Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2009

OR

 

¨ 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 of 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  x    No  ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

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 July 31, 2009)

COMMON STOCK, $0.001 PAR VALUE   3,892,774,406 SHARES

 

 

 


SIRIUS XM RADIO INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

 

Item No.

  

Description

    
   PART I – Financial Information   
Item 1.   

Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008

   1
  

Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008

   2
  

Unaudited Consolidated Statements of Stockholders’ Equity and Comprehensive Loss for the six months ended June 30, 2009

   3
  

Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008

   4
  

Notes to Unaudited Consolidated Financial Statements

   5
Item 2.   

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   39
Item 3.   

Quantitative and Qualitative Disclosures About Material Risk

   66
Item 4.   

Controls and Procedures

   66
   PART II – Other Information   
Item 1.   

Legal Proceedings

   67
Item 1A.   

Risk Factors

   68
Item 2.   

Unregistered Sales of Equity Securities and Use of Proceeds

   68
Item 3.   

Defaults Upon Senior Securities

   68
Item 4.   

Submission of Matters to a Vote of Security Holders

   69
Item 5.   

Other Information

   71
Item 6.   

Exhibits

   71
  

Signatures

   84


PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
(in thousands, except per share data)    2009     2008     2009     2008  

Revenue:

        

Subscriber revenue, including effects of rebates

   $ 561,763      $ 266,518      $ 1,121,151      $ 522,158   

Advertising revenue, net of agency fees

     12,564        8,332        24,869        16,740   

Equipment revenue

     10,928        7,956        20,837        14,019   

Other revenue

     5,574        211        10,951        450   
                                

Total revenue

     590,829        283,017        1,177,808        553,367   

Operating expenses (depreciation and amortization shown separately below) (1):

        

Cost of services:

        

Satellite and transmission

     19,615        7,451        39,894        15,275   

Programming and content

     72,102        55,247        152,511        116,939   

Revenue share and royalties

     95,831        49,723        196,297        92,043   

Customer service and billing

     58,833        22,865        119,041        49,786   

Cost of equipment

     8,051        6,647        16,044        14,234   

Sales and marketing

     48,693        49,133        100,116        87,598   

Subscriber acquisition costs

     67,651        81,392        140,719        171,216   

General and administrative

     66,716        42,467        126,031        91,246   

Engineering, design and development

     11,944        9,028        21,723        17,684   

Depreciation and amortization

     77,158        27,113        159,524        54,019   

Restructuring, impairments and related costs

     27,000        —          27,614        —     
                                

Total operating expenses

     553,594        351,066        1,099,514        710,040   
                                

Income (loss) from operations

     37,235        (68,049     78,294        (156,673

Other income (expense):

        

Interest and investment income

     901        1,425        1,641        4,227   

Interest expense, net of amounts capitalized

     (95,794     (16,745     (161,535     (34,421

Loss on extinguishment of debt and credit facilities, net

     (107,756     —          (125,713     —     

Gain on investments

     8,422        —          516        —     

Other income (expense)

     749        13        1,259        (64
                                

Total other expense

     (193,478     (15,307     (283,832     (30,258
                                

Loss before income taxes

     (156,243     (83,356     (205,538     (186,931

Income tax expense

     (1,115     (543     (2,229     (1,086
                                

Net loss

     (157,358     (83,899     (207,767     (188,017

Preferred stock beneficial conversion feature

     —          —          (186,188     —     
                                

Net loss attributable to common stockholders

   $ (157,358   $ (83,899   $ (393,955   $ (188,017
                                

Net loss per common share (basic and diluted)

   $ (0.04   $ (0.06   $ (0.11   $ (0.13
                                

Weighted average common shares outstanding (basic and diluted)

     3,586,742        1,499,723        3,555,489        1,487,610   
                                

 

(1)    Amounts related to share-based payment expense included in operating expenses were as follows:

       

Satellite and transmission

   $ 1,177      $ 759      $ 1,934      $ 1,555   

Programming and content

     1,891        1,160        4,381        3,949   

Customer service and billing

     779        265        1,318        541   

Sales and marketing

     3,072        2,464        7,358        7,704   

Subscriber acquisition costs

     —          —          —          14   

General and administrative

     20,961        11,457        31,699        23,455   

Engineering, design and development

     1,821        1,046        3,188        2,195   
                                

Total share-based payment expense

   $ 29,701      $ 17,151      $ 49,878      $ 39,413   
                                

See accompanying Notes to the unaudited consolidated financial statements.

 

1


SIRIUS XM RADIO INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

     June 30, 2009     December 31, 2008  
(in thousands, except share and per share data)    (Unaudited)        

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 541,688      $ 380,446   

Accounts receivable, net of allowance for doubtful accounts of $10,313 and $10,860, respectively

     77,263        102,024   

Receivables from distributors

     33,673        45,950   

Inventory, net

     27,886        24,462   

Prepaid expenses

     120,273        67,203   

Related party current assets

     108,527        114,177   

Other current assets

     57,613        58,744   
                

Total current assets

     966,923        793,006   

Property and equipment, net

     1,690,864        1,703,476   

FCC licenses

     2,083,654        2,083,654   

Restricted investments

     3,400        141,250   

Deferred financing fees, net

     63,279        40,156   

Intangible assets, net

     647,936        688,671   

Goodwill

     1,834,856        1,834,856   

Related party long-term assets

     118,628        124,607   

Other long-term assets

     97,792        81,019   
                

Total assets

   $ 7,507,332      $ 7,490,695   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable and accrued expenses

   $ 512,581      $ 642,820   

Accrued interest

     73,134        76,463   

Current portion of deferred revenue

     995,696        985,180   

Current portion of deferred credit on executory contracts

     244,116        234,774   

Current maturities of long-term debt

     286,045        399,726   

Current maturities of long-term related party debt

     787        —     

Related party current liabilities

     59,101        68,373   
                

Total current liabilities

     2,171,460        2,407,336   

Deferred revenue

     284,798        247,889   

Deferred credit on executory contracts

     918,678        1,037,190   

Long-term debt

     2,807,271        2,851,740   

Long-term related party debt

     222,096        —     

Deferred tax liability

     900,273        894,453   

Related party long-term liabilities

     21,123        —     

Other long-term liabilities

     37,929        43,550   
                

Total liabilities

     7,363,628        7,482,158   
                

Commitments and contingencies (Note 15)

    

Stockholders’ equity:

    

Preferred stock, par value $0.001; 50,000,000 authorized at June 30, 2009 and December 31, 2008:

    

Series A convertible preferred stock (liquidation preference of $51,370 at June 30, 2009 and December 31, 2008); 24,808,959 shares issued and outstanding at June 30, 2009 and December 31, 2008

     25        25   

Convertible perpetual preferred stock, series B (liquidation preference of $13 and $0 at June 30, 2009 and December 31, 2008, respectively); 12,500,000 and zero shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

     13        —     

Convertible preferred stock, series C junior; no shares issued and outstanding at June 30, 2009 and December 31, 2008

     —          —     

Common stock, par value $0.001; 9,000,000,000 and 8,000,000,000 shares authorized at June 30, 2009 and December 31, 2008, respectively; 3,883,905,655 and 3,651,765,837 shares issued and outstanding at June 30, 2009 and December 31, 2008, respectively

     3,884        3,652   

Accumulated other comprehensive loss, net of tax

     (6,986     (7,871

Additional paid-in capital

     10,252,983        9,724,991   

Accumulated deficit

     (10,106,215     (9,712,260
                

Total stockholders’ equity

     143,704        8,537   
                

Total liabilities and stockholders’ equity

   $ 7,507,332      $ 7,490,695   
                

See accompanying Notes to the unaudited consolidated financial statements.

 

2


SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE LOSS

 

     Series A
Convertible
Preferred Stock
   Series B
Convertible
Preferred Stock
   Common Stock    Additional
Paid-in
Capital
   Accumulated
Deficit
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders’
Equity
 
(in thousands, except share and per share data)    Shares    Amount    Shares    Amount    Shares    Amount          

Balance at December 31, 2008

   24,808,959    $ 25    —      $ —      3,651,765,837    $ 3,652    $ 9,724,991    $ (9,712,260   $ (7,871   $ 8,537   

Net loss

                          (207,767       (207,767

Other comprehensive loss:

                           

Unrealized gain on available-for-sale securities, net of tax

   —        —      —        —      —        —        —        —          548        548   

Foreign currency translation adjustment, net of tax

   —        —      —        —      —        —        —        —          337        337   
                                 

Total comprehensive loss

   —        —      —        —      —        —        —        —          —          (206,882

Issuance of preferred stock - related party, net of issuance costs

   —        —      12,500,000      13    —        —        410,179      (186,188     —          224,004   

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

   —        —      —        —      8,023,793      8      1,283      —          —          1,291   

Structuring fee on 10% Senior PIK Secured Notes due 2011

   —        —      —        —      59,178,819      59      5,859      —          —          5,918   

Share-based payment expense

   —        —      —        —      91,666      —        44,392      —          —          44,392   

Issuance of restricted stock units in satisfaction of accrued compensation

   —        —      —        —      25,445,540      26      31,254      —          —          31,280   

Exchange of 2 1/2% Convertible Notes due 2009, including accrued interest

   —        —      —        —      139,400,000      139      35,025      —          —          35,164   
                                                                   

Balance at June 30, 2009

   24,808,959    $ 25    12,500,000    $ 13    3,883,905,655    $ 3,884    $ 10,252,983    $ (10,106,215   $ (6,986   $ 143,704   
                                                                   

See accompanying Notes to the unaudited consolidated financial statements.

 

3


SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     For the Six Months
Ended June 30,
 
(in thousands)    2009     2008  

Cash flows from operating activities:

    

Net loss

   $ (207,767   $ (188,017

Adjustments to reconcile net loss to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     159,524        54,019   

Non-cash interest expense, net of amortization of premium

     26,799        1,971   

Provision for doubtful accounts

     16,278        5,048   

Loss on extinguishment of debt and credit facilities, net

     125,713        —     

Write-down of long-lived assets

     27,614        —     

Amortization of deferred income related to equity method investment

     (1,388     —     

Loss on investments

     6,353        —     

Share-based payment expense

     49,878        39,413   

Deferred income taxes

     2,229        1,086   

Other non-cash purchase price adjustments

     (85,223     —     

Changes in operating assets and liabilities:

    

Accounts receivable

     8,483        11,834   

Inventory

     (3,424     5,921   

Receivables from distributors

     12,277        (11,102

Related party assets

     11,629        —     

Prepaid expenses and other current assets

     24,052        14,594   

Other long-term assets

     34,476        5,399   

Accounts payable and accrued expenses

     (106,041     (97,463

Accrued interest

     997        53   

Deferred revenue

     24,713        26,875   

Related party liabilities

     11,851        —     

Other long-term liabilities

     (2,164     (712
                

Net cash provided by (used in) operating activities

     136,859        (131,081
                

Cash flows from investing activities:

    

Additions to property and equipment

     (127,811     (73,698

Purchases of restricted and other investments

     —          (3,000

Merger-related costs

     —          (14,843

Sale of restricted and other investments

     —          5,004   
                

Net cash used in investing activities

     (127,811     (86,537
                

Cash flows from financing activities:

    

Proceeds from exercise of warrants and stock options

     —          181   

Preferred stock issuance costs, net

     (3,712     —     

Long-term borrowings, net

     384,876        —     

Related party long-term borrowings, net

     316,340        —     

Payment of premiums on redemption of debt

     (16,572     —     

Repayment of long-term borrowings

     (427,871     (1,250

Repayment of related party long-term borrowings

     (100,867     —     
                

Net cash provided by (used in) financing activities

     152,194        (1,069
                

Net increase (decrease) in cash and cash equivalents

     161,242        (218,687

Cash and cash equivalents at beginning of period

     380,446        438,820   
                

Cash and cash equivalents at end of period

   $ 541,688      $ 220,133   
                

 

    

Supplemental Disclosure of Cash and Non-Cash Flow Information

    

Cash paid during the period for:

    

Interest, net of amounts capitalized

   $ 157,854      $ 32,196   

Non-cash investing and financing activities:

    

Share-based payments in satisfaction of accrued compensation

     31,280        8,729   

Common stock issued in exchange of 3 1/2% Convertible Notes due 2008, including accrued interest

     —          33,501   

Common stock issued in exchange of 2 1/2% Convertible Notes due 2009, including accrued interest

     35,164        —     

Structuring fee on 10% Senior PIK Secured Notes due 2011

     5,918        —     

Preferred stock issued to Liberty Media

     227,716        —     

Release of restricted investments

     138,000        —     

See accompanying Notes to the unaudited consolidated financial statements.

 

4


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollar amounts in thousands, unless otherwise stated)

 

(1) Business

We broadcast in the United States our music, sports, news, talk, entertainment, traffic and weather channels for a subscription fee through our proprietary satellite radio systems — the SIRIUS system and the XM system. On July 28, 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged (the “Merger”) with and into XM Satellite Radio Holdings Inc. and, as a result, XM Satellite Radio Holdings Inc. is now our wholly owned subsidiary. The SIRIUS system consists of four in-orbit satellites, approximately 120 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites, over 700 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers can also receive certain of our music and other channels over the Internet.

Our satellite radios are primarily distributed through automakers (“OEMs”), retailers and our websites. We have agreements with every major automaker to offer SIRIUS or XM satellite radios as factory or dealer-installed equipment in their vehicles. SIRIUS and XM radios are also offered to customers of rental car companies.

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 for prepaid subscriptions included in the sale or lease price of a new vehicle; certain radios activated for daily rental fleet programs; subscribers to SIRIUS Internet Radio and XM Radio Online, our Internet services; and certain subscribers to our weather, traffic, data and video services.

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 subscriptions as well as discounts for multiple subscriptions. We also derive revenue from activation 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 Backseat TV, data and weather services.

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

We also have an interest in the satellite radio services offered in Canada. Subscribers to the SIRIUS Canada service and the XM Canada service are not included in our subscriber count.

Unless otherwise indicated,

 

   

“we,” “us,” “our,” the “company,” “the companies” and similar terms refer to Sirius XM Radio Inc. and its consolidated subsidiaries;

 

   

“SIRIUS” refers to Sirius XM Radio Inc. and its consolidated subsidiaries, excluding XM Satellite Radio Holdings Inc. and its consolidated subsidiaries;

 

   

“XM Holdings” refers to XM Satellite Radio Holdings Inc. and its consolidated subsidiaries, including XM Satellite Radio Inc.; and

 

   

“XM” refers to XM Satellite Radio Inc. and its consolidated subsidiaries.

(2) Principles of Consolidation and Basis of Presentation

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Sirius XM Radio Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles, 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, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All intercompany transactions have been eliminated in consolidation.

 

5


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

Basis of Presentation

In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Additionally, estimates were used when recording the fair values of our assets acquired and liabilities assumed in the Merger. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of June 30, 2009, and for the three and six months ended June 30, 2009 and 2008, 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, 2008, filed with the SEC on March 10, 2009.

We have evaluated events subsequent to the balance sheet date and prior to filing of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2009 through August 6, 2009 and determined there have not been any events that have occurred that would require adjustment to our unaudited consolidated financial statements.

(3) Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and related disclosures.

Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets. Financial market volatility and economic conditions in the United States have impacted and will continue to impact our business. Such conditions could have a material impact to our significant accounting estimates.

Inventory

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 and obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for our direct to consumer distribution channel is reported as a component of Cost of equipment in our unaudited consolidated statements of operations. The remaining provision is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of operations.

Inventory, net, consists of the following:

 

     June 30,
2009
    December 31,
2008
 

Raw materials

   $ 11,449      $ 11,648   

Finished goods

     39,333        38,323   

Allowance for obsolescence

     (22,896     (25,509
                

Total inventory, net

   $ 27,886      $ 24,462   
                

Fair Value of Financial Instruments

The fair value of a financial instrument is the amount at which the instrument could be exchanged in an orderly transaction between market participants to sell the asset or transfer the liability. As of June 30, 2009 and December 31, 2008, we have determined that the carrying amounts of cash and cash equivalents, accounts and other receivables, and accounts payable approximate fair value due to the short-term nature of these instruments.

The fair value of our long-term debt is determined by either (i) estimating the discounted future cash flows of each instrument at rates currently offered to us for similar debt instruments of comparable maturities, or (ii) quoted market prices at the reporting date for

 

6


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

the traded debt securities. As of June 30, 2009 and December 31, 2008, the carrying value of our long-term debt was $3,316,199 and $3,251,466, respectively; and the fair value approximated $2,698,061 and $1,211,613, respectively.

Reclassifications

Certain amounts in our prior period unaudited consolidated financial statements have been reclassified to conform to our current period presentation.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value and enhances disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position (“FSP”) 157-1, Application of FASB Statement No. 157 to FASB Statement No. 13 and Other Accounting Pronouncements That Address Fair Value Measurements for Purposes of Lease Classification or Measurement under Statement 13 and FSP 157-2, Effective Date of FASB Statement No. 157 . FSP 157-1 amends SFAS No. 157 to remove certain leasing transactions from its scope. FSP 157-2, delayed the effective date of SFAS No. 157 for all nonfinancial assets and liabilities, except those that are recognized or disclosed at fair value in the financial statements on at least an annual basis, until January 1, 2009 for calendar year end entities. In October 2008, the FASB issued FSP 157-3, Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which provides a detailed example to illustrate key considerations in determining the fair value of a financial asset in an inactive market, and emphasizes the requirements to disclose significant unobservable inputs used as a basis for estimating fair value. We adopted the provisions of SFAS No. 157 on January 1, 2008, except as it applies to nonfinancial assets and liabilities as noted in FSP 157-2. Neither the partial adoption nor the issuance of FSP 157-3 had any significant impact on our consolidated results of operations or financial position. We adopted the provisions of SFAS No. 157, as amended, on January 1, 2009 as it relates to nonfinancial assets and liabilities, and there has been no impact on our consolidated results of operations or financial position as a result of such action.

In November 2007, the FASB issued SFAS No. 141R, Business Combinations, which continues to require that all business combinations be accounted for by applying the acquisition method. Under the acquisition method, the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed, and any contingent consideration and contractual contingencies, as a whole, at their fair value as of the acquisition date. Under SFAS No. 141R, all transaction costs are expensed as incurred. SFAS No. 141R rescinded EITF No. 93-07, Uncertainties Related to Income Taxes in a Purchase Business Combination. Under SFAS No. 141R, all subsequent adjustments to uncertain tax positions assumed in a business combination that previously would have impacted goodwill are recognized in the income statement. The guidance in SFAS No. 141R is applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. We adopted SFAS No. 141R effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 141R-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which clarifies the application of SFAS No. 141R to assets and liabilities arising from contingencies in a business combination. FSP No. FAS 141R-1 requires the acquirer to recognize at fair value an asset acquired or liability assumed in a business combination that arises from a contingency if the acquisition-date fair value of that asset or liability can be determined during the measurement period. If the acquisition-date fair value cannot be determined, the acquirer would apply the recognition criteria in SFAS No. 5, Accounting for Contingencies, and FASB Interpretation No.14, Reasonable Estimation of the Amount of a Loss, an interpretation of FASB Statement No. 5, to determine whether the contingency should be recognized as of the acquisition date or after it. The guidance in FSP No. FAS 141R-1 will be applied prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning after December 15, 2008. FSP No. FAS 141R-1 does not impact the accounting for the Merger.

In December 2007, the FASB ratified EITF No. 07-1, Accounting for Collaborative Agreements, which provides guidance on how the parties to a collaborative agreement should account for costs incurred and revenue generated on sales to third parties, how sharing payments pursuant to a collaboration agreement should be presented in the income statement and certain related disclosure requirements. This EITF is effective for the first annual or interim reporting period beginning after December 15, 2008, and should be applied retrospectively to all prior periods presented for all collaborative arrangements existing as of the effective date. We adopted EITF No. 07-1 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2008, the FASB issued FSP No. FAS 142-3, Determination of the Useful Life of Intangible Assets. FSP No. FAS 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a

 

7


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

recognized intangible asset under SFAS No. 142, Goodwill and Other Intangible Assets. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted FSP No. FAS 142-3 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In May 2008, the FASB issued FSP No. APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement), which amends the accounting requirements for certain convertible debt instruments. Additional disclosures are also required for these instruments. This FSP is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted FSP No. APB 14-1 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In June 2008, the FASB ratified EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock, which provides guidance for determining whether an equity-linked financial instrument (or embedded feature) issued by an entity is indexed to the entity’s stock, and therefore would qualify for the first part of the scope exception in paragraph 11(a) of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This EITF prescribes a two-step approach under which the entity would evaluate the instrument’s contingent exercise provisions and then the instrument’s settlement provisions, for purposes of evaluating whether the instrument (or embedded feature) is indexed to the entity’s stock. This EITF is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted EITF No. 07-5 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In November 2008, the FASB ratified EITF No. 08-6, Equity Method Investment Accounting Considerations, which applies to all investments accounted for under the equity method. The EITF clarifies the accounting for certain transactions and impairment considerations involving these investments. This EITF is effective for financial statements issued for fiscal years beginning after December 15, 2008. We adopted EITF No. 08-6 effective January 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, which amend SFAS 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP No. FAS 107-1 and APB 28-1 also amend APB 28, Interim Financial Reporting, to require these disclosures in summarized financial information at interim reporting periods. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted this FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, which amend the other-than-temporary impairment guidance in U.S. generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted this FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly, which provides additional guidance for estimating fair value in accordance with SFAS No. 157 when the volume and level of activity for the asset or liability have significantly decreased. If a significant decrease in the volume and level of activity for the asset or liability has occurred, quoted prices may not be determinative of fair value. Consequently, further analysis of the transactions or quoted prices is needed, and a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value in accordance with SFAS No. 157. This FSP is effective for interim reporting periods ending after June 15, 2009. We adopted the FSP effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events, to establish general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before financial statements are issued or are available to be issued. SFAS No. 165 sets the period after the balance sheet date during which management should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements; the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements; and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim or annual financial reporting periods ending after June 15, 2009. We adopted this SFAS No. 165 effective April 1, 2009, with no impact on our consolidated results of operations or financial position.

 

8


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140, to improve relevance, representational faithfulness, and comparability of information a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 removes the concept of a qualifying special-purpose entity from SFAS No. 140 and removes the exception from applying FASB Interpretation (“FIN”) No. 46, Consolidation of Variable Interest Entities, to qualifying special-purpose entities. SFAS No. 166 is effective beginning the first annual reporting period that begins after November 15, 2009, as well as for interim periods within that first annual reporting period. We are currently evaluating the impact, if any, that the adoption of SFAS No. 166 will have on our consolidated results of operations and financial position.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), to improve financial reporting by entities involved with variable interest entities. SFAS No. 167 amends FIN No. 46(R) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. This analysis identifies the primary beneficiary of a variable interest entity as the enterprise that has both the power to direct the activities of a variable interest entity that most significantly impact the entity’s economic performance; and the obligation to absorb losses of the entity that could potentially be significant to the variable interest entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. SFAS No. 167 is effective beginning with the first annual reporting period that begins after November 15, 2009, as well as for interim periods within that first annual reporting period. We are currently evaluating the impact that the adoption of SFAS No. 166 will have on our consolidated results of operations and financial position.

In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162. SFAS No. 168 does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. SFAS No. 168 provides a single source of authoritative U.S. GAAP for nongovernmental entities and supersedes all other previously issued non-SEC accounting and reporting guidance. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. The adoption of SFAS No. 168 will not have an impact on our results of operations or financial position.

In July 2009, the FASB ratified EITF No. 09-1, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance, which requires an entity that enters into a share-lending arrangement on its own shares (that are classified in equity pursuant to other authoritative accounting guidance) in contemplation of a convertible debt issuance (or other financing) to initially measure the share-lending arrangement at fair value and treat it as an issuance cost. Entities would exclude the shares borrowed under the share-lending arrangement from basic and diluted EPS. If it becomes probable that the share-lending arrangement counterparty will default on the arrangement (not return the entity’s shares within the specified period), the issuing entity should record a loss in current earnings that is equal to the fair value of the shares outstanding less any recoveries and continue to adjust the loss until actual default. This EITF is effective for fiscal years beginning on or after December 15, 2009, and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. This EITF requires retrospective application for all arrangements outstanding as of the beginning of fiscal years beginning on or after December 15, 2009. This EITF is effective for arrangements entered into on or after the beginning of the first reporting period that begins on or after June 15, 2009. Early adoption is not permitted. We are evaluating the impact that adoption of EITF No. 09-1 will have on our consolidated results of operations and financial position.

(4) Goodwill

Pursuant to the provisions of SFAS No. 141, Business Combinations, we allocated the consideration paid in connection with the Merger to the fair value of acquired assets and assumed liabilities, respectively, and in 2008 recorded goodwill in the amount of $6,601,046. During 2008, we recorded an impairment charge of $4,766,190 resulting in a carrying value of $1,834,856 at December 31, 2008. There has not been any change in the carrying value of goodwill during 2009.

 

9


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(5) Intangible Assets

Intangible assets consisted of the following:

 

          June 30, 2009    December 31, 2008
     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    $ (61,524   $ 318,476    $ 380,000    $ (29,226   $ 350,774

Proprietary software

   6 years      16,552      (5,027     11,525      16,552      (2,285     14,267

Developed technology

   10 years      2,000      (183     1,817      2,000      (83     1,917

Licensing agreements

   9.1 years      75,000      (8,998     66,002      75,000      (4,090     70,910

Leasehold interests

   7.4 years      132      (16     116      908      (105     803
                                              

Total intangible assets

      $ 2,807,338    $ (75,748   $ 2,731,590    $ 2,808,114    $ (35,789   $ 2,772,325
                                              

Indefinite Life Intangible Assets

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

We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. SIRIUS’ FCC license for its FM-1, FM-2 and FM-3 satellites expires in 2010 and the FCC licenses for each of its FM-5 and FM-6 satellites will expire eight years after SIRIUS certifies the satellite has been successfully launched and put into operation; XM Holdings’ FCC licenses for its satellites expire in 2013 and 2014. Prior to the expirations, we will be required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost which are expensed as incurred. The FCC licenses authorize us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.

In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of June 30, 2009, there are no legal, regulatory or contractual limitations associated with the XM trademark.

We evaluate our indefinite life intangible assets for impairment on an annual basis in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. During the six months ended June 30, 2009, no impairment loss was recorded for intangible assets with indefinite lives.

Definite Life Intangible Assets

Definite life intangible assets consist primarily of subscriber relationships of $380,000 that were acquired as a result of the Merger. 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 intangibles include certain licensing agreements of $75,000, which are being amortized over a weighted average useful life of 9.1 years on a straight-line basis.

 

10


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

Amortization expense for the three and six months ended June 30, 2009 was $19,681 and $40,111. Expected amortization expense for each of the fiscal years through December 31, 2013 and for periods thereafter is as follows:

 

Year ending December 31,

   Amount

Remaining 2009

   $ 36,475

2010

     65,916

2011

     58,850

2012

     53,420

2013

     47,097

Thereafter

     136,178
      

Total definite life intangibles, net

   $ 397,936
      

(6) Subscriber Revenue

Subscriber revenue consists of subscription fees, revenue derived from our agreements with rental car companies, non-refundable activation fees and the effects of rebates. Revenues received from automakers for prepaid subscriptions included in the sale or lease price of a new vehicle are also included in subscriber revenue over the service period upon activation and sale to the customer.

Subscriber revenue consists of the following:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2009     2008     2009     2008  

Subscription fees

   $ 556,400      $ 261,360      $ 1,109,958      $ 511,827   

Activation fees

     5,702        6,052        11,758        12,350   

Effect of rebates

     (339     (894     (565     (2,019
                                

Total subscriber revenue

   $ 561,763      $ 266,518      $ 1,121,151      $ 522,158   
                                

(7) Interest Costs

We capitalize a portion of the interest on funds borrowed to finance the construction costs of our satellites. The following is a summary of our interest costs:

 

     For the Three Months
Ended June 30,
   For the Six Months
Ended June 30,
     2009    2008    2009    2008

Interest costs charged to expense

   $ 95,794    $ 16,745    $ 161,535    $ 34,421

Interest costs capitalized

     18,430      3,485      34,531      6,746
                           

Total interest costs incurred

   $ 114,224    $ 20,230    $ 196,066    $ 41,167
                           

 

11


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(8) Property and Equipment

Property and equipment, net, consists of the following:

 

     June 30,
2009
    December 31,
2008
 

Satellite system

   $ 1,423,591      $ 1,414,625   

Terrestrial repeater network

     108,823        109,228   

Leasehold improvements

     43,016        42,878   

Broadcast studio equipment

     49,565        49,186   

Capitalized software and hardware

     134,800        132,555   

Satellite telemetry, tracking and control facilities

     56,441        56,217   

Furniture, fixtures, equipment and other

     58,940        57,995   

Land

     38,411        38,411   

Building

     56,302        56,392   

Construction in progress

     567,637        474,716   
                

Total property and equipment

     2,537,526        2,432,203   

Accumulated depreciation and amortization

     (846,662     (728,727
                

Property and equipment, net

   $ 1,690,864      $ 1,703,476   
                

Construction in progress consists of the following:

 

     June 30,
2009
   December 31,
2008

Satellite system

   $ 543,103    $ 449,129

Terrestrial repeater network

     18,747      19,070

Leasehold improvements

     4      —  

Other

     5,783      6,517
             

Construction in progress

   $ 567,637    $ 474,716
             

Depreciation and amortization expense on property and equipment was $57,477 and $27,113 for the three months ended June 30, 2009 and 2008, respectively, and $119,413 and $54,019 for the six months ended June 30, 2009 and 2008, respectively.

Satellites

SIRIUS’ initial three orbiting satellites were successfully launched in 2000. Our spare SIRIUS satellite was delivered to ground storage in 2002. SIRIUS’ three-satellite constellation and terrestrial repeater network were placed into service in 2002. On June 30, 2009, SIRIUS launched a satellite into a geostationary orbit. This satellite will be put into service with SIRIUS’ other three orbiting satellites.

SIRIUS has an agreement with Space Systems/Loral for the design and construction of a sixth SIRIUS satellite. In January 2008, SIRIUS entered into an agreement with International Launch Services to secure a satellite launch on a Proton rocket. This agreement provides us the flexibility to defer this launch date or to cancel that launch upon payment of a cancellation fee.

XM owns four orbiting satellites; two of which, XM-3 and XM-4, currently transmit the XM signal and two of which, XM-1 and XM-2, serve as in-orbit spares. The XM satellites were launched in March 2001, May 2001, February 2005 and October 2006.

Space Systems/Loral has constructed a fifth satellite, XM-5, for use in the XM system. XM has entered into an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code and as a result, XM recorded a charge of $24,196 to Restructuring, impairments and related costs in our unaudited consolidated statements of operations for amounts previously paid, including capitalized interest.

 

12


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(9) Related Party Transactions

Liberty Media

Liberty Media Corporation and its affiliate, Liberty Media, LLC (collectively, “Liberty Media”), have invested in us in the form of loans and a purchase money loan facility. We paid Liberty Media a structuring fee of $30,000 in connection with these transactions. Liberty Media is the holder of our Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), has representatives on our board of directors and is considered a related party. See Note 11, Debt, to our unaudited consolidated financial statements for further information regarding indebtedness owed to Liberty Media.

Investment Agreement

On February 17, 2009, we entered into an Investment Agreement (the “Investment Agreement”) with Liberty Media. Pursuant to the Investment Agreement, we agreed to issue to Liberty Radio, LLC 12,500,000 shares of Series B Preferred Stock with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. The Series B Preferred Stock was issued on March 6, 2009.

The Series B Preferred Stock is convertible into 40% of our outstanding shares of common stock (after giving effect to such conversion). Liberty Radio, LLC has agreed not to acquire more than 49.9% of our outstanding common stock for three years from the date the Series B Preferred Stock was issued, except that Liberty Radio, LLC may acquire more than 49.9% of our outstanding common stock at any time after the second anniversary of such date pursuant to any cash tender offer for all of the outstanding shares of our common stock that are not beneficially owned by Liberty Radio, LLC or its affiliates at a price per share greater than the closing price of the common stock on the trading day preceding the earlier of the public announcement or commencement of such tender offer. The Investment Agreement also provides for certain other standstill provisions during such three year period.

The holder of our Series B Preferred Stock is entitled to appoint a number of directors to our board of directors proportionate to its ownership levels from time to time.

We accounted for the Series B Preferred Stock by recording a $227,716 increase to additional paid-in capital, excluding issuance costs, for the amount of allocated proceeds received and an additional $186,188 increase in paid-in capital for the beneficial conversion feature, which was immediately recognized as a charge to retained earnings.

Loan Investments

On February 17, 2009, SIRIUS entered into a Credit Agreement (the “LM Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent, and Liberty Media, LLC, as lender. The LM Credit Agreement provides for a $250,000 term loan and $30,000 of purchase money loans.

On February 17, 2009, XM entered into a Credit Agreement with Liberty Media Corporation, as administrative agent and collateral agent, and Liberty Media, LLC, as lender. On March 6, 2009, XM amended and restated that credit agreement (the “Second-Lien Credit Agreement”) with Liberty Media Corporation. On June 30, 2009, XM terminated the Second-Lien Credit Agreement in connection with the sale of 11.25% Senior Secured Notes due 2013.

On March 6, 2009, XM amended and restated the $100,000 Term Loan, dated as of June 26, 2008 and the $250,000 Credit Agreement, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media, LLC, purchased $100,000 aggregate principal amount of such loans from the existing lenders. On June 30, 2009, XM used a portion of the net proceeds from the sale of 11.25% Senior Secured Notes due 2013 to extinguish the Amended and Restated Credit Agreement.

In June 2009, Liberty Media Corporation purchased $100,000 aggregate principal amount of XM’s 11.25% Senior Secured Notes due 2013 as part of the offering of such notes.

As of June 30, 2009, we recorded $787 to Current maturities of long-term related party debt, related to the transactions with Liberty Media. As of June 30, 2009, we recorded $222,096 as Long-term related party debt related to the transactions with Liberty Media.

 

13


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

We recognized Interest expense related to Liberty Media of $24,555 and $33,356 for the three and six months ended June 30, 2009, respectively.

SIRIUS Canada

In 2005, SIRIUS entered into a license and services agreement with SIRIUS Canada. Pursuant to such agreement, SIRIUS is 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, SIRIUS has 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. SIRIUS’ investment in SIRIUS Canada is primarily non-voting shares which carry an 8% cumulative dividend.

Total costs that have been or will be reimbursed by SIRIUS Canada for the three months ended June 30, 2009 and 2008 were $2,916 and $3,128, respectively, and $4,914 and $7,830 for the six months ended June 30, 2009 and 2008, respectively. We recorded $1,326 and $0 in royalty income for the three months ended June 30, 2009 and 2008, respectively, and $2,170 and $0 for the six months ended June 30, 2009 and 2008, respectively. Such royalty income was recognized as a component of Other revenue in our unaudited consolidated statements of operations. We also recorded dividend income of $268 and $0 for the three months ended June 30, 2009 and 2008, respectively, and $393 and $0 for the six months ended June 30, 2009 and 2008, respectively, which was included in Interest and investment income in our unaudited consolidated statements of operations. Receivables recorded relating to royalty income and dividend income were fully utilized to absorb a portion of our share of the losses generated by SIRIUS Canada during the three and six months ended June 30, 2009.

As of June 30, 2009 and December 31, 2008, other amounts due from SIRIUS Canada recorded in Related party current assets were $1,385 and $1,814, respectively. As of June 30, 2009 and December 31, 2008, amounts payable to SIRIUS Canada to fund its remaining capital requirements recorded in Related party current liabilities were $1,226 and $1,160, respectively.

XM Canada

In 2005, XM entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial term of ten years and XM Canada has the unilateral option to extend the term of the agreements for an additional five years at no additional cost beyond the current financial arrangements. XM Canada has expressed its intent to exercise this option at the end of the initial term of the agreements. XM has the right to receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and a nominal activation fee for each gross activation of an XM Canada subscriber on XM’s system. XM Canada is obligated to pay XM a total of $71,800 for the rights to broadcast and market National Hockey League (“NHL”) games for the 10-year term of XM’s contract with the NHL. In accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, we recognize these payments on a gross basis as a principal obligor.

The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, and is being amortized on a straight-line basis over the remaining expected term of the agreements. Subsequent to the Merger date, we began to record additional deferred revenue on our agreements with XM Canada involving royalties on subscriber and activation fees. As of June 30, 2009 and December 31, 2008, the carrying value of Deferred revenue related to XM Canada was $38,212 and $36,002, respectively.

XM has extended a Cdn$45,000 standby credit facility to XM Canada which can be utilized to purchase terrestrial repeaters or finance the payment of subscription fees. The facility matures on December 31, 2012 and bears interest at a rate of 17.75% per annum. XM has the right to convert unpaid principal amounts into Class A subordinate voting shares of XM Canada at the price of Cdn$16.00 per share. As of June 30, 2009 and December 31, 2008, amounts drawn by XM Canada on this facility in lieu of payment of subscription fees recorded in Related party long-term assets were $12,515 and $8,311, respectively.

In connection with the deferred income related to XM Canada, we recorded amortization of $694 and $1,388 for the three and six months ended June 30, 2009, respectively. The royalty fees XM earns related to subscriber and activation fees are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recorded royalty fees of $160 and $274 for the three and six months ended June 30, 2009, respectively. XM Canada pays XM a licensing fee and reimburses XM for advertising, both of which are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recognized licensing fee revenue of $1,500 and $3,000, and advertising reimbursements of $367 and $733 for the three and six months ended June 30, 2009, respectively. As of June 30, 2009 and December 31, 2008, amounts due from XM Canada recorded in Related party current

 

14


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

assets were $2,406 and $5,594, respectively. As of June 30, 2009 and December 31, 2008, amounts due from XM Canada (in addition to the amounts drawn on the standby credit facility) recorded in Related party long-term assets were $5,250 and $0, respectively.

General Motors

XM has a long-term distribution agreement with General Motors Company (“GM”). GM has a representative on our board of directors and is considered a related party. During the term of the agreement, GM has agreed to distribute the XM service. To encourage the broad installation of XM radios in GM vehicles, XM subsidizes a portion of the cost of XM radios and makes incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to XM’s service. XM also shares with GM a percentage of the subscriber revenue attributable to GM vehicles with installed XM radios. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we reimburse GM.

XM makes bandwidth available to OnStar Corporation for audio and data transmissions to owners of XM-enabled GM vehicles, regardless of whether the owner is an XM subscriber. OnStar’s use of XM’s bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with XM’s business, and must meet XM’s quality standards. XM also granted to OnStar a certain amount of time to use XM’s studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.

We recorded total revenue from GM, primarily consisting of subscriber revenue, of $6,264 and $13,256 for the three and six months ended June 30, 2009, respectively.

We recognized Sales and marketing expense with GM of $7,537 and $15,631 for the three and six months ended June 30, 2009, respectively. We recognized Revenue share and royalties expense with GM of $13,982 and $31,655 for the three and six months ended June 30, 2009, respectively. We recognized Subscriber acquisition costs with GM of $5,545 and $14,805 for the three and six months ended June 30, 2009, respectively.

As of June 30, 2009, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $9,672 and $92,796, respectively. As of June 30, 2009, prepaid expenses with GM recorded in Related party long-term assets were $100,863. As of December 31, 2008, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $10,132 and $94,444, respectively. As of December 31, 2008, prepaid expenses with GM recorded in Related party long-term assets were $116,296.

As of June 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party current liabilities were $54,329 and $63,023, respectively. As of June 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party long-term liabilities were $21,123 and $0, respectively.

American Honda

XM has an agreement to make a certain amount of its bandwidth available to American Honda. American Honda has a representative on our board of directors and is considered a related party. American Honda’s use of XM’s bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with XM’s business, and must meet XM’s quality standards. This agreement remains in effect so long as American Honda holds a certain amount of its investment in us. In January 2007, XM announced a 10-year extension to its arrangement with American Honda to be its supplier of satellite radio and related data services in Honda and Acura vehicles. XM also agreed to make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and share with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed XM radios.

We recorded total revenue from American Honda, primarily consisting of subscriber revenue, of $2,995 and $5,827 for the three and six months ended June 30, 2009, respectively.

We recognized Sales and marketing expense with American Honda of $1,414 and $2,745 for the three and six months ended June 30, 2009. We recognized Revenue share and royalties expense with American Honda of $1,530 and $2,965 for the three and six months ended June 30, 2009, respectively.

As of June 30, 2009 and December 31, 2008, amounts due from American Honda recorded in Related party current assets were $2,268 and $2,194, respectively.

 

15


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

As of June 30, 2009 and December 31, 2008, amounts due to American Honda recorded in Related party current liabilities were $3,546 and $4,190, respectively.

(10) Investments

Investments consist of the following:

 

     June 30,
2009
   December 31,
2008

Marketable securities

   $ 11,236    $ 10,525

Restricted investments

     3,400      141,250

Embedded derivative accounted for separately from the host contract

     3      2

Equity method investments

     5,583      8,873
             

Total investments

   $ 20,222    $ 160,650
             

SIRIUS Canada

We have a 49.9% economic interest in SIRIUS Canada. Our investment in SIRIUS Canada is recorded using the equity method since we have a significant influence, but less than a controlling voting interest in SIRIUS Canada. Under this method, our investment in SIRIUS Canada, originally recorded at cost, is adjusted quarterly to recognize our proportionate share of net earnings or losses as they occur, rather than at the time dividends or other distributions are received, limited to the extent of our investment in, advances to and commitments to fund SIRIUS Canada. Our share of net earnings or losses of SIRIUS Canada is recorded to Gain (loss) on investments in our unaudited consolidated statements of operations. We recorded $1,594 and $0 for the three months ended June 30, 2009 and 2008, respectively, and $2,563 and $0 for the six months ended June 30, 2009 and 2008, respectively, for our share of SIRIUS Canada’s net loss. We recorded $6,869 for the three and six months ended June 30, 2009 to Gain (loss) on investments in our unaudited consolidated statements of operations for payments received from SIRIUS Canada in excess of our carrying value of our investments in, advances to and commitments to such entity. As of June 30, 2009, the carrying value of our equity method investment in SIRIUS Canada was $0.

XM Canada

We have a 23.33% economic interest in XM Canada. The amount of the Merger purchase price allocated to the fair value of our investment in XM Canada was $41,188. Our investment in XM Canada is recorded using the equity method (on a one-month lag) since we have significant influence, but less than a controlling voting interest in XM Canada. Under this method, our investment in XM Canada is adjusted quarterly to recognize our share of net earnings or losses as they occur, rather than at the time dividends or other distributions are received, limited to the extent of our investment in, advances to, and commitments to fund XM Canada. Our share of net earnings or losses of XM Canada is recorded to Gain (loss) on investments in our unaudited consolidated statements of operations. We recorded $4,847 and $943 for the three and six months ended June 30, 2009, respectively, for our share of XM Canada’s net earnings. During the three and six months ended June 30, 2009, we reduced the carrying value of our investment in XM Canada due to decreases in fair value that were considered to be other than temporary and recorded impairment charges of $1,700 and $4,734, respectively. In addition, during the three and six months ended June 30, 2009, we recorded $666 and $501, respectively, as a foreign exchange gain to Accumulated other comprehensive loss, net of tax.

XM Holdings holds an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by XM Canada for which the embedded conversion feature is required under SFAS No. 133 to be bifurcated from the host contract. The host contract is accounted for as an available-for-sale security at fair value with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for as a derivative at fair value with changes in fair value recorded in earnings as Interest and investment income. As of June 30, 2009, the carrying value of our equity method investment in XM Canada was $5,583, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,623 and $3, respectively. As of December 31, 2008, the carrying value of our equity method investment in XM Canada was $8,873, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,540 and $2, respectively.

 

16


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

Auction Rate Certificates

Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We account for our investment in auction rate certificates as available-for-sale securities. As of June 30, 2009 and December 31, 2008, the carrying value of these securities was $8,613 and $7,985, respectively.

Restricted Investments

Restricted investments relate to deposits placed into escrow for the benefit of third parties pursuant to programming agreements and reimbursement obligations under letters of credit issued for the benefit of lessors of office space. During the three months ended March 31, 2009, $138,000 of escrowed funds were released to programming providers. As of June 30, 2009 and December 31, 2008, the carrying value of our long-term restricted investments was $3,400 and $141,250, respectively.

 

17


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(11) Debt

Our debt consists of the following:

 

     Conversion
Price
(per share)
   Long Term Debt  
        June 30,
2009
    December 31,
2008
 

SIRIUS Debt

       

8 3/4% Convertible Subordinated Notes due 2009

   $ 28.46    $ 1,744      $ 1,744   

3 1/4% Convertible Notes due 2011

   $ 5.30      230,000        230,000   

Senior Secured Term Loan due 2012

     N/A      245,625        246,875   

LM Term Loan

     N/A      250,000        —     

Less: discount

        (122,590     —     

LM Purchase Money Loan

     N/A      380        —     

9 5/8% Senior Notes due 2013

     N/A      500,000        500,000   

2 1/2% Convertible Notes due 2009

   $ 4.41      —          189,586   

XM and XM Holdings Debt

       

10% Convertible Senior Notes due 2009

   $ 10.87      227,515        400,000   

Less: discount

        (4,308     (16,449

10% Senior Secured Discount Convertible Notes due 2009

   $ 0.69      33,249        33,249   

Add: premium

        14,150        34,321   

10% Senior PIK Secured Notes due 2011

     N/A      172,485        —     

Less: discount

        (14,577     —     

11.25% Senior Secured Notes due 2013

     N/A      525,750        —     

Less: discount

        (25,799     —     

13% Senior Notes due 2013

     N/A      778,500        778,500   

Less: discount

        (69,627     (74,986

9.75% Senior Notes due 2014

     N/A      5,260        5,260   

7% Exchangeable Senior Subordinated Notes due 2014

   $ 1.875      550,000        550,000   

Senior Secured Term Loan due 2009

     N/A      —          100,000   

Senior Secured Revolving Credit Facility due 2009

     N/A      —          250,000   

Add: premium

        —          151   

Other debt:

       

Capital leases

     N/A      18,442        23,215   
                   

Total debt

        3,316,199        3,251,466   

Less: current maturities

       

Related party

        787        —     

Non-related party

        286,045        399,726   
                   

Total current maturities

        286,832        399,726   
                   

Total long-term

        3,029,367        2,851,740   

Less: related party

        222,096        —     
                   

Total long-term, excluding related party

      $ 2,807,271      $ 2,851,740   
                   

SIRIUS Debt

8 3/4% Convertible Subordinated Notes due 2009

In 1999, SIRIUS issued 8 3/4% Convertible Subordinated Notes due 2009 (the “8 3/4% Notes”). The 8 3/4% Notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 35.134 shares of common stock for each $1,000 principal amount, or $28.4625 per share of common stock, subject to certain adjustments. The balance of the 8 3/4% Notes matures on September 29, 2009 and interest is payable semi-annually on March 29 and September 29 of each year. The obligations under the 8 3/4% Notes are not secured by any of our assets.

 

18


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

3 1/4% Convertible Notes due 2011

In October 2004, SIRIUS issued $230,000 in aggregate principal amount of 3 1/4% Convertible Notes due 2011 (the “3 1/4% Notes”) resulting in net proceeds, after debt issuance costs, of $224,813. The 3 1/4% Notes are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000 principal amount, or $5.30 per share of common stock, subject to certain adjustments. The 3 1/4% Notes mature on October 15, 2011 and interest is payable semi-annually on April 15 and October 15 of each year. The obligations under the 3 1/4% Notes are not secured by any of our assets.

Senior Secured Term Loan due 2012

In June 2007, SIRIUS entered into a term credit agreement with a syndicate of financial institutions. The term credit agreement provides for a senior secured term loan (the “Senior Secured Term Loan”) of $250,000, which has been fully drawn. Interest under the Senior Secured Term Loan is based, at our option, on (i) adjusted LIBOR plus 2.25% or (ii) the higher of (a) the prime rate and (b) the Federal Funds Effective Rate plus  1/2 of 1.00%, plus 1.25%. The current interest rate is 2.625%. The Senior Secured Term Loan amortizes in equal quarterly installments of 0.25% of the initial aggregate principal amount for the first four and a half years, with the balance of the loan thereafter being repaid in four equal quarterly installments. The Senior Secured Term Loan matures on December 20, 2012.

The Senior Secured Term Loan is guaranteed by our wholly owned subsidiaries, including Satellite CD Radio, Inc. (the “Guarantor”), and is secured by a lien on substantially all of SIRIUS’ and the Guarantor’s assets, including SIRIUS’ four in-orbit satellites, one ground spare satellite and the shares of the Guarantor.

The Senior Secured Term Loan contains customary affirmative covenants and event of default provisions. The negative covenants contained in the Senior Secured Term Loan are substantially similar to those contained in the indenture governing SIRIUS’ 9 5/ 8% Senior Notes due 2013.

LM Term Loan and LM Purchase Money Loan

In February 2009, SIRIUS entered into a Credit Agreement (the “LM Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent. The LM Credit Agreement provides for a $250,000 term loan (“LM Term Loan”) and $30,000 of purchase money loans (“LM Purchase Money Loan”). Concurrently with entering into the LM Credit Agreement, SIRIUS borrowed $250,000 under the LM Term Loan. The proceeds of the LM Term Loan were used (i) to repay at maturity our outstanding 2 1/2% Convertible Notes due February 17, 2009 and (ii) for general corporate purposes, including related transaction costs. As of June 30, 2009, we also had $380 outstanding under the LM Purchase Money Loan.

The LM Term Loan and LM Purchase Money Loan have stated interest rates of 15% per annum. Commencing on March 31, 2010, the loans amortize in quarterly installments equal to (i) 0.25% of the aggregate principal amount of the loans outstanding on January 1, 2010 and (ii) after December 31, 2011, 25% of the aggregate principal amount of the loans outstanding on January 1, 2012. The loans mature on December 20, 2012. In addition, we pay a commitment fee of 2.0% per annum on the unused portion of the LM Purchase Money Loan.

The loans under the LM Credit Agreement are guaranteed by Satellite CD Radio, Inc. and Sirius Asset Management Company LLC, SIRIUS’ wholly owned subsidiaries. The loans are secured by a lien on substantially all of SIRIUS’ assets. The affirmative covenants, negative covenants and event of default provisions in the LM Credit Agreement are substantially similar to those in the Senior Secured Term Loan.

9 5/8% Senior Notes due 2013

In August 2005, SIRIUS issued $500,000 in aggregate principal amount of 9 5/8% Senior Notes due 2013 (the “9 5/8% Notes”) resulting in net proceeds, after debt issuance costs, of $493,005. The 9 5/8% Notes mature on August 1, 2013 and interest is payable semi-annually on February 1 and August 1 of each year. The obligations under the 9 5/8% Notes are not secured by any of our assets.

2 1/2% Convertible Notes due 2009

In February 2004, SIRIUS issued $250,000 in aggregate principal amount of 2 1/2% Convertible Notes due 2009 (the “2 1/2% Notes”) resulting in net proceeds, after debt issuance costs, of $244,625. In March 2004, SIRIUS issued an additional $50,000 in

 

19


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

aggregate principal amount of the 2 1/ 2% Notes pursuant to an option granted in connection with the initial offering of the notes, resulting in net proceeds of $48,975. During 2008, $110,414 in aggregate principal amount of the 2 1/2% Notes were exchanged for shares of our common stock. During the three months ended March 31, 2009, but prior to the maturity date of the 2 1/2% Notes, $18,000 in aggregate principal amount of the 2 1/2% Notes were exchanged for shares of our common stock. The remaining principal balance of $171,586 of the 2 1/2% Notes matured on February 17, 2009, and was paid in cash at maturity.

Space Systems/Loral Credit Agreement

In July 2007, SIRIUS amended and restated its existing Credit Agreement with Space Systems/Loral (the “Loral Credit Agreement”). Under the Loral Credit Agreement, Space Systems/Loral agreed to make loans to SIRIUS to finance the purchase of its fifth and sixth satellites through June 10, 2010. Loral’s commitment is limited to approximately $25,688, or 80% of the amount due with respect to the construction of SIRIUS’ sixth satellite. Loans made under the Loral Credit Agreement will be secured by SIRIUS’ rights under the Satellite Purchase Agreement with Space Systems/Loral, including SIRIUS’ rights to its sixth satellite. The loans will also be entitled to the benefits of a subsidiary guarantee from Satellite CD Radio, Inc., the subsidiary that holds SIRIUS’ FCC license, and any future material subsidiary that may be formed by SIRIUS. The maturity date of the loans is the earliest to occur of (i) June 10, 2010, (ii) 90 days after the sixth satellite becomes available for shipment and (iii) 30 days prior to the scheduled launch of the sixth satellite. The Loral Credit Agreement contains certain conditions to borrowings. Any loans made under the Loral Credit Agreement generally will bear interest at a variable rate equal to 3-month LIBOR plus 4.75%. The daily unused balance bears interest at a rate per annum equal to 0.50%, payable quarterly on the last day of each March, June, September and December. The Loral Credit Agreement permits SIRIUS to prepay all or a portion of the loans outstanding without penalty. SIRIUS has not borrowed under the Loral Credit Agreement.

XM and XM Holdings Debt

10% Convertible Senior Notes due 2009

XM Holdings has issued $400,000 aggregate principal amount of 10% Convertible Senior Notes due 2009 (the “10% Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Convertible Notes mature on December 1, 2009. The 10% Convertible Notes may be converted by the holder, at its option, into shares of our common stock at a conversion rate of 92.0 shares of our common stock per $1,000 principal amount, which is equivalent to a conversion price of $10.87 per share of common stock (subject to adjustment in certain events). As a result of the fair valuation at the acquisition date, we recognized an initial discount of $23,700.

In February 2009, we exchanged $172,485 aggregate principal amount of the outstanding 10% Convertible Notes for a like principal amount of XM Holdings’ 10% Senior PIK Secured Notes due June 2011. We accounted for the exchange as a modification of debt and recorded $2,008 to General and administrative expense in our unaudited consolidated statements of operations and $10,990 of additional debt discount in our unaudited consolidated balance sheets.

In July 2009, XM used a portion of the net proceeds received from the issuance of its 11.25% Senior Secured Notes due 2013 and cash on hand to purchase at par $179,065 aggregate principal amount of the 10% Convertible Notes. We will record a loss of $3,031 related to the unamortized discount to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations as a result of this transaction in the third quarter of 2009.

10% Senior Secured Discount Convertible Notes due 2009

XM Holdings and XM, as co-obligors, have outstanding $33,249 aggregate principal amount of 10% Senior Secured Discount Convertible Notes due 2009 (the “10% Discount Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Discount Convertible Notes mature on December 31, 2009. At any time, a holder of the notes may convert all or part of the accreted value of the notes at a conversion price of $0.69 per share. The 10% Discount Convertible Notes rank equally in right of payment with all of XM Holdings’ and XM’s other existing and future senior indebtedness, and rank senior in right of payment to all of XM Holdings’ and XM’s existing and future subordinated indebtedness. As a result of the fair valuation at the acquisition date, we recognized an initial premium of $57,550.

 

20


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

10% Senior PIK Secured Notes due 2011

In February 2009, XM Holdings exchanged $172,485 aggregate principal amount of outstanding 10% Convertible Notes for a like principal amount of its 10% Senior PIK Secured Notes due June 2011 (the “PIK Notes”). Interest is payable on the PIK Notes semiannually in arrears on June 1 and December 1 of each year at a rate of 10.0% per annum paid in cash from December 1, 2008 to December 1, 2009; at a rate of 10.0% per annum paid in cash and 2.0% per annum paid in kind from December 1, 2009 to December 1, 2010; and at a rate of 10.0% per annum paid in cash and 4.0% per annum paid in kind from December 1, 2010 to the maturity date.

The PIK Notes are fully and unconditionally guaranteed by XM 1500 Eckington LLC and XM Investment LLC (together, the “Subsidiary Guarantors”) and are secured by a first-priority lien on substantially all of the property of the Subsidiary Guarantors. XM Holdings may, at its option, redeem some or all of the PIK Notes at any time at 100% of the principal amount prepaid, together with accrued and unpaid interest, if any.

We paid a fee equal to, at each exchanging noteholders’ election, either (i) 833 shares of our common stock (the “Structuring Fee Shares”) for every $1 principal amount of 10% Convertible Notes exchanged or (ii) an amount in cash equal to $0.05 for every $1 principal amount of 10% Convertible Notes exchanged. The total number of Structuring Fee Shares delivered was 59,178,819, and the aggregate cash delivered was approximately $5,100.

Amended and Restated Credit Agreement due 2011

In March 2009, XM amended and restated the $100,000 Senior Secured Term Loan due 2009, dated as of June 26, 2008 and the $250,000 Senior Secured Revolving Credit Facility due 2009, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media LLC (“Liberty”) purchased $100,000 aggregate principal amount of such loans from the lenders.

In June 2009, XM used net proceeds from the sale of its 11.25% Senior Secured Notes due 2013 to extinguish the Amended and Restated Credit Agreement. Under the terms of our agreement, XM paid a repayment premium of $6,500. We recorded an aggregate loss on extinguishment of the Amended and Restated Credit Agreement of $49,786 consisting primarily of the unamortized discount, deferred financing fees and unaccreted portion of the repayment premium to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.

11.25% Senior Secured Notes due 2013

In June 2009, XM issued $525,750 aggregate principal amount of 11.25% Senior Secured Notes due 2013 (the “11.25% Notes”). Interest is payable semi-annually in arrears on June 15 and December 15 of each year at a rate of 11.25% per annum. The 11.25% Notes mature on June 15, 2013. The 11.25% Notes were issued for $499,951, resulting in an original issuance discount of $25,799.

XM Holdings and the domestic subsidiaries of XM that guarantee certain of the indebtedness of XM and its restricted subsidiaries guarantee XM’s obligations under the 11.25% Notes. The 11.25% Notes and related guarantees are secured by first-priority liens on substantially all of the assets of XM Holdings, XM and the guarantors (subject to certain exceptions). XM, at its option, may redeem the 11.25% Notes at a “make-whole” redemption price prior to June 15, 2011, subject to certain restrictions. In addition, prior to June 15, 2011, XM may on any one or more occasions redeem up to 35% of the aggregate principal amount of 11.25% Notes at a redemption price equal to 111.25% of the principal amount of the 11.25% Notes redeemed, plus accrued and unpaid interest, if any, to the date of redemption with the proceeds of certain equity offerings or contributions made to XM with the proceeds from certain equity offerings of its direct or indirect parent.

In June 2009, XM used a portion of the net proceeds from the sale of the 11.25% Notes to repay in full $325,000 principal amount outstanding under the Amended and Restated Credit Agreement. In connection with the sale of the 11.25% Notes, XM terminated the Second-Lien Credit Agreement.

13% Senior Notes due 2013

In July 2008, XM 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 were issued for $700,105, resulting in an original issuance discount of $78,395. The 13% Notes are unsecured and mature on August 1, 2013.

9.75% Senior Notes due 2014

XM has outstanding $5,260 aggregate principal amount of 9.75% Senior Notes due 2014 (the “9.75% Notes”). Interest on the 9.75% Notes is payable semi-annually on May 1 and November 1 at a rate of 9.75% per annum. The 9.75% Notes are unsecured and

 

21


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

mature on May 1, 2014. XM, at its option, may redeem the 9.75% Notes at declining redemption prices at any time on or after May 1, 2010, subject to certain restrictions. Prior to May 1, 2010, XM may redeem the 9.75% Notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the date of redemption.

In March 2009, XM executed and delivered a Third Supplemental Indenture (the “XM 9.75% Notes Supplemental Indenture”). The XM 9.75% Notes Supplemental Indenture amended the indenture to eliminate substantially all of the restrictive covenants, eliminated certain events of default and modified or eliminated certain other provisions contained in the indenture and the 9.75% Notes.

7% Exchangeable Senior Subordinated Notes due 2014

In August 2008, XM issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes are senior subordinated obligations of XM and rank junior in right of payment to its existing and future senior debt and equally in right of payment with its existing and future senior subordinated debt. XM Holdings, XM Equipment Leasing LLC and XM Radio Inc. have guaranteed the Exchangeable Notes on a senior subordinated basis. The Exchangeable Notes are not guaranteed by SIRIUS or Satellite CD Radio, Inc. 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.

Second-Lien Credit Agreement

In February 2009, XM entered into a Credit Agreement (the “XM Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent. The XM Credit Agreement provided for a $150,000 term loan. On March 6, 2009, XM amended and restated the XM Credit Agreement (the “Second-Lien Credit Agreement”) with Liberty Media Corporation.

In June 2009, XM terminated the Second-Lien Credit Agreement in connection with the sale of the 11.25% Notes. We recorded a loss on termination of the Second-Lien Credit Agreement of $57,663 related to deferred financing fees to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.

Covenants and Restrictions

Our debt generally requires compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions. SIRIUS operates XM Holdings as an unrestricted subsidiary for purposes of compliance with the covenants contained in its debt instruments. If we fail to comply with these covenants, our debt could become immediately payable and any unused availability could be terminated.

At June 30, 2009, we were in compliance with all financial covenants.

(12) Stockholders’ Equity

Common Stock, par value $0.001 per share

We are authorized to issue up to 9,000,000,000 and 8,000,000,000 shares of common stock as of June 30, 2009 and December 31, 2008, respectively. There were 3,883,905,655 and 3,651,765,837 shares of common stock issued and outstanding as of June 30, 2009 and December 31, 2008, respectively.

As of June 30, 2009, approximately 3,898,161,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, preferred stock, warrants, incentive stock plans and common stock to be granted to third parties upon satisfaction of performance targets. During the three and six months ended June 30, 2009, employees did not exercise any stock options.

 

22


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

In January 2004, SIRIUS signed a seven-year agreement with a sports programming provider. 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 are subject to transfer restrictions which lapse over time. We recognized expense associated with these shares of $219 during each of the three months ended June 30, 2009 and 2008, and $1,860 during each of the six months ended June 30, 2009 and 2008. As of June 30, 2009, there was a $11,412 remaining balance of common stock value included in Other current assets and Other long-term assets in the amount of $5,852 and $5,560, respectively. As of December 31, 2008, there was a $13,272 remaining balance of common stock value included in Other current assets and Other long-term assets in the amount of $5,852 and $7,420, respectively.

Preferred Stock, par value $0.001 per share

We are authorized to issue up to 50,000,000 shares of undesignated preferred stock as of June 30, 2009. There were 24,808,959 shares of Series A convertible preferred stock issued and outstanding as of June 30, 2009 and December 31, 2008. There were 12,500,000 shares of Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), issued and outstanding as of June 30, 2009. There were no shares of Preferred Stock, Series C Junior (the “Series C Junior Preferred Stock”), issued and outstanding at June 30, 2009.

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 40% of our outstanding shares of common stock (after giving effect to such conversion). This conversion rate will be subject to adjustment from time to time in certain circumstances such that Liberty Radio LLC will maintain a 40% ownership of all outstanding common shares, inclusive of the Series B Preferred Stock on an as converted basis. As 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 each such Series B Preferred Stock share is 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, the Series A Preferred Stock, and each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock. With respect to liquidation rights, the Series B Preferred Stock ranks evenly with each other class or series of our equity securities not expressly provided as ranking senior to the Series B Preferred Stock, and will rank senior to our common stock and the Series A Preferred Stock.

During 2009, we accounted for the issuance of Series B Preferred Stock by recording a $227,716 increase to additional paid-in capital for the amount of allocated proceeds received and an additional $186,188 increase to paid-in capital for the beneficial conversion feature, which was recognized as a charge to retained earnings.

On April 28, 2009, our board of directors created and reserved for issuance in accordance with the Rights Plan (described below) 9,000 shares of Series C Junior Preferred Stock. The shares of Series C Junior Preferred Stock are not redeemable and rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of the Company’s Preferred Stock, unless the terms of such series shall so provide.

Warrants

We have issued warrants to purchase shares of common stock in connection with distribution and programming agreements, satellite purchase agreements and certain debt issuances. As of June 30, 2009, approximately 52,236,000 warrants to acquire approximately 84,660,000 shares of common stock with an average exercise price of $3.08 per share were outstanding. We recognized expense of $1,318 during the three months ended March 31, 2009 due to the cancellation of certain warrants and the issuance of replacement warrants expiring in March 2015. Warrants vest over time or upon the achievement of milestones and expire at various times through 2015. We recognized aggregate warrant related expense of $0 and $86 for the three months ended June 30, 2009 and 2008, respectively, and $2,522 and $2,856 for the six months ended June 30, 2009 and 2008, respectively.

Rights Plan

On April 28, 2009, our board of directors adopted a rights plan. The terms of the rights and the rights plan are set forth in a Rights Agreement dated as of April 29, 2009 (the “Rights Plan”). The Rights Plan is intended to act as a deterrent to any person or group acquiring 4.9% or more of our outstanding common stock (assuming for purposes of this calculation that all of our outstanding convertible preferred stock is converted into common stock) without the approval of our board of directors.

The Rights Plan will continue in effect until August 1, 2011, unless it is terminated or redeemed earlier by our board of directors. We plan to submit the Rights Plan to a stockholder vote prior to June 30, 2010, and the failure to obtain this approval will result in a termination of the Rights Plan.

 

23


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(13) Benefits Plans

We maintain four share-based benefits plans. We satisfy awards and options granted under these plans through the issuance of new shares. We recognized share-based payment expense of $29,701 and $17,151 for the three months ended June 30, 2009 and 2008, respectively, and $49,878 and $39,413 for the six months ended June 30, 2009 and 2008, respectively. For a summarized schedule of share-based payment expense, see the appended footnote to our unaudited consolidated statements of operations. We did not realize any income tax benefits from share-based benefits plans during the three and six months ended June 30, 2009 and 2008, as a result of a 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 June 30, 2009, approximately 477,858,000 shares of common stock were available for future grant under the 2009 Plan.

2007 Stock Incentive Plan

XM Holdings maintains a 2007 Stock Incentive Plan (the “2007 Plan”) under which officers, other employees and other key individuals of XM Holdings were granted various types of equity awards, including restricted stock, stock units, stock options, stock appreciation rights, dividend equivalent rights and other stock awards. Stock option awards under the 2007 Plan generally vest ratably over three years based on continuous service, while restricted stock generally vests ratably over one or three years based on continuous service. Upon approval of the 2009 Plan by our stockholders, no further awards may be made under the 2007 Plan. Outstanding awards granted under the 2007 Plan will be continued.

2003 Long-Term Stock Incentive Plan

SIRIUS maintains the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan (the “2003 Plan”). Employees, consultants and members of our board of directors were eligible to receive awards under the 2003 Plan. The 2003 Plan provided for the grant of stock options, restricted stock, restricted stock units and other stock-based awards. Stock-based awards granted under the 2003 Plan were generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Upon approval of the 2009 Plan by our stockholders, no further awards may be made under the 2003 Plan. Outstanding awards granted under the 2003 Plan will be continued.

XM Talent Option Plan

XM Holdings maintains a Talent Option Plan (the “Talent Plan”) under which non-employee programming consultants to XM Holdings were granted stock option awards. Stock option awards under the Talent Plan generally vest ratably over three years based on continuous service. Upon approval of the 2009 Plan by our stockholders, no further awards may be made under the Talent Plan. Outstanding awards granted under the Talent Plan will be continued.

 

24


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

The following table summarizes the weighted-average assumptions used to compute reported share-based payment expense to employees and members of our board of directors for the three and six months ended June 30, 2009 and 2008:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2009     2008     2009     2008  

Risk-free interest rate

     2.5     3.1     2.5     2.7

Expected life of options - years

     4.71        4.06        4.71        4.06   

Expected stock price volatility

     88     80     88     80

Expected dividend yield

   $ —        $ —        $ —        $ —     

The following table summarizes the range of assumptions used to compute reported share-based payment expense to third parties, other than non-employee members of our board of directors, for the three and six months ended June 30, 2009 and 2008:

 

     For the Three Months
Ended June 30,
    For the Six Months
Ended June 30,
 
     2009     2008     2009     2008  

Risk-free interest rate

     1.64-2.54     2.9-3.3     1.08-2.54     1.6-3.3

Expected life - years

     2.84-4.71        2.50-4.06        2.50-6.19        2.00-4.08   

Expected stock price volatility

     88     80     83-88     80

Expected dividend yield

   $ —        $ —        $ —        $ —     

The following table summarizes stock option activity under our share-based payment plans for the six months ended June 30, 2009 (shares in thousands):

 

     Shares     Weighted-
Average
Exercise
Price
   Weighted-Average
Remaining
Contractual Term
(Years)
   Aggregate
Intrinsic
Value

Outstanding, December 31, 2008

   165,436      $ 4.42      

Granted

   122,357      $ 0.43      

Exercised

   —        $ —        

Forfeited, cancelled or expired

   (43,649   $ 5.59      
              

Outstanding, June 30, 2009

   244,144      $ 2.21    5.48    $ 1,897
              

Exercisable, June 30, 2009

   96,242      $ 4.39    4.59    $ —  

The weighted average grant date fair value of options granted during the six months ended June 30, 2009 and 2008 was $0.29 and $1.73, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2009 and 2008 was $0 and $120, respectively.

We recognized share-based payment expense associated with stock options of $20,060 and $11,468 for the three months ended June 30, 2009 and 2008, respectively, and $32,312 and $22,524 for the six months ended June 30, 2009 and 2008, respectively.

 

25


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

The following table summarizes the non-vested restricted stock and restricted stock unit activity under our share-based payment plans for the six months ended June 30, 2009 (shares in thousands):

 

     Shares     Weighted-Average
Grant Date
Fair Value

Nonvested, December 31, 2008

   19,931      $ 2.84

Granted

   84,851      $ 0.37

Vested

   (35,129   $ 1.08

Forfeited

   (1,129   $ 2.53
        

Nonvested, June 30, 2009

   68,524      $ 0.69
        

The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2009 and 2008 was $0.37 and $2.87, respectively. The total intrinsic value of restricted stock units that vested during the six months ended June 30, 2009 and 2008 was $10,721 and $8,302, respectively.

We recognized share-based payment expense associated with restricted stock units and shares of restricted stock of $6,000 and $1,800 for the three months ended June 30, 2009 and 2008, respectively, and $12,857 and $4,614 for the six months ended June 30, 2009 and 2008, respectively.

Total unrecognized compensation costs related to unvested share-based payment awards granted to employees and members of our board of directors at June 30, 2009 and December 31, 2008, net of estimated forfeitures, was $83,645 and $90,310, respectively. The weighted-average period over which the compensation expense for these awards is expected to be recognized is three years as of June 30, 2009.

401(k) Savings Plans

We sponsor the Sirius Satellite Radio 401(k) Savings Plan (the “Sirius Plan”) for eligible employees. During 2009, we merged the XM Satellite Radio 401(k) Savings Plan (the “XM Plan”) into the Sirius Plan and transferred the assets held in the XM Plan to the Sirius Plan. All eligible employees under the XM Plan became subject to the contribution, matching and vesting rules of the Sirius Plan.

The Sirius Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary 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. Matching contributions under the Sirius Plan vest at a rate of 33 1/3 % for each year of employment and are fully vested after three years of employment. Expense resulting from the matching contribution to the plans was $666 and $364 for the three months ended June 30, 2009 and 2008, respectively, and $1,589 and $1,229 for the six months ended June 30, 2009 and 2008, respectively.

We may also elect to contribute to the profit sharing portion of the Sirius Plan based upon the total eligible compensation of eligible participants. These additional contributions, referred to as profit-sharing contributions, 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. Profit-sharing contribution expense was $2,756 for the three months ended June 30, 2009. We reduced our accrual for our profit-sharing contribution during the three months ended March 31, 2009 resulting in a $965 profit-sharing contribution benefit for the six months ended June 30, 2009. Profit-sharing contribution expense was $1,703 and $3,360 for the three and six months ended June 30, 2008.

(14) Income Taxes

We recorded income tax expense of $1,115 and $543 for the three months ended June 30, 2009 and 2008, respectively, and $2,229 and $1,086 for the six months ended June 30, 2009 and 2008, respectively. Such expense primarily represents the recognition of a deferred tax liability related to the difference in accounting for the FCC license intangible assets, which are amortized over 15 years for tax purposes but are not amortized for book purposes.

 

26


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(15) Commitments and Contingencies

The following table summarizes our expected contractual cash commitments as of June 30, 2009:

 

     Remaining
2009
   2010    2011    2012    2013    Thereafter    Total

Long-term debt obligations

   $ 268,503    $ 15,890    $ 410,270    $ 484,775    $ 1,804,250    $ 555,262    $ 3,538,950

Cash interest payments

     170,521      317,598      307,927      274,442      218,971      35,548      1,325,007

Satellite and transmission

     80,250      175,690      80,600      7,947      8,201      50,497      403,185

Programming and content

     134,278      248,310      140,278      123,907      32,483      14,350      693,606

Marketing and distribution

     49,693      42,159      24,808      14,533      3,000      4,500      138,693

Satellite incentive payments

     2,083      4,384      4,695      5,030      5,392      42,831      64,415

Operating lease obliations

     20,699      37,148      22,758      18,678      14,852      14,694      128,829

Other

     23,636      29,903      19,060      7,060      —        —        79,659
                                                

Total

   $ 749,663    $ 871,082    $ 1,010,396    $ 936,372    $ 2,087,149    $ 717,682    $ 6,372,344
                                                

Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt.

Cash interest payments. Cash interest payments include interest due on outstanding debt through maturity.

Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks. We have also entered into various agreements to design and construct satellites for use in our systems and to launch those satellites. SIRIUS has an agreement with Space Systems/Loral to design and construct a sixth satellite. In January 2008, SIRIUS entered into an agreement with International Launch Services to secure a satellite launch on a Proton rocket. This agreement provides SIRIUS with the flexibility to defer this launch date or to cancel that launch upon payment of a cancellation fee.

Space Systems/Loral has constructed a fifth satellite, XM-5, for use in the XM system. XM has entered into an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code.

Programming and content. We have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may include fixed payments, advertising commitments and revenue sharing arrangements.

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

Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of XM’s four in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of XM’s four satellites. As of June 30, 2009, we have accrued $28,572 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.

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.

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 automakers, radio manufacturers, distributors and others that include per-radio, per-subscriber, per-show and other variable cost arrangements. These future costs are dependent

 

27


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

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 provisions.

We are required under the terms of certain agreements to provide letters of credit and deposit monies in escrow, which place restrictions on cash and cash equivalents. As of June 30, 2009 and December 31, 2008, $3,400 and $141,250, respectively, were classified as Restricted investments as a result of obligations under these letters of credit and escrow deposits.

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

Legal Proceedings

FCC Merger Order. On July 25, 2008, the FCC adopted an order approving the Merger. The order became effective immediately upon adoption. In September 2008, Mt. Wilson FM Broadcasters, Inc. filed a Petition for Reconsideration of this order. This Petition for Reconsideration remains pending.

Copyright Royalty Board Proceeding. In January 2008, the Copyright Royalty Board, or CRB, of the Library of Congress issued its decision regarding the royalty rate payable by XM and SIRIUS under the statutory license covering the performance of sound recordings over their satellite digital audio radio services for the six-year period starting January 1, 2007 and ending December 31, 2012. In July 2009, the United States Court of Appeals for the District of Columbia Circuit confirmed in all material respects the decision of the CRB.

U.S. Electronics Arbitration. In May 2006, U.S. Electronics Inc., a former licensed distributor and manufacturer of SIRIUS radios, commenced an arbitration proceeding against SIRIUS. U.S. Electronics alleged that SIRIUS breached its contract; failed to pay monies owed under the contract; tortiously interfered with U.S. Electronics’ relationships with retailers and manufacturers; and otherwise acted in bad faith. U.S. Electronics sought up to $133 million in damages. A panel of three arbitrators unanimously dismissed with prejudice all of U.S. Electronics’ claims, including its claims for lost profits. U.S. Electronics filed suit in the New York State Court seeking to vacate the decision of the arbitrators. In July 2009, the New York State Supreme Court affirmed the decision of the arbitrators, and U.S. Electronics filed a notice of appeal of such decision with the New York State Appellate Division.

Atlantic Recording Corporation, BMG Music, Capital Records, Inc., Elektra Entertainment Group Inc., Interscope Records, Motown Record Company, L.P., Sony BMG Music Entertainment, UMG Recordings, Inc., Virgin Records, Inc. and Warner Bros. Records Inc. v. XM Satellite Radio Inc. In May 2006, the plaintiffs filed this action in the United States District Court for the Southern District of New York. The complaint seeks monetary damages and equitable relief, and alleges that XM radios that include advanced recording functionality infringe upon plaintiffs’ copyrighted sound recordings. XM filed a motion to dismiss this matter, and that motion was denied in January 2007. XM has resolved the lawsuit with respect to Universal Music Group, Warner Music Group, Sony BMG Music Entertainment and EMI Group, and each of these parties has withdrawn as a party to the lawsuit, and this lawsuit has been dismissed with respect to such parties.

Music publishing companies and certain other record companies also have filed lawsuits, purportedly on a class basis, with similar allegations. We believe these allegations are without merit and that our products comply with applicable copyright law, including the Audio Home Recording Act. We intend to vigorously defend this matter. There can be no assurance regarding the ultimate outcome of these matters, or the significance, if any, to our business, consolidated results of operations or financial position.

Matthew Enderlin v. XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. In January 2006, the plaintiff filed this action in the United States District Court for the Eastern District of Arkansas on behalf of a purported nationwide class of all XM subscribers. The complaint alleges that XM engaged in a deceptive trade practices under Arkansas and other state laws by representing that its music channels are commercial-free. The court stayed the litigation and directed the parties to arbitration. XM instituted arbitration with the American Arbitration Association pursuant to the compulsory arbitration clause in its customer service agreement. In July 2009, the arbitrator issued a partial, final arbitration award denying the plantiff’s application to certify the matter as a class action. We believe this matter is without merit and intend to vigorously defend the ongoing arbitration.

Other Matters. In the ordinary course of business, we are a defendant in various lawsuits and arbitration proceedings, including actions filed by former employees, parties to contracts or leases and owners of patents, trademarks, copyrights or other intellectual property. None of these actions are, in our opinion, likely to have a material adverse effect on our cash flows, financial position or results of operations.

 

28


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

(16) Condensed Consolidating Financial Information

Sirius Asset Management, LLC and Satellite CD Radio, Inc. (collectively, the “Guarantor Subsidiaries”) are our wholly owned subsidiaries. The Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, the debt issued by us in connection with certain of our financings. Our unrestricted subsidiary, XM Holdings and its consolidated subsidiaries, are non-guarantor subsidiaries.

These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of Sirius XM Radio Inc. and Subsidiaries.

Basis of Presentation

In presenting our condensed consolidating financial statements, the equity method of accounting has been applied to (i) our interests in the Guarantor Subsidiaries and (ii) the Guarantor Subsidiaries’ interests in the Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between us, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”

Our accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries.

 

29


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JUNE 30, 2009

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations     Consolidated
Sirius XM Radio
Inc.
 

Current assets:

           

Cash and cash equivalents

  $ 126,709      $ —        $ —        $ 414,979      $ —        $ 541,688   

Accounts receivable, net

    71,897        —          —          39,039        —          110,936   

Due from subsidiaries/affiliates

    92,800        —          —          —          (92,800     —     

Inventory, net

    24,252        —          —          3,634        —          27,886   

Prepaid expenses

    36,720        —          —          83,553        —          120,273   

Related party current assets

    1,385        —          —          107,142        —          108,527   

Other current assets

    16,886        —          —          64,727        (24,000     57,613   
                                               

Total current assets

    370,649        —          —          713,074        (116,800     966,923   

Property and equipment, net

    867,402        17,142        —          806,320        —          1,690,864   

Investment in subsidiaries/affiliates

    (717,386     —          —          —          717,386        —     

FCC licenses

    —          —          83,654        2,000,000        —          2,083,654   

Restricted investments

    3,150        —          —          250        —          3,400   

Deferred financing fees, net

    24,226        —          —          39,053        —          63,279   

Intangible assets, net

    —          —          —          647,936        —          647,936   

Goodwill

    —          —          —          —          1,834,856        1,834,856   

Due from subsidiaries/affiliates

    —          —          —          3,818        (3,818     —     

Related party long-term assets

    —          —          —          118,628        —          118,628   

Other long-term assets

    31,814        —          —          65,978        —          97,792   
                                               

Total assets

  $ 579,855      $ 17,142      $ 83,654      $ 4,395,057      $ 2,431,624      $ 7,507,332   
                                               

Current liabilities:

           

Accounts payable and accrued expenses

  $ 312,243      $ —        $ —        $ 207,977      $ (7,639   $ 512,581   

Accrued interest

    21,797        —          —          51,337        —          73,134   

Due to subsidiaries/affiliates

    (2,395     17,479        477        30,969        (46,530     —     

Current portion of deferred revenue

    523,719        —          —          464,731        7,246        995,696   

Current portion of deferred credit on executory contracts

    —          —          —          244,116        —          244,116   

Current maturities of long-term debt

    4,244        —          —          271,279        10,522        286,045   

Current maturities of long-term related party debt

    787        —          —          —          —          787   

Related party current liabilities

    1,226        —          —          114,787        (56,912     59,101   
                                               

Total current liabilities

    861,621        17,479        477        1,385,196        (93,313     2,171,460   

Deferred revenue

    122,466        —          —          162,332        —          284,798   

Deferred credit on executory contracts

    —          —          —          918,678        —          918,678   

Long-term debt

    973,127        —          —          1,668,834        165,310        2,807,271   

Long-term related party debt

    127,003        —          —          95,093        —          222,096   

Deferred tax liability

    6,100        —          15,835        895,121        (16,783     900,273   

Related party long-term liabilities

    —          —          —          21,123        —          21,123   

Other long-term liabilities

    4,858        —          —          33,071        —          37,929   
                                               

Total liabilities

    2,095,175        17,479        16,312        5,179,448        55,214        7,363,628   
                                               

Commitments and contingencies

           

Stockholders’ equity (deficit):

           

Preferred and common stock

    3,922        —          —          —          —          3,922   

Accumulated other comprehensive loss

    (6,986     —          —          (6,986     6,986        (6,986

Additional paid-in-capital

    10,252,982        —          83,654        5,989,720        (6,073,373     10,252,983   

Retained earnings (accumulated deficit)

    (11,765,238     (337     (16,312     (6,767,125     8,442,797        (10,106,215
                                               

Total stockholders’ equity (deficit)

    (1,515,320     (337     67,342        (784,391     2,376,410        143,704   
                                               

Total liabilities and stockholders’ equity (deficit)

  $ 579,855      $ 17,142      $ 83,654      $ 4,395,057      $ 2,431,624      $ 7,507,332   
                                               

 

30


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF DECEMBER 31, 2008

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations     Consolidated
Sirius XM Radio
Inc.
 

Current assets:

           

Cash and cash equivalents

  $ 173,647      $ —        $ —        $ 206,799      $ —        $ 380,446   

Accounts receivable, net

    95,247        —          —          52,727        —          147,974   

Due from subsidiaries/affiliates

    64,279        —          —          2,751        (67,030     —     

Inventory, net

    19,973        —          —          4,489        —          24,462   

Prepaid expenses

    29,852        —          —          37,351        —          67,203   

Related party current assets

    1,814        —          —          112,363        —          114,177   

Other current assets

    17,513        —          —          53,004        (11,773     58,744   
                                               

Total current assets

    402,325        —          —          469,484        (78,803     793,006   

Property and equipment, net

    816,562        12,326        —          874,588        —          1,703,476   

Investment in subsidiaries/affiliates

    (525,687     —          —          —          525,687        —     

FCC licenses

    —          —          83,654        2,000,000        —          2,083,654   

Restricted investments

    21,000        —          —          120,250        —          141,250   

Deferred financing fees, net

    9,853        —          —          30,303        —          40,156   

Intangible assets, net

    —          —          —          688,671        —          688,671   

Goodwill

    —          —          —          —          1,834,856        1,834,856   

Related party long-term assets

    —          —          —          124,607        —          124,607   

Other long-term assets

    46,735        —          —          34,284        —          81,019   
                                               

Total assets

  $ 770,788      $ 12,326      $ 83,654      $ 4,342,187      $ 2,281,740      $ 7,490,695   
                                               

Current liabilities:

           

Accounts payable and accrued expenses

  $ 405,303      $ —        $ —        $ 245,598      $ (8,081   $ 642,820   

Accrued interest

    25,920        —          —          50,543        —          76,463   

Due to subsidiaries/affiliates

    —          12,481        477        15,497        (28,455     —     

Current portion of deferred revenue

    557,392        —          —          419,707        8,081        985,180   

Current portion of deferred credit on executory contracts

    —          —          —          234,774        —          234,774   

Current maturities of long-term debt

    4,244        —          —          355,739        39,743        399,726   

Related party current liabilities

    23,018        —          —          83,930        (38,575     68,373   
                                               

Total current liabilities

    1,015,877        12,481        477        1,405,788        (27,287     2,407,336   

Deferred revenue

    116,634        —          —          131,255        —          247,889   

Deferred credit on executory contracts

    —          —          —          1,037,190        —          1,037,190   

Long-term debt

    1,163,961        —          —          1,439,102        248,677        2,851,740   

Deferred tax liability

    4,990        —          14,761        886,475        (11,773     894,453   

Related party long-term liabilities

    —          —          —          —          —          —     

Other long-term liabilities

    7,225        —          —          36,325        —          43,550   
                                               

Total liabilities

    2,308,687        12,481        15,238        4,936,135        209,617        7,482,158   
                                               

Commitments and contingencies

           

Stockholders’ equity (deficit):

           

Common and preferred stock

    3,677        —          —          —          —          3,677   

Accumulated other comprehensive loss

    (7,871     —          —          (7,871     7,871        (7,871

Additional paid-in-capital

    9,724,991        —          83,654        5,870,502        (5,954,156     9,724,991   

Retained earnings (accumulated deficit)

    (11,258,696     (155     (15,238     (6,456,579     8,018,408        (9,712,260
                                               

Total stockholders’ equity (deficit)

    (1,537,899     (155     68,416        (593,948     2,072,123        8,537   
                                               

Total liabilities and stockholders’ equity (deficit)

  $ 770,788      $ 12,326      $ 83,654      $ 4,342,187      $ 2,281,740      $ 7,490,695   
                                               

 

31


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2009

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations   Consolidated
Sirius XM Radio
Inc.
 

Revenue

  $ 283,796      $ —        $ —        $ 307,033      $ —     $ 590,829   

Cost of services

    133,383        8        —          121,041        —       254,432   

Sales and marketing

    18,191        —          —          30,502        —       48,693   

Subscriber acquisition costs

    45,342        —          —          22,309        —       67,651   

General and administrative

    31,996        —          —          34,720        —       66,716   

Engineering, design and development

    5,313        —          —          6,631        —       11,944   

Depreciation and amortization

    27,070        39        —          50,049        —       77,158   

Restructuring, impairments and related costs

    415        —          —          26,585        —       27,000   
                                             

Total operating expenses

    261,710        47        —          291,837        —       553,594   
                                             

Income (loss) from operations

    22,086        (47     —          15,196        —       37,235   

Other income (expense):

           

Interest and investment income

    310        —          —          591        —       901   

Interest expense, net of amounts capitalized

    (23,828     —          —          (88,117     16,151     (95,794

Gain (loss) on change in value of embedded derivative

    —          —          —          (19,800     19,800     —     

Loss on extinguishment of debt and facilities, net

    (307     —          —          (107,449     —       (107,756

Gain (loss) on investments

    (186,747     —          —          (1,588     196,757     8,422   

Other income (expense)

    (4,825     —          —          5,574        —       749   
                                             

Income (loss) before income taxes

    (193,311     (47     —          (195,593     232,708     (156,243

Income tax expense

    —          —          (537     (578     —       (1,115
                                             

Net income (loss)

    (193,311     (47     (537     (196,171     232,708     (157,358

Preferred stock beneficial conversion feature

    —          —          —          —          —       —     
                                             

Net income (loss) attributable to common stockholders

  $ (193,311   $ (47   $ (537   $ (196,171   $ 232,708   $ (157,358
                                             

 

32


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2008

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations   Consolidated
Sirius XM Radio
Inc.
 

Revenue

  $ 283,017      $ —        $ —        $ —        $ —     $ 283,017   

Cost of services

    141,718        —          —          215        —       141,933   

Sales and marketing

    48,757        —          —          376        —       49,133   

Subscriber acquisition costs

    81,299        —          —          93        —       81,392   

General and administrative

    42,466        —          —          1        —       42,467   

Engineering, design and development

    9,028        —          —          —          —       9,028   

Depreciation and amortization

    27,095        18        —          —          —       27,113   

Restructuring, impairments and related costs

    —          —          —          —          —       —     
                                             

Total operating expenses

    350,363        18        —          685        —       351,066   
                                             

Income (loss) from operations

    (67,346     (18     —          (685     —       (68,049

Other income (expense):

           

Interest and investment income

    1,425        —          —          —          —       1,425   

Interest expense, net of amounts capitalized

    (16,745     —          —          —          —       (16,745

Loss on extinguishment of debt and facilities, net

    —          —          —          —          —       —     

Gain (loss) on investments

    (1,246     —          —          —          1,246     —     

Other income (expense)

    13        —          —          —          —       13   
                                             

Income (loss) before income taxes

    (83,899     (18     —          (685     1,246     (83,356

Income tax expense

    —          —          (543     —          —       (543
                                             

Net income (loss)

  $ (83,899   $ (18   $ (543   $ (685   $ 1,246   $ (83,899
                                             

 

33


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations   Consolidated
Sirius XM Radio
Inc.
 

Revenue

  $ 568,354      $ —        $ —        $ 609,454      $ —     $ 1,177,808   

Cost of services

    273,362        8        —          250,417        —       523,787   

Sales and marketing

    33,484        —          —          66,632        —       100,116   

Subscriber acquisition costs

    92,082        —          —          48,637        —       140,719   

General and administrative

    59,558        —          —          66,473        —       126,031   

Engineering, design and development

    10,340        —          —          11,383        —       21,723   

Depreciation and amortization

    54,475        174        —          104,875        —       159,524   

Restructuring, impairments and related costs

    1,029        —          —          26,585        —       27,614   
                                             

Total operating expenses

    524,330        182        —          575,002        —       1,099,514   
                                             

Income (loss) from operations

    44,024        (182     —          34,452        —       78,294   

Other income (expense):

           

Interest and investment income

    522        —          —          1,119        —       1,641   

Interest expense, net of amounts capitalized

    (39,802     —          —          (156,317     34,584     (161,535

Gain (loss) on change in value of embedded derivative

    —          —          —          (78,003     78,003     —     

Loss on extinguishment of debt and facilities, net

    (17,637     —          —          (108,076     —       (125,713

Gain (loss) on investments

    (302,762     —          —          (8,525     311,803     516   

Other income (expense)

    (4,700     —          —          5,959        —       1,259   
                                             

Income (loss) before income taxes

    (320,355     (182     —          (309,391     424,390     (205,538

Income tax expense

    —          —          (1,074     (1,155     —       (2,229
                                             

Net income (loss)

    (320,355     (182     (1,074     (310,546     424,390     (207,767

Preferred stock beneficial conversion feature

    (186,188     —          —          —          —       (186,188
                                             

Net income (loss) attributable to common stockholders

  $ (506,543   $ (182   $ (1,074   $ (310,546   $ 424,390   $ (393,955
                                             

 

34


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2008

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations   Consolidated
Sirius XM Radio
Inc.
 

Revenue

  $ 553,367      $ —        $ —        $ —        $ —     $ 553,367   

Cost of services

    287,724        —          —          553        —       288,277   

Sales and marketing

    86,279        —          —          1,319        —       87,598   

Subscriber acquisition costs

    171,206        —          —          10        —       171,216   

General and administrative

    91,245        —          —          1        —       91,246   

Engineering, design and development

    17,684        —          —          —          —       17,684   

Depreciation and amortization

    53,983        36        —          —          —       54,019   

Restructuring, impairments and related costs

    —          —          —          —          —       —     
                                             

Total operating expenses

    708,121        36        —          1,883        —       710,040   
                                             

Income (loss) from operations

    (154,754     (36     —          (1,883     —       (156,673

Other income (expense):

           

Interest and investment income

    4,227        —          —          —          —       4,227   

Interest expense, net of amounts capitalized

    (34,421     —          —          —          —       (34,421

Loss on extinguishment of debt and facilities, net

    —          —          —          —          —       —     

Gain (loss) on investments

    (3,005     —          —          —          3,005     —     

Other income (expense)

    (64     —          —          —          —       (64
                                             

Income (loss) before income taxes

    (188,017     (36     —          (1,883     3,005     (186,931

Income tax expense

    —          —          (1,086     —          —       (1,086
                                             

Net income (loss)

  $ (188,017   $ (36   $ (1,086   $ (1,883   $ 3,005   $ (188,017
                                             

 

35


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF

STOCKHOLDERS’ EQUITY (DEFICIT) AND COMPREHENSIVE LOSS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio     Non-Guarantors     Eliminations     Consolidated
Sirius XM Radio
Inc.
 

Balance at December 31, 2008

  $ (1,537,899   $ (155   $ 68,416      $ (593,948   $ 2,072,123      $ 8,537   

Net income (loss)

    (320,355     (182     (1,074     (310,546     424,390        (207,767

Other comprehensive loss:

           

Unrealized gain on available-for-sale securities, net of tax

    548        —          —          548        (548     548   

Foreign currency translation adjustment, net of tax

    337        —          —          337        (337     337   
                                               

Total comprehensive loss

    (319,470     (182     (1,074     (309,661     423,505        (206,882

Issuance of preferred stock - related party, net of issuance costs

    224,004        —          —          —          —          224,004   

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

    1,291        —          —          —          —          1,291   

Structuring fee on 10% Senior PIK Notes due 2011

    5,918        —          —          —          —          5,918   

Share-based payment expense

    44,392        —          —          —          —          44,392   

Issuance of restricted stock units in satisfaction of accrued compensation

    31,280                31,280   

Exchange of 2 1/2% Convertible Notes due 2009, including accrued interest

    35,164                35,164   

Contributed capital

    —          —          —          119,218        (119,218     —     
                                               

Balance at June 30, 2009

  $ (1,515,320   $ (337   $ 67,342      $ (784,391   $ 2,376,410      $ 143,704   
                                               

 

36


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2009

 

(in thousands)

  Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio   Non-Guarantors     Eliminations     Consolidated
Sirius XM Radio
Inc.
 

Net cash provided by (used in) operating activities

  $ 36,662      $ 4,990      $ —     $ 101,388      $ (6,181   $ 136,859   
                                             

Cash flows from investing activities:

           

Additions to property and equipment

    (118,700     (4,990     —       (4,121     —          (127,811

Purchases of restricted and other investments

    —          —          —       —          —          —     

Merger-related costs

    —          —          —       —          —          —     

Sale of restricted and other investments

    —          —          —       —          —          —     
                                             

Net cash used in investing activities

    (118,700     (4,990     —       (4,121     —          (127,811
                                             

Cash flows from financing activities:

           

Preferred stock issuance costs, net

    (3,712     —          —       —          —          (3,712

Long-term borrowings, net of costs

    (8,732     —          —       387,427        6,181        384,876   

Related party long-term borrowings, net of costs

    221,247        —          —       95,093        —          316,340   

Debt issuance costs

    —          —          —       —          —          —     

Payment of premiums on redemption of debt

    —          —          —       (16,572     —          (16,572

Repayment of related party long-term borrowings, net of costs

    (867     —          —       (100,000       (100,867

Repayment of long-term borrowings

    (172,836     —          —       (255,035     —          (427,871
                                             

Net cash provided by financing activities

    35,100        —          —       110,913        6,181        152,194   
                                             

Net increase (decrease) in cash and cash equivalents

    (46,938     —          —       208,180        —          161,242   

Cash and cash equivalents at beginning of period

    173,647        —          —       206,799        —          380,446   
                                             

Cash and cash equivalents at end of period

  $ 126,709      $ —        $ —     $ 414,979      $ —        $ 541,688   
                                             

 

37


SIRIUS XM RADIO INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - Continued

(Dollar amounts in thousands, unless otherwise stated)

 

SIRIUS XM RADIO INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2008

 

(in thousands)   Sirius XM Radio
Inc.
    Sirius Asset Mgmt
LLC
    Satellite CD Radio   Non-Guarantors     Eliminations   Consolidated
Sirius XM Radio
Inc.
 

Net cash (used in) provided by operating activities

  $ (127,587   $ 5,029      $ —     $ (8,523   $ —     $ (131,081
                                           

Cash flows from investing activities:

           

Additions to property and equipment

    (68,669     (5,029     —       —          —       (73,698

Purchases of restricted and other investments

    (3,000     —          —       —          —       (3,000

Merger-related costs

    (14,843     —          —       —          —       (14,843

Sale of restricted and other investments

    5,004        —          —       —          —       5,004   
                                           

Net cash used in investing activities

    (81,508     (5,029     —       —          —       (86,537
                                           

Cash flows from financing activities:

           

Proceeds from exercise of warrants and stock options

    181        —          —       —          —&n