Edgar Filing: SIRIUS XM RADIO INC.

SIRI- 2012.3.31 -10Q

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 MARCH 31, 2012



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 April 27, 2012)
COMMON STOCK, $0.001 PAR VALUE	3,801,029,929	SHARES

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q



Item No.	Description

	PART I — Financial Information

Item 1.	Financial Statements:

	Unaudited Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011	1

	Consolidated Balance Sheets as of March 31, 2012 (Unaudited) and December 31, 2011	2

	Unaudited Consolidated Statements of Stockholders’ Equity as of March 31, 2012	3

	Unaudited Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011	4

	Notes to Unaudited Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Material Risk	41

Item 4.	Controls and Procedures	42

	PART II — Other Information

Item 1.	Legal Proceedings	42

Item 1A.	Risk Factors	43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 3.	Defaults Upon Senior Securities	43

Item 4.	Mine Safety Disclosures	43

Item 5.	Other Information	43

Item 6.	Exhibits	43

	Signatures	44

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	For the Three Months Ended March 31,
(in thousands, except per share data)	2012			2011
Revenue:
Subscriber revenue	$	700,242		$	622,437
Advertising revenue, net of agency fees	18,670			16,558
Equipment revenue	16,953			15,867
Other revenue	68,857			68,977
Total revenue	804,722			723,839
Operating expenses:
Cost of services:
Revenue share and royalties	132,111			106,929
Programming and content	70,095			72,959
Customer service and billing	66,187			65,836
Satellite and transmission	18,110			18,560
Cost of equipment	5,806			6,405
Subscriber acquisition costs	116,121			105,270
Sales and marketing	58,361			47,819
Engineering, design and development	12,690			11,135
General and administrative	59,886			56,354
Depreciation and amortization	66,117			68,400
Total operating expenses	605,484			559,667
Income from operations	199,238			164,172
Other income (expense):
Interest expense, net of amounts capitalized	(76,971		)	(78,218		)
Loss on extinguishment of debt and credit facilities, net	(9,971		)	(5,994		)
Interest and investment loss	(1,142		)	(1,884		)
Other (loss) income	(578		)	1,617
Total other expense	(88,662		)	(84,479		)
Income before income taxes	110,576			79,693
Income tax expense	(2,802		)	(1,572		)
Net income	$	107,774		$	78,121
Foreign currency translation adjustment, net of tax	(56		)	67
Comprehensive income	$	107,718		$	78,188
Net income per common share:
Basic	$	0.03		$	0.02
Diluted	$	0.02		$	0.01
Weighted average common shares outstanding:
Basic	3,767,443			3,735,136
Diluted	6,537,728			6,481,384

See accompanying notes to the unaudited consolidated financial statements.

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS



	March 31, 2012			December 31, 2011
(in thousands, except share and per share data)	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	746,576		$	773,990
Accounts receivable, net	108,335			101,705
Receivables from distributors	96,037			84,817
Inventory, net	36,791			36,711
Prepaid expenses	177,515			125,967
Related party current assets	6,503			14,702
Deferred tax asset	144,798			132,727
Other current assets	20,539			6,335
Total current assets	1,337,094			1,276,954
Property and equipment, net	1,645,610			1,673,919
Long-term restricted investments	3,973			3,973
Deferred financing fees, net	38,848			42,046
Intangible assets, net	2,559,712			2,573,638
Goodwill	1,834,856			1,834,856
Related party long-term assets	54,229			54,953
Other long-term assets	27,402			35,657
Total assets	$	7,501,724		$	7,495,996
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	454,748		$	543,193
Accrued interest	77,562			70,405
Current portion of deferred revenue	1,404,919			1,333,965
Current portion of deferred credit on executory contracts	281,270			284,108
Current maturities of long-term debt	1,540			1,623
Related party current liabilities	16,541			14,302
Total current liabilities	2,236,580			2,247,596
Deferred revenue	183,430			198,135
Deferred credit on executory contracts	147,012			218,199
Long-term debt	2,625,533			2,683,563
Long-term related party debt	329,576			328,788
Deferred tax liability	1,024,734			1,011,084
Related party long-term liabilities	21,048			21,741
Other long-term liabilities	84,232			82,745
Total liabilities	6,652,145			6,791,851
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, par value $0.001; 50,000,000 authorized at March 31, 2012 and December 31, 2011:
Series A convertible preferred stock; no shares issued and outstanding at March 31, 2012 and December 31, 2011	—			—
Convertible perpetual preferred stock, series B-1 (liquidation preference of $0.001 per share at March 31, 2012 and December 31, 2011); 12,500,000 shares issued and outstanding at March 31, 2012 and December 31, 2011	13			13
Common stock, par value $0.001; 9,000,000 shares authorized at March 31, 2012 and December 31, 2011; 3,788,755,725 and 3,753,201,929 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively	3,789			3,753
Accumulated other comprehensive income, net of tax	15			71
Additional paid-in capital	10,522,080			10,484,400
Accumulated deficit	(9,676,318		)	(9,784,092		)
Total stockholders’ equity	849,579			704,145
Total liabilities and stockholders’ equity	$	7,501,724		$	7,495,996

See accompanying notes to the unaudited consolidated financial statements.

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



	Series A Convertible Preferred Stock			Convertible Perpetual Preferred Stock, Series B-1			Common Stock
(in thousands, except share data)	Shares	Amount		Shares	Amount		Shares	Amount		Accumulated Other Comprehensive Income			Additional Paid-in Capital		Accumulated Deficit			Total Stockholders’ Equity
Balance at December 31, 2011	—	$	—	12,500,000	$	13	3,753,201,929	$	3,753	$	71		$	10,484,400	$	(9,784,092	)	$	704,145
Comprehensive income, net of tax										(56		)			107,774			107,718
Issuance of common stock to employees and employee benefit plans, net of forfeitures	—	—		—	—		598,972	1		—			1,307		—			1,308
Share-based payment expense	—	—		—	—		—	—		—			13,643		—			13,643
Exercise of stock options and vesting of restricted stock units	—	—		—	—		34,954,824	35		—			22,730		—			22,765
Balance at March 31, 2012	—	$	—	12,500,000	$	13	3,788,755,725	$	3,789	$	15		$	10,522,080	$	(9,676,318	)	$	849,579

See accompanying notes to the unaudited consolidated financial statements.

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS



	For the Three Months Ended March 31,
(in thousands)	2012			2011
Cash flows from operating activities:
Net income	$	107,774		$	78,121
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	66,117			68,400
Non-cash interest expense, net of amortization of premium	10,647			9,573
Provision for doubtful accounts	6,208			9,623
Amortization of deferred income related to equity method investment	(694		)	(694		)
Loss on extinguishment of debt and credit facilities, net	9,971			5,994
Loss on unconsolidated entity investments, net	422			2,350
Loss on disposal of assets	—			266
Share-based payment expense	14,951			12,856
Deferred income taxes	1,572			1,111
Other non-cash purchase price adjustments	(73,956		)	(66,743		)
Changes in operating assets and liabilities:
Accounts receivable	(12,838		)	11,291
Receivables from distributors	(11,220		)	(8,982		)
Inventory	(80		)	(7,330		)
Related party assets	8,347			(3,686		)
Prepaid expenses and other current assets	(65,753		)	(39,232		)
Other long-term assets	8,256			7,617
Accounts payable and accrued expenses	(96,859		)	(110,400		)
Accrued interest	7,157			8,124
Deferred revenue	56,182			39,225
Related party liabilities	2,239			738
Other long-term liabilities	1,505			(113		)
Net cash provided by operating activities	39,948			18,109

Cash flows from investing activities:
Additions to property and equipment	(25,187		)	(34,983		)
Net cash used in investing activities	(25,187		)	(34,983		)

Cash flows from financing activities:
Proceeds from exercise of stock options	22,765			1,072
Payment of premiums on redemption of debt	(6,602		)	(4,094		)
Repayment of long-term borrowings	(58,338		)	(133,100		)
Net cash used in financing activities	(42,175		)	(136,122		)
Net decrease in cash and cash equivalents	(27,414		)	(152,996		)
Cash and cash equivalents at beginning of period	773,990			586,691
Cash and cash equivalents at end of period	$	746,576		$	433,695

See accompanying notes to the unaudited consolidated financial statements.

Table Of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS- Continued



	For the Three Months Ended March 31,
(in thousands)	2012		2011
Supplemental Disclosure of Cash and Non-Cash Flow Information
Cash paid during the period for:
Interest, net of amounts capitalized	$	56,129	$	57,371
Non-cash financing activities:
Common stock issuance upon exercise of warrants	—		7

See accompanying notes to the unaudited consolidated financial statements.

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

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

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


(2)	Summary of Significant Accounting Policies

Principles of Consolidation

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

Basis of Presentation

In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 have been made.

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

We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the three months ended March 31, 2012 and have determined that no events have occurred that would require adjustment to our unaudited consolidated financial statements. For a discussion of subsequent events refer to Notes 16 and 17.

Use of Estimates

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

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

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Income Taxes

Deferred income taxes represents the tax consequence related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each reporting period, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recognized when, based on the weight of all available evidence, it is considered more likely than not that all, or some portion, of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

As of March 31, 2012 and December 31, 2011, we maintained a full valuation allowance against our deferred tax assets due to our historical accumulated pre-tax losses.

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

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

Fair Value of Financial Instruments

The fair value for publicly traded instruments is determined using quoted market prices while the fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. As of March 31, 2012 and December 31, 2011, the carrying value of our debt was $2,956,649 and $3,013,974, respectively; and the fair value approximated $3,192,636 and $3,506,546, respectively.

Accumulated Other Comprehensive Income

Accumulated other comprehensive income of $15 is comprised of foreign currency translation adjustments related to our interest in Sirius XM Canada. During the three months ended March 31, 2012, we recorded a foreign currency translation adjustments loss of $56, net of tax of $35.

Recent Accounting Pronouncements

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

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income (“ASU 2011-05”), to require an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statements of comprehensive income or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present the components of other comprehensive income as part of the statement of equity. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. This standard is effective for interim and annual periods beginning after December 15, 2011 and is to be applied retrospectively. The FASB has deferred the requirement to present reclassification adjustments for each component of

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

accumulated other comprehensive income in both net income and other comprehensive income. Companies are required to either present amounts reclassified out of other comprehensive income on the face of the financial statements or disclose those amounts in the notes to the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The effective date of this deferral will be consistent with the effective date of the ASU 2011-05. We have adopted ASU 2011-05 and disclosed comprehensive income in our unaudited consolidated statements of comprehensive income and note that this guidance only affects financial statement presentation only and has no impact on our results of unaudited consolidated financial statements.


(3)	Earnings per Share

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. For the three months ended March 31, 2012 and 2011, common stock equivalents of approximately 443,764,000 and 587,254,000, respectively, were excluded from the calculation of diluted net income per common share as the effect would have been anti-dilutive.



	For the Three Months Ended March 31,
(in thousands, except per share data)	2012		2011
Net income	$	107,774	$	78,121
Average common shares outstanding-basic	3,767,443		3,735,136
Dilutive effect of equity instruments	2,770,285		2,746,248
Average common shares outstanding-diluted	6,537,728		6,481,384
Net income per common share
Basic	$	0.03	$	0.02
Diluted	$	0.02	$	0.01


(4)	Accounts Receivable, net

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

Accounts receivable, net, consists of the following:



	March 31, 2012			December 31, 2011
Gross accounts receivable	$	119,310		$	111,637
Allowance for doubtful accounts	(10,975		)	(9,932		)
Total accounts receivable, net	$	108,335		$	101,705

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:



	March 31, 2012		December 31, 2011
Billed	$	52,426	$	44,618
Unbilled	43,611		40,199
Total	$	96,037	$	84,817

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)


(5)	Inventory, net

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

Inventory, net, consists of the following:



	March 31, 2012			December 31, 2011
Raw materials	$	22,441		$	24,134
Finished goods	31,102			28,007
Allowance for obsolescence	(16,752		)	(15,430		)
Total inventory, net	$	36,791		$	36,711


(6)	Goodwill

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

As of March 31, 2012, there were no indicators of impairment and no impairment loss was recorded for goodwill during the three months ended March 31, 2012 and 2011.


(7)	Intangible Assets

Intangible assets consisted of the following:



			March 31, 2012							December 31, 2011
	Weighted Average Useful Lives		Gross Carrying Value		Accumulated Amortization			Net Carrying Value		Gross Carrying Value		Accumulated Amortization			Net Carrying Value
Indefinite life intangible assets:
FCC licenses	Indefinite		$	2,083,654	$	—		$	2,083,654	$	2,083,654	$	—		$	2,083,654
Trademark	Indefinite		250,000		—			250,000		250,000		—			250,000
Definite life intangible assets:
Subscriber relationships	9	years	380,000		(202,134		)	177,866		380,000		(191,201		)	188,799
Licensing agreements	9.1	years	78,897		(36,649		)	42,248		78,897		(34,145		)	44,752
Proprietary software	6	years	16,552		(11,941		)	4,611		16,552		(11,507		)	5,045
Developed technology	10	years	2,000		(733		)	1,267		2,000		(683		)	1,317
Leasehold interests	7.4	years	132		(66		)	66		132		(61		)	71
Total intangible assets			$	2,811,235	$	(251,523	)	$	2,559,712	$	2,811,235	$	(237,597	)	$	2,573,638

Indefinite Life Intangible Assets

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

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

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 when this satellite is launched and placed into operation.

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

In connection with the merger of our wholly owned subsidiary, Vernon Merger Corporation, with and into XM Satellite Radio Holdings Inc. in July 2008 (the "Merger"), $250,000 of the purchase price was allocated to the XM trademark. As of March 31, 2012, 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 these assets might be impaired. The impairment test consists of a comparison of the fair value of the assets with its carrying value. If the carrying value of the intangible assets exceeds its fair value, an impairment loss is recognized. As of March 31, 2012, there were no indicators of impairment and no impairment loss was recorded for intangible assets with indefinite lives during the three months ended March 31, 2012 and 2011.

Definite Life Intangible Assets

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

Amortization expense for all definite life intangible assets was $13,926 and $15,303 for the three months ended March 31, 2012 and 2011, respectively. Expected amortization expense for the remaining period in 2012, each of the fiscal years 2013 through 2016 and for periods thereafter is as follows:



Year ending December 31,	Amount
2012	$	39,739
2013	47,357
2014	38,879
2015	37,553
2016	31,959
Thereafter	30,571
Total definite life intangibles assets, net	$	226,058

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)


(8)	Subscriber Revenue

Subscriber revenue consists of subscription fees, revenue derived from agreements with certain daily rental fleet operators, 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 Ended March 31,
	2012		2011
Subscription fees	$	696,298	$	619,291
Activation fees	3,944		3,146
Total subscriber revenue	$	700,242	$	622,437


(9)	Interest Costs

We capitalized a portion of the interest on funds borrowed to finance the construction costs of our FM-6 satellite and related launch vehicle. We will continue to capitalize the interest until the launch of our FM-6 satellite. We also incur interest costs on all of our debt instruments and on our satellite incentive agreements. The following is a summary of our interest costs:



	For the Three Months Ended March 31,
	2012		2011
Interest costs charged to expense	$	76,971	$	78,218
Interest costs capitalized	7,954		7,250
Total interest costs incurred	$	84,925	$	85,468

Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $10,647 and $9,573 for the three months ended March 31, 2012 and 2011, respectively.


(10)	Property and Equipment

Property and equipment, net, consists of the following:



	March 31, 2012			December 31, 2011
Satellite system	$	1,943,537		$	1,943,537
Terrestrial repeater network	110,335			112,440
Leasehold improvements	43,529			43,455
Broadcast studio equipment	54,218			53,903
Capitalized software and hardware	201,266			193,301
Satellite telemetry, tracking and control facilities	61,020			60,539
Furniture, fixtures, equipment and other	60,739			60,283
Land	38,411			38,411
Building	57,200			57,185
Construction in progress	385,300			372,508
Total property and equipment	2,955,555			2,935,562
Accumulated depreciation and amortization	(1,309,945		)	(1,261,643		)
Property and equipment, net	$	1,645,610		$	1,673,919

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Construction in progress consists of the following:



	March 31, 2012		December 31, 2011
Satellite system	$	352,597	$	343,932
Terrestrial repeater network	18,586		19,194
Other	14,117		9,382
Construction in progress	$	385,300	$	372,508

Depreciation and amortization expense on property and equipment was $52,191 and $53,097 for the three months ended March 31, 2012 and 2011, respectively.

Satellites

We currently own a fleet of nine orbiting satellites. The chart below provides certain information on these satellites:



Satellite Designation	Year Delivered	Estimated End of Depreciable Life
FM-1	2000	2013
FM-2	2000	2013
FM-3	2000	2015
FM-5	2009	2024
XM-1	2001	2013
XM-2	2001	2013
XM-3	2005	2020
XM-4	2006	2021
XM-5	2010	2025

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

During the three months ended March 31, 2012 and 2011, we capitalized expenditures, including interest, of $8,665 and $28,815, respectively, related to the construction of our FM-6 satellite and related launch vehicle.


(11)	Related Party Transactions

We had the following related party balances at March 31, 2012 and December 31, 2011:



	Related party current assets				Related party long-term assets				Related party current liabilities				Related party long-term liabilities				Related party long-term debt
	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
Liberty Media	$	—	$	—	$	1,122	$	1,212	$	10,461	$	9,722	$	—	$	—	$	329,576	$	328,788
Sirius XM Canada	6,503		14,702		53,107		53,741		6,080		4,580		21,048		21,741		—		—
Total	$	6,503	$	14,702	$	54,229	$	54,953	$	16,541	$	14,302	$	21,048	$	21,741	$	329,576	$	328,788

Liberty Media

In February 2009, we entered into an Investment Agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC (collectively, “Liberty Media”). Pursuant to the Investment Agreement, in March 2009

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

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 Corporation has filed with the Federal Communications Commission an application for consent to transfer de facto control of Sirius XM. We have filed a petition to dismiss or deny such application. Liberty Media's application was not filed in connection with a transaction between Liberty Media and us.

Liberty Media has advised us that as of March 31, 2012 and December 31, 2011, respectively, it owned the following:



	March 31, 2012		December 31, 2011
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	7,424		8,212
Total carrying value debt	$	329,576	$	328,788

As of March 31, 2012 and December 31, 2011, we recorded $10,461 and $9,722, respectively, related to accrued interest with Liberty Media to Related party current liabilities. We recognized Interest expense associated with debt held by Liberty Media of $8,994 and $8,933 for the three months ended March 31, 2012 and 2011, respectively.

Sirius XM Canada

In June 2011, Canadian Satellite Radio Holdings Inc. (“CSR”), the parent company of XM Canada, and Sirius Canada completed a transaction to combine their operations (“the Canada Merger”). As a result of the Canada Merger, Sirius Canada became a wholly-owned subsidiary of CSR. The combined company operates as Sirius XM Canada. We own

approximately 46,700,000 Class A shares of CSR, representing a 38.0% equity interest and a 25.0% voting interest, and hold a non-interest bearing note of $410 issued by CSR.

We also hold an investment in Cdn $4,000 face value of 8% convertible unsecured subordinated debentures issued by CSR, for which the embedded conversion feature is bifurcated from the host contract. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive income (loss), net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment loss. As of March 31, 2012, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,638 and $13, respectively. As of December 31, 2011, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,490 and $0, respectively. The carrying values of the host contract and embedded derivative are recorded in Related party long-term assets.

Our interest in Sirius XM Canada is accounted for under the equity method. The excess of the cost of our ownership interest in the equity of Sirius XM Canada over our share of the net assets is recognized as goodwill and intangible assets and is included in the carrying amount of our investment. Equity method goodwill is not amortized. We periodically evaluate this investment to determine if there has been an other than temporary decline below carrying value. Equity method intangible assets are amortized over their respective useful lives, which is recorded in Interest and investment loss. As of March 31, 2012, our investment balance in Sirius XM Canada was approximately $44,631, $28,763 of which represents equity method goodwill and intangible assets, and was recorded in Related party long-term assets. As of December 31, 2011, our investment balance in Sirius XM Canada was approximately $45,061, $28,589 of which represented equity method goodwill and intangible assets, and was recorded in Related party long-term assets.

We provide Sirius XM Canada with chip sets and other services and we are reimbursed for these costs. As of March 31, 2012 and December 31, 2011 amounts due for these costs totaled $4,504 and $7,404, respectively, and is reported as Related party current assets.

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

As of March 31, 2012, amounts due from Sirius XM Canada also included $6,414 attributable to deferred programming costs and accrued interest, $4,415 of which is reported as Related party long-term assets. As of December 31, 2011, amounts due from Sirius XM Canada included $7,280 attributable to deferred programming costs and accrued interest, $4,780 of which was reported as Related party long-term assets.

As of March 31, 2012 and December 31, 2011, the amounts due to Sirius XM Canada totaled $3,305 and $1,804, respectively, and is reported as Related party current liabilities.

We recorded the following revenue from Sirius XM Canada as Other revenue in our consolidated statements of comprehensive income:



	For the Three Months Ended March 31,
	2012
Royalty income	$	7,465
Amortization of Sirius XM Canada deferred income	694
Licensing fee revenue	1,500
Advertising reimbursements	417
Total revenue from Sirius XM Canada	$	10,076

Our share of net earnings or losses of Sirius XM Canada are recorded to Interest and investment loss in our consolidated statements of comprehensive income on a one month lag. Our share of Sirius XM Canada’s net loss was $1,645 for the three months ended March 31, 2012. We recorded amortization expense of $(173) related to the equity method intangible assets for three months ended March 31, 2012.

Sirius Canada

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

In 2005, we entered into a license and services agreement with Sirius Canada. Pursuant to such agreement, we are reimbursed for certain costs incurred to provide Sirius Canada service, including certain costs incurred for the production and distribution of radios, as well as information technology support costs. In consideration for the rights granted pursuant to this license and services agreement, we have the right to receive a royalty equal to a percentage of Sirius Canada’s gross revenues based on subscriber levels (ranging between 5% to 15%) and the number of Canadian-specific channels made available to Sirius Canada.

We recorded the following revenue from Sirius Canada. Royalty income is included in other revenue and dividend income is included in Interest and investment loss in our consolidated statements of comprehensive income:



	For the Three Months Ended March 31,
	2011
Royalty income	$	4,470
Dividend income	238
Total revenue from Sirius Canada	$	4,708

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 reimbursed by Sirius Canada were $2,490 for the three months ended March 31, 2011.

Our share of net earnings or losses of Sirius Canada was recorded to Interest and investment loss in our consolidated statements of comprehensive income on a one month lag. Our share of Sirius Canada’s net loss was $4,458 for the three months ended March 31, 2011. The payments received from Sirius Canada in excess of carrying value were $2,880 for the three months ended March 31, 2011.

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

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.

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 March 31, 2012 and December 31, 2011, the carrying value of deferred revenue related to this agreement was $23,823 and $24,517, respectively.

The Cdn $45,000 standby credit facility we extended to XM Canada was paid and terminated as a result of the Canada Merger. We received $38,815 in cash upon payment of this facility. As a result of the repayment of the credit facility and completion of the Canada Merger, we released a $15,649 valuation allowance related to the absorption of our share of the net loss from our investment in XM Canada as of June 21, 2011.

We recorded the following revenue from XM Canada as Other revenue in our consolidated statements of comprehensive income:



	For the Three Months Ended March 31,
	2011
Amortization of XM Canada deferred income	$	694
Subscriber and activation fee royalties	2,623
Licensing fee revenue	1,500
Advertising reimbursements	417
Total revenue from XM Canada	$	5,234

Our share of net earnings or losses of XM Canada is recorded to Interest and investment loss in our consolidated statements of comprehensive income on a one month lag. Our share of XM Canada’s net loss was $2,053 for the three months ended March 31, 2011.

(12) Investments

Long Term Restricted Investments

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

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)


(13)	Debt

Our debt consists of the following:



	Conversion Price (per share)		March 31, 2012			December 31, 2011
8.75% Senior Notes due 2015 (a)	N/A		800,000			800,000
Less: discount			(9,102		)	(9,753		)
9.75% Senior Secured Notes due 2015 (b)	N/A		224,428			257,000
Less: discount			(6,886		)	(8,356		)
13% Senior Notes due 2013 (c)	N/A		744,246			778,500
Less: discount			(32,438		)	(39,504		)
7% Exchangeable Senior Subordinated Notes due 2014 (d)	$	1.875	550,000			550,000
Less: discount			(5,513		)	(5,956		)
7.625% Senior Notes due 2018 (e)	N/A		700,000			700,000
Less: discount			(10,595		)	(10,898		)
Other debt:
Capital leases	N/A		2,509			2,941
Total debt			2,956,649			3,013,974
Less: total current maturities non-related party			1,540			1,623
Total long-term			2,955,109			3,012,351
Less: related party			329,576			328,788
Total long-term, excluding related party			$	2,625,533		$	2,683,563


(a)	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.


(b)	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.

In March 2012, we purchased $32,572 in aggregate principal amount of the 9.75% Notes, $9,500 of which was settled in April 2012. The aggregate purchase price for these 9.75% Notes was $35,565 inclusive of accrued interest. We recognized an aggregate loss on extinguishment of these 9.75% Notes of $3,778, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net, for the three months ended March 31, 2012.


(c)	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 our obligations under

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

the 13% Notes.

In March 2012, we purchased $34,254 in aggregate principal amount of the 13% Notes. The aggregate purchase price for these 13% Notes was $39,610 inclusive of accrued interest. We recognized an aggregate loss on extinguishment on these 13% Notes of $6,193, consisting primarily of unamortized discount, deferred financing fees and repayment premium, to Loss on extinguishment of debt and credit facilities, net, for the three months ended March 31, 2012.


(d)	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. Although our stock price was greater than the exchange price during the three months ended March 31, 2012, the common stock reserved for exchange in connection with the Exchangeable Notes were considered to be anti-dilutive in our calculation of diluted net income per common share.


(e)	7.625% Senior Notes due 2018

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

Retired Debt Instruments

3.25% Convertible Notes due 2011

In February 2011, we purchased $94,148 of our then outstanding 3.25% Convertible Notes due 2011 (the "3.25% Notes") at prices between 100.75% and 100.94% of the principal amount plus accrued interest. We recognized a loss on extinguishment of debt for the 3.25% Notes of $1,079 for the three months ended March 31, 2011, which consisted primarily of cash premiums paid, unamortized discount and deferred financing fees. The remainder of the 3.25% Notes were paid upon maturity in the fourth quarter of 2011.

11.25% Senior Secured Notes due 2013

In January 2011, we purchased the remaining portion of our outstanding 11.25% Senior Secured Notes due 2013 for an aggregate purchase price of $40,376. A loss from extinguishment of debt of $4,915 associated with this purchase was recorded during the three months ended March 31, 2011.

Covenants and Restrictions

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

Under our debt agreements, the following generally constitute an event of default: (i) a default in the payment of

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

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 March 31, 2012, we were in compliance with our debt covenants.


(14)	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 March 31, 2012 and December 31, 2011. There were 3,788,755,725 and 3,753,201,929 shares of common stock issued and outstanding as of March 31, 2012 and December 31, 2011, respectively.

As of March 31, 2012, approximately 3,303,857,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, preferred stock, warrants, incentive stock awards and common stock to be granted to third parties upon satisfaction of performance targets.

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

We recorded interest expense related to the amortization of the costs associated with the share lending arrangement and other issuance costs of $2,982 and $2,690, respectively, for the three months ended March 31, 2012 and 2011. As of March 31, 2012, the unamortized balance of the debt issuance costs was $37,072, with $36,331 recorded in deferred financing fees, net, and $741 recorded in Long-term related party assets. As of December 31, 2011, the unamortized balance of the debt issuance costs was $40,054, with $39,253 recorded in deferred financing fees, net, and $801 recorded in Long-term related party assets. These costs will continue to be amortized until the debt is terminated.

In January 2004, Sirius Satellite Radio Inc. signed a seven-year agreement with a sports programming provider which expired in February 2011. Upon execution of this agreement, Sirius delivered 15,173,070 shares of common stock valued at $40,967 to that programming provider. These shares of common stock were subject to transfer restrictions which lapsed over time. We recognized share-based payment expense associated with these shares of $1,568 in the three months ended March 31, 2011.

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 March 31, 2012 and December 31, 2011. There were no shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of March 31, 2012 and December 31, 2011.

There were 12,500,000 shares of Series B Preferred Stock issued and outstanding as of March 31, 2012 and December 31, 2011. 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 ranks senior to our common stock.

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Warrants

We have issued warrants to purchase shares of common stock in connection with distribution, programming and satellite purchase agreements. As of March 31, 2012 and December 31, 2011, approximately 22,506,000 warrants to acquire an equal number of shares of common stock were outstanding and fully vested. These warrants expire at various times through 2015. At March 31, 2012 and December 31, 2011, the weighted average exercise price of outstanding warrants was $2.63 per share. We did not incur warrant related expenses during the three months ended March 31, 2012 and 2011.

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


(15)	Benefits Plans

We recognized share-based payment expense of $14,951 and $11,288 for the three months ended March 31, 2012 and 2011, respectively. We did not realize any income tax benefits from share-based benefits plans during the three months ended March 31, 2012 and 2011 as a result of the full valuation allowance that is maintained for substantially all net deferred tax assets.

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 March 31, 2012, approximately 199,061,000 shares of common stock were available for future grants under the 2009 Plan.

Other Plans

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

The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors:



	For the Three Months Ended March 31,
	2012
Risk-free interest rate	0.8%
Expected life of options — years	5.34
Expected stock price volatility	57%
Expected dividend yield	0%

There were no options granted to employees and members of our board of directors during the three months ended March 31, 2011.

There were no options granted to third parties during the three months ended March 31, 2012 and 2011.

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

The following table summarizes stock option activity under our share-based payment plans for the three months ended March 31, 2012 (options in thousands):



	Options		Weighted- Average Exercise Price		Weighted-Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
Outstanding as of December 31, 2011	439,580		$	1.25
Granted	275		$	2.04
Exercised	(34,955	)	$	0.65
Forfeited, cancelled or expired	(4,281	)	$	2.67
Outstanding as of March 31, 2012	400,619		$	1.29	6.00	$	501,494
Exercisable, March 31, 2012	148,585		$	1.78	4.20	$	169,371

The weighted average grant date fair value of options granted during the three months ended March 31, 2012 was $1.02. The total intrinsic value of stock options exercised during the three months ended March 31, 2012 and 2011 was $52,274 and $2,099, respectively.

We recognized share-based payment expense associated with stock options of $13,643 and $9,977 for the three months ended March 31, 2012 and 2011, respectively.

The following table summarizes the nonvested restricted stock and restricted stock unit activity under our share-based payment plans for the three months ended March 31, 2012 (awards in thousands):



	Awards	Weighted-Average Grant Date Fair Value
Nonvested, December 31, 2011	421	$	1.46
Granted	—	$	—
Vested restricted stock	—	$	—
Vested restricted stock units	—	$	—
Forfeited	—	$	—
Nonvested, March 31, 2012	421	$	1.46

The outstanding nonvested shares of restricted stock represent shares issued to members of the board of directors as part of our former director compensation program. These shares will vest on the first anniversary of the date the person ceases to be a director.

The weighted average grant date fair value of restricted stock units granted during the three months ended March 31, 2012 and 2011 was $0 as no shares were granted in the periods. The total intrinsic value of restricted stock and restricted stock units that vested during the years ended March 31, 2012 and 2011 was $0 and $3,085, respectively.

We recognized share-based payment expense associated with restricted stock units and shares of restricted stock of $0 and $542 for the three months ended March 31, 2012 and 2011, respectively.

Total unrecognized compensation costs related to unvested share-based payment awards for stock options and restricted stock units and shares granted to employees and members of our board of directors at March 31, 2012 and December 31, 2011, net of estimated forfeitures, was $115,786 and $129,983, respectively. The total unrecognized compensation costs at March 31, 2012 are expected to be recognized over a weighted-average period of three years.

401(k) Savings Plan

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

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

The Sirius XM Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. We match 50% of an employee’s voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of common stock. Employer matching contributions under the Sirius XM Plan vest at a rate of 33.33% for each year of employment and are fully vested after three years of employment for all current and future contributions. Share-based payment expense resulting from the matching contribution to the Sirius XM Plan was $1,308 and $769 for the three months ended March 31, 2012 and 2011, respectively.

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


(16)	Commitments and Contingencies

The following table summarizes our expected contractual cash commitments as of March 31, 2012:



	2012		2013		2014		2015		2016		Thereafter		Total
Long-term debt obligations	$	1,191	$	745,382	$	550,182	$	1,024,428	$	—	$	700,000	$	3,021,183
Cash interest payments	221,328		280,579		183,759		110,257		53,375		106,750		956,048
Satellite and transmission	5,624		57,257		13,311		13,157		3,597		18,693		111,639
Programming and content	135,602		191,616		163,131		156,244		13,388		1,125		661,106
Marketing and distribution	35,957		22,692		17,450		12,129		8,685		3,192		100,105
Satellite incentive payments	7,758		11,864		12,607		11,728		12,604		78,591		135,152
Operating lease obligations	26,501		32,333		27,005		29,378		19,033		195,416		329,666
Other	23,268		14,283		2,712		419		182		—		40,864
Total(1)	$	457,229	$	1,356,006	$	970,157	$	1,357,740	$	110,864	$	1,103,767	$	5,355,763


(1)	The table does not include our reserve for uncertain tax positions, which at March 31, 2012 totaled $1,537, as the specific timing of any cash payments cannot be projected with reasonable certainty.

Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt and capital lease obligations. The chart above does not give effect to the purchase of $62,729 of our 13% Notes in April 2012. Refer to Note 17.

Cash interest payments. Cash interest payments include interest due on outstanding debt and capital lease payments through maturity. The chart above does not give effect to the purchase of $62,729 of our 13% Notes in April 2012. Refer to Note 17.

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

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

Marketing and distribution. We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.

Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of four of XM’s in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of XM’s satellites. As of March 31, 2012, we have accrued $27,812 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 March 31, 2012, we have accrued $10,216 and $21,450 related to contingent performance payments for FM-5 and XM-5, 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 renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.

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

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

Legal Proceedings

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

(17) Subsequent Events

Repurchase of 13% Senior Notes due 2013

In April 2012, we purchased $62,729 of the outstanding principal balance of our 13% Notes. The aggregate purchase price of these 13% Notes was $73,616, which is inclusive of accrued interest. We will recognize a loss on extinguishment of these 13% Notes of approximately $11,600, consisting primarily of unamortized debt, deferred financing fees and repayment premium, in the second quarter.

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

Table Of Contents

Form 10-K for the year ended December 31, 2011 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, 2011.

Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:


•	we face substantial competition and that competition is likely to increase over time;


•	our business depends in large part upon automakers;


•	general economic conditions can affect our business;


•	failure of our satellites would significantly damage our business;


•	our ability to attract and retain subscribers at a profitable level in the future is uncertain;


•	royalties for music rights may increase;


•	failure to comply with FCC requirements could damage our business;


•	the unfavorable outcome of pending or future litigation could have a material adverse effect;


•	rapid technological and industry changes could adversely impact our services;


•	failure of other third parties to perform could adversely affect our business;


•	changes in consumer protection laws and their enforcement could damage our business;


•	interruption or failure of our information technology and communication systems could negatively impact our results and brand;


•	if we fail to protect the security of personal information about our customers, we could be subject to costly government enforcement actions or private litigation and our reputation could suffer;


•	we may from time to time modify our business plan, and these changes could adversely affect us and our financial condition;


•	our substantial indebtedness could adversely affect our operations and could limit our ability to react or changes in the economy or our industry;


•	our broadcast studios, terrestrial repeater networks, satellite uplink facilities or other ground facilities could be damaged by natural catastrophes or terrorist activities;


•	electromagnetic interference from others could damage our business;


•	our business may be impaired by third-party intellectual property rights;


•	Liberty Media Corporation has significant influence over our business and affairs and its interest may differ from ours; and


•	our net operating loss carryforwards could be substantially limited if we experience an ownership change as defined in the Internal Revenue Code.

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.

Executive Summary

We broadcast our music, sports, news, talk, entertainment, traffic and weather channels, as well as infotainment services in the United States on a subscription fee basis through two proprietary satellite radio systems. Subscribers can also receive certain of our music and other channels over the Internet, including through applications for mobile devices.

We have agreements with every major automaker (“OEMs”) to offer satellite radios as factory- or dealer-installed equipment in their vehicles. We also acquire subscribers through the sale and lease of previously owned vehicles with factory-installed satellite radios. We distribute our satellite radios through retail locations nationwide and through our website. Satellite radio services are also offered to customers of certain daily rental car companies.

As of March 31, 2012, we had 22,297,420 subscribers of which 18,208,090 were self-pay subscribers and 4,089,330 were paid promotional 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 Backseat TV, data, traffic, and weather services.

Table Of Contents

We also have an equity interest in the satellite radio services offered in Canada. Subscribers to the Sirius XM Canada service are not included in our subscriber count. 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").

Results of Operations

Set forth below are our results of operations for the three months ended March 31, 2012 compared with the three months ended March 31, 2011.



	Unaudited
	For the Three Months Ended March 31,						2012 vs 2011 Change
	2012			2011			Amount			%
Revenue:
Subscriber revenue	$	700,242		$	622,437		$	77,805		13	%
Advertising revenue, net of agency fees	18,670			16,558			2,112			13	%
Equipment revenue	16,953			15,867			1,086			7	%
Other revenue	68,857			68,977			(120		)	—	%
Total revenue	804,722			723,839			80,883			11	%
Operating expenses:
Cost of services:
Revenue share and royalties	132,111			106,929			25,182			24	%
Programming and content	70,095			72,959			(2,864		)	(4	)%
Customer service and billing	66,187			65,836			351			1	%
Satellite and transmission	18,110			18,560			(450		)	(2	)%
Cost of equipment	5,806			6,405			(599		)	(9	)%
Subscriber acquisition costs	116,121			105,270			10,851			10	%
Sales and marketing	58,361			47,819			10,542			22	%
Engineering, design and development	12,690			11,135			1,555			14	%
General and administrative	59,886			56,354			3,532			6	%
Depreciation and amortization	66,117			68,400			(2,283		)	(3	)%
Total operating expenses	605,484			559,667			45,817			8	%
Income from operations	199,238			164,172			35,066			21	%
Other income (expense):
Interest expense, net of amounts capitalized	(76,971		)	(78,218		)	1,247			2	%
Loss on extinguishment of debt and credit facilities, net	(9,971		)	(5,994		)	(3,977		)	(66	)%
Interest and investment loss	(1,142		)	(1,884		)	742			39	%
Other (loss) income	(578		)	1,617			(2,195		)	(136	)%
Total other expense	(88,662		)	(84,479		)	(4,183		)	(5	)%
Income before income taxes	110,576			79,693			30,883			39	%
Income tax expense	(2,802		)	(1,572		)	(1,230		)	(78	)%
Net income	$	107,774		$	78,121		$	29,653		38	%

Total Revenue

Subscriber Revenue includes subscription, activation and other fees.

Table Of Contents

•

For the three months ended March 31, 2012 and 2011, subscriber revenue was $700,242 and $622,437, respectively, an increase of 13%, or $77,805. The increase was primarily attributable to a 9% increase in daily weighted average subscribers, the increase in certain of our subscription rates beginning in January 2012, and an increase in sales of premium services, including Premier packages, data services and streaming. The increase was partially offset by the impact of subscription discounts offered through customer acquisition and retention programs.

The future growth of subscriber revenue will be dependent upon the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and identification of additional revenue streams from subscribers.

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.


•	For the three months ended March 31, 2012 and 2011, advertising revenue was $18,670 and $16,558, respectively, an increase of 13%, or $2,112. The increase was primarily due to 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 increase in our subscriber base.

Equipment Revenue includes revenue and royalties from the sale of satellite radios, components and accessories.


•	For the three months ended March 31, 2012 and 2011, equipment revenue was $16,953 and $15,867 respectively, an increase of 7%, or $1,086. The increase was driven by royalties from higher 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 includes amounts earned from subscribers for the U.S. Music Royalty Fee, revenue from our Canadian affiliate and ancillary revenues.


•	For the three months ended March 31, 2012 and 2011, other revenue was $68,857 and $68,977, respectively, a decrease of $120. The decrease was primarily due to the December 2010 reduction in the U.S. Music Royalty Fee rate from 15.3% to 10.8%, partially offset by increased royalty revenue from Sirius XM Canada, an increase in subscribers and the increase in certain subscription rates.

Other revenue is dependent upon the amount of the U.S. Music Royalty Fee and the royalty from our Canadian affiliate. Other revenue will fluctuate as our subscriber base changes, as additional subscribers cycle to the lower rate of the U.S. Music Royalty Fee, as the increase in certain subscription rates cycle through to subscriptions, and based on the performance of our Canadian affiliate.

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.

•

For the three months ended March 31, 2012 and 2011, revenue share and royalties were $132,111 and $106,929, respectively, an increase of 24%, or $25,182 and increased as a percentage of total revenue. The increase was primarily attributable to an 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 $4,913 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.

Table Of Contents

We expect our revenue share and royalty costs to increase as our revenues grow. Under the terms of the Copyright Royalty Board's decision, we paid royalties of 8.0% and 7.5% of gross revenues, subject to certain exclusions, for the three months ended March 31, 2012 and 2011, respectively. 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 in 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, purchase advertising on media properties owned or controlled by the licensor, which is allocated to sales and marketing, and pay other guaranteed amounts.

•

For the three months ended March 31, 2012 and 2011, programming and content expenses were $70,095 and $72,959, respectively, a decrease of 4%, or $2,864, and decreased as a percentage of total revenue. The decrease was primarily due to savings in content agreements, partially offset by increases in personnel costs and a $1,122 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.

Excluding the impact from purchase accounting adjustments, 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 2015. Substantially all of the deferred credits on executory contracts will be amortized by the end of 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.


•	For the three months ended March 31, 2012 and 2011, customer service and billing expenses were $66,187 and $65,836, respectively, an increase of 1%, or $351, but decreased as a percentage of total revenue. The increase was primarily due to higher call volume due to the increases in total subscribers, billing and collection costs and personnel costs, partially offset by lower bad debt expense.

We expect our customer service and billing expenses to increase as our subscriber base grows.

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.


•	For the three months ended March 31, 2012 and 2011, satellite and transmission expenses were $18,110 and $18,560, respectively, a decrease of 2%, or $450, and decreased as a percentage of total revenue. The decrease was primarily due to a reduction in in-orbit satellite insurance expense, partially offset by increased repeater network costs.

We expect overall satellite and transmission expenses to increase as we add enhanced internet-based features and functionality, while costs associated with our in-orbit satellite fleet 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.


•	For the three months ended March 31, 2012 and 2011, cost of equipment was $5,806 and $6,405, respectively, a decrease of 9%, or $599, and remained flat as a percentage of total revenue but decreased as a percentage of equipment revenue. The decrease was primarily due to lower direct to consumer sales.

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

Table Of Contents

a new vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios and chip sets; 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.

•

For the three months ended March 31, 2012 and 2011, subscriber acquisition costs were $116,121 and $105,270, respectively, an increase of 10%, or $10,851, and decreased as a percentage of total revenue. The increase was primarily a result of the 5% increase in gross subscriber additions and subsidies related to increased OEM installations occurring in advance of acquiring the subscriber, partially offset by improved OEM subsidy rates per vehicle and a $2,429 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. Changes in contractual OEM subsidy rates and 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 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.

•

For the three months ended March 31, 2012 and 2011, sales and marketing expenses were $58,361 and $47,819, respectively, an increase of 22%, or $10,542, and increased as a percentage of total revenue. The increase was primarily due to additional subscriber communications and retention programs associated with a greater number of subscribers and promotional trials, and higher OEM cooperative marketing.

Sales and marketing expenses will fluctuate on a quarterly basis as we launch seasonal advertising and promotional initiatives to attract new subscribers, and launch and expand programs to retain our existing subscribers and win-back former subscribers. The impact of purchase price accounting adjustments associated with the Merger attributable to the amortization of the deferred credit on acquired sales and marketing contracts will continue to decline, in absolute amount and as a percentage of reported sales and marketing costs, through 2013.

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.


•	For the three months ended March 31, 2012 and 2011, engineering, design and development expenses were $12,690 and $11,135, respectively, an increase of 14% or $1,555, and remained flat as a percentage of total revenue. The increase was due to higher product development costs and costs related to enhanced subscriber features and functionality as well as higher personnel costs.

We expect engineering, design and development expenses to increase in future periods as we develop our next generation chip sets and products.

General and Administrative includes executive management, rent and occupancy, finance, legal, human resources, information technology, insurance and investor relations costs.


•	For the three months ended March 31, 2012 and 2011, general and administrative expense was $59,886 and $56,354, respectively, an increase of 6% or $3,532, and remained flat as a percentage of total revenue. The increase was primarily due to higher facility and legal costs, partially offset by lower litigation settlement charges.

We expect our general and administrative expenses to increase in future periods primarily as a result of enhanced

Table Of Contents

information technology and personnel costs to support the growth of our business.

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.

•

For the three months ended March 31, 2012 and 2011, depreciation and amortization expense was $66,117 and $68,400, respectively, a decrease of 3% or $2,283, and decreased as a percentage of total revenue. The decrease was primarily due to a reduction in the amortization of subscriber relationships and depreciation recognized on assets placed in-service as certain assets reach the end of their estimated service lives.

We expect depreciation expenses to increase in future periods as we complete construction and launch our FM-6 satellite, which will be partially offset by reduced amortization 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.

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.


•	For the three months ended March 31, 2012 and 2011, interest expense was $76,971 and $78,218, respectively, a decrease of 2% or $1,247. The decrease was primarily due to higher capitalized interest related to the construction of a satellite and related launch vehicle and by the mix of outstanding debt with lower interest rates.

Following the launch of our FM-6 satellite, the capitalization of interest expense related to the construction of our satellites and related launch vehicles will be eliminated, until we begin replacing satellites in our fleet. As a result, we expect interest expense to increase, offset partially as our outstanding debt declines due to retirements at maturity, redemptions and repurchases.

Loss on Extinguishment of Debt and Credit Facilities, Net, includes losses incurred as a result of the conversion and retirement of certain debt.

•

For the three months ended March 31, 2012 and 2011, loss on extinguishment of debt and credit facilities, net was $9,971 and $5,994, respectively, an increase of 66% or $3,977. During the three months ended March 31, 2012, a $9,971 loss was recorded on the partial repayment of our 13% Senior Notes due 2013 and our 9.75% Senior Secured Notes due 2015. During the three months ended March 31, 2011, a $5,994 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.

Interest and Investment Loss includes realized gains and losses, dividends, interest income, our share of Sirius Canada’s and XM Canada’s pre-merger net losses, and our share of the income (loss) of Sirius XM Canada.


•	For the three months ended March 31, 2012 and 2011, interest and investment loss was $1,142 and $1,884, respectively, a decrease of 39% or $742. The decrease was primarily attributable to a lower loss on our share of Sirius XM Canada’s net loss in the first quarter of 2012 compared to losses at XM Canada and Sirius Canada during the same period in 2011.

Income Taxes

Income Tax Expense primarily represents the change in our 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, foreign withholding taxes on royalty income and the effect of changes in certain state laws related to the utilization of net operating losses ("NOLs").


•	For the three months ended March 31, 2012 and 2011, income tax expense was $2,802 and $1,572, respectively, an increase of 78%, or $1,230. The increase was primarily due to an increase in the applicable state effective tax rates and the effect of changes in certain state laws related to the utilization of NOLs.

Table Of Contents

In assessing the recoverability of our deferred tax assets, management regularly considers whether a portion or all of the deferred tax assets will not be realized based on the recognition threshold and measurement of tax positions. The ultimate realization of deferred tax assets is dependent upon the generation of sufficient projected taxable income within the carryforward periods. Management considers the scheduled reversal of deferred tax assets and liabilities, projected taxable income and tax planning strategies in making this assessment. Management's evaluation of the realizability of deferred tax assets weighs both positive and negative evidence. The weight given to the potential effects of positive and negative evidence is based on the extent to which it can be objectively verified. Our conclusion with regard to maintaining or releasing the valuation allowance gives consideration to a variety of factors including but not limited to: (a) a three-year cumulative pre-tax income, (b) the extent of current period taxable income and an expectation of sufficient and sustainable future taxable income, and (c) our ability to utilize net operating losses within the carryforward period. After weighing this evidence, management concludes whether it is more likely than not that our deferred tax assets will be realized.

We maintained a deferred tax valuation allowance against our deferred tax assets as of March 31, 2012. In 2010, we had our first year of pre-tax earnings for financial reporting purposes, but continued to generate taxable losses for tax reporting purposes. For the year ended December 31, 2011, we continued to report positive earnings and generated taxable income for the first time since our inception. For the quarter ended March 31, 2012, this positive trend continued. However, based on the objective and verifiable negative evidence, such as cumulative losses in recent years, we have concluded as of March 31, 2012 to retain the valuation allowance.

As part of our continuing assessment of the recoverability of our deferred tax assets, we consider the impact of future forecasted taxable income. Depending on our continued positive performance in the second quarter of 2012, together with the emergence from cumulative losses in recent years, as well as projections of sufficient and sustainable taxable income, we may recognize the benefits of all or a significant portion of our net deferred tax assets in the second quarter of 2012 through a reduction of the valuation allowance. This would result in an income tax benefit that would materially and favorably affect net income and stockholders' equity in the period of the reduction. As of December 31, 2011, we had approximately $3,400 million of valuation allowances established against the deferred tax assets.

Subscriber Data

The following table contains subscriber data for the three months ended March 31, 2012 and 2011, respectively:



	Unaudited
	For the Three Months Ended March 31,
	2012		2011

Beginning subscribers	21,892,824		20,190,964
Gross subscriber additions	2,161,693		2,052,367
Deactivated subscribers	(1,757,097	)	(1,679,303	)
Net additions	404,596		373,064
Ending subscribers	22,297,420		20,564,028

Self-pay	18,208,090		16,807,643
Paid promotional	4,089,330		3,756,385
Ending subscribers	22,297,420		20,564,028

Self-pay	299,348		120,844
Paid promotional	105,248		252,220
Net additions	404,596		373,064

Daily weighted average number of subscribers	21,990,863		20,233,144

Average self-pay monthly churn	1.9	%	2.0	%

New vehicle consumer conversion rate	45	%	45	%
Note: See pages 36 through 41 for glossary.

Table Of Contents

Subscribers. At March 31, 2012, we had 22,297,420 subscribers, an increase of 1,733,392 subscribers, or 8%, from the