $3,706, and decreased as a percentage of total revenue. The decrease was primarily due to savings in repeater expenses from site reductions and favorable lease renewals, as well as savings in personnel costs.
          We expect overall satellite and transmission expenses to increase from costs associated with our enhanced internet-based features and functionality, while costs associated with our in-orbit satellite fleet and terrestrial repeater network remain relatively flat.
          Cost of Equipment includes costs from the sale of satellite radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channels.
    Three Months: For the three months ended September 30, 2011 and 2010, cost of equipment was $5,888 and $6,463, respectively, a decrease of 9%, or $575, and remained flat as a percentage of total revenue. The decrease was primarily due to lower volume of direct to consumer sales.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, cost of equipment was $19,894 and $22,187, respectively, a decrease of 10%, or $2,293, and remained flat as a percentage of total revenue. The decrease was primarily due to lower inventory write-downs and reduced costs to produce aftermarket radios.
          We expect cost of equipment to vary with changes in sales, supply chain management and inventory valuations.
          Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a satellite radio and subscription to our service in the sale or lease price of a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as incentives to purchase, install and activate satellite radios; product warranty obligations; freight; and provisions for inventory allowances attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of satellite radios and revenue share payments to automakers and retailers of satellite radios.
    Three Months: For the three months ended September 30, 2011 and 2010, subscriber acquisition costs were $107,279 and $105,984, respectively, an increase of 1%, or $1,295, but decreased as a percentage of total revenue. The increase was primarily a result of the 10% increase in gross subscriber additions, higher subsidies related to increased OEM installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy rates per vehicle.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, subscriber acquisition costs were $317,711 and $305,745, respectively, an increase of 4%, or $11,966, but decreased as a percentage of total revenue. The increase was primarily a result of the 12% increase in gross subscriber additions and higher subsidies related to increased OEM installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy rates per vehicle and a $5,231 increase in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting associated with the Merger.
          We expect total subscriber acquisition costs to fluctuate with increases or decreases in OEM installations and changes in our gross subscriber additions. Declines in the cost of subsidized radio components will also impact total subscriber acquisition costs. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit for acquired executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition costs, through the expiration of the acquired contracts, primarily in 2013. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
          Sales and Marketing includes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities performed on our behalf.
    Three Months: For the three months ended September 30, 2011 and 2010, sales and marketing expenses were $55,210 and $51,519, respectively, an increase of 7%, or $3,691, and remained flat as a percentage of total revenue. The increase

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      was primarily due to increased subscriber communications and retention programs as well as increased cooperative marketing in our OEM channel associated with a greater number of subscribers and promotional trials, partially offset by reductions in consumer advertising and event marketing.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, sales and marketing expenses were $154,471 and $156,813, respectively, a decrease of 1%, or $2,342, and decreased as a percentage of total revenue. The decrease was primarily due to reductions in consumer advertising and event marketing, partially offset by increased subscriber communications and retention programs as well as increased cooperative marketing in our OEM channel associated with a greater number of subscribers and promotional trials.
          Sales and marketing expenses may fluctuate on a quarterly basis as we launch seasonal advertising and promotional initiatives to attract new subscribers in existing and new distribution channels, and launch and expand programs to retain our existing subscribers and win-back former subscribers.
          Engineering, Design and Development includes costs to develop chip sets and new products, research and development for broadcast information systems and costs associated with the incorporation of our radios into vehicles manufactured by automakers.
    Three Months: For the three months ended September 30, 2011 and 2010, engineering, design and development expenses were $14,175 and $12,526, respectively, an increase of 13%, or $1,649, and remained flat as a percentage of total revenue. The increase was primarily due to higher aftermarket product development costs and costs related to enhanced subscriber features and functionality, partially offset by lower share-based payment expenses.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, engineering, design and development expenses were $39,249 and $35,209, respectively, an increase of 11%, or $4,040, and remained flat as a percentage of total revenue. The increase was primarily due to higher aftermarket product development costs and costs related to enhanced subscriber features and functionality, partially offset by lower share-based payment expenses.
          We expect engineering, design and development expenses to increase in future periods as we develop our next generation chip sets, products, features, and functionality.
          General and Administrative includes executive management, rent and occupancy, finance, legal, human resources, information technology, insurance and investor relations costs.
    Three Months: For the three months ended September 30, 2011 and 2010, general and administrative expenses were $58,635 and $54,188, respectively, an increase of 8%, or $4,447, and remained flat as a percentage of total revenue. The increase was primarily due to an insurance recovery related to legal costs in the third quarter of 2010 with no such amounts in 2011, partially offset by lower legal expense.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, general and administrative expenses were $175,469 and $170,935, respectively, an increase of 3%, or $4,534, and decreased as a percentage of total revenue. The increase was primarily due to an insurance recovery related to legal costs in the third quarter of 2010 with no such amounts in 2011, partially offset by lower share-based payment expense.
          We expect our general and administrative expenses to increase in future periods primarily as a result of increased information technology and personnel costs to support the growth of our business, as well as rising legal costs.
          Depreciation and Amortization represents the systematic recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.
    Three Months: For the three months ended September 30, 2011 and 2010, depreciation and amortization expense was $65,403 and $67,450, respectively, a decrease of 3%, or $2,047, and decreased as a percentage of total revenue. The decrease was primarily due to a reduction in the amortization of subscriber relationships, partially offset by depreciation recognized on additional assets placed in service.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, depreciation and amortization expense was $200,865 and $206,945, respectively, a decrease of 3%, or $6,080, and decreased as a percentage of total revenue. The decrease was primarily due to a reduction in the amortization of subscriber relationships, partially offset by depreciation recognized on additional assets placed in service.
          We expect depreciation expenses to increase in future periods as we recognize depreciation expense on our recently launched satellite, XM-5, and complete the construction and launch of our FM-6 satellite, which will be partially offset by reduced amortization

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associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives, principally through 2017.
          Restructuring, Impairments and Related Costs represents charges related to the re-organization of our staff and restructuring of contracts principally following the Merger.
    In 2011, we have not had any restructuring, impairments and related costs. For the three and nine months ended September 30, 2010, we reported $2,267 and $4,071, respectively, for charges related to the restructuring of certain contracts and the re-organization of our staff principally following the Merger.
     Other Income (Expense)
          Interest Expense, Net of Amounts Capitalized, includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of our satellites and related launch vehicles.
    Three Months: For the three months ended September 30, 2011 and 2010, interest expense was $75,316 and $68,559, respectively, an increase of 10%, or $6,757. The increase was primarily due to lower capitalized interest directly related to the construction of our satellites and related launch vehicles, partially offset by the mix of outstanding debt with lower interest rates.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, interest expense was $229,730 and $223,230, respectively, an increase of 3%, or $6,500. The increase was primarily due to lower capitalized interest directly related to the construction of our satellites and related launch vehicles, partially offset by the mix of outstanding debt with lower interest rates.
          Following the launch of our FM-6 satellite, which is anticipated during the first quarter of 2012, the capitalization of interest expense related to the construction of our satellites and related launch vehicles will be eliminated. As a result, we expect interest expense to increase, as the impact of capitalized interest related to the construction of our satellites and related launch vehicles is eliminated, offset partially as debt outstanding declines due to retirements at maturity, redemption call dates or through debt repurchases.
          Loss on Extinguishment of Debt and Credit Facilities, Net, includes losses incurred as a result of the conversion and retirement of certain debt.
    Three Months: For the three months ended September 30, 2010, loss on extinguishment of debt and credit facilities, net, was $256, resulting from the repayment of our 9.75% Senior Secured Notes due 2015.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, loss on extinguishment of debt and credit facilities, net, was $7,206 and $34,695, respectively, a decrease of 79%, or $27,489. During the nine months ended September 30, 2011, the loss was incurred on the repayment of our 11.25% Senior Secured Notes due 2013 and the partial repayment of our 3.25% Convertible Notes due 2011. During the nine months ended September 30, 2010, the loss was incurred on the repayment of SIRIUS’ Senior Secured Term Loan due 2012 and 9.625% Senior Notes due 2013 and XM’s 10% Senior PIK Secured Notes due 2011 and 9.75% Senior Notes due 2014.
          Interest and Investment Income (Loss) includes realized gains and losses, dividends, interest income, our share of SIRIUS Canada’s and XM Canada’s pre-merger net losses, our share of the income (loss) of Sirius XM Canada and gains related to the Canada Merger.
    Three Months: For the three months ended September 30, 2011 and 2010, interest and investment income (loss) was $292 and ($4,305), respectively, an increase of $4,597. The increase was attributable to income from our interests in Sirius XM Canada compared to net losses incurred by Sirius Canada and XM Canada in the third quarter of 2010.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, interest and investment income (loss) was $78,590 and ($7,197), respectively, an increase of $85,787. The increase was attributable to a net gain realized as a result of the Canada Merger. This transaction resulted in the recognition of an $84,855 gain recorded in interest and investment income. The gain was partially offset by our share of net losses at XM Canada and Sirius Canada.

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     Income Taxes
          Income Tax Expense primarily represents the deferred tax liability related to the difference in accounting for our FCC licenses, which are amortized over 15 years for tax purposes but not amortized for book purposes in accordance with GAAP and foreign withholding taxes on royalty income.
    Three Months: For the three months ended September 30, 2011 and 2010, income tax expense was $5,714 and $3,428, respectively, an increase of 67%, or $2,286. The increase was primarily due to an increase in the applicable state effective tax rate and foreign withholding taxes on royalty income.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, income tax expense was $9,907 and $6,060, respectively, an increase of 63%, or $3,847. The increase was primarily due to an increase in the applicable state effective tax rate and foreign withholding taxes on royalty income.
          We have previously disclosed the details of our deferred tax assets, including the amount of our net tax loss carry forwards, the expiration dates thereof and the valuation allowance related to our deferred tax assets. (See Note 14, Income Taxes, to the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2010 for further details regarding our deferred tax assets). In assessing the recoverability of our deferred tax assets, management regularly considers whether some portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of a tax position in accordance with the Income Tax Topic of the FASB Accounting Standards Codification (the “Income Taxes Topic”). The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected taxable income and tax planning strategies in making this assessment. In accordance with the Income Taxes Topic, based upon the level of historical taxable losses, we have maintained a deferred tax valuation allowance against our deferred tax assets through September 30, 2011. In 2010, we had our first full year of pre-tax earnings yet continued to generate taxable losses. The first nine months of 2011 has continued with positive earnings and has generated taxable income. If such earnings trends continue, we may realize the benefits of all or a significant portion of our net deferred tax assets in 2012 through a reduction in our deferred tax valuation allowance. This would result in an income tax benefit that would be reflected in net income. As of December 31, 2010, we had $3.5 billion of valuation allowances established against the deferred tax assets.
Subscriber Data
          The following table contains actual subscriber data for the three and nine months ended September 30, 2011 and 2010, respectively:
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Beginning subscribers
    21,016,175       19,527,448       20,190,964       18,772,758  
Gross subscriber additions
    2,138,131       1,952,054       6,369,846       5,693,409  
Deactivated subscribers
    (1,804,448 )     (1,617,327 )     (5,210,952 )     (4,603,992 )
 
                       
Net additions
    333,683       334,727       1,158,894       1,089,417  
 
                       
Ending subscribers
    21,349,858       19,862,175       21,349,858       19,862,175  
 
                       
 
                               
Self-pay
    17,534,310       16,335,819       17,534,310       16,335,819  
Paid promotional
    3,815,548       3,526,356       3,815,548       3,526,356  
 
                       
Ending subscribers
    21,349,858       19,862,175       21,349,858       19,862,175  
 
                       
 
                               
Self-pay
    364,004       258,105       847,511       631,887  
Paid promotional
    (30,321 )     76,622       311,383       457,530  
 
                       
Net additions
    333,683       334,727       1,158,894       1,089,417  
 
                       
 
                               
Daily weighted average number of subscribers
    21,107,540       19,610,837       20,688,641       19,181,040  
 
                       
 
                               
Average self-pay monthly churn (1)
    1.9 %     1.9 %     1.9 %     1.9 %
 
                       
 
                               
Conversion rate (2)
    44.4 %     48.1 %     44.7 %     46.6 %
 
                       
 
Note: See pages 38 through 44 for footnotes.
          Subscribers. At September 30, 2011 and 2010, subscribers were 21,349,858 and 19,862,175, an increase of 7%, or 1,487,683. Self-pay subscribers were 17,534,310 and 16,335,819, respectively, an increase of 7%, or 1,198,491. Paid promotional subscribers

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were 3,815,548 and 3,526,356, respectively, an increase of 8%, or 289,192. These improvements were primarily driven by an increase in U.S. light vehicles sales, new vehicle penetration and returning activations.
          Average Self-pay Monthly Churn is derived by dividing the monthly average of self-pay deactivations for the quarter by the average self-pay subscriber balance for the quarter. (See accompanying footnotes on pages 38 through 44 for more details.)
    For the three and nine months ended September 30, 2011 and 2010, our average self-pay monthly churn rate was 1.9%.
          Conversion Rate is the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after an initial promotional period. (See accompanying footnotes on pages 38 through 44 for more details.)
    Three Months: For the three months ended September 30, 2011 and 2010, our conversion rate was 44.4% and 48.1%, respectively. The decrease was primarily due to the changing mix of sales among OEMs and operational issues impacting the timing of the receipt of customer information and prompt marketing communications with buyers and lessees of vehicles.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, our conversion rate was 44.7% and 46.6%, respectively. The decrease was primarily due to the changing mix of sales among OEMs and operational issues impacting the timing of the receipt of customer information and prompt marketing communications with buyers and lessees of vehicles.
Adjusted Results of Operations
          In this section, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, per gross subscriber addition; customer service and billing expenses, per average subscriber; free cash flow; adjusted total revenue; and adjusted EBITDA. These measures exclude the impact of certain purchase price accounting adjustments. We use these Non-GAAP financial measures to manage our business, set operational goals and as a basis for determining performance-based compensation for our employees.
          The purchase price accounting adjustments include the elimination of the earnings benefit of deferred revenue associated with the investment in XM Canada, the recognition of subscriber revenues not recognized in purchase price accounting and the elimination of the earnings benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers.
          Our adjusted EBITDA also reallocates share-based payment expense from functional operating expense line items to a separate line within operating expenses. We believe the exclusion of share-based payment expense from functional operating expenses is useful given the significant variation in expense that can result from changes in the fair value as determined by the Black-Scholes-Merton model which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates; the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs.
          Free cash flow is a metric that our management and Board of Directors use to evaluate the cash generated by our operations, net of capital expenditures and other investment activity. In a capital intensive business, with significant historical and current investments in satellites, we look at our operating cash flow, net of these investing cash outflows, to determine cash available for future subscriber acquisition and capital expenditures, to repurchase or retire debt, to acquire other companies and to evaluate our ability to return capital to stockholders. We believe free cash flow is an indicator of the long-term financial stability of our business. Free cash flow, which is reconciled to “Net cash provided by (used in) operating activities”, is a financial measure that is not calculated and presented in accordance with generally accepted accounting principles in the United States of America. This measure can be calculated by deducting amounts under the captions “Additions to property and equipment” and deducting or adding “Restricted and other investment activity” from “Net cash provided by (used in) operating activities” from the consolidated statements of cash flows. Free cash flow should be used in conjunction with other GAAP financial performance measures and may not be comparable to free cash flow measures presented by other companies. Free cash flow should be viewed as a supplemental measure rather than an alternative measure of cash flows from operating activities, as determined in accordance with GAAP. Free cash flow is limited and does not represent remaining cash flows available for discretionary expenditures due to the fact that the measure does not deduct the payments required for debt maturities. We believe free cash flow provides useful supplemental information to investors regarding our current and projected cash flow, along with other GAAP measures (such as cash flows from operating and investing activities), to determine our financial condition and, to compare our operating performance to other communications, entertainment and media companies.
          We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find these Non-GAAP financial performance measures useful in evaluating our core trends

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because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors’ understanding of our business and our results of operations. These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. Please refer to the footnotes (pages 38 through 44) for a further discussion of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.
          The following table contains our key operating metrics based on our unaudited adjusted results of operations for the three and nine months ended September 30, 2011 and 2010, respectively:
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
(in thousands, except for per subscriber amounts)   2011     2010     2011     2010  
ARPU (3)
  $ 11.66     $ 11.81     $ 11.57     $ 11.70  
SAC, per gross subscriber addition (4)
  $ 55     $ 59     $ 55     $ 59  
Customer service and billing expenses, per average subscriber (5)
  $ 1.01     $ 1.02     $ 1.03     $ 1.00  
Free cash flow (6)
  $ 75,377     $ 61,998     $ 223,936     $ 43,126  
Adjusted total revenue (8)
  $ 764,842     $ 722,537     $ 2,239,737     $ 2,098,659  
Adjusted EBITDA (7)
  $ 197,288     $ 169,727     $ 563,741     $ 481,799  
 
Note: See pages 38 through 44 for footnotes.
          ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 38 through 44 for more details.)
    Three Months: For the three months ended September 30, 2011 and 2010, ARPU was $11.66 and $11.81, respectively. The decrease was driven primarily by an increase in subscription discounts offered through customer acquisition and retention programs, the number of subscribers on OEM paid promotional plans and the decrease in the U.S. Music Royalty Fee, partially offset by an increase in sales of our premium services, including Premier packages, data services and streaming.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, ARPU was $11.57 and $11.70, respectively. The decrease was driven primarily by an increase in subscription discounts offered through customer acquisition and retention programs and the decrease in the U.S. Music Royalty Fee, partially offset by an increase in sales of our premium services, including Premier packages, data services and streaming.
          SAC, Per Gross Subscriber Addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. (See accompanying footnotes on pages 38 through 44 for more details.)
    Three Months: For the three months ended September 30, 2011 and 2010, SAC, per gross subscriber addition was $55 and $59, respectively. The decrease was primarily due to lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from radio manufacturers, partially offset by an increase in OEM production with factory-installed satellite radios compared to the three months ended September 30, 2010.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, SAC, per gross subscriber addition was $55 and $59, respectively. The decrease was primarily due to lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from radio manufacturers.
          Customer Service and Billing Expenses, Per Average Subscriber is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 38 through 44 for more details.)
    Three Months: For the three months ended September 30, 2011 and 2010, customer service and billing expenses, per average subscriber was $1.01 and $1.02, respectively. The decrease was primarily due to

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lower general operating costs, partially offset by higher call volume, handle time per call, increased agent rates and personnel costs associated with the 8% growth in daily weighted average subscribers.
    Nine Months: For the nine months ended September 30, 2011 and 2010, customer service and billing expenses, per average subscriber was $1.03 and $1.00, respectively. The increase was primarily due to higher call volume, handle time per call and personnel costs, partially offset by lower agent rates, general operating costs and the 8% growth in daily weighted average subscribers.
     Free Cash Flow includes the net cash provided by operations, additions to property and equipment, merger related costs and restricted and other investment activity. (See accompanying footnotes on pages 38 through 44 for more details.)
    Three Months: For the three months ended September 30, 2011 and 2010, free cash flow was $75,377 and $61,998, respectively, an increase of $13,379. Net cash provided by operating activities decreased $34,915 to $115,144 for the three months ended September 30, 2011 compared to the $150,059 provided by operations for the three months ended September 30, 2010. Capital expenditures for property and equipment for the three months ended September 30, 2011 decreased $48,294 to $39,767 compared to $88,061 for the three months ended September 30, 2010. The decrease in net cash provided by operating activities was primarily the result of the timing of prepayments made to content providers, partially offset by improved operating performance driving higher adjusted EBITDA. The decrease in capital expenditures for the three months ended September 30, 2011 was primarily the result of decreased satellite construction and launch expenditures due to the launch in the fourth quarter of 2010 of our XM-5 satellite.
 
    Nine Months: For the nine months ended September 30, 2011 and 2010, free cash flow was $223,936 and $43,126, respectively, an increase of $180,810. Net cash provided by operating activities increased $37,588 to $328,634 for the nine months ended September 30, 2011 compared to the $291,046 provided by operations for the nine months ended September 30, 2010. Capital expenditures for property and equipment for the nine months ended September 30, 2011 decreased $142,309 to $115,065 compared to $257,374 for the nine months ended September 30, 2010. Cash provided by restricted and other investing activities increased $913 for the nine months ended September 30, 2011. The increase in net cash provided by operating activities was primarily the result of improved operating performance driving higher adjusted EBITDA, cash received from the Canada Merger, higher collections from subscribers and distributors, and the repayment in the first quarter of 2010 of liabilities deferred in 2009. The decrease in capital expenditures for the nine months ended September 30, 2011 was primarily the result of decreased satellite construction and launch expenditures due to the launch in the fourth quarter of 2010 of our XM-5 satellite. The increase in restricted and other investment activities was driven by the return of capital resulting from the Canada Merger, partially offset by proceeds from the sale of investment securities in the nine months ended September 30, 2010.
     Adjusted Total Revenue. Our adjusted total revenue includes the recognition of deferred subscriber revenues acquired in the Merger that are not recognized in our results under purchase price accounting and the elimination of the benefit in earnings from deferred revenue associated with our investment in XM Canada acquired in the Merger. (See accompanying footnotes on pages 38 through 44 for more details.)
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
(in thousands)   2011     2010     2011     2010  
Revenue:
                               
Subscriber revenue
  $ 660,837     $ 612,119     $ 1,922,917     $ 1,793,258  
Advertising revenue, net of agency fees
    18,810       15,973       53,595       46,296  
Equipment revenue
    15,504       17,823       48,392       50,625  
Other revenue
    67,399       71,633       205,882       190,914  
Purchase price accounting adjustments:
                               
Subscriber revenue
    479       3,176       3,513       12,128  
Other revenue
    1,813       1,813       5,438       5,438  
 
                       
Adjusted total revenue
  $ 764,842     $ 722,537     $ 2,239,737     $ 2,098,659  
 
                       
     Adjusted EBITDA. EBITDA is defined as net income (loss) before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. Adjusted EBITDA removes the impact of other income and expense, losses on extinguishment of debt as well as certain other charges, such as goodwill impairment; restructuring, impairments and related costs; certain purchase price accounting adjustments and share-based payment expense. (See accompanying footnotes on pages 38 through 44 for more details):
    Three Months: For the three months ended September 30, 2011 and 2010, adjusted EBITDA was $197,288 and $169,727, respectively, an increase of 16%, or $27,561. The increase was primarily due to an increase of 6%, or $42,305, in adjusted

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      revenues, partially offset by an increase of 3%, or $14,744, in expenses included in adjusted EBITDA. The increase in adjusted revenues was primarily due to the increase in our subscriber base. The increase in expenses was primarily driven by higher revenue share and royalties expenses associated with growth in revenues and increased customer service and billing expenses associated with subscriber growth, partially offset by lower programming and content costs.
    Nine Months: For the nine months ended September 30, 2011 and 2010, adjusted EBITDA was $563,741 and $481,799, respectively, an increase of 17%, or $81,942. The increase was primarily due to an increase of 7%, or $141,078, in adjusted revenues, partially offset by an increase of 4%, or $59,136, in expenses included in adjusted EBITDA. The increase in adjusted revenues was primarily due to the increase in our subscriber base and the additional subscribers subject to the U.S. Music Royalty Fee. The increase in expenses was primarily driven by higher revenue share and royalties expenses associated with growth in revenues, increased customer service and billing expenses associated with subscriber growth and higher subscriber acquisition costs related to the 12% increase in gross additions, partially offset by lower programming and content costs.
Liquidity and Capital Resources
Cash Flows for the Nine Months Ended September 30, 2011 Compared with the Nine Months Ended September 30, 2010
               As of September 30, 2011 and December 31, 2010, we had $604,592 and $586,691, respectively, of cash and cash equivalents. The following table presents a summary of our cash flow activity for the periods set forth below:
                         
    For the Nine Months Ended September 30,        
    2011     2010     2011 vs. 2010  
Net cash provided by operating activities
  $ 328,634     $ 291,046     $ 37,588  
Net cash used in investing activities
    (104,698 )     (247,920 )     143,222  
Net cash used in financing activities
    (206,035 )     (110,360 )     (95,675 )
 
                 
Net increase (decrease) in cash and cash equivalents
    17,901       (67,234 )     85,135  
Cash and cash equivalents at beginning of period
    586,691       383,489       203,202  
 
                 
Cash and cash equivalents at end of period
  $ 604,592     $ 316,255     $ 288,337  
 
                 
Cash Flows Provided by Operating Activities
             Cash provided by operating activities increased by $37,588, or 13%, to $328,634 for the nine months ended September 30, 2011 from cash provided by operating activities of $291,046 for the nine months ended September 30, 2010. The primary drivers of our operating cash flow growth have been improvements in profitability and changes in operating assets and liabilities.
    Our net income was $355,624 and $124,499 for the nine months ended September 30, 2011 and 2010, respectively. The increase in net income was primarily due to an increase in our subscriber revenues of $129,659, or 7%, for the nine months ended September 30, 2011.
 
    Adjustments to net income were $33,089 and $182,131 for the nine months ended September 30, 2011 and 2010, respectively. Significant components of adjustments to net income, and their impact on cash flows from operating activities, include the following:
                 
    For the Nine Months Ended September 30,  
      2011   2010  
Depreciation and amortization
  $ 200,865     $ 206,945  
Loss on extinguishment of debt and credit facilities, net
    7,206       34,695  
Gain on merger of unconsolidated entities
    (84,855)      
Share-based payment expense
    37,574       50,944  
Other non-cash purchase price adjustments
    (203,630)     (184,703)
            Depreciation and amortization expense is expected to increase in future periods as we recognize depreciation expense on our recently launched satellite, XM-5, and complete the construction and launch of our FM-6 satellite.

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     Loss on extinguishment of debt and credit facilities, net, includes losses incurred as a result of retirement of certain debt instruments. Future charges related to the retirement of debt are dependent upon many factors, including the conversion price of debt or our ability to refinance or retire specific debt instruments.
     Gain on merger of unconsolidated entities represents the gain on the Canada Merger which closed in June 2011.
     Share-based payment expense is expected to increase in future periods as we grant equity awards to our employees and directors. Compensation expense for share-based awards is recorded in the financial statements based on the fair value of the underlying equity awards. The fair value of stock option awards is determined using the Black-Scholes-Merton option-pricing model which is subject to various assumptions including the market price of our common stock, estimated forfeiture rates of awards and the volatility of our stock price. The fair value of restricted shares and restricted stock units is based on the market price of our common stock at date of grant.
     Other non-cash purchase price adjustments include liabilities recorded as a result of the Merger related to executory contracts with an OEM and certain programming providers, as well as amortization resulting from changes in the value of deferred revenue as a result of the Merger.
  Changes in operating assets and liabilities reduced operating cash flows for the nine months ended September 30, 2011 and 2010, by ($60,079) and ($15,584), respectively. Significant changes in operating assets and liabilities include the timing of collections from our customers, the repayment of the XM Canada credit facility and the timing of payments to vendors and related parties. As we continue to grow our subscriber and revenue base, we expect that deferred revenue and amounts due from customers and distributors will continue to increase. Amounts payable to vendors are also expected to increase as our business grows. The timing of payments to vendors and related parties are based on both contractual commitments and the terms and conditions of each of our vendors.
Cash Flows Used in Investing Activities
     Cash used for investing activities consists primarily of capital expenditures for property and equipment. We will continue to incur significant costs to improve our terrestrial repeater network and broadcast and administrative infrastructure. In addition, we will continue to incur capital expenditures associated with our FM-6 satellite, which is scheduled for launch early next year. After the launch of our FM-6 satellite, we anticipate no satellite capital expenditures for several years until it becomes necessary to replace satellites in our fleet.
Cash Flows Used in Financing Activities
     Cash flows used in financing activities have generally been the result of the issuance and repayment of long-term debt and related party debt and cash proceeds from equity issuances. Proceeds from long-term debt, related party debt and equity issuances have been used to fund our operations, construct and launch new satellites and invest in other infrastructure improvements.
Financings and Capital Requirements
     We have historically financed our operations through the sale of debt and equity securities. The Certificate of Designations for our Series B-1 Preferred Stock provides that, so long as Liberty Media beneficially owns at least half of its initial equity investment, Liberty Media’s consent is required for certain actions, including the grant or issuance of our equity securities and the incurrence of debt (other than, in general, debt incurred to refinance existing debt) in amounts greater than $10,000 in any calendar year.
Future Liquidity and Capital Resource Requirements
     As disclosed in Note 14 to our unaudited consolidated financial statements, as of September 30, 2011, we are contractually obligated to incur capital expenditures of approximately $9,760 and $55,680 in 2011 and 2012, respectively, the majority of which is attributable to the construction and launch of our FM-6 satellite and related launch vehicle.
     Based upon our current plans, we believe that we have sufficient cash, cash equivalents and marketable securities to cover our estimated funding needs. We expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our debt with existing cash and cash flow from operations, and we believe that we will be able to generate sufficient revenues to meet our cash requirements.
     Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure

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that sufficient resources are maintained. Our financial projections are based on assumptions, which we believe are reasonable but contain significant uncertainties.
     We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business.
Debt Covenants
     The indentures governing our debt include restrictive covenants. As of September 30, 2011, we were in compliance with our debt covenants.
     For a discussion of our “Debt Covenants”, refer to Note 11 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
     We do not have any significant off-balance sheet arrangements other than those disclosed in Note 14 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
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, which 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, 2011, approximately 196,121,000 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 granted under these plans. There are outstanding awards under these plans.
Contractual Cash Commitments
     For a discussion of our “Contractual Cash Commitments,” refer to Note 14 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Related Party Transactions
     For a discussion of “Related Party Transactions,” refer to Note 9 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
     For a discussion of our “Critical Accounting Policies and Estimates,” refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2010 and Note 3 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes to our critical accounting policies and estimates since December 31, 2010.

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Footnotes
(1)   Average self-pay monthly churn represents the monthly average of self-pay deactivations for the quarter divided by the average number of self-pay subscribers for the quarter.
 
(2)   We measure the percentage of owners and lessees of new vehicles that receive our service and convert to become self-paying subscribers after the initial promotion period. We refer to this as the “conversion rate.” At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive trial subscriptions ranging from three to twelve months. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends.
 
(3)   ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes the U.S. Music Royalty Fee. Purchase price accounting adjustments include the recognition of deferred subscriber revenues not recognized in purchase price accounting associated with the Merger. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Subscriber revenue (GAAP)
  $ 660,837     $ 612,119     $ 1,922,917     $ 1,793,258  
Add: net advertising revenue (GAAP)
    18,810       15,973       53,595       46,296  
Add: other subscription-related revenue (GAAP)
    58,168       63,554       174,341       168,195  
Add: purchase price accounting adjustments
    479       3,176       3,513       12,128  
 
                       
 
  $ 738,294     $ 694,822     $ 2,154,366     $ 2,019,877  
 
                       
 
                               
Daily weighted average number of subscribers
    21,107,540       19,610,837       20,688,641       19,181,040  
 
                       
 
                               
ARPU
  $ 11.66     $ 11.81     $ 11.57     $ 11.70  
 
                       
(4)   Subscriber acquisition cost, per gross subscriber addition (or SAC, per gross subscriber addition) is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to an OEM. SAC, per gross subscriber addition, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Subscriber acquisition costs (GAAP)
  $ 107,279     $ 105,984     $ 317,711     $ 305,745  
Less: margin from direct sales of radios and accessories (GAAP)
    (9,616 )     (11,360 )     (28,498 )     (28,438 )
Add: purchase price accounting adjustments
    20,620       20,889       64,086       58,855  
 
                       
 
  $ 118,283     $ 115,513     $ 353,299     $ 336,162  
 
                       
 
                               
Gross subscriber additions
    2,138,131       1,952,054       6,369,846       5,693,409  
 
                       
 
                               
SAC, per gross subscriber addition
  $ 55     $ 59     $ 55     $ 59  
 
                       
(5)   Customer service and billing expenses, per average subscriber, is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments associated with the Merger, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber, is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Purchase price accounting adjustments associated with the Merger include the elimination of the benefit associated with incremental share-based payment arrangements recognized at the Merger date. Customer service and billing expenses, per average subscriber, is calculated as follows (in thousands, except for subscriber and per subscriber amounts):

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    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Customer service and billing expenses (GAAP)
  $ 64,239     $ 60,613     $ 192,667     $ 175,238  
Less: share-based payment expense, net of purchase price accounting adjustments
    (402 )     (700 )     (1,077 )     (2,157 )
Add: purchase price accounting adjustments
          54       18       226  
 
                       
 
  $ 63,837     $ 59,967     $ 191,608     $ 173,307  
 
                       
 
                               
Daily weighted average number of subscribers
    21,107,540       19,610,837       20,688,641       19,181,040  
 
                       
 
                               
Customer service and billing expenses, per average subscriber
  $ 1.01     $ 1.02     $ 1.03     $ 1.00  
 
                       
(6)   Free cash flow is calculated as follows (in thousands):
                                 
    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Net cash provided by operating activities
  $ 115,144     $ 150,059     $ 328,634     $ 291,046  
Additions to property and equipment
    (39,767 )     (88,061 )     (115,065 )     (257,374 )
Restricted and other investment activity
                10,367       9,454  
 
                       
Free cash flow
  $ 75,377     $ 61,998     $ 223,936     $ 43,126  
 
                       
(7)   EBITDA is defined as net income before interest and investment income (loss); interest expense, net of amounts capitalized; income tax expense and depreciation and amortization. We adjust EBITDA to remove the impact of other income and expense, loss on extinguishment of debt as well as certain other charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) goodwill impairment, (iii) restructuring, impairments, and related costs, (iv) depreciation and amortization and (v) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in XM Canada, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe investors use current and projected adjusted EBITDA to estimate our current and prospective enterprise value and to make investment decisions. Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We believe the exclusion of restructuring, impairments and related costs is useful given the nature of these expenses. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair value as determined using the Black-Scholes-Merton model which varies based on assumptions used for the expected life, expected stock price volatility and risk-free interest rates.
 
    Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income as disclosed in our consolidated statements of operations. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income to the adjusted EBITDA is calculated as follows (in thousands):

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    Unaudited  
    For the Three Months Ended September 30,     For the Nine Months Ended September 30,  
    2011     2010     2011     2010  
Net income (GAAP):
  $ 104,185     $ 67,629     $ 355,624     $ 124,499  
Add back items excluded from Adjusted EBITDA:
                               
Purchase price accounting adjustments:
                               
Revenues (see pages 41-44)
    2,292       4,989       8,951       17,566  
Operating expenses (see pages 41-44)
    (68,878 )     (66,438 )     (205,472 )     (193,904 )
Share-based payment expense, net of purchase price accounting adjustments
    13,983       18,390       37,755       53,277  
Depreciation and amortization (GAAP)
    65,403       67,450       200,865       206,945  
Restructuring, impairments and related costs
          2,267             4,071  
Interest expense, net of amounts capitalized (GAAP)
    75,316       68,559       229,730       223,230  
Loss on extinguishment of debt and credit facilities, net (GAAP)
          256       7,206       34,695  
Interest and investment (income) loss (GAAP)
    (292 )     4,305       (78,590 )     7,197  
Other income (GAAP)
    (435 )     (1,108 )     (2,235 )     (1,837 )
Income tax expense (GAAP)
    5,714       3,428       9,907       6,060  
 
                       
Adjusted EBITDA
  $ 197,288     $ 169,727     $ 563,741     $ 481,799  
 
                       

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(8)   The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses for the three and nine months ended September 30, 2011 and 2010:
                                 
    Unaudited For the Three Months Ended September 30, 2011  
            Purchase Price     Allocation of        
            Accounting     Share-based        
(in thousands)   As Reported     Adjustments     Payment Expense     Adjusted  
Revenue:
                               
Subscriber revenue
  $ 660,837     $ 479     $     $ 661,316  
Advertising revenue, net of agency fees
    18,810                   18,810  
Equipment revenue
    15,504                   15,504  
Other revenue
    67,399       1,813             69,212  
 
                       
Total revenue
  $ 762,550     $ 2,292     $     $ 764,842  
 
                       
Operating expenses
                               
Cost of services:
                               
Revenue share and royalties
    117,043       32,293             149,336  
Programming and content
    70,509       12,034       (1,275 )     81,268  
Customer service and billing
    64,239             (402 )     63,837  
Satellite and transmission
    19,681             (735 )     18,946  
Cost of equipment
    5,888                   5,888  
Subscriber acquisition costs
    107,279       20,620             127,899  
Sales and marketing
    55,210       3,931       (2,165 )     56,976  
Engineering, design and development
    14,175             (1,291 )     12,884  
General and administrative
    58,635             (8,115 )     50,520  
Depreciation and amortization (a)
    65,403                   65,403  
Restructuring, impairments and related costs
                       
Share-based payment expense (b)
                13,983       13,983  
 
                       
Total operating expenses
  $ 578,062     $ 68,878     $     $ 646,940  
 
                       
 
(a)   Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended September 30, 2011 was $15,000.
 
(b)   Amounts related to share-based payment expense included in operating expenses were as follows:
                                 
Programming and content
  $ 1,275     $     $     $ 1,275  
Customer service and billing
    402                   402  
Satellite and transmission
    735                   735  
Sales and marketing
    2,165                   2,165  
Engineering, design and development
    1,291                   1,291  
General and administrative
    8,115                   8,115  
 
                       
Total share-based payment expense
  $ 13,983     $     $     $ 13,983  
 
                       

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    Unaudited For the Three Months Ended September 30, 2010  
            Purchase Price     Allocation of        
(in thousands)   As Reported     Accounting
Adjustments
    Share-based
Payment Expense
    Adjusted  
Revenue:
                               
Subscriber revenue
  $ 612,119     $ 3,176     $     $ 615,295  
Advertising revenue, net of agency fees
    15,973                   15,973  
Equipment revenue
    17,823                   17,823  
Other revenue
    71,633       1,813             73,446  
 
                       
Total revenue
  $ 717,548     $ 4,989     $     $ 722,537  
 
                       
Operating expenses
                               
Cost of services:
                               
Revenue share and royalties
    114,482       27,499             141,981  
Programming and content
    78,143       13,955       (3,229 )     88,869  
Customer service and billing
    60,613       54       (700 )     59,967  
Satellite and transmission
    20,844       272       (1,093 )     20,023  
Cost of equipment
    6,463                   6,463  
Subscriber acquisition costs
    105,984       20,889             126,873  
Sales and marketing
    51,519       3,506       (2,812 )     52,213  
Engineering, design and development
    12,526       93       (1,776 )     10,843  
General and administrative
    54,188       170       (8,780 )     45,578  
Depreciation and amortization (a)
    67,450                   67,450  
Restructuring, impairments and related costs
    2,267                   2,267  
Share-based payment expense (b)
                18,390       18,390  
 
                       
Total operating expenses
  $ 574,479     $ 66,438     $     $ 640,917  
 
                       
 
(a)   Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended September 30, 2010 was $16,000.
 
(b)   Amounts related to share-based payment expense included in operating expenses were as follows:
                                 
Programming and content
  $ 3,148     $ 81     $     $ 3,229  
Customer service and billing
    646       54             700  
Satellite and transmission
    1,042       51             1,093  
Sales and marketing
    2,732       80             2,812  
Engineering, design and development
    1,683       93             1,776  
General and administrative
    8,610       170             8,780  
 
                       
Total share-based payment expense
  $ 17,861     $ 529     $     $ 18,390  
 
                       

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    Unaudited For the Nine Months Ended September 30, 2011  
            Purchase Price     Allocation of        
            Accounting     Share-based        
(in thousands)   As Reported     Adjustments     Payment Expense     Adjusted  
Revenue:
                               
Subscriber revenue
  $ 1,922,917     $ 3,513     $     $ 1,926,430  
Advertising revenue, net of agency fees
    53,595                   53,595  
Equipment revenue
    48,392                   48,392  
Other revenue
    205,882       5,438             211,320  
 
                       
Total revenue
  $ 2,230,786     $ 8,951     $     $ 2,239,737  
 
                       
Operating expenses
                               
Cost of services:
                               
Revenue share and royalties
    340,713       93,359             434,072  
Programming and content
    210,867       36,645       (4,745 )     242,767  
Customer service and billing
    192,667       18       (1,077 )     191,608  
Satellite and transmission
    57,238       313       (1,867 )     55,684  
Cost of equipment
    19,894                   19,894  
Subscriber acquisition costs
    317,711       64,086             381,797  
Sales and marketing
    154,471       10,961       (5,654 )     159,778  
Engineering, design and development
    39,249       31       (3,407 )     35,873  
General and administrative
    175,469       59       (21,005 )     154,523  
Depreciation and amortization (a)
    200,865                   200,865  
Restructuring, impairments and related costs
                       
Share-based payment expense (b)
                37,755       37,755  
 
                       
Total operating expenses
  $ 1,709,144     $ 205,472     $     $ 1,914,616  
 
                       
(a)   Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the nine months ended September 30, 2011 was $45,000.
 
(b)   Amounts related to share-based payment expense included in operating expenses were as follows:
                                 
Programming and content
  $ 4,718     $ 27     $     $ 4,745  
Customer service and billing
    1,059       18             1,077  
Satellite and transmission
    1,848       19             1,867  
Sales and marketing
    5,627       27             5,654  
Engineering, design and development
    3,376       31             3,407  
General and administrative
    20,946       59             21,005  
 
                       
Total share-based payment expense
  $ 37,574     $ 181     $     $ 37,755  
 
                       

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    Unaudited For the Nine Months Ended September 30, 2010  
            Purchase Price     Allocation of        
            Accounting     Share-based        
(in thousands)   As Reported     Adjustments     Payment Expense     Adjusted  
Revenue:
                               
Subscriber revenue
  $ 1,793,258     $ 12,128     $     $ 1,805,386  
Advertising revenue, net of agency fees
    46,296                   46,296  
Equipment revenue
    50,625                   50,625  
Other revenue
    190,914       5,438             196,352  
 
                       
Total revenue
  $ 2,081,093     $ 17,566     $     $ 2,098,659  
 
                       
Operating expenses
                               
Cost of services:
                               
Revenue share and royalties
    320,567       79,271             399,838  
Programming and content
    228,595       42,805       (8,129 )     263,271  
Customer service and billing
    175,238       226       (2,157 )     173,307  
Satellite and transmission
    60,944       897       (3,196 )     58,645  
Cost of equipment
    22,187                   22,187  
Subscriber acquisition costs
    305,745       58,855             364,600  
Sales and marketing
    156,813       10,692       (8,274 )     159,231  
Engineering, design and development
    35,209       427       (5,332 )     30,304  
General and administrative
    170,935       731       (26,189 )     145,477  
Depreciation and amortization (a)
    206,945                   206,945  
Restructuring, impairments and related costs
    4,071                   4,071  
Share-based payment expense (b)
                53,277       53,277  
 
                       
Total operating expenses
  $ 1,687,249     $ 193,904     $     $ 1,881,153  
 
                       
 
(a)   Purchase price accounting adjustments included above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the nine months ended September 30, 2010 was $52,000.
 
(b)   Amounts related to share-based payment expense included in operating expenses were as follows:
                                 
Programming and content
  $ 7,760     $ 369     $     $ 8,129  
Customer service and billing
    1,931       226             2,157  
Satellite and transmission
    2,960       236             3,196  
Sales and marketing
    7,930       344             8,274  
Engineering, design and development
    4,905       427             5,332  
General and administrative
    25,458       731             26,189  
 
                       
Total share-based payment expense
  $ 50,944     $ 2,333     $     $ 53,277  
 
                       

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
          As of September 30, 2011, we did not have any derivative financial instruments. We do not hold or issue any free-standing derivatives. We hold investments in marketable securities consisting of money market funds, and we also hold certificates of deposit and investments in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale. These securities are consistent with the objectives in our investment policy. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield.
          Our debt includes fixed rate instruments and the fair market value of our debt is sensitive to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
     Controls and Procedures
          As of September 30, 2011, an evaluation was performed under the supervision and with the participation of our management, including Mel Karmazin, our Chief Executive Officer, and David J. Frear, our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2011. There has been no change in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended September 30, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
          State Consumer Investigations. A Multistate Working Group of 30 State Attorneys General, led by the Attorney General of the State of Ohio, is investigating certain of our consumer practices. The investigation focuses on practices relating to the cancellation of subscriptions; automatic renewal of subscriptions; charging, billing, collecting, and refunding or crediting of payments from consumers; and soliciting customers.
          A separate investigation into our consumer practices is being conducted by the Attorney General of the State of Florida. In addition, in September 2010, the Attorney General of the State of Missouri commenced an action against us in Missouri Circuit Court, Twenty-Second Judicial Circuit, St. Louis, Missouri, alleging violations of various consumer protection statutes, including the Missouri Telemarketing No-Call List Act. The suit seeks, among other things, a permanent injunction prohibiting us from making, or causing to be made, telephone solicitations to our subscribers in the State of Missouri who are on Missouri’s no-call list, statutory penalties and reimbursement of costs.
          We are cooperating with these investigations and believe our consumer practices comply with all applicable federal and state laws and regulations.
          Carl Blessing et al. v. Sirius XM Radio Inc. We have settled the case titled Carl Blessing et al. v. Sirius XM Radio Inc. and the settlement has been approved by the United States District Court for the Southern District of New York.
          Carl Blessing, a subscriber, filed a lawsuit against us in the United States District Court for the Southern District of New York. Mr. Blessing and several other plaintiffs purported to represent all subscribers who were subject to: an increase in the price for additional-radio subscriptions from $6.99 to $8.99; the imposition of the US Music Royalty Fee; and the elimination of our free streaming internet service. The suit claimed that the pricing changes showed that our merger with XM lessened competition or led to a monopoly in violation of the Clayton Act and that the merger led to monopolization in violation of the Sherman Act. Earlier the Court dismissed the plaintiffs’ claims for breach of contract and granted our motion for summary judgment as to various state law claims.
          As part of the settlement, we agreed not to: raise the price of our basic satellite radio service, our other programming packages or our internet streaming services; increase our US Music Royalty Fee; or decrease our multi-radio discount. Existing subscribers may also renew their current subscription plans at our current rates prior to December 31, 2011. Former subscribers who terminated their subscriptions after July 29, 2009 are entitled to receive, at their election, either: one month of our basic satellite radio service or one

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month of our Internet streaming, at no charge. We also paid the costs of providing notice to the plaintiff class and reimbursed counsel for the plaintiffs for $13 million of their fees and expenses.
          Notices of appeal have been filed by 11 individuals seeking to overturn the settlement.
          One Twelve, Inc. and Don Buchwald v. Sirius XM Radio Inc. In March 2011, One Twelve, Inc., Howard Stern’s production company, and Don Buchwald, Stern’s agent, commenced an action against us in the Supreme Court of the State of New York, County of New York. The action alleges that, upon the Merger, we failed to honor our obligations under the performance-based compensation provisions of our prior agreement dated October 2004 with One Twelve and Buchwald, as agent; One Twelve and Buchwald each assert a claim of breach of contract. More specifically, the complaint alleges that subscribers to the XM Satellite Radio service should have been counted as “Sirius subscribers” following the Merger for purposes of provisions entitling One Twelve and Buchwald to compensation in the event that the number of “Sirius subscribers” exceeded the projected growth amounts of Sirius subscribers by certain magnitudes specified in the 2004 agreement for each year of that agreement. The suit seeks damages, plus interest and costs, in an amount to be determined. We believe that the claims are without merit and intend to vigorously defend this action.
          We filed a motion for summary judgment on the basis that the 2004 agreement is unambiguous; specifically, that the term “Sirius subscribers,” as used in the 2004 agreement, does not include subscribers to XM Satellite Radio following the merger and, as a result, One Twelve and Buchwald were not entitled to additional compensation for exceeding projected growth amounts of Sirius subscribers. The Court has heard oral argument on our motion for summary judgment in September 2011.
          Other Matters. 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; former employees; parties to contracts or leases; and owners of patents, trademarks, copyrights or other intellectual property. None of these actions are, in our opinion, likely to have a material adverse effect on our business, financial condition or results of operations.
ITEM 1A. RISK FACTORS
          There have been no material changes to the risk factors previously disclosed in response to Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2010.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
          Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
          Not applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
          Not applicable.
ITEM 6. EXHIBITS
          See Exhibit Index attached hereto.

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SIGNATURES
          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 3rd day of November 2011.
         
  SIRIUS XM RADIO INC.
 
 
  By:   /s/ David J. Frear    
    David J. Frear   
    Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
 
 
 

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EXHIBIT INDEX
     
Exhibit   Description
10.1*
  Employment Agreement, dated as of July 21, 2011, between the Company and David J. Frear (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on July 22, 2011).
 
10.2*
  Employment Agreement, dated as of August 23, 2011, between the Company and Dara F. Altman (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on August 24, 2011).
 
31.1
  Certificate of Mel Karmazin, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
31.2
  Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
32.1
  Certificate of Mel Karmazin, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
32.2
  Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
101.1**
  The following financial information from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2011 formatted in eXtensible Business Reporting Language (XBRL): (i) Unaudited Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010; (ii) Consolidated Balance Sheets as of September 30, 2011 (Unaudited) and December 31, 2010; (iii) Unaudited Consolidated Statements of Stockholder’s Equity as of September 30, 2011 and Comprehensive Income for the nine months ended September 30, 2011; (iv) Unaudited Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010; and (v) Notes to Unaudited Consolidated Financial Statements.
 
*   This document has been identified as a management contract or compensatory plan or arrangement.
 
**   In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101.1 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be part of any registration statement or other document filed under the Securities Act or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.
 
    The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

 

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