Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2010
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM                      TO                     
COMMISSION FILE NUMBER 001-34295
 
SIRIUS XM RADIO INC.
(Exact name of registrant as specified in its charter)
     
Delaware   52-1700207
(State or other jurisdiction of   (I.R.S. Employer Identification Number)
incorporation or organization)    
     
1221 Avenue of the Americas, 36th Floor    
New York, New York   10020
(Address of principal executive offices)   (Zip Code)
Registrant’s telephone number, including area code: (212) 584-5100
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
             
 
Large accelerated filer þ   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o
        (Do not check if a smaller reporting company)    
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
(Class)
 
  (Outstanding as of July 30, 2010)
 
COMMON STOCK, $0.001 PAR VALUE   3,888,667,924 SHARES
 
 

 


 

SIRIUS XM RADIO INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
             
Item No.   Description        
   
 
       
           
   
 
       
   
 
       
Item 1.          
   
 
       
        1  
   
 
       
        2  
   
 
       
        3  
   
 
       
        4  
   
 
       
        6  
   
 
       
Item 2.       35  
   
 
       
Item 3.       59  
   
 
       
Item 4.       59  
   
 
       
           
   
 
       
Item 1.       60  
   
 
       
Item 1A.       60  
   
 
       
Item 2.       60  
   
 
       
Item 3.       60  
   
 
       
Item 4.       60  
   
 
       
Item 5.       60  
   
 
       
Item 6.       60  
   
 
       
        61  
 EX-4.1
 EX-31.1
 EX-31.2
 EX-32.1
 EX-32.2
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT

 


Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                                 
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
(in thousands, except per share data)   2010   2009   2010   2009
 
                               
Revenue:
                               
Subscriber revenue, including effects of rebates
     $ 601,630        $ 561,763        $ 1,181,139        $ 1,121,151  
Advertising revenue, net of agency fees
    15,797       12,564       30,323       24,869  
Equipment revenue
    18,520       10,928       32,802       20,837  
Other revenue
    63,814       5,574       119,280       10,951  
 
               
Total revenue
    699,761       590,829       1,363,544       1,177,808  
Operating expenses (depreciation and amortization shown separately below):
                               
Cost of services:
                               
Revenue share and royalties
    107,901       95,831       206,085       196,297  
Programming and content
    72,019       72,102       150,452       152,511  
Customer service and billing
    58,414       58,833       114,625       119,041  
Satellite and transmission
    19,982       19,615       40,100       39,894  
Cost of equipment
    7,805       8,051       15,724       16,044  
Subscriber acquisition costs
    110,383       67,651       199,762       140,719  
Sales and marketing
    56,177       48,693       105,294       100,116  
Engineering, design and development
    11,247       11,944       22,684       21,723  
General and administrative
    59,166       66,716       116,746       126,031  
Depreciation and amortization
    69,230       77,158       139,495       159,524  
Restructuring, impairments and related costs
    1,803       27,000       1,803       27,614  
 
               
Total operating expenses
    574,127       553,594       1,112,770       1,099,514  
 
               
Income from operations
    125,634       37,235       250,774       78,294  
Other income (expense):
                               
Interest expense, net of amounts capitalized
    (76,802 )     (98,080 )     (154,670 )     (166,058 )
Loss on extinguishment of debt and credit facilities, net
    (31,871 )     (107,756 )     (34,437 )     (125,713 )
Interest and investment income (loss)
    378       9,323       (2,892 )     2,157  
Other (loss) income
    (601 )     749       728       1,259  
 
               
Total other expense
    (108,896 )     (195,764 )     (191,271 )     (288,355 )
 
               
Income (loss) before income taxes
    16,738       (158,529 )     59,503       (210,061 )
Income tax expense
    (1,466 )     (1,115 )     (2,633 )     (2,229 )
 
               
Net income (loss)
    15,272       (159,644 )     56,870       (212,290 )
Preferred stock beneficial conversion feature
    -       -       -       (186,188 )
 
               
Net income (loss) attributable to common stockholders
     $ 15,272     $ (159,644 )      $ 56,870     $ (398,478 )
 
               
Net income (loss) per common share:
                               
Basic
     $ 0.00     $ (0.04 )      $ 0.02     $ (0.11 )
 
               
Diluted
     $ 0.00     $ (0.04 )      $ 0.01     $ (0.11 )
 
               
 
                               
Weighted average common shares outstanding:
                               
Basic
    3,683,595       3,586,742       3,682,750       3,555,489  
 
               
Diluted
    6,363,955       3,586,742       6,357,507       3,555,489  
 
               
See accompanying Notes to the unaudited consolidated financial statements

1


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    June 30, 2010   December 31, 2009
(in thousands, except share and per share data)   (unaudited)          
ASSETS
               
Current assets:
               
Cash and cash equivalents
     $ 258,854        $ 383,489  
Accounts receivable, net
    113,341       113,580  
Receivables from distributors
    83,208       48,738  
Inventory, net
    13,726       16,193  
Prepaid expenses
    193,440       100,273  
Related party current assets
    5,442       106,247  
Deferred tax asset
    77,570       72,640  
Other current assets
    14,591       18,620  
 
       
Total current assets
    760,172       859,780  
Property and equipment, net
    1,765,347       1,711,003  
Long-term restricted investments
    3,396       3,400  
Deferred financing fees, net
    59,224       66,407  
Intangible assets, net
    2,661,001       2,695,115  
Goodwill
    1,834,856       1,834,856  
Related party long-term assets
    28,416       111,767  
Other long-term assets
    88,520       39,878  
 
       
Total assets
     $ 7,200,932        $ 7,322,206  
 
       
LIABILITIES AND STOCKHOLDER’S EQUITY
               
Current liabilities:
               
Accounts payable and accrued expenses
     $ 519,181        $ 543,686  
Accrued interest
    68,541       74,566  
Current portion of deferred revenue
    1,169,090       1,083,430  
Current portion of deferred credit on executory contracts
    263,998       252,831  
Current maturities of long-term debt
    8,280       13,882  
Related party current liabilities
    12,781       108,246  
 
       
Total current liabilities
    2,041,871       2,076,641  
Deferred revenue
    275,212       255,149  
Deferred credit on executory contracts
    647,691       784,078  
Long-term debt
    2,662,144       2,799,702  
Long-term related party debt
    357,806       263,579  
Deferred tax liability
    947,468       940,182  
Related party long-term liabilities
    26,655       46,301  
Other long-term liabilities
    61,657       61,052  
 
       
Total liabilities
    7,020,504       7,226,684  
 
       
 
               
Commitments and contingencies (Note 14)
               
Stockholders’ equity:
               
Preferred stock, par value $0.001; 50,000,000 authorized at June 30, 2010 and December 31, 2009:
               
Series A convertible preferred stock (liquidation preference of $51,370 at June 30, 2010 and December 31, 2009); 24,808,959 shares issued and outstanding at June 30, 2010 and December 31, 2009
    25       25  
Convertible perpetual preferred stock, series B (liquidation preference of $13 at June 30, 2010 and December 31, 2009); 12,500,000 shares issued and outstanding at June 30, 2010 and December 31, 2009
    13       13  
Convertible preferred stock, series C junior; no shares issued and outstanding at June 30, 2010 and December 31, 2009
    -       -  
Common stock, par value $0.001; 9,000,000,000 shares authorized at June 30, 2010 and December 31, 2009; 3,885,905,912 and 3,882,659,087 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively
    3,885       3,882  
Accumulated other comprehensive loss, net of tax
    (5,987 )     (6,581 )
Additional paid-in capital
    10,379,730       10,352,291  
Accumulated deficit
    (10,197,238 )     (10,254,108 )
 
       
Total stockholder’s equity
    180,428       95,522  
 
       
Total liabilities and stockholder’s equity
     $ 7,200,932        $ 7,322,206  
 
       
See accompanying Notes to the unaudited consolidated financial statements

2


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
                                                                                 
    Series A   Convertible Perpetual                                
    Convertible   Preferred Stock,                   Accumulated            
    Preferred Stock   Series B   Common Stock   Other   Additional       Total
                                              Comprehensive   Paid-in   Accumulated   Stockholders’
(in thousands, except share and per share data)   Shares   Amount   Shares   Amount   Shares   Amount   Loss   Capital   Deficit   Equity
 
                                                                               
Balance at December 31, 2009
    24,808,959        $ 25       12,500,000        $ 13       3,882,659,087        $ 3,882     $ (6,581 )      $ 10,352,291     $ (10,254,108 )      $ 95,522  
Net income
                                                                    56,870       56,870  
Other comprehensive income:
                                                                               
Unrealized gain on available-for-sale securities
    -       -       -       -       -       -       469       -       -       469  
Foreign currency translation adjustment, net of tax of $10
    -       -       -       -       -       -       125       -       -       125  
 
                                                                           
 
                                                                               
Total comprehensive income
    -       -       -       -       -       -       -       -       -       57,464  
 
                                                                               
Issuance of common stock to employees and employee
benefit plans, net of forfeitures
    -       -       -       -       3,246,825       3       -       1,981       -       1,984  
Share-based payment expense
    -       -       -       -       -       -       -       25,458       -       25,458  
 
                                                                               
 
                                       
Balance at June 30, 2010
    24,808,959        $ 25       12,500,000        $ 13       3,885,905,912        $ 3,885     $ (5,987 )      $ 10,379,730     $ (10,197,238 )      $ 180,428  
 
                                       
See accompanying Notes to the unaudited consolidated financial statements

3


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                 
    For the Six Months
    Ended June 30,
(in thousands)   2010   2009
 
               
Cash flows from operating activities:
               
Net income (loss)
     $ 56,870     $ (212,290 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation and amortization
    139,495       159,524  
Non-cash interest expense, net of amortization of premium
    22,294       31,322  
Provision for doubtful accounts
    15,756       16,278  
Restructuring, impairments and related costs
    1,803       27,614  
Amortization of deferred income related to equity method investment
    (2,137 )     (1,388 )
Loss on extinguishment of debt and credit facilities, net
    34,437       125,713  
Loss on investments
    6,065       6,353  
Loss on disposal of assets
    (18 )     -  
Share-based payment expense
    33,083       49,878  
Deferred income taxes
    2,633       2,229  
Other non-cash purchase price adjustments
    (120,706 )     (85,223 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (14,296 )     8,483  
Receivables from distributors
    (26,655 )     12,277  
Inventory
    2,467       (3,424 )
Related party assets
    (701 )     11,629  
Prepaid expenses and other current assets
    10,245       24,052  
Other long-term assets
    10,947       34,476  
Accounts payable and accrued expenses
    (76,144 )     (106,041 )
Accrued interest
    (4,796 )     997  
Deferred revenue
    105,004       22,504  
Related party liabilities
    (54,978 )     14,060  
Other long-term liabilities
    319       (2,164 )
 
       
Net cash provided by operating activities
    140,987       136,859  
 
       
 
               
 
               
Cash flows from investing activities:
               
Additions to property and equipment
    (169,313 )     (127,811 )
Sale of restricted and other investments
    9,454       -  
 
       
Net cash used in investing activities
    (159,859 )     (127,811 )
 
       
 
               
 
               
Cash flows from financing activities:
               
Preferred stock issuance, net of costs
    -       (3,712 )
Long-term borrowings, net of costs
    637,406       384,876  
Related party long-term borrowings, net of costs
    147,094       316,340  
Payment of premiums on redemption of debt
    (24,065 )     (16,572 )
Repayment of long-term borrowings
    (810,977 )     (427,871 )
Repayment of related party long-term borrowings
    (55,221 )     (100,867 )
 
       
Net cash (used in) provided by financing activities
    (105,763 )     152,194  
 
       
Net (decrease) increase in cash and cash equivalents
    (124,635 )     161,242  
Cash and cash equivalents at beginning of period
    383,489       380,446  
 
       
Cash and cash equivalents at end of period
     $ 258,854        $ 541,688  
 
       
See accompanying Notes to the unaudited consolidated financial statements

4


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS - Continued
                 
    For the Six Months
    Ended June 30,
(in thousands)   2010   2009
 
               
Supplemental Disclosure of Cash and Non-Cash Flow Information
               
Cash paid during the period for:
               
Interest, net of amounts capitalized
     $ 128,176        $ 157,854  
Non-cash investing and financing activities:
               
Share-based payments in satisfaction of accrued compensation
    -       31,280  
Common stock issued in exchange of 21/2% 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  
Sale-leaseback of equipment
    5,305       -  
See accompanying Notes to the unaudited consolidated financial statements

5


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(1) Business
          We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States for a subscription fee through our proprietary satellite radio systems — the SIRIUS system and the XM system. The SIRIUS system consists of four in-orbit satellites with over 125 terrestrial repeaters, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites with over 650 terrestrial repeaters, satellite uplink facilities and studios. The terrestrial repeaters receive and retransmit signals. Subscribers can also receive certain of our music and other channels over the Internet.
          Our satellite radios are primarily distributed through automakers (“OEMs”), nationwide through retail locations and through 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 certain daily rental car companies.
          Subscription fees are our primary source of revenue, with most of our customers subscribing to an annual, semi-annual, quarterly or monthly plan. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios 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.
          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 Inc., and its consolidated subsidiaries; and
 
    “XM” refers to XM Satellite Radio Inc. and its consolidated subsidiaries.
          In July 2008, our wholly owned subsidiary, Vernon Merger Corporation, merged with and into XM Satellite Radio Holdings Inc., a Delaware corporation, and, as a result, XM Satellite Radio Holdings Inc. became our wholly-owned subsidiary (the “Merger”). In April 2010, XM Satellite Radio Holdings Inc. merged with and into XM Satellite Radio Inc., which was the surviving corporation of the merger. As a result, XM Satellite Radio Inc. became a direct wholly-owned subsidiary of Sirius XM Radio Inc.
(2) Principles of Consolidation and Basis of Presentation
     Principles of Consolidation
          The accompanying unaudited consolidated financial statements of Sirius XM Radio Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, these interim financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions have been eliminated in consolidation.

6


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
     Basis of Presentation
          In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of June 30, 2010, and for the three and six months ended June 30, 2010 and 2009 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, 2009, that was filed with the SEC on February 25, 2010.
          We have evaluated events subsequent to the balance sheet date and prior to the filing of this Quarterly Report on Form 10-Q for the six months ended June 30, 2010 and have determined no events have occurred that would require adjustment to our unaudited consolidated financial statements as presented.
(3) Summary of Significant Accounting Policies
     Use of Estimates
          In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the reported amounts and accompanying notes. Estimates, by their nature, are based on judgment and available information. Actual results could differ materially from those estimates.
          Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites, share-based payment expense, and valuation allowances against deferred tax assets. Economic conditions in the United States could have a material impact on our accounting estimates.
     Recent Accounting Pronouncements
          The Financial Accounting Standards Board (“FASB”) updated Accounting Standards Codification (“ASC”) 470 to incorporate ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance, into the ASC. This standard requires share-lending arrangements in an entity’s own shares to be initially measured at fair value and treated as an issuance cost, excluded from basic and diluted earnings per share, and requires an entity to recognize a charge to earnings if it becomes probable the counterparty will default on the arrangement. This guidance was adopted as of January 1, 2010, as required, on a retrospective basis for all arrangements outstanding as of that date. The following table reflects the retrospective adoption of ASU 2009-15 on our December 31, 2009 consolidated balance sheet:
                         
    As Originally     Retrospective     As Currently  
Balance Sheet Line Item:  
Reported
 
Adjustments
 
Reported
 
                       
Deferred financing fees, net
     $ 8,902        $ 57,505        $ 66,407  
Related party long-term assets, net of current portion
    110,594       1,173       111,767  
Long-term debt, net of current portion
    2,799,127       575       2,799,702  
Long-term related party debt, net of current portion
    263,566       13       263,579  
Additional paid-in capital
    10,281,331       70,960       10,352,291  
Accumulated deficit
    (10,241,238 )     (12,870 )     (10,254,108 )

7


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          The following table reflects the retrospective adoption of ASU 2009-15 on our statement of operations for the three and six months ended June 30, 2009:
                                                 
    For the Three Months   For the Six Months
    Ended June 30, 2009   Ended June 30, 2009
    As Originally   Retrospective   As Currently   As Originally   Retrospective   As Currently
Statement of Operations Line Item:   Reported   Adjustments   Reported   Reported   Adjustments   Reported
 
                                               
Interest expense, net of amounts capitalized
    $ (95,794 )     $ (2,286 )     $ (98,080 )     $ (161,535 )     $ (4,523 )     $ (166,058 )
Net (loss) income
    (157,358 )     (2,286 )     (159,644 )     (393,955 )     (4,523 )     (398,478 )
          For the three and six months ended June 30, 2010, we recorded $2,491and $4,918 in interest expense related to the amortization of the costs associated with the share-lending arrangement and other issuance costs. As of June 30, 2010, the unamortized balance of the debt issuance costs was $56,420, with $55,292 recorded in deferred financing fees, net, and $1,128 recorded in long-term related party assets. As of June 30, 2010, the estimated fair value of the remaining 202,400,000 loaned shares was approximately $192,280.
     Earnings per Share (“EPS”)
          Basic net income (loss) per common share is calculated using the weighted average common shares outstanding during each reporting period. Diluted net income (loss) per common share adjusts the weighted average common shares outstanding for the potential dilution that could occur if common stock equivalents (convertible debt and preferred stock, warrants, stock options and restricted stock shares and units) were exercised or converted into common stock. For the three and six months ended June 30, 2010, common stock equivalents of approximately 686,407,346 and 692,011,065, respectively, were not included in the calculation of diluted net income per common share as the effect would have been anti-dilutive. Due to the net loss for the three and six months ended June 30, 2009, common stock equivalents of 3,414,940,143 were excluded from net loss per common share because they were anti-dilutive.
     Accounts Receivable
          Accounts receivable are stated at amounts due from customers net of an allowance for doubtful accounts. Our allowance for doubtful accounts considers historical experience, the age of amounts due, current economic conditions and other factors that may affect the debtor’s ability to pay.
          Accounts receivable, net, consists of the following:
                    
    June 30,   December 31,
    2010   2009
 
               
Gross accounts receivable
    $ 122,513       $ 122,247  
Allowance for doubtful accounts
    (9,172 )     (8,667 )
 
       
Total accounts receivable, net
    $ 113,341       $ 113,580  
 
       
          Receivables from distributors include billed and unbilled amounts due from OEMs for prepaid radio services in the sale or lease price of vehicles, as well as billed amounts due from retailers. Receivables from distributors consist of the following:
                    
    June 30,   December 31,
    2010   2009
 
               
Billed
    $ 41,840       $ 25,207  
Unbilled
    41,368       23,531  
 
       
Total
    $ 83,208       $ 48,738  
 
       

8


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
     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, obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for resale in our direct to consumer distribution channel and components held for resale by us is reported as a component of Cost of equipment in our unaudited consolidated statements of operations. The provision related to inventory consumed in our OEM and retail distribution channel is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of operations.
          Inventory, net, consists of the following:
                    
    June 30,   December 31,
    2010   2009
 
Raw materials
    $ 15,160       $ 17,370  
Finished goods
    21,144       19,704  
Allowance for obsolescence
    (22,578 )     (20,881 )
 
 
       
Total inventory, net
    $ 13,726       $ 16,193  
 
       
     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, 2010 and December 31, 2009, the carrying amounts of cash and cash equivalents, accounts and other receivables, and accounts payable approximated fair value due to the short-term nature of these instruments.
          The fair value for publicly traded instruments is determined using quoted market prices while fair value for non-publicly traded instruments is based upon estimates from a market maker and brokerage firm. As of June 30, 2010 and December 31, 2009, the carrying value of our debt was $3,028,230 and $3,077,163, respectively; and the fair value approximated $3,248,139 and $3,195,375, respectively.
     Reclassifications
          Certain amounts in our prior period consolidated financial statements have been reclassified to conform to our current period presentation.
(4) Goodwill
          Goodwill represents the excess of the purchase price over the estimated fair value of net tangible and identifiable intangible assets acquired in business combinations. Our annual impairment assessment is performed as of October 1st of each year. An assessment is performed at other times if events or circumstances indicate it is more likely than not that the asset is impaired. During the three and six months ended June 30, 2010 and 2009, there were no indicators of impairment and no impairment loss was recorded to our goodwill.

9


Table of Contents

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, 2010   December 31, 2009
            Gross                   Gross        
    Weighted Average   Carrying   Accumulated   Net Carrying   Carrying   Accumulated   Net Carrying
    Useful Lives   Value   Amortization   Value   Value   Amortization   Value
 
                                                       
Indefinite life intangible assets
                                                       
FCC licenses
  Indefinite     $ 2,083,654       $ -       $ 2,083,654       $ 2,083,654       $ -       $ 2,083,654  
Trademark
  Indefinite     250,000       -       250,000       250,000       -       250,000  
 
                                                       
Definite life intangible assets
                                                       
Subscriber relationships
  9 years     $ 380,000       $ (118,677 )     $ 261,323       $ 380,000       $ (91,186 )     $ 288,814  
Licensing agreements
  9.1 years     75,000       (18,813 )     56,187       75,000       (13,906 )     61,094  
Proprietary software
  6 years     16,552       (8,430 )     8,122       16,552       (6,823 )     9,729  
Developed technology
  10 years     2,000       (383 )     1,617       2,000       (283 )     1,717  
Leasehold interests
  7.4 years     132       (34 )     98       132       (25 )     107  
 
                                                       
 
                           
Total intangible assets
            $ 2,807,338       $ (146,337 )     $ 2,661,001       $ 2,807,338       $ (112,223 )     $ 2,695,115  
 
                           
     Indefinite Life Intangible Assets
          We have identified our FCC licenses and the XM trademark as indefinite life intangible assets after considering the expected use of the assets, the regulatory and economic environment within which they are used and the effects of obsolescence on their use.
          We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. The following table outlines the years in which each of our licenses expire:
         
FCC license   Expiration year
 
       
SIRIUS FM-1 satellite
    2017  
SIRIUS FM-2 satellite
    2017  
SIRIUS FM-3 satellite
    2017  
SIRIUS FM-4 ground spare satellite
    2017  
SIRIUS FM-5 satellite
    2017  
XM-1 satellite
    2014  
XM-2 satellite
    2014  
XM-3 satellite
    2013  
XM-4 satellite
    2014  
          Prior to expiration, 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 is expensed as incurred. Each of the FCC licenses authorizes us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
          In connection with the Merger, $250,000 of the purchase price was allocated to the XM trademark. As of June 30, 2010, there were no legal, regulatory or contractual limitations associated with the XM trademark.
          We evaluate our indefinite life intangible assets for impairment on an annual basis as of October 1st of each year. An assessment is performed at other times if events or circumstances indicate it is more likely than not that the assets have been impaired. During the three and six months ended June 30, 2010 and 2009, there were no indicators of impairment and no impairment loss was recorded for intangible assets with indefinite lives.
     Definite Life Intangible Assets
          Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangible assets include certain licensing agreements, which are amortized over a weighted average useful life of 9.1 years on a straight-line basis.

10


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          Amortization expense for definite life intangible assets was $16,818 and $19,681 for the three months ended June 30, 2010 and 2009, respectively, and $34,114 and $40,111 for the six months ended June 30, 2010 and 2009, respectively. Expected amortization expense for each of the fiscal years through December 31, 2014 and for periods thereafter is as follows:
         
Year ending December 31,   Amount
 
       
Remaining 2010
    $ 31,802  
2011
    58,850  
2012
    53,420  
2013
    47,097  
2014
    38,619  
Thereafter
    97,559  
 
   
 
       
Total definite life intangibles assets, net
    $ 327,347  
 
   
(6) Subscriber Revenue
          Subscriber revenue consists of subscription fees, revenue derived from our agreements with certain daily rental fleet operators, non-refundable activation and other fees as well as the effects of rebates. Revenues received from OEMs for prepaid subscriptions included in the sale or lease price of vehicles are also included in subscriber revenue over the service period (that is, after sale, lease or subscriber activation).
          Subscriber revenue consists of the following:
                                 
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
    2010   2009   2010   2009
 
                               
Subscription fees
    $ 598,217       $ 556,400       $ 1,172,974       $ 1,109,958  
Activation fees
    3,532       5,702       8,320       11,758  
Effect of rebates
    (119 )     (339 )     (155 )     (565 )
 
               
Total subscriber revenue
    $ 601,630       $ 561,763       $ 1,181,139       $ 1,121,151  
 
               
(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   For the Six Months
    Ended June 30,   Ended June 30,
    2010   2009   2010   2009
 
                               
Interest costs charged to expense
    $ 76,802       $ 98,080       $ 154,670       $ 166,058  
Interest costs capitalized
    16,253       18,430       30,430       34,531  
 
               
Total interest costs incurred
    $ 93,055       $ 116,510       $ 185,100       $ 200,589  
 
               
          Included in interest costs incurred is non-cash interest expense, consisting of amortization related to original issue discounts, premiums and deferred financing fees of $11,175 and $24,656 for the three months ended June 30, 2010 and 2009, respectively, and $22,294 and $31,322 for the six months ended June 30, 2010 and 2009, respectively.

11


Table of Contents

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,   December 31,
    2010   2009
 
               
Satellite system
    $ 1,694,769       $ 1,680,732  
Terrestrial repeater network
    110,995       108,841  
Leasehold improvements
    43,511       43,480  
Broadcast studio equipment
    50,542       49,965  
Capitalized software and hardware
    149,339       146,035  
Satellite telemetry, tracking and control facilities
    56,146       55,965  
Furniture, fixtures, equipment and other
    63,065       57,536  
Land
    38,411       38,411  
Building
    56,433       56,424  
Construction in progress
    563,864       430,543  
 
       
Total property and equipment
    2,827,075       2,667,932  
Accumulated depreciation and amortization
    (1,061,728 )     (956,929 )
 
       
Property and equipment, net
    $ 1,765,347       $ 1,711,003  
 
       
          Construction in progress consists of the following:
                    
    June 30,   December 31,
    2010   2009
 
               
Satellite system
    $ 521,888       $ 398,425  
Terrestrial repeater network
    17,580       19,396  
Other
    24,396       12,722  
 
       
Construction in progress
    $ 563,864       $ 430,543  
 
       
          Depreciation and amortization expense on property and equipment was $52,412 and $57,477 for the three months ended June 30, 2010 and 2009, respectively, and $105,381and $119,413 for the six months ended June 30, 2010 and 2009, respectively.
     Satellites
          SIRIUS’ original three orbiting satellites were launched in 2000. A spare SIRIUS satellite was delivered to ground storage in 2002. SIRIUS’ original three-satellite constellation and terrestrial repeater network were placed into service in 2002. In June 2009, SIRIUS launched a fourth satellite into a geostationary orbit, which was placed into service in August 2009.
          SIRIUS has an agreement with Space Systems/Loral for the design and construction of a sixth SIRIUS satellite (“FM-6”). In January 2008, SIRIUS entered into an agreement with International Launch Services (“ILS”) to secure a satellite launch on a Proton rocket.
          XM owns four orbiting satellites; XM-1 and XM-2 serve as in-orbit spares while XM-3 and XM-4 transmit the XM signal. The XM-1 through XM-4 satellites were launched in March 2001, May 2001, February 2005 and October 2006, respectively. Space Systems/Loral has constructed a fifth satellite, XM-5, for use in the XM system. In October 2009, we entered into an agreement with ILS to secure a satellite launch for XM-5 on a Proton rocket.
          During the six months ended June 30, 2010, we capitalized interest and expenditures related to the construction of our satellites and related launch vehicles for FM-6 and XM-5.

12


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
(9) Related Party Transactions
          We had the following related party transaction balances at June 30, 2010 and December 31, 2009:
                                                                                 
    Related party     Related party     Related party     Related party     Related party  
    current assets   long-term assets   current liabilities   long-term liabilities   long-term debt
    June 30,     December 31,     June 30,     December 31,     June 30,     December 31,     June 30,     December 31,     June 30,     December 31,  
    2010   2009   2010   2009   2010   2009   2010   2009   2010   2009
Liberty Media
    $ -       $ -       $ 1,826       $ 1,974       $ 10,005       $ 8,523       $ -       $ -       $ 357,806       $ 263,579  
SIRIUS Canada
    3,849       2,327       -       -               -       -       -       -       -  
XM Canada
    1,593       1,011       26,590       24,429       2,776       2,775       26,655       28,793       -       -  
General Motors
    -       99,995       -       85,364       -       93,107       -       17,508       -       -  
American Honda
    -       2,914       -       -       -       3,841       -       -       -       -  
 
                                       
Total
    $ 5,442       $ 106,247       $ 28,416       $ 111,767       $ 12,781       $ 108,246       $ 26,655       $ 46,301       $ 357,806       $ 263,579  
 
                                       
          Neither General Motors nor American Honda is considered a related party following May 27, 2010, the date on which individuals nominated by General Motors and American Honda ceased to be members of our board of directors.
     Liberty Media
          In February, 2009, we entered into an Investment Agreement (the “Investment Agreement”) with an affiliate of Liberty Media Corporation, Liberty Radio, LLC (collectively, “Liberty Media”). Pursuant to the Investment Agreement, in March 2009 we issued to Liberty Radio, LLC 12,500,000 shares of our Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. Liberty Media has representatives on our board of directors.
          The Series B Preferred Stock is convertible into approximately 2,586,976,761 shares of our common stock. Liberty Media has agreed not to acquire more than 49.9% of our outstanding common stock prior to March 2012, except that Liberty Media may acquire more than 49.9% of our outstanding common stock at any time after March 2011 pursuant to any cash tender offer for all of the outstanding shares of our common stock that are not beneficially owned by Liberty Media or its affiliates at a price per share greater than the closing price of the common stock on the trading day preceding the earlier of the public announcement or commencement of such tender offer. The Investment Agreement also provides for certain other standstill provisions during the three year period ending in March 2012.
          Liberty Media has advised us that as of June 30, 2010 and December 31, 2009, respectively, it owned the following principal amounts of our debt, excluding discounts of $16,194 and $15,642, respectively:
                     
    June 30,     December 31,  
    2010   2009
9⅝% Senior Notes due 2013
    $ -       $ 55,221  
8.75% Senior Notes due 2015
    150,000       -  
9.75% Senior Secured Notes due 2015
    50,000       50,000  
11.25% Senior Secured Notes due 2013
    87,000       87,000  
13% Senior Notes due 2013
    76,000       76,000  
7% Exchangeable Senior Subordinated Notes due 2014
    11,000       11,000  
 
       
Total
    $ 374,000       $ 279,221  
 
       
          As of June 30, 2010 and December 31, 2009, we recorded $10,005 and $8,523, respectively, related to accrued interest with Liberty Media to Related party current liabilities. We recognized Interest expense associated with debt held by Liberty Media of $10,902 and $24,555 for the three months ended June 30, 2010 and 2009, respectively, and $19,964 and $33,356 for the six months ended June 30, 2010 and 2009, respectively.

13


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
     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.
          We recorded the following revenue from SIRIUS Canada. Royalty income is included in other revenue and dividend income is included in Interest and investment income (loss) in our unaudited consolidated statements of operations:
                                             
    For the Three Months     For the Six Months  
    Ended June 30,   Ended June 30,
    2010   2009   2010   2009
Royalty income
    $ 1,765       $ 1,326       $ 3,440       $ 2,170  
Dividend income
    231       268       457       393  
 
               
Total revenue from SIRIUS Canada
    $ 1,996       $ 1,594       $ 3,897       $ 2,563  
 
               
          Receivables from royalty and dividend income were fully utilized to absorb a portion of our proportionate share of net losses generated by SIRIUS Canada during the three and six months ended June 30, 2010 and 2009. Total costs that have been or will be reimbursed by SIRIUS Canada for the three months ended June 30, 2010 and 2009 were $2,393 and $2,916, respectively, and for the six months ended June 30, 2010 and 2009 were $4,835 and $4,914, 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 ten year term and XM Canada has the unilateral option to extend the agreements for an additional five years. XM receives a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and an activation fee for each gross activation of an XM Canada subscriber on XM’s system. XM Canada is obligated to pay XM a total of $70,300 for the rights to broadcast and market National Hockey League (“NHL”) games for a 10-year term.
          The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, and is amortized on a straight-line basis through 2020, the expected term of the agreements. As of June 30, 2010 and December 31, 2009, the carrying value of deferred revenue related to XM Canada was $29,431 and $31,568, respectively.
          XM has extended a Cdn$45,000 standby credit facility to XM Canada, which can be utilized to purchase terrestrial repeaters or finance royalty and activation fees payable to XM. The facility matures on December 31, 2012 and bears interest at 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, 2010 and December 31, 2009, amounts drawn by XM Canada on this facility in lieu of payment of fees recorded in related party long-term assets were $19,666, net of a $3,991 valuation allowance, and $18,429, respectively. The June 30, 2010 valuation allowance of $3,991 related to the absorption of our proportionate share of net loss from our investment in XM Canada shares.
          As of June 30, 2010 and December 31, 2009, amounts due from XM Canada also included $6,924 and $6,000, respectively, attributable to deferred programming costs and accrued interest (in addition to the amounts drawn on the standby credit facility), all of which is reported as Related party long-term assets.

14


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          We recorded the following revenue from XM Canada as Other revenue in our unaudited consolidated statements of operations:
                                             
    For the Three Months     For the Six Months  
    Ended June 30,   Ended June 30,
    2010     2009     2010     2009  
Amortization of XM Canada deferred income
    $ 694       $ 694       $ 1,388       $ 1,388  
Subscriber and activation fee royalties
    2,658       160       5,005       274  
Licensing fee revenue
    750       1,500       2,250       3,000  
Advertising reimbursements
    333       367       667       733  
 
               
Total revenue from XM Canada
    $ 4,435       $ 2,721       $ 9,310       $ 5,395  
 
               
     General Motors and American Honda
          XM has a long-term distribution agreement with General Motors Company (“GM”). GM had a representative on our board of directors and was considered a related party through May 27, 2010. GM is no longer a related party. During the term of the agreement, GM has agreed to distribute the XM service. XM subsidizes a portion of the cost of XM radios and makes incentive payments to GM when the owners of GM vehicles with factory- or dealer- installed XM radios become self-paying subscribers to XM’s service. XM also shares with GM a percentage of the subscriber revenue attributable to GM vehicles with factory- or dealer- 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.
          XM has a long-term distribution agreement with American Honda. American Honda had a representative on our board of directors and was considered a related party through May 27, 2010. American Honda is no longer a related party. XM has an agreement to make a certain amount of its bandwidth available to American Honda. 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. XM makes incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and shares with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed XM radios.
          As of May 27, 2010, we had the following aggregate assets and liabilities related to GM and America Honda:
         
    Non-cash  
Balance sheet line item   Adjustment
Related party current assets
    $ 107,908  
Related party long term assets
    73,016  
Related party current liabilities
    57,996  

15


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          We recorded the following total related party revenue from GM and American Honda, primarily consisting of subscriber revenue, in connection with the agreements above:
                                             
    For the Three Months     For the Six Months  
    Ended June 30,   Ended June 30,
    2010*   2009   2010*   2009
GM
    $ 4,995       $ 6,264       $ 12,759       $ 13,256  
American Honda
    2,103       2,995       4,990       5,827  
                 
Total
    $ 7,098       $ 9,259       $ 17,749       $ 19,083  
                 
 
*   GM and American Honda were considered related parties through May 27, 2010.
          We have incurred the following expenses with GM and American Honda:
                                                                 
    For the Three Months Ended June 30,   For the Six Months Ended June 30,
    2010*   2009   2010*   2009
            American             American             American             American  
    GM   Honda   GM   Honda   GM   Honda   GM   Honda
Sales and marketing
    $ 5,575       $ -       $ 7,537       $ -       $ 13,374       $ -       $ 15,631       $ -  
Revenue share and royalties
    6,756       1,337       13,982       1,530       15,823       3,167       31,655       2,965  
Subscriber acquisition costs
    7,027       742       5,545       1,414       17,514       1,969       14,805       2,745  
Customer service and billing
    50       -       -       -       125       -       -       -  
Interest expense, net of amounts capitalized
    -       -       -       -       1,421       -       -       -  
                                 
Total
    $ 19,408       $ 2,079       $ 27,064       $ 2,944       $ 48,257       $ 5,136       $ 62,091       $ 5,710  
                                 
 
*   GM and American Honda were considered related parties through May 27, 2010.
(10) Investments
          Our investments consist of the following:
                     
    June 30,     December 31,  
    2010   2009
Investment in SIRIUS Canada
    $ -       $ -  
Investment in XM Canada
    -       2,390  
Investment in XM Canada debentures
    3,073       2,970  
Auction rate certificates
    -       8,556  
Restricted investments
    3,396       3,400  
 
       
Total investments
    $ 6,469       $ 17,316  
 
       
     Canadian Entities
          Our investments in SIRIUS Canada and XM Canada (the “Canadian Entities”) are recorded using the equity method since we have a significant influence, but do not control the Canadian Entities. Under this method, our investments in the Canadian Entities, originally recorded at cost, are 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 the Canadian Entities. We have a 49.9% economic interest in SIRIUS Canada and a 23.33% economic interest in XM Canada.
          Our share of net earnings or losses of the Canadian Entities is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations. As it relates to XM Canada, this is done on a one month lag. We evaluate the Canadian Entities periodically and record an impairment charge to Interest and investment income (loss) in our unaudited consolidated statements of operations if we determine that decreases in fair value are considered to be other-than temporary. In addition, any payments received from the Canadian Entities in excess of the carrying value of our investments in, advances to and commitments to such entity is recorded to Interest and investment income (loss) in our unaudited consolidated statements of operations.

16


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          We recorded the following amounts to Interest and investment income (loss):
                                             
    For the Three Months     For the Six Months  
    Ended June 30,   Ended June 30,
    2010     2009     2010     2009  
Share of SIRIUS Canada net loss
    $ (1,316 )     $ (1,594 )     $ (3,218 )     $ (2,563 )
Payments received from SIRIUS Canada in excess of carrying value
    3,710       6,869       3,710       6,869  
Share of XM Canada net loss
    (3,339 )     4,847       (6,490 )     943  
Impairment of XM Canada
    -       (1,700 )     -       (4,734 )
Realized gain on sale of auction rate certificates
    -       -       425       -  
 
               
Total
    $ (945 )     $ 8,422       $ (5,573 )     $ 515  
 
               
          In addition, during the three and six months ended June 30, 2010, we recorded $74 and $109, respectively, of a foreign exchange gain to Accumulated other comprehensive loss, net of tax, related to our investment in XM Canada.
          XM 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 bifurcated from the host contract. The host contract is accounted for at fair value as an available-for-sale security with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for at fair value as a derivative with changes in fair value recorded in earnings as Interest and investment income (loss). As of June 30, 2010, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $3,070 and $3, respectively. As of December 31, 2009, the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,961 and $9, respectively.
     Auction Rate Certificates
          Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We accounted for our investment in auction rate certificates as available-for-sale securities. In January 2010, our investment in the auction rate certificates was called by the issuer at par plus accrued interest, or $9,456, resulting in a gain of $425 in the six months ended June 30, 2010.
     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. As of June 30, 2010 and December 31, 2009, Long-term restricted investments were $3,396 and $3,400, respectively.

17


Table of Contents

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     June 30,     December 31,  
    (per share)   2010   2009
 
                       
SIRIUS Debt
                       
31/4% Convertible Notes due 2011 (a)
     $    5.30       230,000       230,000  
Less: discount
            (997 )     (1,371 )
Senior Secured Term Loan due 2012 (b)
    N/A       -       244,375  
95/8% Senior Notes due 2013 (c)
    N/A       -       500,000  
Less: discount
            -       (3,341 )
8.75% Senior Notes due 2015 (d)
    N/A       800,000       -  
Less: discount
            (13,360 )     -  
9.75% Senior Secured Notes due 2015 (e)
    N/A       257,000       257,000  
Less: discount
            (10,927 )     (11,695 )
XM Debt
                       
10% Senior PIK Secured Notes due 2011 (f)
    N/A       -       113,685  
Less: discount
            -       (7,325 )
11.25% Senior Secured Notes due 2013 (g)
    N/A       525,750       525,750  
Less: discount
            (28,474 )     (32,259 )
13% Senior Notes due 2013 (h)
    N/A       778,500       778,500  
Less: discount
            (68,450 )     (76,601 )
9.75% Senior Notes due 2014 (i)
    N/A       5,260       5,260  
7% Exchangeable Senior Subordinated Notes due 2014 (j)
     $    1.875       550,000       550,000  
Less: discount
            (8,391 )     (9,119 )
Other debt:
                       
Capital leases
    N/A       12,319       14,304  
 
               
Total debt
            3,028,230       3,077,163  
Less: current maturities
                       
Non-related party
            8,280       13,882  
 
               
Total current maturities
            8,280       13,882  
Total long-term
            3,019,950       3,063,281  
Less: related party
            357,806       263,579  
 
               
Total long-term, excluding related party
             $       2,662,144        $       2,799,702  
 
               
SIRIUS Debt
     (a) 31/4% Convertible Notes due 2011
          In October 2004, SIRIUS issued $230,000 in aggregate principal amount of 31/4% Convertible Notes due October 15, 2011 (the “31/4% Notes”), which are convertible, at the option of the holder, into shares of our common stock at any time at a conversion rate of 188.6792 shares of common stock for each $1,000 principal amount, or $5.30 per share of common stock, subject to certain adjustments. Interest is payable semi-annually on April 15 and October 15 of each year. The obligations under the 31/4% Notes are not secured by any of our assets.
     (b) 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 provided for a senior secured term loan (the “Senior Secured Term Loan”) of $250,000, which was fully drawn. Interest under the Senior Secured Term Loan was 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%. On March 16, 2010, we used net proceeds of $244,714 from the sale of our 8.75% Senior Notes due 2015 to repay the Senior Secured Term Loan. This amount included accrued and unpaid interest of

18


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
$339. We recorded an aggregate loss on extinguishment on the Senior Secured Term Loan of $2,450 consisting of deferred financing fees to Loss on extinguishment of debt and credit facilities, net, in our unaudited consolidated statements of operations.
     (c) 95/8% Senior Notes due 2013
          In August 2005, SIRIUS issued $500,000 in aggregate principal amount of 95/8% Senior Notes due 2013 (the “95/8% Notes”). The obligations under the 95/8% Notes were not secured by any of our assets. On April 16, 2010, we used net proceeds of $534,091 from the sale of our 8.75% Senior Notes due 2015 to redeem the 95/8% Notes. This amount included accrued and unpaid interest of $10,026 and a repayment premium of $24,065. We recorded an aggregate loss on extinguishment on the 95/8% Notes of $27,705 consisting primarily of unamortized discount, deferred financing fees and repayment premium to Loss on extinguishment of debt and credit facilities, net, in our unaudited consolidated statements of operations.
     (d) 8.75% Senior Notes due 2015
          In March 2010, SIRIUS issued $800,000 aggregate principal amount of 8.75% Senior Notes due April 1, 2015 (the “8.75% Notes”). Interest is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on October 1, 2010, at a rate of 8.75% per annum. The 8.75% Notes were issued for $786,000, resulting in an aggregate original issuance discount of $14,000. Certain of the domestic wholly-owned subsidiaries of SIRIUS guarantee SIRIUS’ obligations under the 8.75% Notes on a senior unsecured basis. SIRIUS operates XM as an unrestricted subsidiary under the 8.75% Notes indenture.
     (e) 9.75% Senior Secured Notes due 2015
          In August 2009, SIRIUS issued $257,000 aggregate principal amount of 9.75% Senior Secured Notes due September 1, 2015 (the “9.75% Notes”). Interest is payable semi-annually in arrears on March 1 and September 1 of each year at a rate of 9.75% per annum. The 9.75% Notes were issued for $244,292, resulting in an aggregate original issuance discount of $12,708. Certain of the domestic wholly-owned subsidiaries of SIRIUS guarantee SIRIUS’ obligations under the 9.75% Notes. The 9.75% Notes and related guarantees are secured by first-priority liens on substantially all of the assets of SIRIUS and the guarantors other than certain excluded assets (including cash, accounts receivable and certain inventory). SIRIUS operates XM as an unrestricted subsidiary under the 9.75% Notes indenture.
XM Debt
     (f) 10% Senior PIK Secured Notes due 2011
          At December 31, 2009, XM had outstanding $113,685 aggregate principal amount of 10% Senior PIK Secured Notes due 2011 (the “PIK Notes”). Interest was payable on the PIK Notes semi-annually in arrears on June 1 and December 1 of each year at a rate of 10% per annum paid in cash from December 1, 2008 to December 1, 2009; at a rate of 10% per annum paid in cash and 2% per annum paid in kind from December 1, 2009 to December 1, 2010; and at a rate of 10% per annum paid in cash and 4% per annum paid in kind from December 1, 2010 to the maturity date. On June 1, 2010, we redeemed all outstanding PIK Notes at a price of 100% plus accrued interest. We recognized an aggregate loss on extinguishment of the PIK Notes of $4,138, consisting primarily of unamortized discount, as a Loss on extinguishment of debt and credit facilities, net, in our unaudited consolidated statements of operations.
     (g) 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 $488,398, resulting in an aggregate original issuance discount of $37,352.
          Substantially all the domestic wholly-owned subsidiaries of XM 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 and the guarantors.

19


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
     (h) 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 are unsecured and mature on August 1, 2013. Substantially all the domestic wholly-owned subsidiaries of XM guarantee XM’s obligations under the 13% Notes.
     (i) 9.75% Senior Notes due 2014
          XM has outstanding $5,260 aggregate principal amount of 9.75% Senior Notes due 2014 (the “XM 9.75% Notes”). Interest on the XM 9.75% Notes is payable semi-annually on May 1 and November 1 at a rate of 9.75% per annum. The XM 9.75% Notes are unsecured and mature on May 1, 2014. XM, at its option, may redeem the XM 9.75% Notes at declining redemption prices at any time, subject to certain restrictions. Substantially all the domestic subsidiaries of XM guarantee XM’s obligations under the XM 9.75% Notes.
          On August 3, 2010, XM issued to holders of its outstanding XM 9.75% Notes a notice of redemption of the 9.75% Notes at a price of 104.875% of the principal amount of the notes plus accrued interest on August 16, 2010.
     (j) 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. Substantially all the domestic wholly-owned subsidiaries of XM 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.
     Covenants and Restrictions
          Our debt generally requires compliance with certain financial covenants that restrict our ability to, among other things, (i) incur additional indebtedness unless our consolidated leverage ratio would be no greater than 6.00 to 1.00 after the incurrence of the indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions. SIRIUS operates XM as an unrestricted subsidiary for purposes of compliance with the covenants contained in its debt instruments.
          Under our debt agreements, the following generally constitute an event of default: (i) a default in the payment of interest; (ii) a default in the payment of principal; (iii) failure to comply with covenants; (iv) failure to pay other indebtedness after final maturity or acceleration of other indebtedness exceeding a specified amount; (v) certain events of bankruptcy; (vi) judgment for payment of money exceeding a specified aggregate amount; and (vii) voidance of subsidiary guarantees, subject to grace periods where applicable. If an event of default occurs and is continuing, our debt could become immediately due and payable.
          At June 30, 2010, we were in compliance with our financial debt covenants.
(12) Stockholders’ Equity
     Common Stock, par value $0.001 per share
          We were authorized to issue up to 9,000,000,000 shares of common stock as of June 30, 2010 and December 31, 2009. There were 3,885,905,912 and 3,882,659,087 shares of common stock issued and outstanding as of June 30, 2010 and December 31, 2009, respectively.

20


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          As of June 30, 2010, approximately 3,692,600,000 shares of common stock were reserved for issuance in connection with outstanding convertible debt, preferred stock, warrants, incentive stock awards and common stock to be granted to third parties upon satisfaction of performance targets.
          To facilitate the offering of the Exchangeable Notes, we entered into share lending agreements with Morgan Stanley Capital Services Inc. (“MS”) and UBS AG London Branch (“UBS”) in July 2008, under which we loaned MS and UBS an aggregate of 262,400,000 shares of our common stock in exchange for a fee of $.001 per share. The obligations of MS to us under its share lending agreement are guaranteed by its parent company, Morgan Stanley. During the third quarter of 2009, MS returned to us 60,000,000 shares of our common stock borrowed in July 2008, which were retired upon receipt. As of June 30, 2010, there were 202,400,000 shares loaned under the facilities.
          Under each share lending agreement, the share loan will terminate in whole or in part, as the case may be, and the relevant borrowed shares must be returned to us upon the earliest of the following: (i) the share borrower terminates all or a portion of the loan between it and us, (ii) we notify the share borrower that some of the Exchangeable Notes as to which borrowed shares relate have been exchanged, repaid or repurchased or are otherwise no longer outstanding, (iii) the maturity date of the Exchangeable Notes, December 1, 2014, (iv) the date as of which the entire principal amount of the Exchangeable Notes ceases to be outstanding as a result of exchange, repayment, repurchase or otherwise or (v) the termination of the share lending agreement by the share borrower or by us upon default by the other party, including the bankruptcy of us or the share borrower or, in the case of the MS share lending agreement, the guarantor. A share borrower may delay the return of borrowed shares for up to 30 business days (or under certain circumstances, up to 60 business days) if such share borrower is legally prevented from returning the borrowed shares to us, in which case the share borrower may, under certain circumstances, choose to pay us the value of the borrowed shares in cash instead of returning the borrowed shares. Once borrowed shares are returned to us, they may not be re-borrowed under the share lending agreements. There were no requirements for the share borrowers to provide collateral.
          The shares we loaned to the share borrowers are issued and outstanding for corporate law purposes, and holders of borrowed shares (other than the share borrowers) have the same rights under those shares as holders of any of our other outstanding common shares. Under GAAP, the borrowed shares are not considered outstanding for the purpose of computing and reporting our net income (loss) per common share. The accounting method may change if, due to a default by either UBS or MS (or Morgan Stanley, as guarantor), the borrowed shares, or the equivalent value of those shares, will not be returned to us as required under the share lending agreements.
          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 share-based payment expense associated with these shares of $219 in each of the three months ended June 30, 2010 and 2009 and $1,860 in each of the six months ended June 30, 2010 and 2009. As of June 30, 2010, there was a $5,560 remaining balance of common stock value included in other current assets. As of December 31, 2009, there was a $7,420 remaining balance of common stock value included in other current assets and other long-term assets in the amount of $5,852 and $1,568, respectively.
     Preferred Stock, par value $0.001 per share
          We were authorized to issue up to 50,000,000 shares of undesignated preferred stock as of June 30, 2010 and December 31, 2009. There were 24,808,959 shares of Series A Convertible Preferred Stock (“Series A Preferred Stock”) issued and outstanding as of June 30, 2010 and December 31, 2009. 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, 2010 and December 31, 2009. There were no shares of Preferred Stock, Series C Junior (the “Series C Junior Preferred Stock”), issued and outstanding as of June 30, 2010 and December 31, 2009.
          The Series A Preferred Stock is redeemable at the option of the holder at any time for an equal number of shares of our common stock.
          The Series B Preferred Stock is convertible into shares of our common stock at the rate of 206.9581409 shares of common stock for each share of Series B Preferred Stock, representing approximately 40% of our outstanding shares of common stock (after giving effect to such conversion). As the holder of the Series B Preferred Stock, Liberty Radio LLC is entitled to a number of votes equal to the number of shares of our common stock into which 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

21


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
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.
          In 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.
          In 2009, our board of directors created and reserved for issuance in accordance with the Rights Plan (as described below) 9,000 shares of the Series C Junior Preferred Stock. The shares of Series C Junior Preferred Stock are not redeemable and rank, with respect to the payment of dividends and the distribution of assets, junior to all other series of our preferred stock, unless the terms of such series shall so provide.
     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, 2010, approximately 46,946,000 warrants to acquire an equal number of shares of common stock with an average exercise price of $3.00 per share were outstanding. Warrants vest over time or upon the achievement of milestones and expire at various times through 2015. We did not have any warrant related expense for both the three months ended June 30, 2010 and 2009 and $0 and $2,522 for the six months ended June 30, 2010 and 2009, respectively.
     Rights Plan
          In April 2009, our board of directors adopted a rights plan. The terms of the rights and the rights plan are set forth in a Rights Agreement dated as of April 29, 2009 (the “Rights Plan”). The Rights Plan 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.
(13) Benefits Plans
          We maintain five 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 $15,682 and $29,482 for the three months ended June 30, 2010 and 2009, respectively, and $31,223 and $45,496 for the six months ended June 30, 2010 and 2009, respectively. We did not realize any income tax benefits from share-based benefits plans during the three and six months ended June 30, 2010 and 2009 as a result of the full valuation allowance 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, 2010, approximately 323,160,838 shares of common stock were available for future grants under the 2009 Plan.
     Other Plans
          SIRIUS and XM maintain four other share-based benefit plans — the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM 1998 Shares Award Plan and the XM Talent Option Plan. These plans generally provided for the grant of stock options, restricted stock, restricted stock units and other stock-based awards. No further awards may be made under these plans. Outstanding awards under these plans are being continued.

22


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          The following table summarizes the weighted-average assumptions used to compute the fair value of options granted to employees and members of our board of directors during the three and six months ended June 30, 2010 and 2009:
                                        
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
    2010   2009   2010   2009
                 
Risk-free interest rate
    2.2%       2.5%       2.5%       2.5%  
Expected life of options - years
    5.11       4.71       5.06       4.71  
Expected stock price volatility
    86%       88%       85%       88%  
Expected dividend yield
    0%       0%       0%       0%  
          The following table summarizes the range of assumptions used to compute the fair value of options granted to third parties, other than non-employee members of our board of directors, during the three and six months ended June 30, 2010 and 2009.
                                    
    For the Three Months   For the Six Months
    Ended June 30,   Ended June 30,
    2010   2009   2010   2009
                 
Risk-free interest rate
    N/A       1.64 - 2.54%       N/A       1.08 - 2.54%  
Expected life - years
    N/A       2.84 - 4.71       N/A       2.50 - 6.19  
Expected stock price volatility
    N/A       88%       N/A       83 - 88%  
Expected dividend yield
    N/A       0%       N/A       0%  
          There were no options granted to third parties during the three and six months ended June 30, 2010.
          The following table summarizes stock option activity under our share-based payment plans for the six months ended June 30, 2010 (shares in thousands):
                                 
            Weighted-     Weighted-Average        
            Average     Remaining     Aggregate  
            Exercise     Contractual Term     Intrinsic  
    Shares   Price   (Years)   Value
                         
Outstanding, December 31, 2009
           364,792        $    1.44                  
Granted
    14,202       0.69                  
Exercised
    (284 )     0.23                  
Forfeited, cancelled or expired
    (9,674 )     3.44                  
 
                       
Outstanding, June 30, 2010
    369,036       1.36       6.56     $ 120,216  
 
                       
Exercisable, June 30, 2010
    78,627        $    4.12       4.24     $ 1,393  
 
                       
          The weighted average grant date fair value of options granted during the six months ended June 30, 2010 and 2009 was $0.47 and $0.29, respectively. The total intrinsic value of stock options exercised during the six months ended June 30, 2010 was $221. The total intrinsic value of stock options exercised during the six months ended June 30, 2009 was $0; no options were exercised in the period.
          We recognized share-based payment expense associated with stock options of $10,254 and $20,060 for the three months ended June 30, 2010 and 2009, respectively, and $20,780 and $32,312 for the six months ended June 30, 2010 and 2009, respectively.

23


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
          The following table summarizes the nonvested restricted stock and restricted stock unit activity under our share-based payment plans for the six months ended June 30, 2010 (shares in thousands):
                      
            Weighted-Average  
            Grant Date  
    Shares   Fair Value
 
               
Nonvested, December 31, 2009
    6,919        $    2.65  
Granted
    -       -  
Vested
            (4,191 )     2.85  
Forfeited
    (185 )     2.69  
 
           
Nonvested, June 30, 2010
    2,543        $    2.58  
 
           
          The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2010 was $0; no restricted stock units were granted during the period. The weighted average grant date fair value of restricted stock units granted during the six months ended June 30, 2009 was $0.37. The total intrinsic value of restricted stock units that vested during the six months ended June 30, 2010 and 2009 was $3,885 and $10,721, respectively.
          We recognized share-based payment expense associated with restricted stock units and shares of restricted stock of $2,116 and $6,000 for the three months ended June 30, 2010 and 2009, respectively, and $4,674 and $12,857 for the six months ended June 30, 2010 and 2009, 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, 2010 and December 31, 2009, net of estimated forfeitures, was $95,666 and $114,068, 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, 2010.
     401(k) Savings Plan
          We sponsor the Sirius XM Radio 401(k) Savings Plan (the “Sirius XM Plan”) for eligible employees.
          The Sirius XM Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax eligible earnings, subject to certain defined limits. We match 50% of an employee’s voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of common stock. Employer matching contributions under the Sirius XM Plan vest at a rate of 331/3% for each year of employment and are fully vested after three years of employment for all current and future contributions. Legacy XM Plan participants are fully vested for all current and future employer contributions. Share-based payment expense resulting from the matching contribution to the plans was $718 and $666 for the three months ended June 30, 2010 and 2009, respectively, and $1,925 and $1,292 for the six months ended June 30, 2010 and 2009, respectively.
          We may also elect to contribute to the profit sharing portion of the Sirius XM Plan based upon the total eligible compensation of eligible participants. These additional contributions in the form of shares of common stock are determined by the compensation committee of our board of directors. Employees are only eligible to receive profit-sharing contributions during any year in which they are employed on the last day of the year. Profit-sharing contribution expense (benefit) was $2,594 and $2,756 for the three months ended June 30, 2010 and 2009, respectively, and $3,844 and $(965) for the six months ended June 30, 2010 and 2009, respectively.

24


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
(14) Commitments and Contingencies
          The following table summarizes our expected contractual cash commitments as of June 30, 2010:
                                                         
    Remaining                                      
    2010   2011   2012   2013   2014   Thereafter   Total
Long-term debt obligations
     $ 5,341        $ 234,127        $ 1,539        $ 1,305,386        $ 555,442        $ 1,057,000        $ 3,158,835  
Cash interest payments
    151,410       302,323       294,620       264,919       133,816       60,058       1,207,146  
Satellite and transmission
    82,546       67,817       5,382       5,898       14,385       34,655       210,683  
Programming and content
    99,791       167,862       127,782       33,265       10,350       4,000       443,050  
Marketing and distribution
    49,562       29,117       18,764       7,015       3,090       1,500       109,048  
Satellite incentive payments
    3,729       8,851       10,505       11,100       10,807       63,535       108,527  
Operating lease obligations
    24,436       26,283       21,885       17,936       11,742       6,806       109,088  
Other
    25,323       24,643       7,782       3       -       -       57,751  
 
                           
Total
     $ 442,138        $ 861,023        $ 488,259        $ 1,645,522        $ 739,632        $ 1,227,554        $ 5,404,128  
 
                           
          Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt and capital lease obligations. Included in the chart above is the aggregate principal balance of $5,260 of the XM 9.75% Notes. The XM 9.75% Notes, originally scheduled to mature in 2014, were called for redemption in August 2010 and will be redeemed on August 16, 2010. The table above continues to reflect the contractual payments of interest and principal for these notes.
          Cash interest payments. Cash interest payments include interest due on outstanding debt through maturity.
          Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater networks. We have also entered into various agreements to design and construct satellites and related launch vehicles for use in our systems.
          SIRIUS has an agreement with Space Systems/Loral to design and construct a sixth satellite, FM-6. In January 2008, SIRIUS entered into an agreement with ILS to secure a satellite launch on a Proton rocket.
          Space Systems/Loral has constructed a fifth satellite, XM-5, for use in the XM system. In October 2009, we entered into an agreement with ILS to secure a satellite launch for XM-5 on a Proton rocket.
          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, 2010, we have accrued $28,575 related to contingent in-orbit performance payments for XM-3 and XM-4 based on expected operating performance over their fifteen year design life. Boeing may also be entitled to an additional $10,000 if XM-4 continues to operate above baseline specifications during the five years beyond the satellite’s fifteen-year design life.
          Space Systems/Loral, the manufacturer of SIRIUS’ fifth satellite, may be entitled to future in-orbit performance payments. As of June 30, 2010, we have accrued $13,706 related to contingent performance payments for FM-5 based on expected operating performance over its 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

25


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
improvements and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term, including reasonably assured renewal periods.
          Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, including subscriber growth, and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar variable cost provisions.
          We do not have any other significant off-balance sheet 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. In September 2008, Mt. Wilson FM Broadcasters, Inc. filed a Petition for Reconsideration of the FCC’s merger order. This Petition for Reconsideration remains pending.
          Advanced Recording Functionality Disputes/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. Commencing in May 2006, holders of copyrights in sound recordings and holders of copyrights in musical works brought, or threatened to bring, actions against SIRIUS and XM in connection with the advanced recording functionality included in the XM Inno, the XM NeXus, the XM Helix, the XM SkyFi3 line of radios, the SIRIUS S50 and the SIRIUS Stiletto line of radios. The plaintiffs brought this action in the United States District Court for the Southern District of New York, seeking monetary damages and equitable relief. XM has settled these claims with the major record companies and a significant number of music publishers. XM is in discussions to settle these claims with certain independent record companies and other music publishers.
          Prior to introducing retail sales of devices with advanced recording functionality, SIRIUS entered into agreements with the major recording companies concerning such devices. SIRIUS is in discussions to settle the remaining claims with certain independent record companies and music publishers.
          SIRIUS and XM believe that the distribution and use of their products do not violate applicable copyright laws. There can be no assurance regarding the ultimate outcome of these matters and settlement discussions, or the significance, if any, to our business, consolidated results of operations or financial position.
          Other Matters. In the ordinary course of business, we are a defendant in various lawsuits and arbitration proceedings, including actions filed by subscribers, both on behalf of themselves and on a class action basis; former employees; parties to contracts or leases; and owners of patents, trademarks, copyrights or other intellectual property. None of these actions are, in our opinion, likely to have a material adverse effect on our cash flows, financial position or results of operations.
(15) 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, and its consolidated subsidiaries are non-guarantor subsidiaries (collectively, the “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.

26


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
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 Non-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 GAAP. 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.
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2010
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
 
                                               
Revenue
     $ 329,315        $ -            $ -            $ 370,446        $ -            $ 699,761  
 
                                               
Cost of services
    143,579       -           -           122,542       -           266,121  
Subscriber acquisition costs
    71,557       -           -           38,826       -           110,383  
Sales and marketing
    22,104       -           -           34,073       -           56,177  
Engineering, design and development
    6,255       -           -           4,992       -           11,247  
General and administrative
    30,776       -           -           28,390       -           59,166  
Depreciation and amortization
    32,686       126       -           36,418       -           69,230  
Restructuring, impairments and related costs
    1,101       -           -           702       -           1,803  
 
                       
Total operating expenses
    308,058       126       -           265,943       -           574,127  
 
                       
 
                                               
Income (loss) from operations
    21,257       (126 )     -           104,503       -           125,634  
 
                                               
Other income (expense):
                                               
Interest expense, net of amounts capitalized
    (25,202 )     -           -           (56,879 )     5,279       (76,802 )
Loss on extinguishment of debt and credit facilities, net
    (27,597 )     -           -           (4,274 )     -           (31,871 )
Loss on change in value of embedded derivative
    -           -           -           (11,312 )     11,312       -      
Interest and investment income (loss)
    31,030       -           -           (2,281 )     (28,371 )     378  
Other income
    (273 )     -           -           (203 )     (125 )     (601 )
 
                       
 
                                               
Income (loss) before income taxes
    (785 )     (126 )     -           29,554       (11,905 )     16,738  
 
                                               
Income tax expense
    (412 )     -           (538 )     (516 )     -           (1,466 )
 
                       
Net income (loss)
    (1,197 )     (126 )     (538 )     29,038       (11,905 )     15,272  
 
                                               
Preferred stock beneficial conversion feature
    -           -           -           -           -           -      
 
                       
 
                                               
Net income (loss) attributable to common stockholders
     $ (1,197 )      $ (126 )      $ (538 )      $ 29,038        $ (11,905 )      $ 15,272  
 
                       

27


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
 
                                               
Revenue
     $ 283,796        $ -            $ -            $ 307,033        $ -            $ 590,829  
 
                                               
Cost of services
    133,383       8       -           121,041       -           254,432  
Subscriber acquisition costs
    45,342       -           -           22,309       -           67,651  
Sales and marketing
    18,191       -           -           30,502       -           48,693  
Engineering, design and development
    5,313       -           -           6,631       -           11,944  
General and administrative
    31,996       -           -           34,720       -           66,716  
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 expense, net of amounts capitalized
    (23,828 )     -           -           (87,926 )     13,674       (98,080 )
Loss on extinguishment of debt and credit facilities, net
    (307 )     -           -           (107,449 )     -           (107,756 )
Loss on change in value of embedded derivative
    -           -           -           (19,800 )     19,800       -      
Interest and investment income (loss)
    (186,246 )     -           -           (997 )     196,566       9,323  
Other income
    (4,825 )     -           -           5,574       -           749  
 
                       
 
                                               
Income (loss) before income taxes
    (193,120 )     (47 )     -           (195,402 )     230,040       (158,529 )
 
                                               
Income tax expense
    -           -           (537 )     (578 )     -           (1,115 )
 
                       
Net income (loss)
    (193,120 )     (47 )     (537 )     (195,980 )     230,040       (159,644 )
 
                                               
Preferred stock beneficial conversion feature
    -           -           -           -           -           -      
 
                       
 
                                               
Net income (loss) attributable to common stockholders
     $ (193,120 )      $ (47 )      $ (537 )      $ (195,980 )      $ 230,040        $ (159,644 )
 
                       

28


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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, 2010
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
 
                                               
Revenue
     $ 639,748        $ -            $ -            $ 723,796        $ -            $ 1,363,544  
 
                                               
Cost of services
    287,486       -           -           239,500       -           526,986  
Subscriber acquisition costs
    128,684       -           -           71,078       -           199,762  
Sales and marketing
    38,635       -           -           66,659       -           105,294  
Engineering, design and development
    12,461       -           -           10,223       -           22,684  
General and administrative
    61,818       -           -           54,928       -           116,746  
Depreciation and amortization
    65,300       308       -           73,887       -           139,495  
Restructuring, impairments and related costs
    1,101       -           -           702       -           1,803  
 
                       
Total operating expenses
    595,485       308       -           516,977       -           1,112,770  
 
                       
 
                                               
Income (loss) from operations
    44,263       (308 )     -           206,819       -           250,774  
 
                                               
Other income (expense):
                                               
Interest expense, net of amounts capitalized
    (47,810 )     -           -           (116,878 )     10,018       (154,670 )
Loss on extinguishment of debt and credit facilities, net
    (30,155 )     -           -           (4,282 )     -           (34,437 )
Loss on change in value of embedded derivative
    -           -           -           (48,603 )     48,603       -      
Interest and investment income (loss)
    32,759       -           -           (3,903 )     (31,748 )     (2,892 )
Other income
    (273 )     -           -           1,126       (125 )     728  
 
                       
 
                                               
Income (loss) before income taxes
    (1,216 )     (308 )     -           34,279       26,748       59,503  
 
                                               
Income tax expense
    (412 )     -           (1,076 )     (1,145 )     -           (2,633 )
 
                       
Net income (loss)
    (1,628 )     (308 )     (1,076 )     33,134       26,748       56,870  
 
                                               
Preferred stock beneficial conversion feature
    -           -           -           -           -           -      
 
                       
 
                                               
Net income (loss) attributable to common stockholders
     $ (1,628 )      $ (308 )      $ (1,076 )      $ 33,134        $ 26,748        $ 56,870  
 
                       

29


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
 
                                               
Revenue
     $ 568,354        $ -            $ -            $ 609,454        $ -            $ 1,177,808  
 
                                               
Cost of services
    273,362       8       -           250,417       -           523,787  
Subscriber acquisition costs
    92,082       -           -           48,637       -           140,719  
Sales and marketing
    33,484       -           -           66,632       -           100,116  
Engineering, design and development
    10,340       -           -           11,383       -           21,723  
General and administrative
    59,558       -           -           66,473       -           126,031  
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 expense, net of amounts capitalized
    (39,802 )     -           -           (155,838 )     29,582       (166,058 )
Loss on extinguishment of debt and credit facilities, net
    (17,637 )     -           -           (108,076 )     -           (125,713 )
Loss on change in value of embedded derivative
    -           -           -           (78,003 )     78,003       -      
Interest and investment income (loss)
    (301,761 )     -           -           (7,406 )     311,324       2,157  
Other income
    (4,700 )     -           -           5,959       -           1,259  
 
                       
 
                                               
Income (loss) before income taxes
    (319,876 )     (182 )     -           (308,912 )     418,909       (210,061 )
 
                                               
Income tax expense
    -           -           (1,074 )     (1,155 )     -           (2,229 )
 
                       
Net income (loss)
    (319,876 )     (182 )     (1,074 )     (310,067 )     418,909       (212,290 )
 
                                               
Preferred stock beneficial conversion feature
    (186,188 )     -           -           -           -           (186,188 )
 
                       
 
                                               
Net income (loss) attributable to common stockholders
     $ (506,064 )      $ (182 )      $ (1,074 )      $ (310,067 )      $ 418,909        $ (398,478 )
 
                       

30


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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, 2010
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
Current assets:
                                               
Cash and cash equivalents
     $ 162,864        $ -            $ -            $ 95,990        $ -            $ 258,854  
Accounts receivable, net
    123,170       -           -           73,379       -           196,549  
Due from subsidiaries/affiliates
    148,692       3,333       -           683       (152,708 )     -      
Inventory, net
    8,299       -           -           5,427       -           13,726  
Prepaid expenses
    45,071       -           -           148,369       -           193,440  
Related party current assets
    3,849       -           -           1,593       -           5,442  
Deferred tax asset
    7,207       -           -           70,363       -           77,570  
Other current assets
    8,876       -           -           5,837       (122 )     14,591  
 
                       
 
                                               
Total current assets
    508,028       3,333       -           401,641       (152,830 )     760,172  
 
                                               
Property and equipment, net
    890,937       16,493       -           857,917       -           1,765,347  
Investment in subsidiaries/affiliates
    (568,632 )     -           -           -           568,632       -      
Restricted investments
    3,146       -           -           250       -           3,396  
Deferred financing fees, net
    1,552       -           -           65,137       (7,465 )     59,224  
Intangible assets, net
    -           -           83,654       2,577,347       -           2,661,001  
Goodwill
    -           -           -           -           1,834,856       1,834,856  
Due from subsidiaries/affiliates
    -           -           -           -           -           -      
Related party long-term assets
    347       -           -           28,221       (152 )     28,416  
Other long-term assets
    10,040       -           -           78,480       -           88,520  
 
                       
 
                                               
Total assets
     $ 845,418        $ 19,826        $ 83,654        $ 4,008,993        $ 2,243,041        $ 7,200,932  
 
                       
 
                                               
Current liabilities:
                                               
Accounts payable and accrued expenses
     $ 292,828        $ -            $ -            $ 226,786        $ (433 )      $ 519,181  
Accrued interest
    24,715       -           -           43,826       -           68,541  
Due to subsidiaries/affiliates
    -           20,551       477       131,264       (152,292 )     -      
Current portion of deferred revenue
    610,045       -           -           558,682       363       1,169,090  
Current portion of deferred credit on executory contracts
    -           -           -           263,998       -           263,998  
Current maturities of long-term debt
    1,422       -           -           6,858       -           8,280  
Related party current liabilities
    5,417       -           -           7,364       -           12,781  
 
                       
 
                                               
Total current liabilities
    934,427       20,551       477       1,238,778       (152,362 )     2,041,871  
 
                                               
Deferred revenue
    123,826       -           -           151,386       -           275,212  
Deferred credit on executory contracts
    -           -           -           647,691       -           647,691  
Long-term debt
    1,069,881       -           -           1,456,873       135,390       2,662,144  
Long-term related party debt
    195,369       -           -           159,674       2,763       357,806  
Deferred tax liability
    7,217       -           17,984       922,267       -           947,468  
Related party long-term liabilities
    -           -           -           26,655       -           26,655  
Other long-term liabilities
    22,888       -           -           38,769       -           61,657  
 
                       
 
                                               
Total liabilities
    2,353,608       20,551       18,461       4,642,093       (14,209 )     7,020,504  
 
                       
 
                                               
Commitments and contingencies
                                               
 
                                               
Stockholders’ equity (deficit):
                                               
Preferred and common stock
    3,923       -           -           -           -           3,923  
Accumulated other comprehensive loss
    (5,987 )     -           -           (5,987 )     5,987       (5,987 )
Additional paid-in-capital
    10,379,730       -           83,654       6,060,660       (6,144,314 )     10,379,730  
Retained earnings (accumulated deficit)
    (11,885,856 )     (725 )     (18,461 )     (6,687,773 )     8,395,577       (10,197,238 )
 
                       
 
                                               
Total stockholders’ equity (deficit)
    (1,508,190 )     (725 )     65,193       (633,100 )     2,257,250       180,428  
 
                       
 
                                               
Total liabilities and stockholders’ equity
     $ 845,418        $ 19,826        $ 83,654        $ 4,008,993        $ 2,243,041        $ 7,200,932  
 
                       

31


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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, 2009
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non - Guarantors   Eliminations   Inc.
Current assets:
                                               
Cash and cash equivalents
     $ 171,265        $ -            $ -            $ 212,224        $ -            $ 383,489  
Accounts receivable, net
    102,276       -           -           60,042       -           162,318  
Due from subsidiaries/affiliates
    127,110       -           -           930       (128,040 )     -      
Inventory, net
    12,177       -           -           4,016       -           16,193  
Prepaid expenses
    25,042       -           -           75,231       -           100,273  
Related party current assets
    2,768       -           -           103,479       -           106,247  
Deferred tax asset
    7,999       -           -           64,641       -           72,640  
Other current assets
    12,896       -           -           5,724       -           18,620  
 
                       
 
                                               
Total current assets
    461,533       -           -           526,287       (128,040 )     859,780  
 
                                               
Property and equipment, net
    894,485       17,113       -           799,405       -           1,711,003  
Investment in subsidiaries/affiliates
    (600,976 )     -           -           -           600,976       -      
Restricted investments
    3,150       -           -           250       -           3,400  
Deferred financing fees, net
    3,595       -           -           68,571       (5,759 )     66,407  
Intangible assets, net
    -           -           83,654       2,611,461       -           2,695,115  
Goodwill
    -           -           -           -           1,834,856       1,834,856  
Due from subsidiaries/affiliates
    -           -           -           -           -           -      
Related party long-term assets
    155       -           -           111,730       (118 )     111,767  
Other long-term assets
    14,350       -           -           25,528       -           39,878  
 
                       
 
                                               
Total assets
     $ 776,292        $ 17,113        $ 83,654        $ 4,143,232        $ 2,301,915        $ 7,322,206  
 
                       
 
                                               
Current liabilities:
                                               
Accounts payable and accrued expenses
     $ 343,131        $ -            $ -            $ 207,803        $ (7,248 )      $ 543,686  
Accrued interest
    27,627       -           -           46,939       -           74,566  
Due to subsidiaries/affiliates
    -           17,530       477       110,032       (128,039 )     -      
Current portion of deferred revenue
    569,742       -           -           506,440       7,248       1,083,430  
Current portion of deferred credit on executory contracts
    -           -           -           252,831       -           252,831  
Current maturities of long-term debt
    2,500       -           -           11,382       -           13,882  
Related party current liabilities
    3,934       -           -           104,312       -           108,246  
 
                       
 
                                               
Total current liabilities
    946,934       17,530       477       1,239,739       (128,039 )     2,076,641  
 
                                               
Deferred revenue
    121,286       -           -           133,863       -           255,149  
Deferred credit on executory contracts
    -           -           -           784,078       -           784,078  
Long-term debt
    1,109,893       -           -           1,494,921       194,888       2,799,702  
Long-term related party debt
    102,577       -           -           157,032       3,970       263,579  
Deferred tax liability
    7,999       -           16,908       915,275       -           940,182  
Related party long-term liabilities
    -           -           -           46,301       -           46,301  
Other long-term liabilities
    22,201       -           -           38,851       -           61,052  
 
                       
 
                                               
Total liabilities
    2,310,890       17,530       17,385       4,810,060       70,819       7,226,684  
 
                       
 
                                               
Commitments and contingencies
                                               
 
                                               
Stockholders’ equity (deficit):
                                               
Preferred and common stock
    3,920       -           -           -           -           3,920  
Accumulated other comprehensive loss
    (6,581 )     -           -           (6,581 )     6,581       (6,581 )
Additional paid-in-capital
    10,352,291       -           83,654       6,060,660       (6,144,314 )     10,352,291  
Retained earnings (accumulated deficit)
    (11,884,228 )     (417 )     (17,385 )     (6,720,907 )     8,368,829       (10,254,108 )
 
                       
 
                                               
Total stockholders’ equity (deficit)
    (1,534,598 )     (417 )     66,269       (666,828 )     2,231,096       95,522  
 
                       
 
                                               
Total liabilities and stockholders’ equity
     $ 776,292        $ 17,113        $ 83,654        $ 4,143,232        $ 2,301,915        $ 7,322,206  
 
                       

32


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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, 2010
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non-Guarantors   Eliminations   Inc.
 
                                               
Balance at December 31, 2009
     $ (1,534,598 )      $ (417 )      $ 66,269        $ (666,828 )      $ 2,231,096        $ 95,522  
Net income (loss)
    (1,628 )     (308 )     (1,076 )     33,134       26,748       56,870  
Other comprehensive income:
                                               
Unrealized gain on available-for-sale securities
    469       -           -           469       (469 )     469  
Foreign currency translation adjustment
    125       -           -           125       (125 )     125  
 
                       
Total comprehensive income (loss)
    (1,034 )     (308 )     (1,076 )     33,728       26,154       57,464  
Issuance of common stock to employees and employee benefit plans, net of forfeitures
    1,984       -           -           -           -           1,984  
Share-based payment expense
    25,458       -           -           -           -           25,458  
Contributed capital
    -           -           -           -           -           -      
 
                       
 
                                               
Balance at June 30, 2010
     $ (1,508,190 )      $ (725 )      $ 65,193        $ (633,100 )      $ 2,257,250        $ 180,428  
 
                       
SIRIUS XM RADIO INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non-Guarantors   Eliminations   Inc.
 
                                               
Net cash provided by (used in) operating activities
     $ 27,538        $ -            $ -            $ 113,449        $ -            $ 140,987  
 
                       
 
                                               
Cash flows from investing activities:
                                               
Additions to property and equipment
    (50,839 )     -           -           (118,474 )     -           (169,313 )
Sale of restricted and other investments
    4       -           -           9,450       -           9,454  
 
                       
Net cash used in investing activities
    (50,835 )     -           -           (109,024 )     -           (159,859 )
 
                       
 
                                               
Cash flows from financing activities:
                                               
Long-term borrowings, net of costs
    637,406       -           -           -           -           637,406  
Related party long-term borrowings, net of costs
    147,094       -           -           -           -           147,094  
Restricted cash to be used for the redemption of debt
    -           -           -           -           -           -      
Repayment of long-term borrowings
    (690,318 )                     (120,659 )             (810,977 )
Repayment of related party long term borrowings
    (55,221 )                                     (55,221 )
Payment of premiums
    (24,065 )     -           -           -           -           (24,065 )
 
                       
Net cash provided by (used in) financing activities
    14,896       -           -           (120,659 )     -           (105,763 )
 
                       
 
                                               
Net (decrease) increase in cash and cash equivalents
    (8,401 )     -           -           (116,234 )     -           (124,635 )
Cash and cash equivalents at beginning of period
    171,265       -           -           212,224       -           383,489  
 
                       
 
                                               
Cash and cash equivalents at end of period
     $ 162,864        $ -            $ -            $ 95,990        $ -            $ 258,854  
 
                       

33


Table of Contents

SIRIUS XM RADIO INC. AND SUBSIDIARIES
NOTES TO 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
                                                 
                                            Consolidated  
    Sirius XM Radio     Sirius Asset Mgmt                             Sirius XM Radio  
(in thousands)   Inc.   LLC   Satellite CD Radio   Non-Guarantors   Eliminations   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 )
 
                       
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  
Payment of premiums on redemption of debt
    -           -           -           (16,572 )     -           (16,572 )
Repayment of long-term borrowings
    (172,836 )     -           -           (255,035 )     -           (427,871 )
Repayment of related party long-term borrowings
    (867 )     -           -           (100,000 )     -           (100,867 )
 
                       
Net cash provided by (used in) financing activities
    35,100       -           -           110,913       6,181       152,194  
 
                       
Net (decrease) increase 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  
 
                       

34


Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
          We have included in this Quarterly Report on Form 10-Q, and from time to time, our management may make statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” For a discussion of other significant factors and risks that could affect our future results and financial condition, see “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2009.
          Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
    our dependence upon automakers, many of which have experienced a dramatic drop in sales, and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers;
 
    the substantial indebtedness of SIRIUS and XM;
 
    the useful life of our satellites, which have experienced component failures including, with respect to a number of satellites, failures on their solar arrays, and, in certain cases, are not insured; and
 
    the competitive position of SIRIUS and XM versus other forms of audio and video entertainment including terrestrial radio, HD radio, Internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies.
          We have entered into a number of important content arrangements, including agreements with the National Football League, Howard Stern and NASCAR, which require us to pay substantial sums. Our agreement with Howard Stern expires in December 2010; our agreement with the NFL expires at the end of the 2010-2011 NFL season; and our agreement with NASCAR expires in December 2011. Although preliminary discussions have been held with the National Football League, Howard Stern and NASCAR regarding new programming arrangements, we may not be able to secure new programming arrangements with one or more of these providers, or enter into new agreements at costs that are acceptable to us. If we do not secure new programming arrangements with one or more of these providers, certain of our subscribers may elect to cancel or not to renew their subscriptions. We cannot quantify how many subscribers may cancel or elect not to renew their subscriptions if we fail to secure new programming arrangements with one or more of these providers; however, we have no reason to believe that any such subscriber loss will be material to our business or financial condition taken as a whole.
          Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or a combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

35


Table of Contents

Executive Summary
          We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States on a subscription fee basis through our proprietary satellite radio systems — the SIRIUS system and the XM system. The SIRIUS system consists of four in-orbit satellites with over 125 terrestrial repeaters, satellite uplink facilities and studios. The XM system consists of four in-orbit satellites with over 650 terrestrial repeaters, satellite uplink facilities and studios. The terrestrial repeaters receive and retransmit signals. Subscribers can also receive certain of our music and other channels over the Internet, including through an application on the Apple iPhone and Blackberry.
          Our satellite radios are primarily distributed through automakers (“OEMs”), nationwide through retail locations and through 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 certain daily rental car companies.
          As of June 30, 2010, we had 19,527,448 subscribers; 9,470,068 SIRIUS subscribers and 10,057,380 XM subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers and dealers for prepaid subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet operators; certain 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 subscription plans, as well as discounts for multiple subscriptions on each platform. We also derive revenue from activation and other subscription-related fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our 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. In May 2010, our letter of intent with ACIR DARS Mexico, S. de R.L. de C.V. to pursue a license to offer satellite radio in Mexico was terminated.
          In April 2010, XM Satellite Radio Holdings Inc. merged with and into XM Satellite Radio Inc. XM Satellite Radio Inc., together with its subsidiaries, is operated as an unrestricted subsidiary under the agreements governing our existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our respective debt agreements.

36


Table of Contents

Actual Results of Operations
          Set forth below are our results of operations for the three and six months ended June 30, 2010 compared with the three and six months ended June 30, 2009.
     Total Revenue
          Subscriber Revenue includes subscription fees, activation and other fees and the effects of rebates.
    Three Months: For the three months ended June 30, 2010 and 2009, subscriber revenue was $601,630 and $561,763, respectively, an increase of 7%, or $39,867. The increase was primarily attributable to the 4% increase in daily weighted average subscribers, an increase in the sale of “Best of” programming, rate increases on multi-subscription and internet packages and an $11,209 decrease in the impact of purchase price accounting adjustments attributable to acquired deferred subscriber revenues.
 
    Six Months: For the six months ended June 30, 2010 and 2009, subscriber revenue was $1,181,139 and $1,121,151, respectively, an increase of 5%, or $59,988. The increase was primarily attributable to the 2% increase in daily weighted average subscribers, an increase in the sale of “Best of” programming, rate increases on multi-subscription and internet packages and a $22,931 decrease in the impact of purchase price accounting adjustments attributable to acquired deferred subscriber revenues.
          Future subscriber revenue will be dependent, among other things, upon the growth of our subscriber base, conversion and churn rates, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices and the identification of additional revenue streams from subscribers. The impact of purchase price accounting adjustments attributable to acquired subscriber deferred revenues will continue to decline in absolute amount and as a percentage of reported total subscriber revenues through 2013 as balances are earned over the acquired subscription period.
          Advertising Revenue includes the sale of advertising on our non-music channels, net of agency fees. Agency fees are based on a stated percentage per the advertising agreement applied to gross billing revenue.
    Three Months: For the three months ended June 30, 2010 and 2009, advertising revenue was $15,797 and $12,564, respectively, which represents an increase of 26%, or $3,233. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising.
 
    Six Months: For the six months ended June 30, 2010 and 2009, advertising revenue was $30,323 and $24,869, respectively, which represents an increase of 22%, or $5,454. The increase was primarily due to more effective sales efforts and improvements in the national market for advertising.
          Our advertising revenue is subject to fluctuation based on the national economic environment. We expect advertising revenue to grow as our subscribers increase and the economy improves.
          Equipment Revenue includes revenue and royalties from the sale of SIRIUS and XM radios, components and accessories.
    Three Months: For the three months ended June 30, 2010 and 2009, equipment revenue was $18,520 and $10,928, respectively, which represents an increase of 69%, or $7,592. The increase was driven by royalties from increased OEM installations.
 
    Six Months: For the six months ended June 30, 2010 and 2009, equipment revenue was $32,802 and $20,837, respectively, which represents an increase of 57%, or $11,965. The increase was driven by royalties from increased OEM installations.
          We expect equipment revenue to fluctuate based on the volume and mix of equipment sales in our direct to consumer business and OEM installations for which we receive royalty payments for our technology.
          Other Revenue includes the U.S. Music Royalty Fee, revenue from affiliates, content licensing fees and syndication fees.
    Three Months: For the three months ended June 30, 2010, other revenue was $63,814 and $5,574, respectively. The increase was primarily due to the introduction of the U.S. Music Royalty Fee in the third quarter of 2009.

37


Table of Contents

    Six Months: For the six months ended June 30, 2010, other revenue was $119,280 and $10,951, respectively. The increase was primarily due to the introduction of the U.S. Music Royalty Fee in the third quarter of 2009.
          We expect other revenue to increase as subscribers become subject to the U.S. Music Royalty Fee at subscription renewal dates, as our subscriber base grows and as revenues from affiliates increase. The FCC’s order approving the Merger allows us to pass through cost increases incurred since the filing of our FCC merger application as a result of statutorily or contractually required payments to the music, recording and publishing industries for the performance of musical works and sound recordings or for device recording fees.
     Operating Expenses
          Revenue Share and Royalties include distribution and content provider revenue share, residuals and broadcast and web streaming royalties. Residuals are monthly fees paid based upon the number of subscribers using SIRIUS and XM radios purchased from retailers. Advertising revenue share is recorded to revenue share and royalties in the period in which the advertising is broadcast.
    Three Months: For the three months ended June 30, 2010 and 2009, revenue share and royalties were $107,901 and $95,831, respectively, which represents an increase of 13%, or $12,070. The increase was primarily attributable to an increase in our revenues and the statutory royalty rate for the performance of sound recordings, partially offset by a decrease in the revenue sharing rate with an automaker and a $4,577 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting.
 
    Six Months: For the six months ended June 30, 2010 and 2009, revenue share and royalties were $206,085 and $196,297, respectively, which represents an increase of 5%, or $9,788. The increase was primarily attributable to an increase in our revenues and the statutory royalty rate for the performance of sound recordings, partially offset by a decrease in the revenue sharing rate with an automaker and a $9,137 increase in the benefit to earnings from the amortization of deferred credits on executory contracts initially recognized in purchase price accounting.
          We expect these costs to increase as our revenues grow, as we expand our distribution of SIRIUS and XM radios through automakers, and as a result of statutory increases in the royalty rate for the performance of sound recordings. Under the terms of the Copyright Royalty Board’s decision, we paid royalties of 6.5% and 7.0% of gross revenues, subject to certain exclusions, for 2009 and 2010, respectively, and will pay royalties of 7.5% and 8.0% for 2011 and 2012, respectively. Our next rate setting proceeding before the Copyright Royalty Board is scheduled to commence in January 2011 and the results of that proceeding may have an impact on our results of operations. The deferred credits on executory contracts initially recognized in purchase price accounting are expected to provide increasing benefits to revenue share and royalties through the expiration of the acquired executory contracts, principally in 2012 and 2013.
          Programming and Content includes costs to acquire, create and produce content and on-air talent costs. We have entered into various agreements with third parties for music and non-music programming that require us to pay license fees, share advertising revenue, purchase advertising on media properties owned or controlled by the licensor and pay other guaranteed amounts. Purchased advertising is recorded as a sales and marketing expense and the cost of sharing advertising revenue is recorded as revenue share and royalties in the period in which the advertising is broadcast.
    Three Months: For the three months ended June 30, 2010 and 2009, programming and content expenses were $72,019 and $72,102, respectively, which represents a decrease of $83. The decrease was primarily due to savings in content agreements, partially offset by a $3,999 reduction in the benefit to earnings from purchase price accounting adjustments attributable to the amortization of the deferred credit on acquired programming executory contracts.
 
    Six Months: For the six months ended June 30, 2010 and 2009, programming and content expenses were $150,452 and $152,511, respectively, which represents a decrease of 1%, or $2,059. The decrease was primarily due to savings in content agreements and production costs, partially offset by increases in personnel costs, general operating expenses and a $7,742 reduction in the benefit to earnings from purchase price accounting adjustments attributable to the amortization of the deferred credit on acquired programming executory contracts.
          Our programming and content expenses, excluding share-based payment expense, are expected to decrease as various agreements expire and are renewed or replaced on more cost effective terms. The impact of purchase price accounting adjustments attributable to the amortization of the deferred credit on acquired programming executory contracts will continue to decline, in absolute amount and as a percentage of reported programming and content, through 2013 as acquired programming contracts expire, principally in 2012 and 2013. Our agreements with third-party content providers are subject to contractual expiration dates. We may

38


Table of Contents

or may not be able to negotiate renewals of these agreements on cost effective terms or at all. See “Special Note Regarding Forward-Looking Statements” for a discussion of these risks.
          Customer Service and Billing includes costs associated with the operation of third party customer service centers and our subscriber management systems as well as bad debt expense.
    Three Months: For the three months ended June 30, 2010 and 2009, customer service and billing expenses were $58,414 and $58,833, respectively, which represents a decrease of 1%, or $419. The decrease was primarily due to lower call center expenses as a result of moving calls to lower cost locations.
 
    Six Months: For the six months ended June 30, 2010 and 2009, customer service and billing expenses were $114,625 and $119,041, respectively, which represents a decrease of 4%, or $4,416. The decrease was primarily due to lower call center expenses as a result of moving calls to lower cost locations.
          We expect our customer care and billing expenses to decrease on a per subscriber basis due to volume efficiencies, but increase overall as our subscriber base grows due to increased call center operating costs, transaction fees and bad debt expense.
          Satellite and Transmission consists of costs associated with the operation and maintenance of our satellites; satellite telemetry, tracking and control systems; terrestrial repeater networks; satellite uplink facilities; and broadcast studios.
    Three Months: For the three months ended June 30, 2010 and 2009, satellite and transmission expenses were $19,982 and $19,615, respectively, which represents an increase of 2%, or $367. The increase was primarily due to increased satellite insurance expense, partially offset by savings in personnel costs, consulting expenses and repeater maintenance expenses.
 
    Six Months: For the six months ended June 30, 2010 and 2009, satellite and transmission expenses were $40,100 and $39,894, respectively, which represents an increase of 1%, or $206. The increase was primarily due to increased satellite insurance expense, partially offset by savings in personnel costs, consulting expenses and repeater maintenance expenses.
          We expect satellite and transmission expenses, excluding share-based payment expense, to increase as we add XM-5 and FM-6 to our in-orbit satellite fleet and continue to enhance our terrestrial repeater networks.
          Cost of Equipment includes costs from the sale of SIRIUS and XM radios, components and accessories and provisions for inventory allowance attributable to products purchased for resale in our direct to consumer distribution channel.
    Three Months: For the three months ended June 30, 2010 and 2009, cost of equipment was $7,805 and $8,051, respectively, which represents a decrease of 3%, or $246. The decrease was primarily due to lower inventory write-downs, partially offset by increased component sales to manufacturers and distributors.
 
    Six Months: For the six months ended June 30, 2010 and 2009, cost of equipment was $15,724 and $16,044, respectively, which represents a decrease of 2%, or $320. The decrease was primarily due to lower inventory write-downs, partially offset by increased component sales to manufacturers and distributors.
          We expect cost of equipment to vary with changes in sales, inventory, and inventory valuations.
          Subscriber Acquisition Costs include hardware subsidies paid to radio manufacturers, distributors and automakers, including subsidies paid to automakers who include a SIRIUS or XM radio and a prepaid subscription to our service in the sale or lease price of a vehicle; subsidies paid for chip sets and certain other components used in manufacturing radios; device royalties for certain radios; commissions paid to retailers and automakers as incentives to purchase, install and activate SIRIUS and XM radios; product warranty obligations; and provisions for inventory allowance attributable to inventory consumed in our OEM and retail distribution channels. The majority of subscriber acquisition costs are incurred and expensed in advance of, or concurrent with, acquiring a subscriber. Subscriber acquisition costs do not include advertising, loyalty payments to distributors and dealers of SIRIUS and XM radios and revenue share payments to automakers and retailers of SIRIUS and XM radios.
    Three Months: For the three months ended June 30, 2010 and 2009, subscriber acquisition costs were $110,383 and $67,651, respectively, which represents an increase of 63%, or $42,732. The increase was primarily a result of the 46% increase in gross subscriber additions and higher subsidies related to the 103% increase in OEM installations, partially offset by a $6,963 increase in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting.

39


Table of Contents

    Six Months: For the six months ended June 30, 2010 and 2009, subscriber acquisition costs were $199,762 and $140,719, respectively, which represents an increase of 42%, or $59,043. The increase was primarily a result of the 38% increase in gross subscriber additions and higher subsidies related to the 91% increase in OEM installations, partially offset by a $13,987 increase in the benefit to earnings from the amortization of the deferred credit for acquired executory contracts recognized in purchase price accounting.
          We expect total subscriber acquisition costs to fluctuate as increases or decreases in OEM installations, which are primarily driven by manufacturing and penetration rates, and changes in our gross subscriber additions are accompanied by continuing declines in the costs of subsidized components of SIRIUS and XM radios. The impact of purchase price accounting adjustments attributable to the amortization of the deferred credit for acquired subscriber acquisition executory contracts will vary, in absolute amount and as a percentage of reported subscriber acquisition costs, through the expiration of the acquired contracts, principally in 2013. We intend to continue to offer subsidies, commissions and other incentives to acquire subscribers.
          Sales and Marketing includes costs for advertising, media and production, including promotional events and sponsorships; cooperative marketing; customer retention and personnel. Cooperative marketing costs include fixed and variable payments to reimburse retailers and automakers for the cost of advertising and other product awareness activities.
    Three Months: For the three months ended June 30, 2010 and 2009, sales and marketing expenses were $56,177 and $48,693, respectively, which represents an increase of 15%, or $7,484. The increase was primarily due to additional cooperative marketing and personnel costs, partially offset by reductions in consumer advertising, event marketing and third party distribution support expenses.
 
    Six Months: For the six months ended June 30, 2010 and 2009, sales and marketing expenses were $105,294 and $100,116, respectively, which represents an increase of 5%, or $5,178. The increase was primarily due to additional cooperative marketing and personnel costs, partially offset by reductions in consumer advertising, event marketing and third party distribution support expenses.
          We expect sales and marketing expenses, excluding share-based payment expense, to increase as we increase our advertising, retention and promotional activities.
          Engineering, Design and Development includes costs to develop chip sets and new products, research and development for broadcast information systems and costs associated with the incorporation of our radios into vehicles manufactured by automakers.
    Three Months: For the three months ended June 30, 2010 and 2009, engineering, design and development expenses were $11,247 and $11,944, respectively, which represents a decrease of 6%, or $697. The decrease was primarily due to lower costs associated with chip set development, partially offset by higher personnel costs.
 
    Six Months: For the six months ended June 30, 2010 and 2009, engineering, design and development expenses were $22,684 and $21,723, respectively, which represents an increase of 4%, or $961. The increase was primarily due to higher personnel and overhead costs, partially offset by reductions in other research and development costs.
          We expect engineering, design and development expenses, excluding share-based payment expense, to increase in future periods as we develop our next generation chip sets and products.
          General and Administrative includes rent and occupancy, finance, legal, human resources, information technology and investor relations costs.
    Three Months: For the three months ended June 30, 2010 and 2009, general and administrative expenses were $59,166 and $66,716, respectively, which represents a decrease of 11%, or $7,550. The decrease was primarily due to lower share-based payment expense, consulting, accounting and office costs, partially offset by increased personnel and legal costs.
 
    Six Months: For the six months ended June 30, 2010 and 2009, general and administrative expenses were $116,746 and $126,031, respectively, which represents a decrease of 7%, or $9,285. The decrease was primarily due to lower share-based payment expense, consulting, accounting and office costs, partially offset by increased personnel and legal costs.
          We do not expect significant changes in future total general and administrative expenses.

40


Table of Contents

          Depreciation and Amortization represents the systematic recognition in earnings of the acquisition cost of assets used in operations, including our satellite constellations, property, equipment and intangible assets, over their estimated service lives.
    Three Months: For the three months ended June 30, 2010 and 2009, depreciation and amortization expense was $69,230 and $77,158, respectively, which represents a decrease of 10%, or $7,928. The decrease was primarily due to a $13,916 reduction in the charge to earnings attributable to the acquired satellite constellation and subscriber relationships, partially offset by additional depreciation recognized on assets placed in-service subsequent to the Merger.
 
    Six Months: For the six months ended June 30, 2010 and 2009, depreciation and amortization expense was $139,495 and $159,524, respectively, which represents a decrease of 13%, or $20,029. The decrease was primarily due to a $26,114 reduction in the charge to earnings attributable to the acquired satellite constellation and subscriber relationships, partially offset by additional depreciation recognized on assets placed in-service subsequent to the Merger.
          We expect depreciation and amortization expenses to increase in future periods as we complete the construction and launch satellites, which will be partially offset by reductions in the depreciation and amortization associated with the stepped-up basis in assets acquired in the Merger (including intangible assets, satellites, property and equipment) through the end of their estimated service lives, principally through 2017.
     Other Income (Expense)
          Interest Expense, Net of Amounts Capitalized, includes interest on outstanding debt, reduced by interest capitalized in connection with the construction of our satellites and related launch vehicles.
    Three Months: For the three months ended June 30, 2010 and 2009, interest expense was $76,802 and $98,080, respectively, which represents a decrease of 22%, or $21,278. The decrease was primarily due to decreases in the interest rates on our outstanding debt in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 and the redemption of XM’s 10% Senior PIK Secured Notes due 2011 on June 1, 2010.
 
    Six Months: For the six months ended June 30, 2010 and 2009, interest expense was $154,670 and $166,058, respectively, which represents a decrease of 7%, or $11,388. The decrease was primarily due to decreases in the interest rates on our outstanding debt in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 and the redemption of XM’s 10% Senior PIK Secured Notes due 2011 on June 1, 2010.
          Loss on Extinguishment of Debt and Credit Facilities, Net, includes losses incurred as a result of the conversion and retirement of certain debt.
    Three Months: For the three months ended June 30, 2010 and 2009, loss on extinguishment of debt and credit facilities, net, was $31,871 and $107,756, respectively, which represents a decrease of 70%, or $75,855. During the three months ended June 30, 2010, the loss was incurred on the repayment of SIRIUS’ 95/8% Senior Notes due 2013 and XM’s 10% Senior PIK Secured Notes due 2011. During the three months ended June 30, 2009, the loss was incurred on the repayment of the XM’s Amended and Restated Credit Agreement due 2011 and the termination of XM’s Second Lien Credit Agreement.
 
    Six Months: For the six months ended June 30, 2010 and 2009, loss on extinguishment of debt and credit facilities, net, was $34,437 and $125,713, respectively, which represents a decrease of 73%, or $91,276. During the six months ended June 30, 2010, the loss was incurred on the repayment of SIRIUS’ Senior Secured Term Loan due 2012 and 95/8% Senior Notes due 2013 and XM’s 10% Senior PIK Secured Notes due 2011. During the six months ended June 30, 2009, the loss was incurred on the retirement of SIRIUS’ 21/2% Convertible Notes due 2009 and the repayment of the XM’s Amended and Restated Credit Agreement due 2011 and the termination of XM’s Second Lien Credit Agreement.
          Interest and Investment Income (Loss) includes realized gains and losses, dividends, interest income, our share of SIRIUS Canada’s and XM Canada’s net losses and losses recorded from our investment in XM Canada when the fair value was determined to be other than temporary.
    Three Months: For the three months ended June 30, 2010 and 2009, interest and investment income was $378 and $9,323, respectively, which represents a decrease of 96%, or $8,945. The decrease was primarily attributable to higher net losses at XM Canada, lower net income at SIRIUS Canada and a decrease in payments received from SIRIUS Canada in excess of our carrying value of our investments during the three months ended June 30, 2010.

41


Table of Contents

    Six Months: For the six months ended June 30, 2010 and 2009, interest and investment (loss) income was ($2,892) and $2,157, respectively, which represents a decrease in income of 234%, or $5,049. The decrease in income was primarily attributable to higher net losses at XM Canada, lower net income at SIRIUS Canada and a decrease in payments received from SIRIUS Canada in excess of our carrying value of our investments during the six months ended June 30, 2010.
     Income Taxes
          Income Tax Expense represents the recognition of a deferred tax liability related to the difference in accounting for our FCC licenses, which are amortized over 15 years for tax purposes but not amortized for book purposes in accordance with GAAP.
    Three Months: For the three months ended June 30, 2010 and 2009, income tax expense was $1,466 and $1,115, respectively, which represents an increase of 31%, or $351 primarily related to withholding taxes for royalty income.
 
    Six Months: For the six months ended June 30, 2010 and 2009, income tax expense was $2,633 and $2,229, respectively, which represents an increase of 18%, or $404 primarily related to withholding taxes for royalty income.

42


Table of Contents

Subscriber Data
The following table contains actual subscriber data for the three and six months ended June 30, 2010 and 2009, respectively:
                                 
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Beginning subscribers
    18,944,199       18,599,434       18,772,758       19,003,856  
Gross subscriber additions
    2,020,507       1,380,125       3,741,355       2,719,086  
Deactivated subscribers
    (1,437,258 )     (1,566,124 )     (2,986,665 )     (3,309,507 )
 
               
Net additions
    583,249       (185,999 )     754,690       (590,421 )
 
               
Ending subscribers
    19,527,448       18,413,435       19,527,448       18,413,435  
 
               
 
                               
Retail
    7,277,446       8,235,761       7,277,446       8,235,761  
OEM
    12,100,665       10,081,514       12,100,665       10,081,514  
Rental
    149,337       96,160       149,337       96,160  
 
               
Ending subscribers
    19,527,448       18,413,435       19,527,448       18,413,435  
 
               
 
                               
Self-pay
    16,077,714       15,421,414       16,077,714       15,421,414  
Paid promotional
    3,449,734       2,992,021       3,449,734       2,992,021  
 
               
Ending subscribers
    19,527,448       18,413,435       19,527,448       18,413,435  
 
               
 
                               
Retail
    (142,757 )     (301,295 )     (448,304 )     (669,326 )
OEM
    709,226       123,165       1,169,713       85,561  
Rental
    16,780       (7,869 )     33,281       (6,656 )
 
               
Net additions
    583,249       (185,999 )     754,690       (590,421 )
 
               
 
                               
Self-pay
    304,043       (14,996 )     373,782       (128,243 )
Paid promotional
    279,206       (171,003 )     380,908       (462,178 )
 
               
Net additions
    583,249       (185,999 )     754,690       (590,421 )
 
               
 
                               
Daily weighted average number of subscribers
    19,139,926       18,438,473       18,962,580       18,575,219  
 
               
 
                               
Average self-pay monthly churn (1)
    1.8 %     2.0 %     1.9 %     2.1 %
 
               
 
                               
Conversion rate (2)
    46.7 %     44.3 %     45.9 %     44.5 %
 
               
 
Note:   See pages 52 through 58 for footnotes.
          Subscribers. At June 30, 2010, we had 19,527,448 subscribers, an increase of 1,114,013 subscribers, or 6%, from the 18,413,435 subscribers as of June 30, 2009.
    Three Months: For the three months ended June 30, 2010 and 2009, net additions were 583,249 and (185,999), respectively, an increase in net additions of 769,248. Net additions in our OEM channel increased 586,061 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Net reductions in our retail channel decreased 158,538 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The improvement in net additions was due to the 46% increase in gross subscriber additions, primarily resulting from an improvement in U.S. auto sales, and the 8% decline in deactivations resulting from improvements in the conversion rate in paid promotional trials and average self-pay monthly churn.

43


Table of Contents

    Six Months: For the six months ended June 30, 2010 and 2009, net additions were 754,690 and (590,421), respectively, an increase in net additions of 1,345,111. Net additions in our OEM channel increased 1,084,152 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Net reductions in our retail channel decreased 221,022 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The improvement in net additions was due to the 38% increase in gross subscriber additions, primarily resulting from an improvement in U.S. auto sales, and the 10% decline in deactivations resulting from improvements in the conversion rate in paid promotional trials and average self-pay monthly churn.
          Average Self-pay Monthly Churn is derived by dividing the monthly average of self-pay deactivations for the quarter by the average self-pay subscriber balance for the quarter. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, our average self-pay monthly churn rate was 1.8% and 2.0%, respectively. The decrease was due to an improving economy, the success of retention and win-back programs and reductions in non-pay cancellations.
 
    Six Months: For the six months ended June 30, 2010 and 2009, our average self-pay monthly churn rate was 1.9% and 2.1%, respectively. The decrease was due to an improving economy, the success of retention and win-back programs and reductions in non-pay cancellations.
          Conversion Rate is the percentage of vehicle owners and lessees that convert to self-paying after an initial promotional period. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, our conversion rate was 46.7% and 44.3%, respectively. The increase was primarily due to marketing to promotional period subscribers and an improving economy.
 
    Six Months: For the six months ended June 30, 2010 and 2009, our conversion rate was 45.9% and 44.5%, respectively. The increase was primarily due to marketing to promotional period subscribers and an improving economy.

44


Table of Contents

          The discussion of operating results below excludes the effects of stock-based compensation and purchase accounting adjustments associated with the Merger. Financial measures and metrics previously reported as “pro forma” have been renamed “adjusted.”
Adjusted Results of Operations
     In this report, we present certain financial performance measures that are not calculated and presented in accordance with generally accepted accounting principles in the United States of America (“Non-GAAP”). These Non-GAAP financial measures include: average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, per gross subscriber addition; customer service and billing expenses, per average subscriber; free cash flow; and adjusted EBITDA. These measures include the historical results of operations of XM, including predecessor financial information, and exclude the impact of certain purchase price accounting adjustments. We use these Non-GAAP financial measures to manage our business, set operational goals and as a basis for determining performance-based compensation for our employees.
     The purchase price accounting adjustments include the elimination of the benefit to earnings of deferred revenue associated with the investment in XM Canada, the recognition of subscriber revenues not recognized in purchase price accounting and the elimination of the earnings benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. The purchase price accounting adjustments to EBITDA do not include the incremental depreciation and amortization for certain XM property, equipment and intangible assets acquired in the Merger and reported on a stepped up basis.
     Our adjusted EBITDA also reallocates share-based payment expense from functional operating expense line items to a separate line within operating expenses. We believe the exclusion of share-based payment expense from operating expenses is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our operating costs. Specifically, the exclusion of share-based payment expense in subscriber acquisition costs is important to understand the economic impact of the direct costs incurred to acquire subscribers and the effect over time as economies of scale are reached.
     We believe these Non-GAAP financial measures provide useful information to investors regarding our financial condition and results of operations. We believe investors find this Non-GAAP financial performance measure useful in evaluating our core trends because it provides a direct view of our underlying contractual costs. We believe investors use our current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. By providing these Non-GAAP financial measures, together with the reconciliations to the most directly comparable GAAP measure, we believe we are enhancing investors understanding of our business and our results of operations. These Non-GAAP financial measures should be viewed in addition to, and not as an alternative for or superior to, our reported results prepared in accordance with GAAP. Please refer to the footnotes (pages 52 through 58) following our discussion of results of operations for the definitions of these Non-GAAP measures, a further discussion of the usefulness of such Non-GAAP financial measures and reconciliations to the most directly comparable GAAP measure.

45


Table of Contents

          The following table contains our key operating metrics based on our adjusted results of operations for the three and six months ended June 30, 2010 and 2009, respectively (in thousands, except for per subscriber amounts):
                                 
    Unaudited Adjusted
    For the Three Months Ended     For the Six Months Ended  
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
ARPU (3)
     $ 11.81        $ 10.66        $ 11.65        $ 10.57  
SAC, per gross subscriber addition (4)
     $ 59        $ 57        $ 59        $ 59  
Customer service and billing expenses, per average subscriber (5)
     $ 1.01        $ 1.05        $ 1.00        $ 1.06  
Free cash flow (6)
     $ 108,331        $ 12,694        $ (18,872 )      $ 9,048  
Adjusted total revenue (8)
     $ 705,560        $ 607,836        $ 1,376,122        $ 1,213,317  
Adjusted EBITDA (7)
     $ 154,313        $ 132,219        $ 312,070        $ 241,055  
 
Note:   See pages 52 through 58 for footnotes.
          ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, total ARPU was $11.81 and $10.66, respectively. The increase was driven primarily by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, increased revenues from the sale of “Best of” programming, rate increases on multi-subscription and internet packages, and increased net advertising revenue.
 
    Six Months: For the six months ended June 30, 2010 and 2009, total ARPU was $11.65 and $10.57, respectively. The increase was driven primarily by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, increased revenues from the sale of “Best of” programming, rate increases on multi-subscription and internet packages, and increased net advertising revenue.
          SAC, Per Gross Subscriber Addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, SAC, per gross subscriber addition was $59 and $57, respectively. The increase was primarily due to a 46% increase in gross subscriber additions, a 103% increase in OEM production with factory-installed satellite radios associated with the automotive industry recovery, partially offset by lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from satellite radio manufacturers compared to the three months ended June 30, 2009.
 
    Six Months: For each of the six months ended June 30, 2010 and 2009, SAC, per gross subscriber addition was $59. We experienced a 38% increase in gross subscriber additions and an 91% increase in OEM production with factory-installed satellite radios associated with the automotive market recovery, partially offset by lower per radio subsidy rates for certain OEMs and growth in subscriber reactivations and royalties from satellite radio manufacturers compared to the six months ended June 30, 2009.
          Customer Service and Billing Expenses, Per Average Subscriber is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, customer service and billing expenses, per average subscriber was $1.01 and $1.05, respectively. The decrease was primarily due to a lower call center expense as a result of moving calls to lower cost locations.

46


Table of Contents

    Six Months: For the six months ended June 30, 2010 and 2009, customer service and billing expenses, per average subscriber was $1.00 and $1.06, respectively. The decrease was primarily due to a lower call center expense as a result of moving calls to lower cost locations.
          Free Cash Flow includes the net cash provided by (used in) operations, additions to property and equipment, merger related costs and restricted and other investment activity. (See accompanying footnotes on pages 52 through 58 for more details.)
    Three Months: For the three months ended June 30, 2010 and 2009, free cash flow was $108,331 and $12,694, respectively, an increase of $95,637. Net income plus non-cash operating activities increased 37%, to $96,574, from $70,737, principally as a result of improvements in our adjusted EBITDA. Changes in our operating assets and liabilities increased by $82,850 compared to the three months ended June 30, 2009. The increase was primarily due to increases in trade payables related to subsidies and commissions associated with the increase in our subscriber base and growth in deferred revenue; during the three months ended June 30, 2010, offset by growth in receivables from subscribers, radio manufacturers and distributors and the payment of related party obligations and accrued interest. In addition, capital expenditures in the three months ended June 30, 2010 increased by $13,677 compared to the three months ended June 30, 2009, primarily due to increased satellite and related launch vehicle spending.
 
    Six Months: For the six months ended June 30, 2010 and 2009, free cash flow was ($18,872) and $9,048, respectively, a decrease of $27,920. Net income plus non-cash operating activities increased 58%, to $189,575, from $120,010, principally as a result of improvements in our adjusted EBITDA. Changes in our operating assets and liabilities increased $65,437. This was offset by a reduction in cash provided by operating activities, principally as a result of pay-downs of related party liabilities deferred in 2009 and employee bonus payments in the first quarter of 2010 where no bonus payments were made in 2009 and a prepayment to a programming provider in 2010 that had been paid over the course of the year in 2009. As a result of these transactions net cash provided by operating activities increased $4,128 to $140,987 in the six months ended June 30, 2010 compared to the $136,859 provided by operations in the six months ended June 30, 2009. In addition, capital expenditures in the six months ended June 30, 2010 increased $41,502 to $169,313 compared to $127,811 expended in the six months ended June 30, 2009, primarily due to increased satellite and related launch vehicle spending, offset by $9,454 of proceeds from the sale of investment securities in the six months ended June 30, 2010.
          Adjusted Total Revenue. Set forth below are our adjusted total revenue for the three and six months ended June 30, 2010 compared with the three and six months ended June 30, 2009. Our adjusted total revenue includes the recognition of deferred subscriber revenues acquired in the Merger that are not recognized in our post-Merger results under purchase price accounting and the elimination of the benefit in earnings from deferred revenue associated with our investment in XM Canada acquired in the Merger. (See the accompanying footnotes on pages 52 through 58 for more details.)
                                 
    Unaudited  
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
(in thousands)   2010     2009     2010     2009  
 
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 601,630     $ 561,763     $ 1,181,139     $ 1,121,151  
Advertising revenue, net of agency fees
    15,797       12,564       30,323       24,869  
Equipment revenue
    18,520       10,928       32,802       20,837  
Other revenue
    63,814       5,574       119,280       10,951  
Purchase price accounting adjustments:
                               
Subscriber revenue
    3,986       15,195       8,952       31,883  
Other revenue
    1,813       1,812       3,626       3,626  
 
                       
Adjusted total revenue
  $ 705,560     $ 607,836     $ 1,376,122     $ 1,213,317  
 
                       
    Three Months: Our adjusted total revenue grew 16%, or $97,724, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. Subscriber revenue increased 5%, or $28,658, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in subscriber revenue was driven by the increase in subscribers as well as an increase in the sale of “Best of” programming and the rate increases on multi-subscription and internet packages. Advertising revenue increased 26%, or $3,233, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in advertising revenue was driven by more effective sales efforts and improvements in the national market for advertising. Equipment revenue increased 69%, or $7,592, in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in equipment revenue was driven by royalties from increased OEM installations. Other revenue increased $58,241 in the three months ended June 30, 2010 compared to the three months ended June 30, 2009. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009.

47


Table of Contents

    Six Months: Our adjusted total revenue grew 13%, or $162,805, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. Subscriber revenue increased 3%, or $37,057, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in subscriber revenue was driven by the increase in subscribers as well as an increase in the sale of “Best of” programming and the rate increases on multi-subscription and internet packages. Advertising revenue increased 22%, or $5,454, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in advertising revenue was driven by more effective sales efforts and improvements in the national market for advertising. Equipment revenue increased 57%, or $11,965, in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in equipment revenue was driven by royalties from increased OEM installations. Other revenue increased $108,329 in the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The increase in other revenue was driven by the introduction of the U.S. Music Royalty Fee in the third quarter of 2009.
          Adjusted EBITDA. Set forth below are our adjusted EBITDA for the three and six months ended June 30, 2010 compared with the three and six months ended June 30, 2009. Adjusted EBITDA is income (loss) from operations, excluding, if applicable: goodwill impairment; restructuring, impairments and related costs; depreciation and amortization; purchase price accounting adjustments and share-based payment expense. (See the accompanying footnotes on pages 52 through 58 for more details.)
                                 
    Unaudited Adjusted
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
(in thousands)   2010   2009   2010   2009
Adjusted EBITDA
     $ 154,313        $ 132,219        $ 312,070        $ 241,055  
 
               
    Three Months: For the three months ended June 30, 2010 and 2009, adjusted EBITDA was $154,313 and $132,219, respectively, an increase of 17%, or $22,094. The increase was primarily due to an increase of 16%, or $97,724, in revenues, partially offset by an increase of 16%, or $75,630, in expenses included in adjusted EBITDA. The increase in revenue was primarily due to the increase in our subscriber base and the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, as well as increased advertising and equipment revenue, rate increases on multi-subscription and internet packages, and an increase in the sale of “Best of” programming. The increase in expenses was primarily driven by higher subscriber acquisition costs related to the 46% increase in gross additions, higher revenue share and royalties expenses associated with growth in revenues subject to revenue sharing and royalty arrangements and additional sales and marketing costs, primarily related to co-operative marketing.
 
    Six Months: For the six months ended June 30, 2010 and 2009, adjusted EBITDA was $312,070 and $241,055, respectively, an increase of 29%, or $71,015. The increase was primarily due to an increase of 13%, or $162,805, in revenues, partially offset by an increase of 9%, or $91,790, in expenses included in adjusted EBITDA. The increase in revenue was primarily due to the increase in our subscriber base, the introduction of the U.S. Music Royalty Fee in the third quarter of 2009, increased advertising and equipment revenue, rate increases on multi-subscription and internet packages, and an increase in the sale of “Best of” programming. The increase in expenses was primarily driven by higher subscriber acquisition costs related to the 38% increase in gross additions and higher revenue share and royalties expenses associated with growth in revenues subject to revenue sharing and royalty arrangements.

48


Table of Contents

Liquidity and Capital Resources
Cash Flows for the Six Months Ended June 30, 2010 Compared with the Six Months Ended June 30, 2009
          As of June 30, 2010 and December 31, 2009, we had $258,854 and $383,489, respectively, in cash and cash equivalents. The following table presents a summary of our cash flow activity for the periods set forth below (in thousands):
                         
    For the Six Months        
    Ended June 30,      
    2010   2009   2010 vs. 2009
 
                       
Net cash provided by operating activities
     $ 140,987        $ 136,859        $ 4,128  
Net cash used in investing activities
    (159,859 )     (127,811 )     (32,048 )
Net cash (used in) provided by financing activities
    (105,763 )     152,194       (257,957 )
 
           
Net (decrease) increase in cash and cash equivalents
    (124,635 )     161,242       (285,877 )
Cash and cash equivalents at beginning of period
    383,489       380,446       3,043  
 
           
Cash and cash equivalents at end of period
     $ 258,854        $ 541,688        $ (282,834 )
 
           
Cash Flows Provided by Operating Activities
    Six Months: Net cash provided by operating activities increased $4,128, to $140,987, for the six months ended June 30, 2010 from $136,859 for the six months ended June 30, 2009. The increase was primarily the result of improvements in our income from operations and increases in deferred revenue related to the growth of our subscriber base, offset in part by pay-downs of related party liabilities deferred in 2009, employee bonus payments in 2010 where no bonus payments were made in 2009 and a prepayment to a programming provider in 2010 that had been paid over the course of the year in 2009.
Cash Flows Used in Investing Activities
    Six Months: Net cash used in investing activities increased $32,048, to $159,859, for the six months ended June 30, 2010 from $127,811 for the six months ended June 30, 2009. The increase was primarily the result of an increase of $41,502 in capital expenditures for construction of our satellites and related launch vehicles, partially offset by $9,450 from the sale of available-for-sale securities.
          We will incur significant capital expenditures to construct and launch our new satellites and improve our terrestrial repeater network and broadcast and administrative infrastructure. We have entered into various agreements to design, construct, and launch our satellites in the normal course of business. These capital expenditures will support our growth and the resiliency of our operations, and will also support the delivery of new revenue streams.
Cash Flows (Used in) Provided by Financing Activities
    Six Months: Net cash used in financing activities increased $257,957, to $105,763, for the six months ended June 30, 2010 from net cash provided by financing activities of $152,194 for the six months ended June 30, 2009. The increase in cash used in financing activities was primarily due to an increase of $337,460 in repayments of debt, partially offset by an increase of $83,284 in net proceeds from the issuance of debt. During the six months ended June 30, 2010, we received net proceeds of $784,500 from the issuance of our 8.75% Senior Notes due 2015 while during the six months ended June 30, 2009, we received net proceeds of $701,216 from the issuance of XM’s 11.25% Senior Secured Notes due 2013 and agreements with Liberty Media. During the six months ended June 30, 2010, we made debt repayments of $866,198, principally to holders of SIRIUS’ 95/8% Senior Notes due 2013, SIRIUS’ Senior Secured Term Loan due 2012 and XM’s 10% Senior PIK Secured Notes due 2011 while during the six months ended June 30, 2009, we made debt repayments of $528,738, principally to holders of SIRIUS’ 21/2% Convertible Notes due 2009 and XM’s Amended and Restated Credit Agreement due 2011. During the six months ended June 30, 2010 and 2009, we paid $24,065 and $16,572 in premiums on the redemption of debt, respectively.
Financings and Capital Requirements
          We have historically financed our operations through the sale of debt and equity securities. The Certificate of Designations for our Series B Preferred Stock provides that, so long as Liberty Media beneficially owns at least half of its initial equity investment,

49


Table of Contents

Liberty Media’s consent is required for certain actions, including the grant or issuance of our equity securities and the incurrence of debt (other than, in general, debt incurred to refinance existing debt) in amounts greater than $10,000 in any calendar year.
Future Liquidity and Capital Resource Requirements
          We have entered into various agreements to design, construct, and launch our satellites in the normal course of business. As disclosed in Note 14 in our unaudited condensed consolidated financial statements, as of June 30, 2010, we expect to incur capital expenditures of approximately $82,546 and $67,817 during the remainder of 2010 and in 2011, respectively, and an additional $60,320 over the next five years, the majority of which is attributable to the construction and launch of our XM-5 and FM-6 satellites and related launch vehicles.
          Based upon our current plans, we believe that both SIRIUS and XM have sufficient cash, cash equivalents and marketable securities to cover their estimated funding needs. We expect to fund operating expenses, capital expenditures, working capital requirements, interest payments, taxes and scheduled maturities of our current and long-term debt with existing cash and cash flow from operations, and we believe that we will be able to generate sufficient revenues to meet our cash requirements.
          Our ability to meet our debt and other obligations depends on our future operating performance and on economic, financial, competitive and other factors. We continually review our operations for opportunities to adjust the timing of expenditures to ensure that sufficient resources are maintained. Our financial projections are based on assumptions, which we believe are reasonable but contain significant uncertainties.
          Sirius XM Radio Inc. is the sole stockholder of XM Satellite Radio Inc., and its business is operated as an unrestricted subsidiary under the agreements governing our existing indebtedness. Under certain circumstances, SIRIUS may be unwilling or unable to contribute or loan XM capital. Similarly, under certain circumstances, XM may be unwilling or unable to contribute or loan SIRIUS capital. To the extent XM’s funds are insufficient to support its business, XM may be required to seek additional financing, which may not be available on favorable terms, or at all. If XM is unable to secure additional financing, its business and results of operations may be adversely affected.
          We regularly evaluate our business plans and strategy. These evaluations often result in changes to our business plans and strategy, some of which may be material and significantly change our cash requirements. These changes in our business plans or strategy may include: the acquisition of unique or compelling programming; the introduction of new features or services; significant new or enhanced distribution arrangements; investments in infrastructure, such as satellites, equipment or radio spectrum; and acquisitions, including acquisitions that are not directly related to our satellite radio business. In addition, our operations are affected by the FCC order approving the Merger, which imposed certain conditions upon, among other things, our program offerings and our ability to increase prices.
Debt Covenants
          The indentures governing our long-term debt include restrictive covenants. As of June 30, 2010, we were in compliance with our financial debt covenants.
          For a discussion of our debt covenants see Note 11 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance Sheet Arrangements
          We do not have any significant off-balance sheet arrangements other than those disclosed in Note 14 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
2009 Long-Term Stock Incentive Plan
          In May 2009, our stockholders approved the Sirius XM Radio Inc. 2009 Long-Term Stock Incentive Plan (the “2009 Plan”). Employees, consultants and members of our board of directors are eligible to receive awards under the 2009 Plan, which provides for the grant of stock options, restricted stock, restricted stock units and other stock-based awards that the compensation committee of our board of directors may deem appropriate. Vesting and other terms of stock-based awards are set forth in the agreements with the individuals receiving the awards. Stock-based awards granted under the 2009 Plan are generally subject to a vesting requirement. Stock-based awards generally expire ten years from the date of grant. Each restricted stock unit entitles the holder to receive one share of common stock upon vesting. As of June 30, 2010, approximately 323,160,838 shares of common stock were available for future grants under the 2009 Plan.

50


Table of Contents

Other Plans
          SIRIUS and XM maintain four other share-based benefit plans — the XM 2007 Stock Incentive Plan, the Amended and Restated Sirius Satellite Radio 2003 Long-Term Stock Incentive Plan, the XM 1998 Shares Award Plan and the XM Talent Option Plan. These plans generally provide for the grant of stock options, restricted stock, restricted stock units and other stock based awards. No further awards may be made under these plans. Outstanding awards under these plans are being continued.
Contractual Cash Commitments
          For a discussion of our “Contractual Cash Commitments,” refer to Note 14 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Related Party Transactions
          For a discussion of “Related Party Transactions,” refer to Note 9 to our unaudited consolidated financial statements in Item 1 of this Quarterly Report on Form 10-Q.
Critical Accounting Policies and Estimates
          For a discussion of our “Critical Accounting Policies and Estimates,” refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2009 and Note 3 to our unaudited consolidated financial statements in Item 1 of this Form 10-Q. There have been no material changes to our critical accounting policies and estimates since December 31, 2009.

51


Table of Contents

Footnotes
(1)   Average self-pay monthly churn represents the monthly average of self-pay deactivations for the quarter divided by the average self-pay subscriber balance for the quarter.
 
(2)   We measure the percentage of vehicle owners and lessees that receive our service and convert to self-paying after the initial promotion period. We refer to this as the “conversion rate.” At the time satellite radio enabled vehicles are sold or leased, the owners or lessees generally receive between three and twelve month trial subscriptions. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. Based on our experience it may take up to 90 days after the trial service ends for vehicle owners and lessees to respond to our marketing communications and become self-paying subscribers.
 
(3)   ARPU is derived from total earned subscriber revenue, net advertising revenue and other subscription-related revenue, net of purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. Other subscription-related revenue includes amounts recognized on account of the U.S. Music Royalty Fee since the third quarter of 2009. Purchase price accounting adjustments include the recognition of deferred subscriber revenues not recognized in purchase price accounting. ARPU is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
                                 
    Unaudited  
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Subscriber revenue (GAAP)
     $ 601,630        $ 561,763        $ 1,181,139        $ 1,121,151  
Net advertising revenue (GAAP)
    15,797       12,564       30,323       24,869  
Other subscription-related revenue (GAAP)
    56,694       -       104,641       -  
Purchase price accounting adjustments
    3,986       15,195       8,952       31,883  
 
               
 
     $ 678,107        $ 589,522        $ 1,325,055        $ 1,177,903  
 
                               
Daily weighted average number of subscribers
    19,139,926       18,438,473       18,962,580       18,575,219  
 
               
ARPU
     $ 11.81        $ 10.66        $ 11.65        $ 10.57  
 
               

52


Table of Contents

(4)   SAC, per gross subscriber addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of gross subscriber additions for the period. Purchase price accounting adjustments include the elimination of the benefit of amortization of deferred credits on executory contracts recognized at the Merger date attributable to third party arrangements with an OEM. SAC, per gross subscriber addition is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
                                 
    Unaudited
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Subscriber acquisition costs (GAAP)
     $ 110,383        $ 67,651        $ 199,762        $ 140,719  
Less: margin from direct sales of radios and accessories (GAAP)
    (10,715 )     (2,877 )     (17,078 )     (4,793 )
Add: purchase price accounting adjustments
    20,300       13,337       37,966       23,979  
 
               
 
     $ 119,968        $ 78,111        $ 220,650        $ 159,905  
 
                               
Gross subscriber additions
    2,020,507       1,380,125       3,741,355       2,719,086  
 
               
SAC, per gross subscriber addition
     $ 59        $ 57        $ 59        $ 59  
 
               
(5)   Customer service and billing expenses, per average subscriber is derived from total customer service and billing expenses, excluding share-based payment expense and purchase price accounting adjustments, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. We believe the exclusion of share-based payment expense in our calculation of customer service and billing expenses, per average subscriber is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our customer service and billing expenses. Purchase price accounting adjustments include the elimination of the benefit associated with share-based payment arrangements recognized at the Merger date. Customer service and billing expenses, per average subscriber is calculated as follows (in thousands, except for subscriber and per subscriber amounts):
                                 
    Unaudited
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Customer service and billing expenses (GAAP)
     $ 58,414        $ 58,833        $ 114,625        $ 119,041  
Less: share-based payment expense, net of purchase price accounting adjustments
    (729 )     (905 )     (1,457 )     (1,561 )
Add: purchase price accounting adjustment
    78       126       172       243  
 
               
 
     $ 57,763        $ 58,054        $ 113,340        $ 117,723  
Daily weighted average number of subscribers
    19,139,926       18,438,473       18,962,580       18,575,219  
 
               
Customer service and billing expenses, per average subscriber
     $ 1.01        $ 1.05        $ 1.00        $ 1.06  
 
               
(6)   Free cash flow is calculated as follows (in thousands):
                                 
    Unaudited
    For the Three Months Ended   For the Six Months Ended
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Net cash provided by operating activities
     $ 178,675        $ 69,988        $ 140,987        $ 136,859  
Additions to property and equipment
    (70,348 )     (56,671 )     (169,313 )     (127,811 )
Merger related costs
    -       (623 )     -       -  
Restricted and other investment activity
    4       -       9,454       -  
 
               
Free cash flow
     $ 108,331        $ 12,694        $ (18,872 )      $ 9,048  
 
               

53


Table of Contents

(7)   EBITDA is defined as net income before interest, taxes, depreciation and amortization. We adjust EBITDA to also remove the impact of other income and expense, loss on extinguishment of debt as well as certain non-cash charges discussed below. This measure is one of the primary Non-GAAP financial measures on which we (i) evaluate the performance of our businesses, (ii) base our internal budgets and (iii) compensate management. Adjusted EBITDA is a Non-GAAP financial performance measure that excludes (if applicable): (i) certain adjustments as a result of the purchase price accounting for the Merger, (ii) goodwill impairment, (iii) restructuring, impairments, and related costs, (iv) depreciation and amortization and (v) share-based payment expense. The purchase price accounting adjustments include: (i) the elimination of deferred revenue associated with the investment in Canadian Satellite Radio, (ii) recognition of deferred subscriber revenues not recognized in purchase price accounting, and (iii) elimination of the benefit of deferred credits on executory contracts, which are primarily attributable to third party arrangements with an OEM and programming providers. We believe adjusted EBITDA is a useful measure of the underlying trend of our operating performance, which provides useful information about our business apart from the costs associated with our physical plant, capital structure and purchase price accounting. We believe investors find this Non-GAAP financial measure useful when analyzing our results and comparing our operating performance to the performance of other communications, entertainment and media companies. We believe that investors use current and projected adjusted EBITDA to estimate our current or prospective enterprise value and to make investment decisions. Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our adjusted results of operations reflect significant charges for depreciation expense. The exclusion of depreciation and amortization expense is useful given significant variation in depreciation and amortization expense that can result from the potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We believe the exclusion of restructuring, impairments and related costs is useful given the nature of these expenses. We also believe the exclusion of share-based payment expense is useful given the significant variation in expense that can result from changes in the fair market value of our common stock.
 
    Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including share-based payment expense and certain purchase price accounting for the Merger. We endeavor to compensate for the limitations of the Non-GAAP measure presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the Non-GAAP measure. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net income (loss) as disclosed in our consolidated statements of operations. Since adjusted EBITDA is a Non-GAAP financial performance measure, our calculation of adjusted EBITDA may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP. The reconciliation of net income (loss) to the adjusted EBITDA is calculated as follows (see footnotes for reconciliation of the adjusted amounts to their respective GAAP amounts) (in thousands):
                                 
    Unaudited  
    For the Three Months Ended     For the Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
Net income (loss) (GAAP):
  $ 15,272     $ (159,644 )   $ 56,870     $ (212,290 )
Add back items excluded from Adjusted EBITDA:
                               
Purchase price accounting adjustments:
                               
Revenues (see pages 55-58)
    5,799       17,007       12,578       35,509  
Operating expenses (see pages 55-58)
    (64,857 )     (57,184 )     (127,467 )     (112,387 )
Share-based payment expense, net of purchase price accounting adjustments
    16,704       31,003       34,887       52,501  
Depreciation and amortization
    69,230       77,158       139,495       159,524  
Restructuring, impairments and related costs
    1,803       27,000       1,803       27,614  
Interest expense, net of amounts capitalized
    76,802       98,080       154,670       166,058  
Loss on extinguishment of debt and credit facilities, net
    31,871       107,756       34,437       125,713  
Interest and investment income (loss)
    (378 )     (9,323 )     2,892       (2,157 )
Other (loss) income
    601       (749 )     (728 )     (1,259 )
Income tax expense
    1,466       1,115       2,633       2,229  
 
                       
Adjusted EBITDA
  $ 154,313     $ 132,219     $ 312,070     $ 241,055  
 
                       

54


Table of Contents

(8)   The following tables reconcile our actual revenues and operating expenses to our adjusted revenues and operating expenses:
                                 
    Unaudited For the Three Months Ended June 30, 2010  
            Purchase Price     Allocation of Share-        
    As Reported     Accounting     based Payment     Adjusted  
(in thousands)       Adjustments     Expense      
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 601,630     $ 3,986     $     $ 605,616  
Advertising revenue, net of agency fees
    15,797                   15,797  
Equipment revenue
    18,520                   18,520  
Other revenue
    63,814       1,813             65,627  
 
                       
Total revenue
  $ 699,761     $ 5,799     $     $ 705,560  
 
                       
Operating expenses (depreciation and amortization shown separately below) (1)
                               
Cost of services:
                               
Revenue share and royalties
    107,901       26,417             134,318  
Programming and content
    72,019       13,702       (1,790 )     83,931  
Customer service and billing
    58,414       78       (729 )     57,763  
Satellite and transmission
    19,982       303       (1,050 )     19,235  
Cost of equipment
    7,805                   7,805  
Subscriber acquisition costs
    110,383       20,300             130,683  
Sales and marketing
    56,177       3,661       (2,762 )     57,076  
Engineering, design and development
    11,247       148       (1,760 )     9,635  
General and administrative
    59,166       248       (8,613 )     50,801  
Depreciation and amortization (2)
    69,230                   69,230  
Restructuring, impairments and related costs
    1,803                   1,803  
Share-based payment expense
                16,704       16,704  
 
                       
Total operating expenses
  $ 574,127     $ 64,857     $     $ 638,984  
 
                       
 
 
                               
(1)    Amounts related to share-based payment expense included in operating expenses were as follows:
 
                               
Programming and content
  $ 1,662     $ 128     $     $ 1,790  
Customer service and billing
    651       78             729  
Satellite and transmission
    968       82             1,050  
Sales and marketing
    2,643       119             2,762  
Engineering, design and development
    1,612       148             1,760  
General and administrative
    8,365       248             8,613  
 
                       
Total share-based payment expense
  $ 15,901     $ 803     $     $ 16,704  
 
                       
 
                               
(2)   Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000  stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended June 30, 2010 was $17,000.

55


Table of Contents

                                 
    Unaudited For the Three Months Ended June 30, 2009  
            Purchase Price     Allocation of Share-        
            Accounting     based Payment        
(in thousands)   As Reported     Adjustments     Expense     Adjusted  
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 561,763     $ 15,195     $     $ 576,958  
Advertising revenue, net of agency fees
    12,564                   12,564  
Equipment revenue
    10,928                   10,928  
Other revenue
    5,574       1,812             7,386  
 
                       
Total revenue
  $ 590,829     $ 17,007     $     $ 607,836  
 
                       
Operating expenses (depreciation and amortization shown separately below) (1)
                               
Cost of services:
                               
Revenue share and royalties
    95,831       21,840             117,671  
Programming and content
    72,102       17,701       (2,096 )     87,707  
Customer service and billing
    58,833       126       (905 )     58,054  
Satellite and transmission
    19,615       354       (1,310 )     18,659  
Cost of equipment
    8,051                   8,051  
Subscriber acquisition costs
    67,651       13,337             80,988  
Sales and marketing
    48,693       3,173       (3,256 )     48,610  
Engineering, design and development
    11,944       247       (2,068 )     10,123  
General and administrative
    66,716       406       (21,368 )     45,754  
Depreciation and amortization (2)
    77,158                   77,158  
Restructuring, impairments and related costs
    27,000                   27,000  
Share-based payment expense
                31,003       31,003  
 
                       
Total operating expenses
  $ 553,594     $ 57,184     $     $ 610,778  
 
                       
 
                               
(1) Amounts related to share-based payment expense included in operating expenses were as follows:
 
                               
Programming and content
  $ 1,891     $ 205     $     $ 2,096  
Customer service and billing
    779       126             905  
Satellite and transmission
    1,177       133             1,310  
Sales and marketing
    3,072       184             3,256  
Engineering, design and development
    1,821       247             2,068  
General and administrative
    20,961       407             21,368  
 
                       
Total share-based payment expense
  $ 29,701     $ 1,302     $     $ 31,003  
 
                       
 
                               
(2) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the three months ended June 30, 2009 was $31,000.

56


Table of Contents

                                 
    Unaudited For the Six Months Ended June 30, 2010  
            Purchase Price     Allocation of Share-        
            Accounting     based Payment        
(in thousands)   As Reported     Adjustments     Expense     Adjusted  
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 1,181,139     $ 8,952     $     $ 1,190,091  
Advertising revenue, net of agency fees
    30,323                   30,323  
Equipment revenue
    32,802                   32,802  
Other revenue
    119,280       3,626             122,906  
 
                       
Total revenue
  $ 1,363,544     $ 12,578     $     $ 1,376,122  
 
                       
Operating expenses (depreciation and amortization shown separately below) (1)
                               
Cost of services:
                               
Revenue share and royalties
    206,085       51,772             257,857  
Programming and content
    150,452       28,850       (4,900 )     174,402  
Customer service and billing
    114,625       172       (1,457 )     113,340  
Satellite and transmission
    40,100       626       (2,104 )     38,622  
Cost of equipment
    15,724                   15,724  
Subscriber acquisition costs
    199,762       37,966             237,728  
Sales and marketing
    105,294       7,186       (5,462 )     107,018  
Engineering, design and development
    22,684       334       (3,556 )     19,462  
General and administrative
    116,746       561       (17,408 )     99,899  
Depreciation and amortization (2)
    139,495                   139,495  
Restructuring, impairments and related costs
    1,803                   1,803  
Share-based payment expense
                34,887       34,887  
 
                       
Total operating expenses
  $ 1,112,770     $ 127,467     $     $ 1,240,237  
 
                       
 
                               
(1) Amounts related to share-based payment expense included in operating expenses were as follows:
 
                               
Programming and content
  $ 4,612     $ 288     $     $ 4,900  
Customer service and billing
    1,285       172             1,457  
Satellite and transmission
    1,919       185             2,104  
Sales and marketing
    5,198       264             5,462  
Engineering, design and development
    3,222       334             3,556  
General and administrative
    16,847       561             17,408  
 
                       
Total share-based payment expense
  $ 33,083     $ 1,804     $     $ 34,887  
 
                       
 
                               
(2) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the six months ended June 30, 2010 was $36,000.

57


Table of Contents

                                 
    Unaudited For the Six Months Ended June 30, 2009  
            Purchase Price     Allocation of Share-        
            Accounting     based Payment        
(in thousands)   As Reported     Adjustments     Expense     Adjusted  
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 1,121,151     $ 31,883     $     $ 1,153,034  
Advertising revenue, net of agency fees
    24,869                   24,869  
Equipment revenue
    20,837                   20,837  
Other revenue
    10,951       3,626             14,577  
 
                       
Total revenue
  $ 1,177,808     $ 35,509     $     $ 1,213,317  
 
                       
Operating expenses (depreciation and amortization shown separately below) (1)
                               
Cost of services:
                               
Revenue share and royalties
    196,297       42,635             238,932  
Programming and content
    152,511       36,592       (4,717 )     184,386  
Customer service and billing
    119,041       243       (1,561 )     117,723  
Satellite and transmission
    39,894       681       (2,174 )     38,401  
Cost of equipment
    16,044                   16,044  
Subscriber acquisition costs
    140,719       23,979             164,698  
Sales and marketing
    100,116       6,831       (7,735 )     99,212  
Engineering, design and development
    21,723       548       (3,736 )     18,535  
General and administrative
    126,031       878       (32,578 )     94,331  
Depreciation and amortization (2)
    159,524                   159,524  
Restructuring, impairments and related costs
    27,614                   27,614  
Share-based payment expense
                52,501       52,501  
 
                       
Total operating expenses
  $ 1,099,514     $ 112,387     $     $ 1,211,901  
 
                       
 
                               
(1) Amounts related to share-based payment expense included in operating expenses were as follows:
 
                               
Programming and content
  $ 4,381     $ 336     $     $ 4,717  
Customer service and billing
    1,318       243             1,561  
Satellite and transmission
    1,934       240             2,174  
Sales and marketing
    7,358       377             7,735  
Engineering, design and development
    3,188       548             3,736  
General and administrative
    31,699       879             32,578  
 
                       
Total share-based payment expense
  $ 49,878     $ 2,623     $     $ 52,501  
 
                       
 
                               
(2) Purchase price accounting adjustments included in the tables above exclude the incremental depreciation and amortization associated with the $785,000 stepped up basis in property, equipment and intangible assets as a result of the Merger. The increased depreciation and amortization for the six months ended June 30, 2009 was $62,000.
(9)   The following table reconciles our GAAP Net cash provided by operating activities to our Net income plus non-cash operating activities (in thousands):
                                 
    For the Three Months Ended     For the Six Months Ended  
    June 30,   June 30,
    2010   2009   2010   2009
 
                               
Net cash provided by operating activities
     $ 178,675        $ 69,988        $ 140,987        $ 136,859  
Less: Changes in operating assets and liabilities, net
    (82,101 )     749       48,588       (16,849 )
 
               
Net income plus non cash operating activities
     $ 96,574        $ 70,737        $ 189,575        $ 120,010  
 
               

58


Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
          As of June 30, 2010, we did not have any derivative financial instruments. We do not hold or issue any free-standing derivatives. We hold investments in marketable securities, which consist of certificates of deposit and investments in debt and equity securities of other entities. We classify our investments in marketable securities as available-for-sale. These securities are consistent with the investment objectives contained within our investment policy. The basic objectives of our investment policy are the preservation of capital, maintaining sufficient liquidity to meet operating requirements and maximizing yield.
          Our debt includes fixed rate instruments and the fair market value of our debt is sensitive to changes in interest rates. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations.
ITEM 4. CONTROLS AND PROCEDURES
     Controls and Procedures
          As of June 30, 2010, an evaluation was performed under the supervision and with the participation of our management, including Mel Karmazin, our Chief Executive Officer, and David J. Frear, our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as that term is defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on that evaluation, our management, including our Chief Executive Officer and our Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2010. There has been no change in our internal control over financial reporting (as that term is defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act) during the quarter ended June 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

59


Table of Contents

PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
          There have been no material developments with respect to the information previously reported under Part I, Item 3, of our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 1A. RISK FACTORS
          There have been no material changes to the risk factors previously disclosed in response to Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2009.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
          Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
          Not applicable.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
          Not applicable.
ITEM 6. EXHIBITS
          See Exhibits Index attached hereto.

60


Table of Contents

SIGNATURES
          Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on this 6th day of August 2010.
         
  SIRIUS XM RADIO INC.
 
 
  By:   /s/ David J. Frear    
    David J. Frear   
    Executive Vice President and
Chief Financial Officer
(Duly Authorized Officer and
Principal Financial Officer)
 
 
 

61


Table of Contents

EXHIBIT INDEX
         
Exhibit     Description
4.1
      Assumption and Joinder Agreement, dated as of June 1, 2010, between XM 1500 Eckington LLC and XM Investment LLC to the Collateral Agreement, dated as of December 31, 2009, by and among XM Satellite Radio Inc. and certain subsidiaries thereof and U.S. Bank National Association, as collateral agent, relating to the 11.25% Senior Secured Notes due 2013 (filed herewith).
 
       
4.2
      Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Holdings Inc., XM Satellite Radio Inc., certain subsidiaries thereof and U.S. Bank National Association, as trustee, relating to the Senior PIK Secured Notes due 2011 (incorporated by reference to Exhibit 4.1 to XM Satellite Radio Inc.’s Current Report on Form 8-K filed on April 16, 2010).
 
       
4.3
      Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and U.S. Bank National Association, as trustee, relating to the 11.25% Senior Secured Notes due 2013 (incorporated by reference to Exhibit 4.2 to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
 
       
4.4
      Third Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and the Bank of New York Mellon, as trustee, relating to the 13% Senior Notes due 2013 (incorporated by reference to Exhibit 4.3 to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
 
       
4.5
      Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and the Bank of New York Mellon, as trustee, relating to the 7% Exchangeable Senior Subordinated Notes due 2014 (incorporated by reference to Exhibit 4.4 to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
 
       
4.6
      Fourth Supplemental Indenture, dated April 14, 2010, among XM Satellite Radio Inc., certain subsidiaries thereof and the Bank of New York Mellon, as trustee, relating to the 9.75% Senior Notes due 2014 (incorporated by reference to Exhibit 4.5 to XM Satellite Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010).
 
       
31.1
      Certificate of Mel Karmazin, Chief Executive Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
       
31.2
      Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
       
32.1
      Certificate of Mel Karmazin, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
       
32.2
      Certificate of David J. Frear, Executive Vice President and Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
       
100.1*
      The following information from Sirius XM Radio Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2010 formatted in XBRL: (i) Unaudited Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009; (ii) Consolidated Balance Sheets as of June 30, 2010 (Unaudited) and December 31, 2009; (iii) Unaudited Consolidated Statements of Stockholders’ Equity as of June 30, 2010 and Comprehensive Income for the six months ended June 30, 2010; (iv) Unaudited Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009; and (v) Notes to Unaudited Consolidated Financial Statements tagged as blocks of text.
 
*   Furnished with this Form 10-Q.