Exhibit 99.2
 
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
The unaudited pro forma condensed combined balance sheet combines (i) the historical consolidated balance sheets of Sirius Satellite Radio Inc. and its subsidiaries (“Sirius”) and XM Satellite Radio Holdings Inc. (“Holdings”, and its subsidiaries together with Holdings, “XM”), giving effect to the merger of Holdings and Vernon Merger Corporation (the “merger”), pursuant to which Holdings became a wholly-owned subsidiary of Sirius, as well as the refinancing of a substantial portion of XM’s existing indebtedness and raising of certain additional liquidity, which we refer to as the “Refinancing Transactions”, as if they had been consummated on March 31, 2008 and (ii) the unaudited pro forma condensed combined statements of operations for the three months ended March 31, 2008 and for the year ended December 31, 2007, giving effect to the merger and the Refinancing Transactions as if they had occurred on January 1, 2007. The historical consolidated financial information has been adjusted to give effect to pro forma events that are (i) directly attributable to the merger, (ii) factually supportable, and (iii) with respect to the statement of operations, expected to have a continuing impact on the combined results. Intercompany transactions have not been eliminated as the preliminary estimates are not material to the unaudited pro forma condensed combined financial statements.
 
The unaudited pro forma condensed combined financial statements are not necessarily indicative of the operating results or financial position that would have occurred if the merger had been completed at the dates indicated. It may be necessary to further reclassify XM’s financial statements to conform to those classifications that are determined by the combined company to be most appropriate. While some reclassifications of prior periods have been included in the unaudited pro forma condensed combined financial statements, further reclassifications may be necessary.
 
The unaudited pro forma condensed combined financial statements were prepared using the purchase method of accounting with Sirius treated as the acquiring entity. Accordingly, consideration paid by Sirius to complete the merger with XM will be allocated to XM’s assets and liabilities based upon their estimated fair values as of the date of completion of the merger. The allocation is dependent upon certain valuations and other studies that have not progressed to a stage where there is sufficient information to make a definitive allocation. Additionally, a final determination of the fair value of XM’s assets and liabilities, which cannot be made prior to the completion of the transaction, will be based on the actual net tangible and intangible assets of XM that exist as of the date of completion of the merger. Accordingly, the pro forma purchase price adjustments are preliminary, subject to further adjustments as additional information becomes available and as additional analyses are performed and have been made solely for the purpose of providing the unaudited pro forma condensed combined financial information presented below. Sirius estimated the fair value of XM’s assets and liabilities based on discussions with XM’s management, due diligence and information presented in public filings. Pending regulatory approval from the FCC, both companies were limited in their ability to share information. Therefore, certain valuations have not been performed on tangible and intangible assets and liabilities such as property and equipment and deferred revenue and therefore an estimate of fair value is not included as a pro forma adjustment. Upon completion of the merger, final valuations will be performed. Increases or decreases in the fair value of relevant balance sheet amounts including property and equipment, deferred revenue, debt and intangibles will result in adjustments to the balance sheet and/or statement of operations. There can be no assurance that the final determination will not result in material changes.
 
These pro forma results reflect the impact of the following Refinancing Transactions:
 
  •  the repurchase of the $600 million aggregate principal amount of 9.75% Senior Notes due 2014 (the “9.75% Notes”) of XM Satellite Radio Inc. (“XM Inc.”) for cash,
 
  •  the repurchase of $200 million aggregate principal amount of Senior Floating Rate Notes due 2013 (the “Senior Floating Rate Notes”) of XM Inc. for cash,
 
  •  amendment of the indenture for Holdings’ 1.75% Convertible Senior Notes due 2009 (the “1.75% Notes”) to increase the interest rate to 10% per annum in return for the noteholders agreeing not to assert any claim that the merger constitutes a Fundamental Change under the existing indenture,


1


 

 
  •  issuance by XM Inc. of $550 million aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “New Exchangeable Notes”),
 
  •  issuance by XM Inc. of $778.5 million aggregate principal amount of 13% Senior Notes due 2014 (the “13% Senior Notes”), the debt balance of which is reflected herein net of original issue discount of approximately $78.4 million, and
 
  •  payment of $309.4 million for XM’s transponder repurchase obligation, for both debt and equity holders of a consolidated variable interest entity.
 
Sirius expects to incur significant costs associated with integrating Sirius’ and XM’s businesses. The unaudited pro forma condensed combined financial statements do not reflect the cost of any integration activities or benefits that may result from synergies that may be derived from any integration activities. In addition, the unaudited pro forma combined consolidated financial statements do not reflect one-time fees and expenses of $25 million payable by Sirius as a result of the merger or payments contemplated by the Consent Decrees.


2


 

 
SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
 
Unaudited Pro Forma Condensed Combined Statement of Operations
 
                                 
    For the Three Months Ended March 31, 2008  
                Pro Forma
       
    Sirius     XM     Adjustments     Combined  
    (in thousands, except per share amounts)  
 
Revenue:
                               
Subscriber revenue, including effects of mail-in rebates
  $ 255,640     $ 275,725     $ 5,144 (a)   $ 536,509  
Advertising revenue, net of agency fees
    8,408       9,118             17,526  
Equipment revenue
    6,063       4,321             10,384  
Other revenue
    239       19,290       (5,144 )(a)     14,385  
                                 
Total revenue
    270,350       308,454             578,804  
Operating Expenses (Excludes Depreciation Shown Separately Below)(1):
                               
Cost of services:
                               
Satellite and transmission
    7,822       13,181       6,960 (b)     27,963  
Programming and content
    61,692       51,562             113,254  
Revenue share and royalties
    42,320       68,822             111,142  
Customer service and billing
    26,922       34,310             61,232  
Cost of equipment
    7,588       8,551             16,139  
Broadcast and operations
          17,451       (17,451 )(b)      
Sales and marketing
    38,467             43,001 (c)     81,468  
Ad sales
          4,703       (4,703 )(c)      
Marketing
          109,822       (38,298 )(c)      
                      (71,524 )(d)        
Subscriber acquisition costs
    89,824             71,524 (d)     161,348  
General and administrative
    48,778       30,729       10,491 (b)     89,998  
Engineering, design and development
    8,656       11,020             19,676  
Depreciation and amortization
    26,906       51,987       31,917 (f)     110,810  
                                 
Total operating expenses
    358,975       402,138       31,917       793,030  
                                 
Loss from operations
    (88,625 )     (93,684 )     (31,917 )     (214,226 )
Other Income (Expense):
                               
Interest and investment income
    2,802       1,675             4,477  
Interest expense, net of amounts capitalized
    (17,675 )     (29,327 )     (21,878 )(e)     (68,880 )
Loss from impairment of investments
                       
Loss from de-leveraging transactions
                       
Other income (expense)
    (77 )     (7,602 )           (7,679 )
                                 
Total other income (expense)
    (14,950 )     (35,254 )     (21,878 )     (72,082 )
                                 
Loss before income taxes
    (103,575 )     (128,938 )     (53,795 )     (286,308 )
Income tax (expense) benefit
    (543 )     (331 )           (874 )
                                 
Net loss
  $ (104,118 )   $ (129,269 )   $ (53,795 )   $ (287,182 )
                                 
Net loss per common share — basic and diluted
                          $ (0.10 )
Weighted average shares used in computing net loss per common share — basic and diluted
                            2,943,585  
                               
 
(1) Amounts related to stock-based compensation included in Operating expenses were as follows:
                                 
Satellite and transmission
  $ 797     $ 642     $ 793 (b)   $ 2,232  
Programming and content
    2,789       2,543             5,332  
Broadcast and operations
          1,263       (1,263 )(b)      
Customer service and billing
    276       889             1,165  
Sales and marketing
    5,240             3,652 (c)     8,892  
Ad sales
          607       (607 )(c)      
Marketing
          3,045       (3,045 )(c)      
Subscriber acquisition costs
    14                   14  
General and administrative
    11,998       6,052       470 (b)     18,520  
Engineering, design and development
    1,148       2,463             3,611  
                                 
Total stock-based compensation
  $ 22,262     $ 17,504     $     $ 39,766  
                                 
 
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements


3


 

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
 
Unaudited Pro Forma Condensed Combined Statement of Operations
 
                                 
    For the Year Ended December 31, 2007  
                Pro Forma
       
    Sirius     XM     Adjustments     Combined  
    (in thousands, except per share amounts)  
 
Revenue:
                               
Subscriber revenue, including effects of mail-in rebates
  $ 854,933     $ 1,005,479     $ 19,354 (a)   $ 1,879,766  
Advertising revenue, net of agency fees
    34,192       39,148             73,340  
Equipment revenue
    29,281       28,333             57,614  
Other revenue
    3,660       63,582       (19,354 )(a)     47,888  
                                 
Total revenue
    922,066       1,136,542             2,058,608  
Operating Expenses (Excludes Depreciation Shown Separately Below)(1):
                               
Cost of services:
                               
Satellite and transmission
    27,907       54,434       26,602 (b)     108,943  
Programming and content
    236,059       183,900             419,959  
Revenue share and royalties
    146,715       256,344             403,059  
Customer service and billing
    93,817       126,776             220,593  
Cost of equipment
    45,458       62,003             107,461  
Broadcast and operations
          65,067       (65,067 )(b)      
Sales and marketing
    173,572             243,915 (c)     417,487  
                      (223,323 )(c)        
Marketing
          482,466       (259,143 )(d)      
Ad sales
          20,592       (20,592 )(c)      
Subscriber acquisition costs
    407,642             259,143 (d)     666,785  
General and administrative
    155,863       150,109       38,465 (b)     344,437  
Engineering, design and development
    41,343       33,077             74,420  
Depreciation and amortization
    106,780       213,211       127,667 (f)     447,658  
                                 
Total operating expenses
    1,435,156       1,647,979       127,667       3,210,802  
                                 
Loss from operations
    (513,090 )     (511,437 )     (127,667 )     (1,152,194 )
Other Income (Expense):
                               
Interest and investment income
    20,570       14,084             34,654  
Interest expense, net of amounts capitalized
    (70,328 )     (116,605 )     (86,961 )(e)     (273,894 )
Loss from de-leveraging transactions
          (3,693 )           (3,693 )
Loss from impairment of investments
          (39,665 )           (39,665 )
Other income (expense):
    31       (26,004 )           (25,973 )
                                 
Total other income (expense)
    (49,727 )     (171,883 )     (86,961 )     (308,571 )
                                 
Loss before income taxes
    (562,817 )     (683,320 )     (214,628 )     (1,460,765 )
Income tax (expense) benefit
    (2,435 )     939             (1,496 )
                                 
Net loss
  $ (565,252 )   $ (682,381 )   $ (214,628 )   $ (1,462,261 )
                                 
Net loss per common share — basic and diluted
                          $ (0.50 )
                                 
Weighted average shares used in computing net loss per common share — basic and diluted
                            2,906,095  
                                 
                               
 
(1) Amounts related to stock-based compensation included in Operating expenses were as follows:
Satellite and transmission
  $ 2,198     $ 2,308     $ 2,716 (b)   $ 7,222  
Programming and content
    9,643       8,855             18,498  
Broadcast and operations
          4,316       (4,316 )(b)      
Customer service and billing
    708       2,483             3,191  
Sales and marketing
    15,607             24,452 (c)     40,059  
Advertising and marketing
          12,833       (12,833 )(c)      
Ad sales
          1,910       (1,910 )(c)      
Marketing
          9,709       (9,709 )(c)      
Subscriber acquisition costs
    2,843             9,167 (d)     12,010  
Subsidies and distribution
          9,167       (9,167 )(d)      
General and administrative
    44,317       26,689       1,600 (b)     72,606  
Engineering, design and development
    3,584       7,929             11,513  
                                 
Total stock-based compensation
  $ 78,900     $ 86,199     $     $ 165,099  
                                 
 
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements


4


 

SIRIUS SATELLITE RADIO INC. AND SUBSIDIARIES
 
Unaudited Pro Forma Condensed Combined Balance Sheet
 
                                 
    As of March 31, 2008  
                Pro Forma
       
    Sirius     XM     Adjustments     Combined  
    (in thousands, except share and per share amounts)  
 
ASSETS
Current Assets:
                               
Cash and cash equivalents
  $ 252,508     $ 211,542     $ 38,083 (e)   $ 502,133  
Accounts receivable, net of allowance for doubtful accounts
    22,743       56,657             79,400  
Receivable from distributors
    69,992                   69,992  
Inventory, net
    25,344             10,200 (h)     35,544  
Related party current assets
          99,746             99,746  
Prepaid and other current assets
    88,177       102,916       (10,200 )(h)     180,893  
                                 
Total current assets
    458,764       470,861       38,083       967,708  
Property and equipment, net
    798,852       677,509       161,772 (i)     1,638,133  
System under construction
          161,772       (161,772 )(i)      
FCC license
    83,654       141,412       1,158,588 (k)     1,383,654  
Intangible assets, net
          3,064       433,936 (k)     437,000  
Goodwill
                5,744,104 (l)     5,744,104  
Related party prepaid expenses, net of current portion
          136,726             136,726  
                      (42,975 )(s)        
Other long-term assets
    128,553       70,830       52,515 (e)     208,923  
                                 
Total assets
  $ 1,469,823     $ 1,662,174     $ 7,384,251     $ 10,516,248  
                                 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
                               
Accounts payable and accrued expenses
  $ 320,897     $ 217,457     $ 22,025 (j)   $ 560,379  
Accrued interest
    12,626       39,671       (31,411 )(e)     20,886  
Current portion of long-term debt
    304,749       8,978             313,727  
Due to related parties
          64,819             64,819  
Deferred revenue
    561,710       433,059             994,769  
                                 
Total current liabilities
    1,199,982       763,984       (9,386 )     1,954,580  
Long-term debt
    977,994       1,666,819       219,366 (e)     2,864,179  
Deferred revenue, net of current portion
    111,857       226,982             338,839  
Other long-term liabilities
    19,424       42,159       463,435 (g)     525,018  
                                 
Total liabilities
    2,309,257       2,699,944       673,415       5,682,616  
                                 
Commitments and contingencies
                               
Minority interest
          60,208       (60,208 )(e)      
Stockholders’ Equity:
                               
Series A Convertible preferred stock, par value $0.001; 50,000,000 shares authorized, 24,808,959 shares issued and outstanding
          54       (54 )(m)     25  
                      25 (o)        
Common stock, $0.001 par value; 4,500,000,000 shares authorized, 2,968,820,907 shares issued and outstanding
    1,499       3,195       (3,195 )(m)     2,969  
                      1,426 (p)        
                      44 (n)        
Accumulated other comprehensive income, net of tax
          9,345       (9,345 )(m)      
Additional paid-in capital
    3,662,157       3,199,554       (3,199,554 )(m)     9,333,728  
                      220,864 (q)        
                      165,139 (n)        
                      5,403,489 (p)        
                      (117,921 )(r)        
Accumulated deficit
    (4,503,090 )     (4,310,126 )     4,310,126 (m)     (4,503,090 )
                                 
Total stockholders’ (deficit) equity
    (839,434 )     (1,097,978 )     6,771,044       4,833,632  
                                 
Total liabilities and stockholders’ (deficit) equity
  $ 1,469,823     $ 1,662,174     $ 7,384,251     $ 10,516,248  
                                 
 
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements


5


 

Notes to Unaudited Pro Forma Condensed Combined Financial Statements
 
Note 1.   Basis of Presentation
 
On February 19, 2007, we and XM jointly announced the execution of the Agreement and Plan of Merger with Holdings, under which Holdings’ business would be combined with ours through a merger of Holdings and Vernon Merger Corporation, our wholly-owned subsidiary, resulting in XM becoming direct or indirect wholly-owned subsidiaries of us. The original agreement, set to expire on March 1, 2008, was extended for rolling two week periods unless either party notified the other of its intention not to extend. The accompanying unaudited pro forma condensed combined financial statements present the pro forma consolidated financial position and results of operations of the combined company based upon the historical financial statements of Sirius and XM, after giving effect to the merger and adjustments described in these footnotes, and are intended to reflect the impact of the merger on us.
 
The accompanying unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not give effect to any cost savings, revenue synergies or restructuring costs which may result from the integration of our and XM’s operations.
 
The unaudited pro forma condensed combined balance sheet reflects the merger and the Refinancing Transactions as if they were completed on March 31, 2008 and includes pro forma adjustments for our preliminary valuations of certain intangible assets. The pro forma debt balances do not include $162.5 million of incremental debt incurred by XM since March 31, 2008 or $78.4 million of original issue discount relating to the 13% Senior Notes. These adjustments are subject to further adjustment as additional information becomes available and additional analyses are performed. The unaudited pro forma condensed combined statements of operations reflect the merger and the Refinancing Transactions as if they had been completed on January 1, 2007.
 
The pro forma condensed combined balance sheet has been adjusted to reflect the preliminary allocation of the purchase price to identifiable net assets acquired and the excess purchase price to goodwill. The purchase price allocation included within these unaudited pro forma condensed combined financial statements is based upon a purchase price of approximately $5.8 billion. This amount was derived from the estimated number of shares of our common stock to be issued of approximately 1.5 billion, based on the outstanding shares of XM common stock, preferred stock and restricted stock on March 31, 2008 and the exchange ratio of 4.6 per each XM share, at a price of $3.79 per share, the average closing price of our shares of common stock for the two days prior to, including and two days subsequent to the public announcement of the merger. The actual number of newly issued shares of our common stock to be delivered in connection with the merger was based upon the actual number of XM shares issued and outstanding when the merger closed. The purchase price also includes the estimated fair value of warrants, restricted stock and stock options issued as of the closing date of the merger in exchange for similar securities of XM. XM options, restricted stock and warrants were exchanged for stock options, restricted stock and warrants in us and the price per share was adjusted for the 4.6 exchange ratio. Vested stock options, restricted stock and warrants issued by us in exchange for options, restricted stock and warrants held by employees and directors of XM were considered part of the purchase price. Accordingly, the purchase price included an estimated fair value of stock options, restricted stock and warrants of approximately $221 million.
 
The fair value of the Sirius options that were issued in exchange for XM options was estimated by using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The more significant assumptions used in estimating the fair value include volatility of 60 percent, an expected life of 1-6 years based on the age of the original award, and a risk-free interest rate of 2.46%.


6


 

The preliminary consideration is as follows:
 
                                 
                Additional
       
    Common
    Preferred
    Paid in
       
    Stock     Stock     Capital     Total  
    (in thousands)  
 
Total Consideration
                               
Issuance of Sirius common stock to XM stockholders (1.4 billion shares at $3.79)
  $ 1,426     $     $ 5,403,489     $ 5,404,915  
Issuance of Sirius preferred stock to XM stockholders (24.8 million shares at $3.79)
          25             25  
Issuance of Sirius common stock to XM restricted stockholders (43.6 million shares at $3.79)
    44             165,139       165,183  
Estimated fair value of outstanding XM stock options and restricted stock (See Note 2q)
                155,672       155,672  
Estimated fair value of outstanding XM warrants (See Note 2q)
                65,191       65,191  
                                 
Total consideration
  $ 1,470     $ 25     $ 5,789,491     $ 5,790,986  
                                 
 
The table below represents a preliminary allocation of the total consideration to XM’s tangible and intangible assets and liabilities based on management’s preliminary estimate of their respective fair values as of March 31, 2008.
 
         
    Total  
    (in thousands)  
 
XM historical net book value of assets and liabilities assumed
  $ (1,037,770 )
XM minority interest assumed
    (60,208 )
Elimination of XM historical FCC license
    (141,412 )
Adjustment to fair value FCC license
    1,300,000  
Elimination of XM historical intangible asset related to subscriber and advertiser relationships and trademarks
    (3,064 )
Adjustment to fair value intangible assets related to subscriber and advertiser relationships and trademarks
    437,000  
Adjustment to deferred taxes related to increased FCC license carrying value
    (463,435 )
Estimated transaction costs
    (65,000 )
Residual goodwill created from the merger
    5,744,104  
Unrecognized compensation on unvested stock options and restricted stock
    117,921  
Loss on commitment to purchase transponders of XM-4 satellite
    (16,057 )
Write-off of debt issuance costs
    (21,093 )
         
Total consideration allocated
  $ 5,790,986  
         
 
Upon completion of the fair value assessment after the merger, we anticipate that the ultimate price allocation will differ from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be recorded as adjustments to those assets and liabilities and residual amounts will be allocated to goodwill.


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Note 2.   Pro Forma Adjustments
 
a. Reclassify XM’s activation revenue which was reported in XM’s other revenue to subscriber revenue to conform to our presentation.
 
b. Reclassify XM’s broadcast expense included in broadcast and operation expenses to satellite and transmission and reclassify XM’s operation expense, which includes facilities and information technology expense, included in broadcast and operation expense to general and administrative expenses to conform to our presentation.
 
c. Reclassify (i) ad sales expense and (ii) advertising and marketing and retention and support included in marketing to sales and marketing to conform to our presentation.
 
d. Reclassify subsidies and distribution included in marketing to subscriber acquisition costs to conform to our presentation.
 
e. Reflects the impact of the refinancing transactions. The following table details the impact to long-term debt and interest expense related to these transactions (in thousands):
                                                 
    Actual     Pro Forma  
    Debt
    Interest
    Interest
    Debt
    Interest
    Interest
 
    Outstanding
    Expense
    Expense
    Outstanding
    Expense
    Expense
 
    at March 31,
    for March 31,
    for December 31,
    at March 31,
    for March 31,
    for December 31,
 
    2008     2008     2007     2008     2008     2007  
 
9.75% Senior Notes
  $ 600,000     $ 14,625     $ 58,500     $     $     $  
1.75% Notes
    400,000       1,750       7,000       400,000       10,000       40,000  
Senior Floating Rate Notes
    200,000       4,000       19,717                    
Variable Interest Entity
    230,739       5,749       20,293                    
New Exchangeable Notes(1)
                      550,000       8,250       33,000  
13% Senior Notes
                      700,105       28,112       112,449  
                                                 
Totals
  $ 1,430,739     $ 26,124     $ 105,510     $ 1,650,105     $ 46,362     $ 185,449  
                                                 
 
 
(1)  An interest rate of 6% is assumed for the New Exchangeable Notes. A change of 0.125% in the interest rate for the New Exchangeable Notes would change annual interest expense by $688 thousand.
 
The impact to outstanding debt is an increase of $219,366. Interest expense also increases by $20,238 and $79,939 for the three months ended March 31, 2008 and the twelve months ended December 31, 2007, respectively.
 
The debt issuance costs resulting from these refinancing activities totaling $69,238 are reflected in the pro forma condensed combined balance sheet in Other long-term assets. Interest expense also increases by $1,639 and $7,022 for the three months ended March 31, 2008 and the twelve months ended December 31, 2007, respectively.
 
Following the merger, XM is required to make an offer to repurchase the transponders of its XM-4 satellite in accordance with the terms of a sale-leaseback transaction. The expected payout to settle this obligation is $76,265 which is comprised of a minority interest payable of $60,208 at March 31, 2008 and a loss on the redemption of $16,057.
 
At March 31, 2008, there was $31,411 of accrued interest expense.
 
The 13% Senior Notes are reflected net of original issue discount of $78,394.


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f. Adjustment to reflect the additional amortization expense due to the adjustment of certain XM’s intangible assets to fair value at the time of the merger (See Note 1). Pro Forma amortization expense for the twelve months ended December 31, 2007 and three months ended March 31, 2008 of $128 million and $32 million, respectively, was recorded utilizing the straight-line method of amortization for the following intangible assets:
 
                                 
                Pro Forma
    Pro Forma
 
                Amortization
    Amortization
 
                Expense for
    Expense for
 
    Fair Value at
    Estimated Useful
    March 31,
    December 31,
 
    Acquisition     Lives (Years)     2008     2007  
    (dollars in thousands)  
 
Subscriber relationships
  $ 350,000       3     $ 29,167     $ 116,667  
Advertiser relationships
    7,000       7       250       1,000  
Trademarks
    80,000       8       2,500       10,000  
                                 
Pro forma amortization expense
                  $ 31,917     $ 127,667  
                                 
 
g. Reflects the adjustment to record the deferred tax liability for the incremental fair value adjustment of the FCC license included as a pro forma adjustment in the balance sheet calculated as follows (in thousands):
 
         
Net adjustment to fair value FCC license
  $ 1,158,588  
Combined federal and state rate
    40 %
         
Deferred tax liability
  $ 463,435  
         
 
h. Reflects the estimated reclassification of XM’s net inventory included in prepaid and other current assets to inventory to conform to our presentation.
 
i. Reflects the estimated reclassification of XM’s system under construction costs to property and equipment to conform to our presentation.
 
j. Reflects the adjustment to record as liabilities the estimated transaction cost to be incurred by us. Included in the pro forma adjustment is our estimated investment banking, attorney and independent accountant fees, and other transaction-related costs.
 
k. Reflects a preliminary allocation of the purchase price to XM’s FCC License and certain long-lived intangible assets. The remaining unallocated purchase price was allocated to Goodwill (See Note 1). The preliminary allocation of the purchase price was calculated as follows (in thousands):
 
                             
    Book Value as of
  Fair Value as of
  Pro Forma
   
    March 31, 2008   March 31, 2008   Adjustment   Fair Value Range
 
FCC License
  $ 141,412     $ 1,300,000     $ 1,158,588     $1,000,000 - $1,500,000
Intangibles, net
    3,064       437,000       433,936     $381,000 - $495,000
 
The fair value of XM’s FCC license was based on the Greenfield Method. The key assumptions in building the model included projected revenues and estimated start up costs, which were based primarily on the operating histories of XM and Sirius. The fair value of XM’s trademarks was estimated based on the Relief from Royalty Method. The royalties relieved for the use of the XM trademarks were computed by multiplying the projected revenues by a hypothetical royalty rate. The resulting royalties relieved represent the cost saved by XM from not having to license the trademarks from another owner. The estimation of a hypothetical royalty rate was based on comparable licensing agreements and the perceived impact the trademarks have on the expected cash flow of XM. The fair values of XM’s subscriber and advertising relationships were based on projected discounted cash flows, which were derived from projected revenues after adjusting for attrition rates based on XM’s historical experience.


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Each of these calculations included an estimated discount rate which incorporates the difficulties and uncertainties associated with the satellite radio industry.
 
The final purchase price allocations may result in different allocations for tangible and intangible assets than presented in the unaudited pro forma condensed combined financial statements, and those differences could be material.
 
l. Residual goodwill created from the merger (See Note 1).
 
m. Eliminate the historical stockholders’ deficit accounts of XM at March 31, 2008.
 
n. Reflect the issuance of 4.6 shares of our common stock for each share of XM restricted shares outstanding as follows (in thousands except for share data):
 
         
XM restricted shares outstanding at March 31, 2008
    9,474,765  
Exchange ratio
    4.6  
Sirius common shares to be issued
    43,583,919  
Price per share
  $ 3.79  
Aggregate value of Sirius consideration
  $ 165,183  
Value attributed to par at $.001 par value
  $ 44  
Balance to capital in excess of par value
  $ 165,139  
 
o. Reflect the issuance of 4.6 shares of our preferred stock for each share of XM preferred stock outstanding as follows (in thousands except for share data):
 
         
XM preferred shares outstanding at March 31, 2008
    5,393,252  
Exchange ratio
    4.6  
Sirius preferred shares to be issued
    24,808,959  
Value attributed to par at $.001 par value
  $ 25  
 
p. Reflect the issuance of 4.6 shares of our common stock for each share of XM common stock outstanding as follows (in thousands except for share data):
 
         
XM common shares outstanding at March 31, 2008
    310,021,501  
Exchange ratio
    4.6  
Sirius common shares to be issued
    1,426,098,905  
Price per share
  $ 3.79  
Aggregate value of Sirius consideration
  $ 5,404,915  
Value attributed to par at $.001 par value
  $ 1,426  
Balance to capital in excess of par value
  $ 5,403,489  
 
q. Reflect the fair value of XM’s employees’ stock options, warrants and restricted stock. The fair value of XM’s options to be exchanged for Sirius options was estimated using a Black Scholes pricing model. Option pricing models require the use of highly subjective assumptions including expected stock price and volatility, that when changed, can materially affect fair value estimates. The more significant assumptions used in estimating the fair value include volatility of 60 percent, an expected life of 1-6 years based on the age of the original award, and a risk-free interest rate of 2.46%.


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r. Reflect the revaluation of XM’s unvested stock options and restricted stock as of March 31, 2008. The original valuation of these awards were determined by XM at the original grant dates. Upon completion of the merger, these awards will be revalued using current market assumptions. The fair value of these awards approximates $120 million at March 31, 2008. Annual compensation expense related to these awards is expected to approximate the historic compensation expense. Total compensation expense for these awards for the period ended March 31, 2008 was approximately $18 million. For unvested stock options, the average remaining vesting period is 1.51 years and the average remaining contractual life is 5.63 years. For unvested restricted stock awards, the average remaining vesting period is 1.9 years. Pursuant to FAS 123(R), unvested awards are not considered a component of purchase price and are solely recognized in compensation expense in future periods. $120 million is a reduction of additional paid-in capital.
 
s. Reclassify transaction related costs from Other long-term assets to Goodwill.


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