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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 


FORM 10-Q

 


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For The Quarterly Period Ended June 30, 2007

 


 

Commission

File

Number

  

Exact name of Registrant As Specified in its Charter

  

I.R.S. Employer

Identification

Number

000-27441

   XM SATELLITE RADIO HOLDINGS INC.    54-1878819

333-39178

   XM SATELLITE RADIO INC.    52-1805102

 


Delaware

(State or other jurisdiction of incorporation or organization of both registrants)

1500 Eckington Place, NE

Washington, DC 20002-2194

(Address of principal executive offices)

(Zip code)

202-380-4000

(Registrants’ telephone number, including area code)

 


Indicate by check mark whether each registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨

Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

XM Satellite Radio Holdings Inc.

   Large Accelerated Filer   x    Accelerated Filer   ¨    Non-Accelerated Filer   ¨

XM Satellite Radio Inc.

   Large Accelerated Filer   ¨    Accelerated Filer   ¨    Non-Accelerated Filer   x

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

(Class)

 

(Outstanding as of June 30, 2007)

XM SATELLITE RADIO HOLDINGS INC.

CLASS A COMMON STOCK, $0.01 PAR VALUE

  306,810,723

XM SATELLITE RADIO INC.

COMMON STOCK, $0.10 PAR VALUE

(all shares are issued to XM Satellite Radio Holdings Inc.)

  125

 



Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

TABLE OF CONTENTS

 

          Page

PART I: FINANCIAL INFORMATION

  

Item 1.

  

Financial Statements

  
  

Unaudited Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and 2006

   3
  

Condensed Consolidated Balance Sheets as of June 30, 2007 (unaudited) and December 31, 2006

   5
  

Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2006

   7
  

Notes to the Unaudited Condensed Consolidated Financial Statements

   9

Item 2.

  

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

   41

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   59

Item 4.

  

Controls and Procedures

   60

PART II: OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

   61

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   63

Item 4.

  

Submission of Matters to a Vote of Security Holders

   63

Item 6.

  

Exhibits

   64

 


FORWARD-LOOKING STATEMENTS

“Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995: This Form 10-Q contains forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Without limitation, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans,” “will” and similar expressions are intended to identify forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future — including statements relating to growth, expected levels of expenditures and statements expressing general optimism about future operating results — are forward-looking statements. Similarly, statements that describe the Company’s business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. All such forward-looking statements including those presented elsewhere by our management from time to time are subject to certain risks and uncertainties that could cause actual results to differ materially from those in forward-looking statements. These risks and uncertainties include, but are not limited to, those described in Part I, “Item 1A. Risk Factors” of our Form 10-K for the year ended December 31, 2006 filed with the SEC on March 1, 2007. These cautionary statements should not be construed by you to be exhaustive and are made only as of the date of this filing. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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EXPLANATORY NOTE

This quarterly report on Form 10-Q is a combined report being filed by two separate registrants: XM Satellite Radio Holdings Inc. (the “Company”, “Holdings”, or “XM”) and XM Satellite Radio Inc. (“Inc.”). Holdings’ principal wholly owned subsidiary is Inc., and as such, the information presented in this report regarding Inc. also applies to Holdings. Unless the context requires otherwise, the terms “we,” “our” and “us,” refer to Holdings. Holdings fully and unconditionally guarantees Inc.’s registered debt securities. The combined report includes Holdings’ unaudited Condensed Consolidated Financial Statements as the only set of financial statements; an explanation of the differences between the companies is in the Notes to the unaudited Condensed Consolidated Financial Statements; and condensed consolidating financial information regarding Inc. The management’s discussion and analysis section has also been combined, focusing on the financial condition and results of operations of Holdings, which is consistent with the inclusion in the combined report of one set of financial statements.

We make available certain reports filed with the Securities and Exchange Commission (“SEC”) that can be accessed, free of charge, through our website at http://www.xmradio.com , as soon as reasonably practicable after they are electronically filed with the SEC.

 

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PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

    Three months ended
June 30,
    Six months ended
June 30,
 
(in thousands, except share and per share data)   2007     2006     2007     2006  

Revenue:

       

Subscription

  $ 245,778     $ 202,165     $ 482,264     $ 390,267  

Activation

    4,766       3,942       9,419       7,521  

Merchandise

    5,658       4,928       10,955       8,479  

Net ad sales

    10,153       8,982       17,631       15,500  

Other

    10,921       7,869       21,118       14,085  
                               

Total revenue

    277,276       227,886       541,387       435,852  
                               

Operating expenses:

       

Cost of revenue (excludes depreciation & amortization, shown below):

       

Revenue share & royalties

    49,723       37,923       97,149       72,200  

Customer care & billing operations (1)

    30,749       26,395       58,677       48,850  

Cost of merchandise

    12,694       10,254       30,970       18,247  

Ad sales (1)

    5,480       4,460       8,866       7,815  

Satellite & terrestrial (1)

    13,472       11,571       27,354       24,620  

Broadcast & operations:

       

Broadcast (1)

    6,885       5,169       13,429       11,022  

Operations (1)

    9,683       8,805       19,399       17,692  
                               

Total broadcast & operations

    16,568       13,974       32,828       28,714  

Programming & content (1)

    41,827       42,253       85,779       79,896  
                               

Total cost of revenue

    170,513       146,830       341,623       280,342  

Research & development (excludes depreciation & amortization, shown below) (1)

    8,159       8,518       15,469       19,499  

General & administrative (excludes depreciation & amortization, shown below) (1)

    35,869       18,672       70,053       36,301  

Marketing (excludes depreciation & amortization, shown below):

       

Retention & support (1)

    10,618       7,443       20,374       15,490  

Subsidies & distribution

    63,855       56,696       107,457       112,169  

Advertising & marketing

    43,244       42,096       76,053       76,022  
                               

Marketing

    117,717       106,235       203,884       203,681  

Amortization of GM liability

    6,504       7,440       13,008       16,753  
                               

Total marketing

    124,221       113,675       216,892       220,434  

Depreciation & amortization

    46,506       41,847       93,387       81,729  
                               

Total operating expenses (1)

    385,268       329,542       737,424       638,305  
                               

Operating loss

    (107,992 )     (101,656 )     (196,037 )     (202,453 )

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

 

   

Three months ended

June 30,

   

Six months ended

June 30,

 
(in thousands, except share and per share data)   2007     2006     2007     2006  

Other income (expense):

       

Interest income

    4,238       6,376       7,781       12,949  

Interest expense

    (32,423 )     (29,317 )     (60,032 )     (62,553 )

Loss from de-leveraging transactions

    —         (82,345 )     (2,965 )     (100,724 )

Loss from impairment of investments

    (35,824 )     (18,926 )     (35,824 )     (18,926 )

Equity in net loss of affiliate

    (2,752 )     (4,206 )     (8,177 )     (13,090 )

Minority interest

    (3,266 )     —         (4,962 )     —    

Other income (expense)

    413       (212 )     856       4,422  
                               

Net loss before income taxes

    (177,606 )     (230,286 )     (299,360 )     (380,375 )

Benefit from deferred income taxes

    1,859       1,177       1,175       2,045  
                               

Net loss

    (175,747 )     (229,109 )     (298,185 )     (378,330 )
                               

8.25% Series B and C preferred stock dividend requirement

    —         (1,814 )     —         (3,963 )

8.25% Series B preferred stock retirement loss

    —         (755 )     —         (755 )
                               

Net loss attributable to common stockholders

  $ (175,747 )   $ (231,678 )   $ (298,185 )   $ (383,048 )
                               

Net loss per common share—basic and diluted

  $ (0.57 )   $ (0.87 )   $ (0.97 )   $ (1.47 )

Weighted average shares used in computing net loss per common share—basic and diluted

    306,425,375       266,098,554       306,154,565       259,866,408  

(1) These captions include non-cash stock-based compensation expense as follows:

 

   

Three months ended

June 30,

  Six months ended
June 30,
(in thousands)   2007   2006   2007   2006

Customer care & billing operations

  $ 497   $ 268   $ 937   $ 354

Ad sales

    460     520     816     948

Satellite & terrestrial

    491     511     1,010     972

Broadcast

    606     577     1,206     1,058

Operations

    351     419     729     1,002

Programming & content

    2,061     2,126     4,227     4,018

Research & development

    1,716     1,780     3,442     3,237

General & administrative

    5,829     6,017     11,878     11,078

Retention & support

    2,069     1,696     3,966     3,308
                       

Total stock-based compensation

  $ 14,080   $ 13,914   $ 28,211   $ 25,975
                       

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(in thousands, except share and per share data)  

June 30,

2007

  December 31,
2006
    (unaudited)    
ASSETS    

Current assets:

   

Cash and cash equivalents

  $ 275,392   $ 218,216

Accounts receivable, net of allowance for doubtful accounts of $6,182 and $4,946

    43,890     62,293

Due from related parties

    10,254     13,991

Related party prepaid expenses

    75,085     66,946

Prepaid programming content

    59,232     28,172

Prepaid and other current assets

    48,002     43,040
           

Total current assets

    511,855     432,658

Restricted investments

    196     2,098

System under construction

    142,935     126,049

Property and equipment, net of accumulated depreciation and amortization of $860,538 and $767,768

    774,185     849,662

DARS license

    141,387     141,387

Intangibles, net of accumulated amortization of $8,847 and $8,222

    4,015     4,640

Deferred financing fees, net of accumulated amortization of $23,815 and $20,537

    38,482     38,601

Due from related parties, net of current portion

    1,459     —  

Related party prepaid expenses, net of current portion

    149,648     160,712

Investments

    44,650     80,592

Prepaid and other assets, net of current portion

    4,146     4,219
           

Total assets

  $   1,812,958   $   1,840,618
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT    

Current liabilities:

   

Accounts payable

  $ 53,774   $ 51,844

Accrued expenses

    135,481     147,591

Accrued satellite liability

    —       64,875

Accrued interest

    18,749     18,482

Current portion of long-term debt

    13,740     14,445

Due to related parties

    52,962     46,459

Subscriber deferred revenue

    380,121     340,711

Deferred income

    9,915     9,915
           

Total current liabilities

    664,742     694,322

Long-term debt, net of current portion

    1,476,720     1,286,179

Subscriber deferred revenue, net of current portion

    99,026     86,482

Deferred income, net of current portion

    127,676     130,780

Other non-current liabilities

    41,993     40,735
           

Total liabilities

    2,410,157     2,238,498
           

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

 

(in thousands, except share and per share data)  

June 30,

2007

    December 31,
2006
 
    (unaudited)        

Commitments and contingencies

   

Minority interest

    62,662       —    

Stockholders’ deficit:

   

Series A convertible preferred stock, par value $0.01 (liquidation preference of $51,370 at June 30, 2007 and December 31, 2006); 15,000,000 shares authorized, 5,393,252 shares issued and outstanding at June 30, 2007 and December 31, 2006

    54       54  

Class A common stock, par value $0.01; 600,000,000 shares authorized, 306,810,723 shares and 305,781,515 shares issued and outstanding at June 30, 2007 and December 31, 2006, respectively

    3,068       3,058  

Accumulated other comprehensive income, net of tax

    8,639       3,590  

Additional paid-in capital

    3,125,039       3,093,894  

Accumulated deficit

    (3,796,661 )     (3,498,476 )
               

Total stockholders’ deficit

    (659,861 )     (397,880 )
               

Total liabilities and stockholders’ deficit

  $    1,812,958     $    1,840,618  
               

 

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   

Six months ended

June 30,

 
(in thousands)   2007     2006  

Cash flows from operating activities:

   

Net loss

  $ (298,185 )   $ (378,330 )

Adjustments to reconcile net loss to net cash used in operating activities:

   

Provision for doubtful accounts

    7,516       7,410  

Depreciation and amortization

         93,387       81,729  

Amortization of deferred income related to XM Canada

    (4,996 )     (5,040 )

Non-cash loss on impairment of investments

    35,824       18,926  

Loss from de-leveraging transactions

    2,965          100,724  

Non-cash loss on equity in affiliate

    8,177       13,090  

Amortization of deferred financing fees and debt discount

    5,021       23,488  

Stock-based compensation

    28,211       25,975  

Benefit from deferred income taxes

    (1,175 )     (2,045 )

Gain on sale of fixed assets

    —         (4,490 )

Minority interest

    4,962       —    

Other

    (39 )     207  

Changes in operating assets and liabilities:

   

Decrease (increase) in accounts receivable

    10,927       (8,253 )

Decrease (increase) in due from related parties

    2,277       (4,561 )

(Increase) decrease in prepaid programming content

    (31,059 )     2,884  

Increase in prepaid and other assets

    (1,964 )     (236,173 )

Increase (decrease) in accounts payable, accrued expenses and other liabilities

    7,364       (125,570 )

Increase in accrued interest

    267       14,467  

Increase in due to related parties

    6,503       2,876  

Increase in subscriber deferred revenue

    51,954       38,600  

Increase in deferred income

    1,893       717  
               

Net cash used in operating activities

    (70,170 )     (433,369 )
               

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)

 

   

Six months ended

June 30,

 
(in thousands)   2007     2006  

Cash flows from investing activities:

   

Purchase of property and equipment

    (33,811 )     (34,457 )

Additions to system under construction

    (78,596 )     (62,735 )

Proceeds from sale of fixed assets

    —         7,182  

Net maturity of restricted investments

    1,901       2,781  
               

Net cash used in investing activities

    (110,506 )     (87,229 )
               

Cash flows from financing activities:

   

Proceeds from exercise of warrants and stock options

    2,989       4,510  

Proceeds from issuance of 9.75% senior notes due 2014

    —         600,000  

Proceeds from issuance of senior floating rate notes due 2013

    —         200,000  

Proceeds from sale-leaseback transaction

    288,500       —    

Repayment of 14% senior secured discount notes due 2009

    —         (186,545 )

Repayment of 12% senior secured notes due 2010

    —         (100,000 )

Repayment of senior secured floating rate notes due 2009

    —         (200,000 )

Payment of premiums on de-leveraging transactions

    (2,965 )     (27,357 )

Repurchase of Series B convertible redeemable preferred stock

    —         (23,960 )

Retirement of mortgages on corporate facilities

    (38,877 )     —    

Payments on other borrowings

    (7,592 )     (5,548 )

Deferred financing costs

    (4,203 )     (20,406 )
               

Net cash provided by financing activities

    237,852       240,694  
               

Net increase (decrease) in cash and cash equivalents

    57,176       (279,904 )

Cash and cash equivalents at beginning of period

    218,216       710,991  
               

Cash and cash equivalents at end of period

  $   275,392     $    431,087  
               

See accompanying Notes to the unaudited Condensed Consolidated Financial Statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(1) Nature of Business

XM Satellite Radio Inc. (“Inc.”) was incorporated on December 15, 1992 in the State of Delaware for the purpose of operating a digital audio radio service (“DARS”) under a license from the Federal Communications Commission (“FCC”). XM Satellite Radio Holdings Inc. (the “Company”, “Holdings”, or “XM”) was formed as a holding company for Inc. on May 16, 1997. The Company commenced commercial operations in two markets on September 25, 2001 and completed its national rollout on November 12, 2001.

As of June 30, 2007, the principal differences between the financial conditions of Holdings and Inc., were:

 

 

the ownership by Holdings of the corporate headquarters and data center since August 2001 and September 2005, respectively, and the lease of these buildings to Inc.;

 

 

XM-1, XM-2, and XM-3, except for the B702 bus portion of XM-3, are owned by Inc.; the transponders of XM-4, are owned by Satellite Leasing (702-4) LLT, a separate legal entity subject to consolidation by the Company, and leased to Inc.; and XM-5 and the B702 bus portion of XM-3 and XM-4 are owned by Holdings;

 

 

the presence at Holdings of additional indebtedness, primarily the 1.75% Convertible Senior Notes due 2009, not guaranteed by Inc.;

 

 

the investments by Holdings in Canadian Satellite Radio (including related revenue and deferred income) and WorldSpace, Inc.; and

 

 

the existence of cash balances at Holdings.

Accordingly, the results of operations for Inc. and its subsidiaries are substantially the same as the results for Holdings and its subsidiaries except that Inc. has:

 

 

additional rent, less depreciation and amortization expense and less other income, in each case principally related to Inc.’s rental of its corporate headquarters and data center buildings from Holdings, which are intercompany transactions that have been eliminated in the consolidated Holdings financial statements;

 

 

less interest expense principally related to the additional indebtedness at Holdings;

 

 

less revenue associated with the amortization of deferred income and equity in losses from Holdings’ investment in Canadian Satellite Radio;

 

 

no gains or losses on Holdings’ investments in Canadian Satellite Radio or WorldSpace, Inc.; and

 

 

less interest income because of additional cash balances at Holdings.

Proposed Merger

On February 19, 2007, XM Satellite Radio Holdings Inc. and Sirius Satellite Radio Inc. (“Sirius”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which XM and Sirius will combine its businesses through a merger of XM and a newly formed, wholly owned subsidiary of Sirius (the “Merger”).

Each of XM and Sirius has made customary representations and warranties and covenants in the Merger Agreement. The completion of the Merger is subject to various closing conditions, including obtaining the approval of XM’s and Sirius’ stockholders and receiving certain regulatory and antitrust approvals (including from the FCC and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended). XM filed a Notification and Report Form pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“the HSR Act”), with respect to the transactions contemplated by the Merger Agreement between XM and Sirius. On April 12, 2007, both XM and Sirius received from the Department of Justice requests for additional information and documentary material relating to the Merger, generally referred to as a “Second Request.” The effect of the Second Request is to extend the waiting period imposed by the HSR Act until 30 days after XM and Sirius have substantially complied with the Second Request.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

On March 20, 2007, XM and Sirius filed a Consolidated Application for Authority to Transfer Control with the FCC with respect to the Merger Agreement. On June 8, 2007, the FCC released a Public Notice announcing that the application had been accepted for filing and establishing deadlines of July 9, 2007 for comments and July 24, 2007 for reply comments. On July 24, 2007, XM and Sirius filed a reply to the comments to the merger application. On June 27, 2007, the FCC released a related Notice of Proposed Rule Making asking for comment on whether language in the FCC’s 1997 Order establishing the satellite radio service concerning the transfer of such licenses constitutes a binding rule and, if so, whether the FCC should waive, modify, or repeal the rule if the FCC determines that the proposed merger would serve the public interest. The FCC will accept comments on this issue until August 13, 2007 and reply comments until August 27, 2007.

(2) Summary of Significant Accounting Policies and Practices

Principles of Consolidation and Basis of Presentation

The unaudited Condensed Consolidated Financial Statements include the accounts of XM Satellite Radio Holdings Inc. and its subsidiaries. All significant intercompany transactions and accounts have been eliminated. In addition, the Company evaluates its relationships with other entities to identify whether they are variable interest entities as defined by Financial Accounting Standards Board (“FASB”) Interpretation (“FIN”) No. 46(R), Consolidation of Variable Interest Entities, An Interpretation of ARB No. 51 , and to assess whether it is the primary beneficiary of such entities. If the determination is made that the Company is the primary beneficiary, then that entity is consolidated in the unaudited Condensed Consolidated Financial Statements in accordance with FIN No. 46(R). Beginning March 31, 2007, the Company reported a variable interest entity subject to consolidation by the Company pursuant to FIN No. 46(R). Satellite Leasing (702-4) LLT is a separate legal entity whose primary beneficiary, as defined under FIN No. 46(R), is the Company. See Note 6 under the heading “Capital Lease—XM-4 Satellite” . Satellite Leasing (702-4) LLC, an entity solely owned by the equity investors in the transaction, will be entitled to the residual benefits, including ownership of the assets of the trust after repayment of the debt incurred by that entity.

The accompanying Condensed Consolidated Balance Sheet as of December 31, 2006, which has been derived from audited financial statements, and the interim unaudited Condensed Consolidated Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America and Regulation S-X, Rule 10-01 of the United States Securities and Exchange Commission (“SEC”). Certain information and note disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. It is suggested that these interim unaudited Condensed Consolidated Financial Statements be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 1, 2007. All adjustments that, in the opinion of management, are necessary for a fair presentation of the periods presented have been reflected as required by Regulation S-X, Rule 10-01.

Reclassifications

Certain prior period amounts have been reclassified to conform to the current year presentation. Amounts from Subsidies & distribution related to on-going loyalty payments in the amount of $4.4 million and $8.7 million for the three and six months ended June 30, 2006, respectively, were reclassified to Advertising & marketing.

Restricted Investments

Restricted investments consist principally of certificates of deposits. In February 2007, the restricted investments which represented securities held in escrow on the Company’s buildings were redeemed and included in the total cash paid to retire the mortgage loans on the buildings. There were no gross unrealized holding gains or losses on these restricted investments at June 30, 2007 and December 31, 2006.

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 

Inventory

Inventories are stated at the lower of average cost or market. The Company provides estimated inventory allowances for excess, slow moving and obsolete inventory as well as inventory whose carrying value is in excess of net realizable value. Inventories consist of both finished goods and raw materials. The Company had $15.9 million and $17.0 million of net inventory as of June 30, 2007 and December 31, 2006, respectively, which are included in Prepaid and other current assets on the Condensed Consolidated Balance Sheets.

During the three and six months ended June 30, 2007, the Company recorded total inventory write-down charges of $2.1 million and $6.9 million, respectively; while for the comparable periods in 2006, the Company did not record any write-down charges. These charges are reflected in Cost of merchandise in the unaudited Condensed Consolidated Statements of Operations.

Investments

Investments in marketable equity securities of companies in which XM does not have a controlling interest or is unable to exert significant influence are accounted for at market value if the investments are publicly traded and resale restrictions of less than one year exist (“available-for-sale equity securities”). Unrealized holding gains and losses on marketable available-for-sale equity securities are carried net of taxes as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets.

Investments in equity securities that do not have readily determinable fair values and in which XM does not have a controlling interest or is unable to exert significant influence are recorded at cost, subject to other than temporary impairment (“cost method”).

For those investments in which the Company has the ability to exercise significant influence, the equity method of accounting is used. Under this method, the investment, originally recorded at cost, is adjusted to recognize the Company’s share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received, limited to the extent of the Company’s investment in, advances to and commitments to the investee. The Company’s share of net earnings or loss of affiliate is recorded in Other income (expense).

Investments are periodically reviewed for impairment and a write down is recorded whenever declines in fair value below carrying value are determined to be other than temporary. In making this determination, the Company considers, among other factors, the severity and duration of the decrease as well as the likelihood of a recovery within a reasonable timeframe.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Equipment under capital leases is stated at the present value of minimum lease payments. Depreciation and amortization are calculated using the straight-line method over the following estimated useful lives:

 

Spacecraft system

   6.75 – 15 years

Terrestrial repeater network

   5 – 10 years

Spacecraft control and uplink facilities

   17.5 years

Broadcast facilities

   3 – 7 years

Computer systems

   3 – 7 years

Building and improvements

   20 years

Furniture and fixtures

   3 – 7 years

Equipment under capital leases and leasehold improvements

   Lesser of useful life
or remaining lease term

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Maintenance and repairs costs are expensed as incurred, whereas expenditures for renewal and betterments are capitalized. The cost of internally developed software is capitalized in accordance with Statement of Position (“SOP”) 98-1, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use, and amortized over its estimated useful life. Interest costs incurred in connection with the construction of major equipment and facilities are capitalized as part of the asset cost to which it relates and depreciated over the asset’s useful life. Upon the normal sale or retirement of depreciable property, the net carrying value less any salvage value is recognized as an operating gain or loss in the unaudited Condensed Consolidated Statements of Operations.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.

Net Loss Per Common Share

The Company computes net loss per common share in accordance with SFAS No. 128, Earnings Per Share and SEC Staff Accounting Bulletin (“SAB”) No. 98, Computations of Earnings Per Share . Under the provisions of SFAS No. 128 and SAB No. 98, basic net loss per common share is computed by dividing the net loss attributable to common stockholders (after deducting preferred dividend requirements) for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss attributable to common stockholders for the period by the weighted average number of common and dilutive equivalent shares outstanding during the period. Options, warrants and convertible instruments outstanding as of June 30, 2007 to purchase 50 million shares of common stock (47 million of which were vested) were not included in the computation of diluted net loss per common share for the three and six months ended June 30, 2007 as their inclusion would have been anti-dilutive. Options, warrants and convertible instruments outstanding as of June 30, 2006 to purchase 94 million shares of common stock (89 million of which were vested) were not included in the computation of diluted net loss per common share for the three and six months ended June 30, 2006 as their inclusion would have been anti-dilutive. Unvested shares of restricted stock in the amount of 7,366,183 and 2,313,921 as of June 30, 2007 and 2006, respectively, are not included in the computation of basic net loss per common share or in diluted net loss per common share because their inclusion would have been anti-dilutive. The Company had a net loss in each of the periods presented, and therefore, basic and diluted net loss per common share are the same.

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Comprehensive Income or Loss

Accumulated other comprehensive income or loss is reported on the Condensed Consolidated Balance Sheets. Unrealized gains and losses on available-for-sale securities (see Note 4, under the heading “ WorldSpace ”) and foreign currency translation adjustments (see Note 4, under the heading “ Canadian Satellite Radio ”) are included in other comprehensive income or loss. However, in the event that an unrealized loss is deemed other than temporary, the loss is recognized in earnings. The components of Comprehensive income or loss for the three and six months ended June 30, 2007 and 2006 are as follows (in thousands):

 

     Three months ended     Six months ended  
     June 30,     June 30,  
     2007     2006     2007     2006  

Net loss

   $ (175,747 )   $ (229,109 )   $ (298,185 )   $ (378,330 )

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

     1,201       —         1,326       —    

Reclassification adjustment for unrealized gain (loss) on available-for-sale securities, net of tax

     —         703       —         (5,985 )

Foreign currency translation adjustment, net of tax

     3,893       2,802       3,723       5,113  
                                

Total comprehensive loss

     $  (170,653 )     $  (225,604 )     $  (293,136 )     $  (379,202 )
                                

Unrealized gain on available-for-sale securities for the three and six months ended June 30, 2007 is shown net of tax expense of $0.8 million. Reclassification adjustment for unrealized gain (loss) on available-for-sale securities for the three and six months ended June 30, 2006 is shown net of tax (expense) benefit of ($0.4) million and $3.7 million, respectively. Foreign currency translation adjustment, for the three and six months ended June 30, 2007, is shown net of tax expense of $2.4 million and $2.3 million, respectively; while for the comparable periods in 2006, foreign currency translation adjustment is shown net of tax expense of $1.8 million and $3.2 million, respectively. The unrealized gain (loss) on available-for-sale securities relates to the Company’s investment in WorldSpace, while the foreign currency translation adjustment relates to the Company’s investment in Canadian Satellite Radio (discussed further in Note 4 and Note 9).

Recent Accounting Pronouncements

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115 , which permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement objectives for accounting for financial instruments. This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company will adopt this Statement effective January 1, 2008. The Company is currently evaluating the impact that the adoption of SFAS No. 159 will have on its consolidated results of operations and financial position.

In June 2007, the FASB issued Emerging Issues Task Force (“EITF”) No. 07-3, Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities , which states how entities involved in research and development activities should account for non-refundable advance payments for goods that will be used or for services that will be performed in future research and development activities. EITF No. 07-3 concludes that nonrefundable advance payments for future research and development activities should be deferred and capitalized and that such amounts should be recognized as an expense as the goods are delivered or the related services are performed. Entities should continue to evaluate whether they expect the goods to be delivered or services to be rendered. If an entity does not expect the goods to be delivered or services to be rendered, the capitalized advance payment should be charged to expense. The consensus is effective for the first annual or interim reporting period beginning after

 

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(Continued)

 

December 15, 2007. The Company will adopt this consensus effective January 1, 2008. The Company is currently evaluating the impact that the adoption of EITF No. 07-3 will have on its consolidated results of operations and financial position.

(3) Property and Equipment

Property and equipment consists of the following (in thousands):

 

     June 30,
2007
    December 31,
2006
 

Spacecraft system

   $ 903,210     $ 905,507  

Terrestrial repeater network

     264,368       264,223  

Spacecraft control and uplink facilities

     47,010       46,181  

Broadcast facilities

     65,445       65,302  

Land

     8,788       8,788  

Buildings and improvements

     73,854       73,252  

Computer systems, furniture and fixtures, and equipment

     272,048       254,177  
                

Total property and equipment

     1,634,723       1,617,430  

Accumulated depreciation and amortization

     (860,538 )     (767,768 )
                

Property and equipment, net

   $ 774,185     $ 849,662  
                

Spacecraft System

The Company currently operates four in-orbit satellites, all of which are owned, except for the transponders on XM-4, which are leased under a capital lease. The Company launched its first two satellites, XM-1 and XM-2 in the first half of 2001 prior to the commencement of commercial operations. Depreciation commenced upon acceptance of the satellites from Boeing Satellite Systems, which occurred during the first half of 2001. The XM-1 and XM-2 satellites suffer from a progressive solar array power degradation issue and during 2004, the Company recovered from insurers $142 million, of which $134 million was recorded as a reduction to the carrying values of XM-1 and XM-2. In February 2005, XM-3 was successfully launched and moved into the 85° West Longitude orbital location. In October 2006, XM-4 was successfully launched and moved into the 115° West Longitude orbital location. XM-1 and XM-2 are collocated with XM-4, and are in-orbit spares. Depreciation of XM-3 and XM-4 commenced upon acceptance of the satellites, which occurred during April 2005 and December 2006, respectively. In February 2007, the transponders on XM-4 were the subject of a sale- leaseback transaction and are now being amortized over their nine-year lease term, less the estimated residual value.

 

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(Continued)

 

(4) Investments

The Company’s investments consist of an equity method investment, a cost method investment and available-for-sale equity securities as follows (in thousands):

 

     June 30,
2007
   December 31,
2006

Equity method investment

   $ 36,232    $ 74,252

Cost method investment

     480      480

Available-for-sale equity securities

     7,938      5,860
             

Total investments

   $   44,650    $   80,592
             

Equity Method Investment

Canadian Satellite Radio (“XM Canada”)

In December 2005, XM Canada, a related party, issued to XM 11,077,500 Class A Subordinate Voting Shares representing a 23.33% ownership interest and 11% voting interest in XM Canada. These shares were determined to have an initial fair value of $152.1 million, based on the XM Canada initial public offering price of CDN$16.00 per share. XM accounts for its ownership in XM Canada using the equity method of accounting.

XM Canada has a fiscal year end of August 31. Therefore, XM records its share of XM Canada’s net income or loss, using the average currency exchange rate for the period, based on XM Canada’s quarterly periods ending on the last day of February, May, August and November. During the three and six months ended June 30, 2007, XM recorded a currency translation gain of $3.9 million and $3.7 million, respectively, as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets. These gains were net of $2.4 million and $2.3 million in income taxes and were recorded as benefits to the Provision for deferred income taxes during the three and six months ended June 30, 2007, respectively. During the three and six months ended June 30, 2006, XM recorded a currency translation gain of $2.8 million and $5.1 million, respectively, as a component of Accumulated other comprehensive income in Stockholders’ deficit in the Condensed Consolidated Balance Sheets. These gains were net of $1.8 million and $3.2 million in income taxes and were recorded as benefits to the Provision for deferred income taxes during the three and six months ended June 30, 2006, respectively.

During December 2006, the Company reduced the carrying value of its investment in XM Canada due to a decrease in fair value that was considered to be other than temporary and recorded an impairment charge of $57.6 million to Other expense in the Consolidated Statements of Operations. XM Canada’s shares trade publicly on the Toronto Stock Exchange under the symbol “XSR.TO”. The fair value of the Company’s investment in XM Canada was determined based on XM Canada’s quoted share price on November 30, 2006 (the date of XM Canada’s most recent financial statements as of December 31, 2006) of CAD$7.65, or US$6.70. Based on the number of shares held by the Company as of December 31, 2006, the carrying value of the Company’s investment in XM Canada was written down to its fair value, which was $74.3 million.

During the three months ended June 30, 2007, the Company further reduced the carrying value of its investment in XM Canada due to a continued decrease in fair value that was considered to be other than temporary and recorded an impairment charge of $35.8 million to Other expense in the unaudited Condensed Consolidated Statements of Operations. The fair value of the Company’s investment in XM Canada was determined based on XM Canada’s quoted share price on May 31, 2007 (the date of XM Canada’s most recent financial statements as of June 30, 2007) of CAD$3.50, or US$3.27. Based on the number of shares held by the Company on June 30, 2007, the carrying value of the Company’s investment in XM Canada was written down to its fair value, which was $36.2 million.

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Summarized unaudited financial information for XM Canada is as follows (US$ in thousands):

 

     May 31,
2007
   November 30,
2006

Current assets

   $ 35,119    $ 50,641

Non-current assets

   $ 246,845    $ 247,848

Current liabilities

   $ 22,285    $ 17,782

Non-current liabilities

   $ 104,574    $ 101,674

Total shareholders’ equity

   $   155,105    $   179,033

 

    

Three months ended
May 31,

    

Six months ended
May 31,

     2007    2006      2007    2006

Revenues

   $ 5,076    $ 2,068      $ 9,253    $ 3,060

Net loss

   $   11,794    $   18,024      $   35,046    $   56,101

XM’s share of net loss

   $ 2,752    $ 4,206      $ 8,177    $ 13,090

Cost Method Investment and Available-for-Sale Equity Securities

WorldSpace

On July 18, 2005, XM acquired 1,562,500 shares of Class A common stock of WorldSpace, Inc. (“WSI”) and a warrant to purchase at WSI’s initial public offering price of $21.00 an additional aggregate number of shares equal to $37.5 million, subject to certain operational vesting conditions, in exchange for $25.0 million. XM allocated its $25.0 million investment between the two financial instruments, $12.9 million to the Class A common stock and $12.1 million to the warrant. XM accounts for its investment in WSI Class A common stock as available-for-sale securities and accounts for its investment in the warrant under the cost method, subject to other than temporary impairment. WorldSpace provides XM certain programming in exchange for a nominal monthly fee under an amended programming agreement that extends through June 7, 2009.

During the second quarter of 2006, the Company reduced the carrying values of its investments in WSI common stock and warrant due to decreases in fair values that were considered to be other than temporary and recorded impairment charges of $7.3 million and $11.6 million, respectively. WorldSpace’s shares trade publicly on the NASDAQ Stock Exchange under the symbol “WRSP”. The quoted market price on June 30, 2007 was $4.83. Based on the number of shares held by the Company, the fair value of the Company’s investment in WSI common stock was $7.5 million on June 30, 2007. As of June 30, 2007, the carrying value of the Company’s investments in WSI common stock and warrant was $7.5 million (which included $1.2 million of unrealized gains) and $0.5 million, respectively. As of December 31, 2006, the carrying value of the Company’s investments in WSI common stock and warrant was $5.5 million (which included $0.1 million of unrealized losses) and $0.5 million, respectively.

 

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(Continued)

 

(5) Deferred Financing Fees

Deferred financing fees consist of the following (in thousands):

 

    

June 30,

2007

    December 31,
2006
 

10% senior secured discount convertible notes due 2009

   $ 1,432     $ 1,432  

9.75% senior notes due 2014

     16,091       16,091  

Senior floating rate notes due 2013

     5,354       5,354  

1.75% convertible senior notes due 2009

     10,066       10,066  

Valuation of warrants issued to related party in conjunction with credit facilities

     25,151       25,151  

Valuation of warrants issued to related party in conjunction with the issuance of 10% senior secured discount convertible notes

     —         540  

Mortgages

     —         504  

Sale-leaseback transaction of XM-4 satellite

     4,203       —    
                

Total deferred financing fees

     62,297       59,138  

Accumulated amortization

     (23,815 )     (20,537 )
                

Deferred financing fees, net

   $       38,482     $       38,601  
                

(6) Long-Term Debt

Certain of the Company’s debt instruments and credit facility contain covenants that include restrictions on indebtedness, mergers, limitations on liens, limitations on dividends, liquidations and sale and leaseback transactions, and also require the maintenance of certain financial ratios. The Company was in compliance with all of its covenants as of June 30, 2007. The Company’s debt instruments and credit facilities permit the debt issued thereunder to be accelerated upon certain events, including the failure to pay principal when due under any of the Company’s other debt instruments or credit facilities subject to materiality thresholds.

 

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(Continued)

 

The following table presents a summary of the debt activity for the six months ended June 30, 2007 (in thousands):

 

     December 31,
2006
    Issuances /
Additions
   Discount
Amortization
   Principal
Payments
   

June 30,

2007

 

9.75% senior notes due 2014

   $ 600,000     $ —      $           —      $ —       $ 600,000  

1.75% convertible senior notes due 2009

     400,000       —        —        —         400,000  

Senior floating rate notes due 2013

     200,000       —        —        —         200,000  

10% senior secured discount convertible notes due 2009

     33,249       —        —        —         33,249  

Less: discount

     (5,213 )     —        699      —         (4,514 )

Debt of variable interest entity

     —         230,800      —        —         230,800  

Mortgages

     38,877       —        —        (38,877 )     —    

Capital leases

     33,711       4,806      —        (7,592 )     30,925  
                                      

Total debt

     1,300,624     $   235,606    $ 699      $  (46,469 )     1,490,460  
                          

Less: current portion

     14,445               13,740  
                        

Long-term debt, net of current portion

   $   1,286,179             $   1,476,720  
                        

Mortgages

1500 Eckington Place

As of June 30, 2007 and December 31, 2006, the remaining principal balance of the 1500 Eckington Place Mortgage Loan was $0 and $32.4 million, respectively. Principal and interest at a fixed rate of 6.015% was payable monthly until the mortgage was scheduled to mature in September 2014. The mortgage loan was secured by the building and an escrow with a balance of $1.4 million at December 31, 2006. The mortgage loan on this property was retired during February 2007, as further discussed below under the heading “Capital Lease – XM-4 Satellite” , and the Company recorded a de-leveraging charge of $2.2 million.

60 Florida Avenue

As of June 30, 2007 and December 31, 2006, the remaining principal balance of the 60 Florida Avenue Mortgage Loan was $0 and $6.5 million, respectively. Principal and interest at a fixed rate of 8.26% was payable monthly until the mortgage was scheduled to mature in September 2010. The mortgage loan was secured by the building, the land, and an escrow with a balance of $0.3 million at December 31, 2006. The mortgage loan on this property was retired during February 2007, as further discussed below under the heading “Capital Lease – XM-4 Satellite” , and the Company recorded a de-leveraging charge of $0.8 million.

Capital Lease – XM-4 Satellite

On February 13, 2007, the Company entered into a sale-leaseback transaction with respect to the transponders on the XM-4 satellite, which was launched in October 2006 and placed into service during December 2006. The Company sold the XM-4 transponders to Satellite Leasing (702-4) LLT (“Trust”), a third-party trust formed solely for the purpose of facilitating the sale-leaseback transaction. The Trust pooled the funds used to purchase the transponders from a $57.7 million investment by an equity investor and the $230.8 million in proceeds from the issuance of its 10% senior secured notes due 2013 (“Debt of variable interest entity”). The Company is accounting for the sale and leaseback of the transponders under sale-leaseback accounting with a capital lease, pursuant to SFAS No. 13, Accounting for Leases, as amended. Furthermore, the Company determined that the Trust is a variable interest entity, as that

 

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(Continued)

 

term is defined under FIN No. 46(R), and that the Company is the primary beneficiary of the Trust. Pursuant to FIN No. 46(R), the Company consolidated the Trust into its unaudited Condensed Consolidated Financial Statements.

Under the terms of the lease, the Company is obligated to make payments that total $437.4 million, of which $126.6 million is interest, over the nine-year base lease term as follows: $27.9 million in 2007, $33.2 million in 2008, $28.9 million in 2009, $28.4 million in 2010, $71.0 million in 2011 and $248.0 million thereafter.

Summary of the Transaction . Under the sale-leaseback arrangement, the Company sold the XM-4 transponders to the Trust owned by Satellite Leasing (702-4) LLC (“Owner participant”) for $288.5 million, representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. XM Satellite Radio Inc. is leasing the transponders for a term of nine years with an early buy-out option in year five and a buy-out option at the end of the term. These lease payment obligations, which are unconditional and guaranteed by XM Satellite Radio Holdings Inc., are senior unsecured obligations and rank equally in right of payment with existing and future senior unsecured obligations.

Throughout the term of the lease, at any time when the Company is not investment grade, the Company will provide credit support to Owner participant. To provide this credit support, the Company retired the existing mortgages on its headquarters and data center properties in Washington, D.C. and put into place new mortgage liens on those properties in favor of the Owner participant.

The Company will have full operational control over the transponders for the lease term, absent default. The Company is subject to an obligation to sell the XM-4 Bus, the remaining component of the XM-4 satellite, to the lessor for a nominal sum in the event that the Company does not repurchase the transponders at the end of the term.

The Company has an early buyout option in year five and a buy-out right at the end of the lease term, each at prices representing the fair market value based on an appraisal performed by satellite consulting and lease appraisal firms. The Company has other rights to purchase the transponders or the equity interest in the lessor, all at prices at or above the appraised fair market value. The Company also has rights to cause the lessor to effect a refinancing of the notes, and any interest savings from the refinancing would result in reduced lease payments.

The Company can be required to repurchase the transponders upon the occurrence of specified events, including an event of loss of the satellite (subject to the right to substitute another satellite meeting equivalent or better value and functionality tests), changes in law that impose a material regulatory burden on the Owner participant, changes of control and events resulting in the absence of another holder (other than the Company and its affiliates) of FCC satellite radio licenses in the frequency bands that can be served by the XM-4 satellite. The Company has agreed to provide indemnities in the event that certain actions by the Company cause the Owner participant to lose or not be able to take certain tax positions relating to the transaction.

(7) Equity

Preferred Stock

The Company has authorized 60,000,000 shares of preferred stock, par value $0.01, of which 15,000,000 shares were designated non-voting Series A convertible preferred stock, 3,000,000 shares were designated non-voting 8.25% Series B convertible redeemable preferred stock, and 250,000 shares were designated 8.25% Series C convertible redeemable preferred stock, all of which are convertible into Class A common stock at the option of the holder. Additionally, 250,000 shares were designated as non-voting Series D participating preferred stock in connection with the adoption of the Shareholders’ Rights Plan and are junior to all other classes of preferred stock. The Series A convertible preferred stock receives dividends, if declared, ratably with the common stock. The Series C convertible redeemable preferred stock contains voting and certain consent rights.

 

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There were 5,393,252 shares of Series A convertible preferred stock issued and outstanding with a liquidation preference of $51.4 million as of June 30, 2007 and December 31, 2006. During 2006, the Company repurchased the Series B convertible redeemable preferred stock and converted the Series C convertible redeemable preferred stock. There were no shares issued and outstanding of the Series B convertible redeemable preferred stock, Series C convertible redeemable preferred stock or Series D preferred stock as of June 30, 2007 and December 31, 2006.

Common Stock

The Company has authorized 600,000,000 shares of Class A common stock, par value of $0.01, of which 306,810,723 and 305,781,515 shares were issued and outstanding as of June 30, 2007 and December 31, 2006, respectively. The Company has authorized 15,000,000 shares of Class C common stock, par value of $0.01, of which no shares were issued and outstanding as of June 30, 2007 and December 31, 2006.

(8) Stock-Based Compensation

The Company has three stock-based compensation plans. It is the practice of the Company to satisfy awards and options granted under these plans through the issuance of new shares. During the three and six months ended June 30, 2007, the Company recognized compensation expense of $14.1 million and $28.2 million, respectively; while for the comparable periods in 2006, the Company recognized compensation expense of $13.9 million and $26.0 million, respectively. In each of the periods described above, compensation expense was recorded in the unaudited Condensed Consolidated Statements of Operations related to these plans. For a summarized schedule of the distribution of stock-based compensation expense, see the appended footnote to the unaudited Condensed Consolidated Statements of Operations on page 4 of this Form 10-Q. The Company did not capitalize any stock-based compensation cost during the three and six months ended June 30, 2007 and 2006. The Company did not realize any income tax benefits from stock-based payment plans during the three and six months ended June 30, 2007 and 2006, as a result of a full valuation allowance that is maintained for substantially all net deferred tax assets.

2007 Stock Incentive Plan

On May 25, 2007, the Company adopted the 2007 Stock Incentive Plan (“2007 Plan”) under which officers, other employees and other key individuals may be granted various types of equity awards, including restricted stock, stock units, stock options, stock appreciation rights, dividend equivalent rights and other stock awards. A total of 25,000,000 shares of the Company’s Class A common stock are reserved for issuance pursuant to these awards. Stock option awards under the 2007 Plan generally vest ratably over three years based on continuous service; while restricted stock generally vests ratably over one or three years based on continuous service. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. Grants of equity awards other than stock options or stock appreciation rights reduce the number of shares available for future grant by 1.5 times the number of shares granted under such equity awards. As of June 30, 2007, there were 17,995,823 shares available under the 2007 Plan for future grant.

1998 Shares Award Plan

On June 1, 1998, the Company adopted the 1998 Shares Award Plan (“1998 Plan”) under which, as amended, employees, consultants and non-employee directors may be granted stock options and restricted stock for up to 25,000,000 shares of the Company’s Class A common stock. Stock option awards and restricted stock awards under the 1998 Plan generally vest ratably over three years based on continuous service. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. As of June 30, 2007, there were 162,408 shares available under the 1998 Plan for future grant.

 

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XM Talent Option Plan

In May 2000, the Company adopted the XM Talent Option Plan (“Talent Plan”) under which non-employee programming consultants to the Company may be granted stock options for up to 500,000 shares of the Company’s Class A common stock, which shares are reserved under the Talent Plan. Stock option awards under the Talent Plan generally vest ratably over three years based on continuous service. Stock option awards are generally granted with an exercise price equal to the market price of the Company’s stock at the date of grant and expire no later than ten years from the date of grant. As of June 30, 2007, there were 340,000 options available under the Talent Plan for future grant.

Stock Options —The fair value of each stock option award is estimated on the date of grant using a Black-Scholes option-pricing model based on the following weighted average assumptions:

 

     Three months ended
June 30,
     2007    2006

Expected dividend yield

   0%    0%

Expected volatility (1)

   41%    51%

Risk-free interest rate (2)

   4.92%    5.10%

Expected term (3)

   6 Years    6 Years
 
  (1) Expected volatilities are based on implied volatilities from publicly traded options on the Company’s stock.
  (2) The risk-free rate for periods within the contractual term of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant.
  (3) The expected term for 2006 and 2007 is calculated as the average between the vesting term and the contractual term, weighted by tranche, pursuant to SAB 107.

A summary of the status of the Company’s aggregate stock option awards under the 2007 Plan, 1998 Plan and the Talent Plan as of June 30, 2007, and activity during the six months then ended is presented below:

 

     Shares    

Weighted-Average

Exercise

Price

  

Weighted-Average

Remaining

Contractual Term

(Years)

  

Aggregate
Intrinsic
Value

(in thousands)

                      

Outstanding, January 1, 2007

   15,843,884     $               17.87      

Granted

   327,150     $ 12.66      

Exercised

   (337,429 )   $ 5.82      

Forfeited, cancelled or expired

   (266,510 )   $ 24.35      
              

Outstanding, June 30, 2007

   15,567,095     $ 17.91    6.24    $ 20,081

Vested and expected to vest, June 30, 2007

   15,280,654     $ 17.92    6.24    $ 19,712

Exercisable, June 30, 2007

   12,253,092     $ 17.23    5.65    $ 19,993

The per share weighted-average fair value of stock option awards granted during the six months ended June 30, 2007 and 2006 was $6.23 and $10.41, respectively, on the date of grant. The total intrinsic value on the date of exercise of stock option awards exercised during the six months ended June 30, 2007 and 2006 was $2.6 million and $5.5 million, respectively. As of June 30, 2007, there was $21.2 million of total unrecognized compensation cost related to stock option awards granted under the 2007 Plan, 1998 Plan and Talent Plan. The weighted-average period over which the compensation expense for these awards is expected to be recognized is 1.48 years as of June 30, 2007.

 

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(Continued)

 

Restricted Stock —A summary of the status of the Company’s restricted stock as of June 30, 2007, and activity during the six months then ended is presented below:

 

     Shares    

Weighted-Average

Grant Date

Fair Value

Nonvested, January 1, 2007

   3,407,026     $ 19.29

Granted

   4,748,101     $ 11.84

Vested

   (704,939 )   $ 22.81

Forfeited

   (84,005 )   $ 18.73
        

Nonvested, June 30, 2007

   7,366,183     $ 13.84
        

The fair value of each restricted stock award is the market value of the stock, as determined by the last sale price of the Company’s Class A common stock on The NASDAQ Global Select Market as if it were vested and issued on the grant date. As of June 30, 2007 and December 31, 2006, there were $87.7 million and $49.3 million, respectively, of total unrecognized compensation cost related to restricted stock granted under the 2007 Plan and 1998 Plan. The weighted-average period over which the compensation expense for these awards is expected to be recognized is 2.20 years as of June 30, 2007.

Employee Stock Purchase Plan

In 1999, the Company established an employee stock purchase plan (“ESPP”) that, as amended, provides for the issuance of 1,000,000 shares. All employees whose customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to participate in the stock purchase plan, provided that any employee who would own 5% or more of the Company’s total combined voting power immediately after an offering date under the ESPP is not eligible to participate. Eligible employees must authorize the Company to deduct an amount from their pay during offering periods established by the Compensation Committee of the Board of Directors. The purchase price for shares under the plan was determined by the Compensation Committee but may not be less than 85% of the lesser of the market price of the common stock on the first or last business day of each offering period, a “look-back option.”

Under the provisions of SFAS No. 123R, Share-Based Payment , the Company’s ESPP is considered a compensatory plan due to the greater than 5% discount and the “look-back option.” Effective January 1, 2006, the Company began recognizing compensation cost related to the ESPP. Compensation expense recognized pursuant to the ESPP is not material to the unaudited Condensed Consolidated Statements of Operations. Effective April 1, 2007, the Company suspended further purchases under the ESPP pursuant to the terms of the February 19, 2007 merger agreement with Sirius Satellite Radio Inc. As of June 30, 2007 and 2006, the Company had issued a cumulative total of 744,453 and 665,537 shares, respectively, under this plan. The weighted-average grant date fair value per share for shares issued during the six months ended June 30, 2007 and 2006 was $10.98 and $15.24, respectively. The remaining shares available for issuance under the ESPP as of June 30, 2007 were 255,547.

(9) Related Party Transactions

The Company developed strategic relationships with General Motors (“GM”) and American Honda Motor Co., Inc. (“American Honda”) that were instrumental in the construction and development of its system. In connection with the Company granting to them large supply contracts, both companies have become large investors in the Company and have been granted rights to designate directors or observers to the Company’s board of directors. The negotiation of these supply contracts and investments primarily occurred at or prior to the time both companies became related parties.

 

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(Continued)

 

The Company is a party to a long-term distribution agreement with GM that provides for the installation of XM radios in GM vehicles, as further described in Note 11. This agreement, as amended, continues to be clarified as the Company’s business operations and working relationship with GM continues to evolve. The Company has an agreement with GM to make available use of the Company’s bandwidth. The Company has arrangements with American Honda relating to the promotion of the XM Service to new car buyers, the use of bandwidth on the XM System and the development of telematics services and technologies. The Company is engaged in activities with GM and American Honda to jointly promote new car buyers to subscribe to the XM Service. Subscriber revenues received from GM and American Honda for these programs are recorded as related party revenue. GM is one of the Company’s shareholders and Chester A. Huber, Jr., the President of OnStar Corporation, a subsidiary of GM, is a member of the Company’s board of directors. John W. Mendel, a member of the Company’s board of directors, is Senior Vice President, automobile operations of American Honda.

In November 2005, the Company entered into a number of agreements (“Agreements”) with XM Canada that provide XM Canada with exclusive rights to offer XM satellite digital radio service in Canada. The Agreements have an initial term of ten years and XM Canada has the unilateral option to extend the term of the Agreements for an additional five years at no additional cost beyond the current financial arrangements. XM Canada has expressed its intent to exercise this option at the end of the initial term of the Agreements. The various deliverables of these Agreements are considered a single accounting unit in accordance with EITF No. 00-21, and as such are accounted for as follows:

 

 

The $152.1 million fair value of the shares received (see Note 4 – Equity Method Investment) is recorded as Deferred income on the Company’s Condensed Consolidated Balance Sheets and amortized on a straight-line basis into income over the 15-year expected term of the Agreements. As of June 30, 2007 and December 31, 2006, the Deferred income balance related to the fair value of shares received was $133.7 million and $138.6 million, respectively.

 

 

The Company receives a 15% royalty fee for all subscriber fees earned by XM Canada each month for its basic service and a nominal activation fee for each gross activation of an XM Canada subscriber on the Company’s system. Beginning in 2006, XM began to accrue for, and record as revenue, royalties and activation fees related to XM Canada’s subscribers. This revenue is recognized on a straight-line basis over the remaining expected term of the Agreements. The unrecognized portion is recorded as Deferred income. As of June 30, 2007 and December 31, 2006, the Deferred income balance related to the subscriber revenue royalty and activation fees was $3.9 million and $2.0 million, respectively.

 

 

XM Canada will pay the Company $69.1 million for the rights to broadcast and market National Hockey League (“NHL”) games for the 10-year term of the Company’s contract with the NHL. The $69.1 million payment is comprised of $57.0 million in license fees and $12.1 million in advertising costs and is required to be paid in ten annual installments ranging from $5.3 million to $7.5 million per year. In accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, the Company recognizes these payments on a gross basis as a principal.

 

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(Continued)

 

The Company recognized the following amortization of XM Canada investment, subscriber revenue royalty and activation fees, advertising cost reimbursements and license fees as Other revenue in the unaudited Condensed Consolidated Statement of Operations (in thousands):

 

    

Three months ended

June 30,

  

Six months ended

June 30,

     2007    2006    2007    2006

Amortization of deferred income related to XM Canada

   $ 2,498    $ 2,520    $ 4,996    $ 5,040

Subscriber revenue royalty and activation fees

     74      12      126      16

Advertising cost reimbursements

     333      750      667      750

License fees

     1,125      1,125      2,250      2,250

In addition, during 2006, XM recognized a $4.5 million gain as Other income related to the sale of 78 terrestrial repeaters to XM Canada during 2005. XM Canada purchased these repeaters from XM at their original cost.

XM has also provided XM Canada with a CDN$45 million standby credit facility which can only be utilized to finance purchases of terrestrial repeaters or for the payment of subscription fees to XM. The facility matures on December 31, 2012 and bears interest at a rate of 9% 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, 2007, XM Canada has drawn $1.5 million on this facility in lieu of payment of subscription fees.

As of June 30, 2007 and December 31, 2006, accounts receivable due from XM Canada were $3.5 million and $1.6 million, respectively, and are included in Prepaid and other current assets in the Condensed Consolidated Balance Sheets.

The Company had the following related party balances as of June 30, 2007 and December 31, 2006 (in thousands):

 

     Due from    Prepaid expense    Due to
     June 30,
2007
   December 31,
2006
   June 30,
2007
   December 31,
2006
   June 30,
2007
   December 31,
2006

GM

   $ 6,848    $ 8,149    $   224,733    $ 227,658    $ 50,429    $ 44,975

Honda

     3,406      5,842      —        —        2,533      1,484

XM Canada

     1,459      —        —        —        —        —  
                                         

Total

   $ 11,713    $ 13,991    $ 224,733    $ 227,658    $   52,962    $ 46,459
                                         

The Company earned the following total revenue, primarily consisting of subscriptions, in connection with sales to related parties described above (in thousands):

 

    

Three months ended

June 30,

  

Six months ended

June 30,

     2007    2006    2007    2006

GM

   $ 8,209    $ 6,702    $   14,881    $   12,820

Honda

     4,594      4,808      8,961      8,425

XM Canada

     4,030      4,407      8,039      8,056
                           

Total

   $   16,833    $   15,917    $ 31,881    $ 29,301
                           

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

The Company has relied upon certain related parties for technical, marketing and other services. The Company has incurred the following costs in transactions with the related parties described above (in thousands):

 

     Three months ended
June 30, 2007
   Three months ended
June 30, 2006
     GM    Honda    GM    Honda

Research & development

   $ —      $ —      $ —      $ 1,250

Customer care & billing operations

     51      —        99      —  

Revenue share & royalties

     27,125      71      19,936      —  

Marketing

     43,341      1,879      36,711      371
                           

Total

   $ 70,517    $ 1,950    $ 56,746    $ 1,621
                           
     Six months ended
June 30, 2007
   Six months ended
June 30, 2006
     GM    Honda    GM    Honda

Research & development

   $ —      $ —      $ —      $ 2,200

Customer care & billing operations

     103      —        188      —  

Revenue share & royalties

     50,855      72      37,735      —  

Marketing

     80,824      2,355      75,724      707
                           

Total

   $ 131,782    $ 2,427    $ 113,647    $ 2,907
                           

(10) Supplemental Cash Flows Disclosures

The Company paid $55.0 million and $24.6 million for interest, net of amounts capitalized to System under construction of $1.6 million and $11.3 million, during the six months ended June 30, 2007 and 2006, respectively. Additionally, the Company incurred the following non-cash financing and investing activities (in thousands):

 

     Six months ended
June 30,
     2007    2006

Accrued system construction costs

   $ —      $ 40,880

Conversion of 10% senior secured discount convertible notes due 2009 to Class A common stock

     —        79,940

Non-cash loss from de-leveraging transactions

     —        73,367

Write-off of deferred financing costs to equity in connection with the conversion of 10% Senior secured discount convertible notes due 2009

     —        2,152

Property acquired through capital leases

     4,806      26,613

 

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(Continued)

 

(11) Commitments and Contingencies

Satellite System

Satellite Deployment Plan —The Company currently operates four satellites in-orbit. It launched its first two satellites, XM-1 and XM-2 in the first half of 2001 prior to the commencement of commercial operations. These satellites suffer from a progressive solar array power degradation issue that is common to the first six Boeing 702 class satellites in orbit—XM-2 and XM-1 were the fifth and sixth Boeing 702s launched. In February 2005, the Company launched XM-3. XM-3 was placed into one of the Company’s orbital slots and since April 2005 has been used to transmit the XM service. During the second quarter of 2005, the Company collocated XM-1 with XM-2 in the other orbital slot. The Company successfully launched its fourth satellite (“XM-4”) into geosynchronous transfer orbit on October 30, 2006, which was handed over to the Company in December 2006 and is being used to transmit the XM service. XM-1 and XM-2 now function as in-orbit spares. During the second quarter of 2005, XM entered into a contract to construct a fifth satellite, (“XM-5”), expected to be completed in 2008 for use as a ground spare or to be available for launch as needed.

Satellite Contracts and Other Costs: XM-1, XM-2, XM-3, XM-4 and XM-5 —As of June 30, 2007, the Company has paid $966.9 million, including manufacturing and launch costs, financing charges, in-orbit performance incentives and additional costs for collocation, under the satellite contracts related to XM-1, XM-2, XM-3, XM-4 and XM-5. The Company originally entered into its satellite contract with Boeing Satellite Systems International, Inc. (“BSS”) in March 1998, and subsequently amended the contract as required. Under the satellite contract, BSS has delivered four satellites in-orbit, XM-1, XM-2, XM-3 and XM-4, supplied ground equipment and software used in the XM Radio system and provided certain launch and operations support services. XM has fully paid its contractual obligations to BSS, except for XM-3 and XM-4 performance incentive payments which are accrued to Satellite & terrestrial expense when certain performance criteria are met pursuant to the satellite contracts. In August 2003, XM contracted with Sea Launch Company, LLC (“Sea Launch”) for the associated launch services for the XM-4 satellite, and in September 2006, the Company exercised an option in the Sea Launch contract for launch services for XM-5. In June 2005, the Company awarded a contract to Space Systems/Loral (“SS/L”) for the design and construction of XM-5.

XM-3 —In February 2005, the Company launched its XM-3 satellite. XM-3 was modified to correct the solar array degradation issues experienced by XM-1 and XM-2, as well as to optimize XM-3 for the specific orbital slot into which it has been placed. BSS has the right to earn performance incentive payments of up to $25.9 million, excluding interest, based on the in-orbit performance of XM-3 over its design life of fifteen years. The Company has in-orbit insurance relating to XM-3 through February 2008.

XM-4 —In October 2006, the Company launched its XM-4 satellite. BSS has the right to earn performance incentive payments of up to $12 million, plus interest, over the first twelve years of in-orbit life, up to $7.5 million for high performance (above baseline specifications) during the first fifteen years of in-orbit life, and up to $10 million for continued high performance across the five year period beyond the fifteen year design life. The Company has launch plus one year of in-orbit insurance for XM-4 and five years of in-orbit insurance for a portion of XM-4. These policies run concurrently. In February 2007, the Company entered into a sale-leaseback transaction of the transponders on the XM-4 satellite.

XM-5 —During the second quarter of 2005, XM entered into a contract with SS/L to construct a spare satellite. Upon the award of the contract, SS/L began construction of the XM-5 satellite. Approximately two years before, on July 15, 2003, SS/L, its parent, Loral Space & Communications Ltd. and certain other affiliated entities (collectively, the “Debtors”) commenced voluntary Chapter 11 bankruptcy cases under the Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York (the “Court”), which cases are being jointly administered under lead case number 03-41710. Pursuant to an order entered on July 20, 2005, the Court approved the Company’s contract with SS/L. On August 1, 2005, the Court entered an order confirming the Debtors’ Fourth Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code (the “Reorganization Plan”). The Reorganization Plan became effective on November 21, 2005. Pursuant to the terms of the Company’s contract with SS/L, the Company is required to make construction payments on XM-5 into an escrow account until the occurrence of an “Emergence Date” as defined in the contract. Although the contractually-defined “Emergence Date” has not occurred, XM has authorized the escrow agent to release certain escrowed

 

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(Continued)

 

funds to SS/L to cover SS/L’s costs incurred as is reasonably necessary for SS/L to continue performing work under the contract. As of June 30, 2007, with respect to XM-5, the Company has paid $123.5 million, excluding financing charges.

GM Distribution Agreement

The Company has a long-term distribution agreement with GM. The agreement had been assigned by GM to its subsidiary, OnStar, but was assigned back to GM in June 2006. During the term of the agreement, which expires twelve years from the commencement date of the Company’s commercial operations in 2001, GM has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The agreement was amended in June 2002 and January 2003 to clarify certain terms in the agreement, including extending the dates when certain initial payments were due to GM and confirming the date of the Company’s commencement of commercial operations, and to provide that the Company could make certain payments to GM in shares of the Company’s Class A common stock. The Company’s total cash payment obligations were not increased. Under the distribution agreement, the Company is required to make a subscriber acquisition payment to GM for each person who becomes and remains an XM subscriber through the purchase of a GM vehicle.

In April 2006, the Company amended the distribution agreement pursuant to which the Company made a prepayment in May 2006 in the amount of $237 million to GM to retire at a discount $320 million of the remaining fixed payment obligations that would have come due in 2007, 2008, and 2009. The April 2006 amendments eliminated the Company’s ability to make up to $35 million of subscriber acquisition payments in shares of the Company’s Class A common stock. In addition, the Company’s credit facility with GM was increased from $100 million to $150 million. The facility will terminate, and all draws will become due, upon the earlier of December 31, 2009 and six months after the Company achieves investment grade status. The amendments also provide that the security arrangements on the GM facility will be unsecured until the first draw under the bank credit facility and then secured on a second priority basis behind the secured indebtedness permitted to be incurred under the bank credit facility. As of June 30, 2007, the Company has $26.0 million of current prepaid expense to related party and $136.6 million of non-current prepaid expense to related party in connection with the guaranteed fixed payments, as the result of a prepayment of $237 million to GM in May 2006.

In order to encourage the broad installation of XM radios in GM vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to the Company’s service. The Company must also share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM radios, which percentage increases until there are more than eight million GM vehicles with installed XM radios (at which point the percentage remains constant). Accordingly, the revenue share expense is recognized as the related subscription revenue is earned. As of June 30, 2007, the Company has $49.1 million of current prepaid expense to related party and $13.1 million of non-current prepaid expense to related party in connection with this revenue sharing arrangement. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which the Company must reimburse GM. The agreement is subject to renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radio’s service. The agreement was subject to renegotiation in November 2005, and will be subject to renegotiation at two-year intervals thereafter, if GM did or does not achieve and maintain specified installation levels of GM vehicles capable of receiving the Company’s service. The specified installation level of 1,240,000 units by November 2005 was achieved in 2004. The specified installation levels in future years are the lesser of 600,000 units per year or amounts proportionate to targets in the satellite digital radio service market. There can be no assurances as to the outcome of any such renegotiations. GM’s exclusivity obligations will discontinue if, by November 2007 and at two-year intervals thereafter, the Company fails to achieve and maintain specified minimum share levels in the satellite digital radio service market. For the three and six months ended June 30, 2007, the Company incurred total costs of $70.5 million and $131.8 million, respectively; while for the comparable periods in 2006, the Company incurred total costs of $56.7 million and $113.6 million, respectively, under the distribution agreement.

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

 

Legal Proceedings

The Company is currently subject to claims, potential claims, inquiries or investigations, or party to legal proceedings, in various matters described below. In addition, in the ordinary course of business the Company becomes aware from time to time of claims, potential claims, inquiries or investigations, or may become party to legal proceedings arising out of various matters, such as contract matters, employment related matters, issues relating to its repeater network, product liability issues, copyright, patent, trademark or other intellectual property matters and other federal regulatory matters.

Litigation and Arbitration

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. —Plaintiffs filed this action in the United States District Court for the Southern District of New York on May 16, 2006. The complaint seeks monetary damages and equitable relief, alleging that recently introduced XM radios that also have MP3 functionality infringe upon plaintiffs’ copyrighted sound recordings. The Company’s motion to dismiss this matter was denied in January 2007. The Company believes these allegations are without merit and that these products comply with applicable copyright law, including the Audio Home Recording Act, and intends to vigorously defend the matter. Music publishing companies and certain other record companies also have filed lawsuits, purportedly on a class basis, with similar allegations. There can be no assurance regarding the ultimate outcome of these matters, or the significance, if any, to the Company’s business, consolidated results of operations or financial position.

Matthew Enderlin v. XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. —Plaintiff filed this action in the United States District Court for the Eastern District of Arkansas on January 10, 2006 on behalf of a purported nationwide class of all XM subscribers. The complaint alleges that the Company engaged in a deceptive trade practice under Arkansas and other state laws by representing that its music channels are commercial-free. The Company has filed an answer to the complaint and instituted arbitration with the American Arbitration Association pursuant to the compulsory arbitration clause in its customer service agreement. The arbitration has been stayed pending judicial determination of Enderlin’s objections to the arbitration. The United States Court of Appeals for the Eighth Circuit held on April 17, 2007 that those objections are to be decided by the trial court, not the arbitrator. The Company believes the suit is without merit and intends to vigorously defend the matter. There can be no assurance regarding the ultimate outcome of this matter, or the significance, if any, to the Company’s business, consolidated results of operations or financial position.

Copyright Royalty Board Arbitration —The Company is participating in a Copyright Royalty Board (CRB) proceeding in order to set the royalty rate payable by the Company under the statutory license covering its performance of sound recordings over the XM system for the six year period starting in January 2007. The Company and Sirius have recently filed their direct cases with the CRB proposing a rate of 0.88% of each of their adjusted gross revenues for this statutory license. SoundExchange, a collective operated on behalf of owners of copyrighted recordings, such as the major record labels, has filed a direct case proposing a rate increasing from 10% of adjusted gross revenues for the first year of the license increasing each year to over 23% during the final year of the license term; their requested guaranteed minimums could result in a rate in excess of the foregoing percentages. The Company is also participating in a concurrent proceeding to set the royalty rate payable by the Company under the statutory license covering its performance of sound recordings over XM channels transmitted over the DIRECTV satellite television system. Hearings in these matters are taking place in 2007, and the Company anticipates that the CRB will render its decision by the end of 2007. There can be no assurance regarding the ultimate outcome of these matters, or their significance to the Company’s business, consolidated results of operations or financial position.

Regulatory Matters and Inquiries

Federal Communications Commission (“FCC”)

FCC Receiver Matter —As the Company has previously disclosed, it has received inquiries from, and responded to, the FCC regarding FM modulator wireless transmitters in various XM radios not in compliance with permissible emission limits. No health or safety issues

 

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(Continued)

 

have been involved with these wireless XM radios. The Company has implemented a series of design and installation modifications, and the Company has obtained new certifications for numerous models of modified XM radios using its new SureConnect technology. In addition, the Company has implemented a regulatory compliance plan, including the appointment of an FCC regulatory compliance officer, to monitor FCC regulatory compliance, specifically with reference to the design, verification/certification, and production of XM radio receivers. The Company has been submitting documents to the FCC and is in discussions with the FCC to resolve this matter. The Company cannot predict at this time the extent of any further actions that it will need to undertake or any financial obligations it may incur. There can be no assurance regarding the ultimate outcome of this matter, or its significance to the Company’s business, consolidated results of operations or financial position.

FCC Repeater Network Matter —In October 2006, the Company filed for both a 30-day Special Temporary Authority (“STA”) and a 180-day STA with respect to its terrestrial repeater network, seeking authority to continue to operate its entire repeater network despite the fact that the technical characteristics of certain repeaters, as built, differ from the technical characteristics in the original STAs granted for its repeater network. These differences include some repeaters not being built in the exact locations, or with the same antenna heights, power levels, or antenna characteristics than set forth in the earlier STAs. Prior to making these recent filings, the Company reduced the power or discontinued operation of certain repeaters. As a result, the Company believes that service quality in portions of the affected metro areas has been somewhat reduced, including in terms of more frequent interruptions and/or occasional outages to the service. There has been no impact on the satellite signal. The Company continues to hold meetings with the staff of the FCC regarding these matters. In February 2007, the Company received a letter of inquiry from the FCC relating to these matters, to which the Company has responded. This proceeding may result in the imposition of financial penalties against the Company or adverse changes to the Company’s repeater network resulting from having repeaters turned off or otherwise modified in a manner that would reduce service quality in the affected areas. There can be no assurance regarding the ultimate outcome of this matter, or its significance to the Company’s business, consolidated results of operations or financial position.

These recent STA requests are distinct from (and if granted would modify) the STAs originally granted by the FCC relating to the Company’s commencing and continuing operation of the repeater network. As the Company has been disclosing, the FCC has not yet issued final rules permitting the Company (or Sirius) to deploy terrestrial repeaters, and the Company has been deploying and operating its repeater network based on those early STAs and requests the Company has filed previously to extend the time periods of those STAs, which have expired. The Company (and Sirius) and others have been requesting that the FCC establish final rules for repeater deployment.

Federal Trade Commission (“FTC”)

FTC Inquiry —On April 25, 2006, the Company received a letter from the FTC stating that they are conducting an inquiry into whether its activities are in compliance with various acts, including the FTC Act, the Telemarketing Sales Rule, the Truth in Lending Act and the CAN-SPAM Act. This letter requests information about a variety of the Company’s marketing activities, including free trial periods, rebates, telemarketing activities, billing and customer complaints.

The Company has been submitting documents to the agency in response to the letter and is cooperating fully with this inquiry. There can be no assurance regarding the ultimate outcome of this matter, or the significance, if any, to the Company’s business, consolidated results of operations or financial position.

Securities and Exchange Commission (“SEC”)

SEC Inquiry —As previously disclosed, the Staff of the SEC has requested that the Company voluntarily provide documents to the Staff, including information relating to its subscriber targets, costs associated with attempting to reach those targets during the third and fourth quarters of 2005, the departure of Mr. Roberts from its board of directors, its historic practices regarding stock options and certain other matters. In this connection, the Company retained outside counsel, who engaged an independent accounting advisor, to conduct a review of its stock option practices. The inquiry did not reveal the existence of material errors in any prior financial statements.

 

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The Company has been submitting documents to the SEC in response to their requests and is cooperating fully with this inquiry. There can be no assurance regarding the ultimate outcome of these SEC matters, or the significance, if any, to the Company’s business, consolidated results of operations or financial position.

Leases

In February 2007, the Company entered into a sale-leaseback transaction of the transponders on the XM-4 satellite. For a further discussion, see Note 6, under the heading “Capital Lease—XM-4 Satellite” .

The Company has noncancelable operating leases for terrestrial repeater sites, office space, and software, and noncancelable capital leases for equipment that expire over the next fifteen years. Additionally, the Company owns several buildings and leases a portion of the space to other entities.

(12) Subsequent Events

The Company announced on July 24, 2007 the departure of Hugh Panero from his position as Chief Executive Officer and as a member of the Board of Directors, effective on August 10, 2007. The Company also announced the appointment of Nate Davis, currently the Company’s President and Chief Operating Officer, to his new position as the Company’s President and interim Chief Executive Officer, effective upon the departure of Mr. Panero. Mr. Davis has served as the Company’s President and Chief Operating Officer since July 2006 and has served as a member of the Company’s Board of Directors since October 1999.

(13) Condensed Consolidating Financial Information

The Company has certain series of debt securities outstanding that are guaranteed by Holdings and two of the Company’s subsidiaries, XM Equipment Leasing LLC, which owns certain terrestrial repeaters, and XM Radio Inc. These guarantees are full and unconditional and joint and several. Inc. is owned 100% by Holdings, while XM Equipment Leasing LLC and XM Radio Inc. are owned 100% by Inc. Satellite Leasing (702-4) LLT is a separate legal entity subject to consolidation by the Company, pursuant to FIN 46(R). Accordingly, the Company provides the following condensed consolidating financial information.

 

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(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JUNE 30, 2007

 

(in thousands)   XM Satellite
Radio Inc.
  XM Radio
Inc.
  XM
Equipment
Leasing
LLC
  XMSR Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Inc.
  XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
  XM Holdings
Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Holdings
Inc.

Current assets:

                     

Cash and cash equivalents

  $ 103,181   $ —     $ 8   $ —     $ —       $ 103,189   $ 172,200     $ —     $ 3   $ —       $ 275,392

Accounts receivable, net

    43,890     —       —       —       —         43,890     —         —       —       —         43,890

Due from subsidiaries/affiliates

    3,895     344,950     37,293     654,126     (1,040,220 )     44     8,652       —       34,841     (43,537 )     —  

Due from related parties

    10,254     —       —       —       —         10,254     —         —       —       —         10,254

Related party prepaid expenses

    75,085     —       —       —       —         75,085     —         —       —       —         75,085

Prepaid programming content

    59,232     —       —       —       —         59,232     —         —       —       —         59,232

Prepaid and other current assets

    46,932     —       —       —       —         46,932     1,378       30,726     816     (31,850 )     48,002
                                                                       

Total current assets

    342,469     344,950     37,301     654,126     (1,040,220 )     338,626     182,230       30,726     35,660     (75,387 )     511,855

Restricted investments

    186     —       —       —       —         186     —         —       10     —         196

System under construction

    —       —       —       —       —         —       142,935       —       —       —         142,935

Property and equipment, net

    671,972     —       20,801     —       —         692,773     50,059       —       39,574     (8,221 )     774,185

Investment in subsidiary/affiliates

    1,137,223     —       —       —       (1,137,223 )     —       (483,598 )     —       —       483,598       —  

DARS license

    —       141,387     —       —       —         141,387     —         —       —       —         141,387

Intangibles, net

    4,015     —       —       —       —         4,015     —         —       —       —         4,015

Deferred financing fees, net

    33,461     —       —       —       —         33,461     5,021       —       —       —         38,482

Due from related parties

    1,459     —       —       —       —         1,459     —         —       —       —         1,459

Related party prepaid expenses

    149,648     —       —       —       —         149,648     —         —       —       —         149,648

Investments

    —       —       —       —       —         —       44,650       —       —       —         44,650

Prepaid and other assets

    2,193     —       —       —       —         2,193     —         499,771     1,953     (499,771 )     4,146
                                                                       

Total assets

  $ 2,342,626   $ 486,337   $ 58,102   $ 654,126   $ (2,177,443 )   $ 1,363,748   $ (58,703 )   $ 530,497   $ 77,197   $ (99,781 )   $ 1,812,958
                                                                       

 

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XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF JUNE 30, 2007

(Continued)

 

(in thousands)   XM Satellite
Radio Inc.
    XM Radio
Inc.
  XM
Equipment
Leasing LLC
    XMSR Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
  XM Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Holdings
Inc.
 

Current liabilities:

                     

Accounts payable

  $ 53,605     $ —     $ —       $ —     $ —       $ 53,605     $ 172     $ 3,371   $ (3 )   $ (3,371 )   $ 53,774  

Accrued expenses

    135,474       —       107       —       —         135,581       51       —       290       (441 )     135,481  

Accrued satellite liability

    —         —       —         —       —         —         —         —       —         —         —    

Accrued interest

    21,148       —       —         —       —         21,148       583       1,824     —         (4,806 )     18,749  

Current portion of long-term debt

    42,956       —       —         —       —         42,956       —         —       —         (29,216 )     13,740  

Due to related parties

    52,962       —       —         —       —         52,962       —         —       —         —         52,962  

Due to subsidiary/affiliates

    1,012,663       246     2,461       25,394     (1,040,199 )     565       —         —       6,985       (7,550 )     —    

Subscriber deferred revenue

    380,121       —       —         —       —         380,121       —         —       —           380,121  

Deferred income

    —         —       —         —       —         —         13,338       30,726     —         (34,149 )     9,915  
                                                                                 

Total current liabilities

    1,698,929       246     2,568       25,394     (1,040,199 )     686,938       14,144       35,921     7,272       (79,533 )     664,742  

Long-term debt, net of current portion

    1,079,656       —       —         —       —         1,079,656       400,000       230,800     —         (233,736 )     1,476,720  

Subscriber deferred revenue, net of current portion

    99,026       —       —         —       —         99,026       —         —       —         —         99,026  

Deferred income, net of current portion

    3,938       —       —         —       —         3,938       152,024       204,485     —         (232,771 )     127,676  

Other non-current liabilities

    13,270       33,113     —         —       —         46,383       34,990       —       (1,315 )     (38,065 )     41,993  
                                                                                 

Total liabilities

    2,894,819       33,359     2,568       25,394     (1,040,199 )     1,915,941       601,158       471,206     5,957       (584,105 )     2,410,157  
                                                                                 

Commitments and contingencies

                     

Minority interest

    —         —       —         —       —         —         —         —       —         62,662       62,662  

Stockholders’ equity (deficit):

                     

Capital stock

    —         —       —         —       —         —         3,122       —       —         —         3,122  

Accumulated other comprehensive income

    44       —       —         —       —         44       8,639       —       —         (44 )     8,639  

Additional paid-in-capital

    3,157,964       146,271     60,759       286,765     (493,795 )     3,157,964       3,125,039       54,329     46,926       (3,259,219 )     3,125,039  

Retained earnings (deficit)

    (3,710,201 )     306,707     (5,225 )     341,967     (643,449 )     (3,710,201 )     (3,796,661 )     4,962     24,314       3,680,925       (3,796,661 )
                                                                                 

Total stockholders’ equity (deficit)

    (552,193 )     452,978     55,534       628,732     (1,137,244 )     (552,193 )     (659,861 )     59,291     71,240       421,662       (659,861 )
                                                                                 

Total liabilities and stockholders’ equity (deficit)

  $ 2,342,626     $ 486,337   $ 58,102     $ 654,126   $ (2,177,443 )   $ 1,363,748     $ (58,703 )   $ 530,497   $ 77,197     $ (99,781 )   $ 1,812,958  
                                                                                 

 

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XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF DECEMBER 31, 2006

 

(in thousands)   XM Satellite
Radio Inc.
  XM Radio
Inc.
  XM
Equipment
Leasing LLC
  XMSR Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Inc.
  XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
  XM Holdings
Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Holdings
Inc.

Current assets:

                     

Cash and cash equivalents

  $ 92,445   $ —     $ 32   $ —     $ —       $ 92,477   $ 125,593     $ —     $ 146   $ —       $ 218,216

Accounts receivable, net

    62,293     —       —       —       —         62,293     —         —       —       —         62,293

Due from subsidiaries/affiliates

    3,645     267,724     31,251     624,991     (927,582 )     29     —         —       29,235     (29,264 )     —  

Due from related parties

    13,991     —       —       —       —         13,991     —         —       —       —         13,991

Related party prepaid expenses

    66,946     —       —       —       —         66,946     —         —       —       —         66,946

Prepaid programming content

    28,172     —       —       —       —         28,172     —         —       —       —         28,172

Prepaid and other current assets

    42,288     —       —       —       —         42,288     1,280       —       597     (1,125 )     43,040
                                                                       

Total current assets

    309,780     267,724     31,283     624,991     (927,582 )     306,196     126,873       —       29,978     (30,389 )     432,658

Restricted investments

    386     —       —       —       —         386     —         —       1,712     —         2,098

System under construction

    —       —       —       —       —         —       126,049       —       —       —         126,049

Property and equipment, net

    475,521     —       26,895     —       —         502,416     311,767       —       40,578     (5,099 )     849,662

Investment in subsidiary/affiliates

    1,032,642     —       —       —       (1,032,642 )     —       (379,419 )     —       —       379,419       —  

DARS license

    —       141,387     —       —       —         141,387     —         —       —       —         141,387

Intangibles, net

    4,640     —       —       —       —         4,640     —         —       —       —         4,640

Deferred financing fees, net

    32,185     —       —       —       —         32,185     6,025       —       391     —         38,601

Related party prepaid expenses

    160,712     —       —       —       —         160,712     —         —       —       —         160,712

Investments

    —       —       —       —       —         —       80,592       —       —       —         80,592

Prepaid and other assets

    2,315     —       —       —       —         2,315     —         —       1,904     —         4,219
                                                                       

Total assets

  $ 2,018,181   $ 409,111   $ 58,178   $ 624,991   $ (1,960,224 )   $ 1,150,237   $ 271,887     $ —     $ 74,563   $ 343,931     $ 1,840,618
                                                                       

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS

AS OF DECEMBER 31, 2006

(Continued)

 

(in thousands)   XM Satellite
Radio Inc.
    XM Radio
Inc.
  XM
Equipment
Leasing
LLC
    XMSR Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
  XM Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Holdings
Inc.
 

Current liabilities:

                     

Accounts payable

  $ 51,634     $ —     $ —       $ —     $ —       $ 51,634     $ 210     $ —     $ —       $ —       $ 51,844  

Accrued expenses

    146,902       —       127       —       —         147,029       713       —       290       (441 )     147,591  

Accrued satellite liability

    —         —       —         —       —         —         64,875       —       —         —         64,875  

Accrued interest

    15,277       —       —         —       —         15,277       3,001       —       204       —         18,482  

Current portion of long-term debt

    13,883       —       —         —       —         13,883       —         —       562       —         14,445  

Due to related parties

    46,459       —       —         —       —         46,459       —         —       —         —         46,459  

Due to subsidiary/affiliates

    900,055       245     2,226       25,062     (927,562 )     26       29,235       —       112       (29,373 )     —    

Subscriber deferred revenue

    340,711       —       —         —       —         340,711       —         —       —         —         340,711  

Deferred income

    —         —       —         —       —         —         9,915       —       —         —         9,915  
                                                                                 

Total current liabilities

    1,514,921       245     2,353       25,062     (927,562 )     615,019       107,949       —       1,168       (29,814 )     694,322  

Long-term debt, net of current portion

    847,864       —       —         —       —         847,864       400,000       —       38,315       —         1,286,179  

Subscriber deferred revenue, net of current portion

    86,482       —       —         —       —         86,482       —         —       —         —         86,482  

Deferred income, net of current portion

    2,045       —       —         —       —         2,045       128,735       —       —         —         130,780  

Other non-current liabilities

    14,043       31,958     —         —       —         46,001       33,083       —       (1,316 )     (37,033 )     40,735  
                                                                                 

Total liabilities

    2,465,355       32,203     2,353       25,062     (927,562 )     1,597,411       669,767       —       38,167       (66,847 )     2,238,498  
                                                                                 

Commitments and contingencies

                     

Stockholders’ equity (deficit):

                     

Capital stock

    —         —       —         —       —         —         3,112       —       —         —         3,112  

Accumulated other comprehensive income

    —         —       —         —       —         —         3,590       —       —         —         3,590  

Additional paid-in-capital

    3,002,594       146,271     60,759       286,765     (493,795 )     3,002,594       3,093,894       —       10,830       (3,013,424 )     3,093,894  

Retained earnings (deficit)

    (3,449,768 )     230,637     (4,934 )     313,164     (538,867 )     (3,449,768 )     (3,498,476 )     —       25,566       3,424,202       (3,498,476 )
                                                                                 

Total stockholders’ equity (deficit)

    (447,174 )     376,908     55,825       599,929     (1,032,662 )     (447,174 )     (397,880 )     —       36,396       410,778       (397,880 )
                                                                                 

Total liabilities and stockholders’ equity (deficit)

  $ 2,018,181     $ 409,111   $ 58,178     $ 624,991   $ (1,960,224 )   $ 1,150,237     $ 271,887     $ —     $ 74,563     $ 343,931     $ 1,840,618  
                                                                                 

 

34


Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

 

(in thousands)   XM
Satellite
Radio Inc.
    XM
Radio
Inc.
    XM
Equipment
Leasing
LLC
    XMSR Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
    XM Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings Inc.
 

Revenue

  $ 536,360     $ 77,225     $     5,481     $         —       $ (82,706 )   $     536,360     $         4,996     $   13,710     $         5,197     $ (18,876 )   $     541,387  

Cost of revenue

    344,666       —         10       —         228       344,904       —         —         594       (3,875 )     341,623  

Research & development

    15,469       —         —         —         —         15,469       —         —         —         —         15,469  

General & administrative

    68,652       —         —         —         —         68,652       292       —         1,369       (260 )     70,053  

Marketing

    216,892       —         —         —         —         216,892       —         —         —         —         216,892  

Depreciation & amortization

    86,718       —         6,094       —         —         92,812       2,611       —         1,003       (3,039 )     93,387  
                                                                                       

Total operating expenses

    732,397       —         6,104       —         228       738,729       2,903       —         2,966       (7,174 )     737,424  
                                                                                       

Operating income (loss)

    (196,037 )     77,225       (623 )     —         (82,934 )     (202,369 )     2,093       13,710       2,231       (11,702 )     (196,037 )

Other income (expense):

                     

Interest income

    3,322       —         332       29,135       (29,467 )     3,322       4,459       —         —         —         7,781  

Interest expense

    (89,340 )     —         —         (332 )           29,467       (60,205 )     (2,291 )     (8,748 )     (517 )         11,729       (60,032 )

Loss from de-leveraging transactions

    —         —         —         —         —         —         —         —         (2,965 )     —         (2,965 )

Loss from impairment of investments

    —         —         —         —         —         —         (35,824 )     —         —         —         (35,824 )

Equity in net loss of affiliate

    —         —         —         —         —         —         (8,177 )     —         —         —         (8,177 )

Minority interest

    —         —         —         —         —         —         —         —         —         (4,962 )     (4,962 )

Other income (expense)

    21,595       —         —         —         (21,647 )     (52 )     (259,593 )     —         —         260,501       856  
                                                                                       

Net income (loss) before income taxes

    (260,460 )     77,225       (291 )     28,803       (104,581 )     (259,304 )     (299,333 )     4,962       (1,251 )     255,566       (299,360 )
                                                                                       

Benefit from (provision for) deferred income taxes

    28       (1,156 )     —         —         —         (1,128 )     1,148       —         —         1,155       1,175  
                                                                                       

Net income (loss)

  $ (260,432 )   $ 76,069     $ (291 )   $ 28,803     $ (104,581 )   $ (260,432 )   $ (298,185 )   $ 4,962     $ (1,251 )   $ 256,721     $ (298,185 )
                                                                                       

 

35


Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2007

 

(in thousands)   XM
Satellite
Radio Inc.
    XM Radio
Inc.
    XM
Equipment
Leasing
LLC
    XMSR Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
    XM Holdings
Non-
Guarantor
Subsidiaries
  Eliminations     Consolidated
XM Satellite
Radio
Holdings Inc.
 

Revenue

  $   274,746     $   39,560     $     2,740     $         —       $ (42,301 )   $     274,745     $         2,498     $     8,988     $       2,675   $ (11,630 )   $     277,276  

Cost of revenue

    172,058       —         3       —                   114       172,175       —         —         326     (1,988 )     170,513  

Research & development

    8,159       —         —         —         —         8,159       —         —         —       —         8,159  

General & administrative

    35,845       —         —         —         —         35,845       157       —         2     (135 )     35,869  

Marketing

    124,221       —         —         —         —         124,221       —         —         —       —         124,221  

Depreciation & amortization

    45,066       —         2,998       —         —         48,064       7       —         502     (2,067 )     46,506  
                                                                                     

Total operating expenses

    385,349       —         3,001       —         114       388,464       164       —         830     (4,190 )     385,268  
                                                                                     

Operating income (loss)

    (110,603 )     39,560       (261 )     —         (42,415 )     (113,719 )     2,334       8,988       1,845     (7,440 )     (107,992 )

Other income (expense):

                     

Interest income

    1,804       —         167       14,648       (14,815 )     1,804       2,434       —         —       —         4,238  

Interest expense

    (47,578 )     —         —         (167 )     14,815       (32,930 )     (1,436 )     (5,722 )     —       7,665       (32,423 )

Loss from de-leveraging transactions

    —         —         —         —         —         —         —         —         —       —         —    

Loss from impairment of investments

    —         —         —         —         —         —         (35,824 )     —         —       —         (35,824 )

Equity in net loss of affiliate

    —         —         —         —         —         —         (2,752 )     —         —       —         (2,752 )

Minority interest

    —         —         —         —         —         —         —         —         —       (3,266 )     (3,266 )

Other income (expense)

    10,907       —         —         —         (10,954 )     (47 )     (142,335 )     —         —           142,795       413  
                                                                                     

Net income (loss) before income taxes

    (145,470 )     39,560       (94 )     14,481       (53,369 )     (144,892 )     (177,579 )     3,266       1,845     139,754       (177,606 )
                                                                                     

Benefit from (provision for) deferred income taxes

    28       (578 )     —         —         —         (550 )     1,832       —         —       577       1,859  
                                                                                     

Net income (loss)

  $ (145,442 )   $ 38,982     $ (94 )   $ 14,481     $ (53,369 )   $ (145,442 )   $ (175,747 )   $ 3,266     $ 1,845   $ 140,331     $ (175,747 )
                                                                                     

 

36


Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(in thousands)   XM
Satellite
Radio Inc.
    XM
Radio
Inc.
    XM
Equipment
Leasing
LLC
    XMSR
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM
Satellite
Radio
Holdings
Inc.
    Satellite
Leasing
(702-4),
LLT
  XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

  $ 430,804     $ 62,088     $ 5,460     $ —       $ (67,541 )   $ 430,811     $ 5,041     $
 
  —
  
  $ 5,079     $ (5,079 )   $ 435,852  

Cost of revenue

    283,584       —         17       —         245       283,846       —         —       309       (3,813 )     280,342  

Research & development

    19,499       —         —         —         —         19,499       —         —       —         —         19,499  

General & administrative

    36,329       —         —         —         —         36,329       249       —       (27 )     (250 )     36,301  

Marketing

    220,434       —         —         —         —         220,434       —         —       —         —         220,434  

Depreciation & amortization

    72,222         6,585       —         —         78,807       1,918       —       1,004       —         81,729  
                                                                                     

Total operating expenses

    632,068       —         6,602       —         245       638,915       2,167       —       1,286       (4,063 )     638,305  
                                                                                     

Operating income (loss)

    (201,264 )     62,088       (1,142 )     —         (67,786 )     (208,104 )     2,874       —       3,793       (1,016 )     (202,453 )

Other income (expense):

                     

Interest income

    1,433       —         391       29,135       (29,469 )     1,490       11,084       —       375       —         12,949  

Interest expense

    (90,624 )     —         —         (334 )     29,469       (61,489 )     (843 )     —       (221 )     —         (62,553 )

Loss from de-leveraging transactions

    (100,099 )     —         —         —         —         (100,099 )     (625 )     —       —         —         (100,724 )

Loss from impairment of investments

    —         —         —         —         —         —         (18,926 )     —       —         —         (18,926 )

Equity in net loss of affiliate

    —         —         —         —         —         —         (13,090 )     —       —         —         (13,090 )

Other income (expense)

    25,497       —         4,304       —         (25,500 )     4,301       (358,804 )     —       1       358,924       4,422  
                                                                                     

Net income (loss) before income taxes

    (365,057 )     62,088       3,553       28,801       (93,286 )     (363,901 )     (378,330 )     —       3,948       357,908       (380,375 )
                                                                                     

Benefit from (provision for) deferred income taxes

    —         (1,156 )     —         —         —         (1,156 )     —         —       —         3,201       2,045  
                                                                                     

Net income (loss)

  $ (365,057 )   $ 60,932     $ 3,553     $ 28,801     $ (93,286 )   $ (365,057 )   $ (378,330 )   $ —     $ 3,948     $ 361,109     $ (378,330 )
                                                                                     

 

37


Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2006

 

(in thousands)   XM
Satellite
Radio Inc.
    XM
Radio
Inc.
    XM
Equipment
Leasing
LLC
    XMSR
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio Inc.
    XM
Satellite
Radio
Holdings
Inc.
    Satellite
Leasing
(702-4),
LLT
  XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

  $ 225,185     $ 32,529     $ 2,730     $ —       $ (35,259 )   $ 225,185     $ 2,701     $       —     $ 2,537     $ (2,537 )   $ 227,886  

Cost of revenue

    148,400       —         9       —         119       148,528       —         —       203       (1,901 )     146,830  

Research & development

    8,518       —         —         —         —         8,518       —         —       —         —         8,518  

General & administrative

    18,642       —         —         —         —         18,642       153       —       2       (125 )     18,672  

Marketing

    113,675       —         —         —         —         113,675       —         —       —         —         113,675  

Depreciation & amortization

    37,080       —         3,313       —         —         40,393       952       —       502       —         41,847  
                                                                                     

Total operating expenses

    326,315       —         3,322       —         119       329,756       1,105       —       707       (2,026 )     329,542  
                                                                                     

Operating income (loss)

    (101,130 )     32,529       (592 )     —         (35,378 )     (104,571 )     1,596       —       1,830       (511 )     (101,656 )

Other income (expense):

                     

Interest income

    1,132       —         168       14,648       (14,816 )     1,132       5,022       —       222       —         6,376  

Interest expense

    (43,459 )     —         —         (168 )     14,816       (28,811 )     (283 )     —       (223 )     —         (29,317 )

Loss from de-leveraging transactions

    (81,719 )     —         —         —         —         (81,719 )     (626 )     —       —         —         (82,345 )

Loss from impairment of investments

    —         —         —         —         —         —         (18,926 )     —       —         —         (18,926 )

Equity in net loss of affiliate

    —         —         —         —         —         —         (4,206 )     —       —         —         (4,206 )

Other income (expense)

    10,740       —         112       —         (10,741 )     111       (210,240 )     —       1       209,916       (212 )
                                                                                     

Net income (loss) before income taxes

    (214,436 )     32,529       (312 )     14,480       (46,119 )     (213,858 )     (227,663 )     —       1,830       209,405       (230,286 )
                                                                                     

Benefit from (provision for) deferred income taxes

    —         (578 )     —         —         —         (578 )     (1,446 )     —       —         3,201       1,177  
                                                                                     

Net income (loss)

  $ (214,436 )   $ 31,951     $ (312 )   $ 14,480     $ (46,119 )   $ (214,436 )   $ (229,109 )   $ —     $ 1,830     $ 212,606     $ (229,109 )
                                                                                     

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2007

 

(in thousands)   XM
Satellite
Radio Inc.
    XM
Radio Inc.
  XM
Equipment
Leasing LLC
    XMSR
Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
    XM Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings Inc.
 

Net cash (used in) provided by operating activities

  $ (79,217)     $         —     $ 7,568     $         —     $         —     $ (71,649 )   $ (38,518 )   $ —       $ 39,997     $ —       $ (70,170 )

Cash flows from investing activities:

                     

Purchase of property and equipment

    (33,245 )     —       —         —       —       (33,245 )     (566 )     (288,500 )     —         288,500       (33,811 )

Additions to system under construction

    —         —       —         —       —       —         (78,596 )     —         —         —         (78,596 )

Proceeds from sale of assets

    —         —       —         —       —       —         288,500       —         —         (288,500 )     —    

Net maturity (purchase) of restricted investments

    199       —       —         —       —       199       —         —         1,702       —         1,901  
                                                                                 

Net cash (used in) provided by investing activities

    (33,046 )     —       —         —       —       (33,046 )     209,338       (288,500 )     1,702       —         (110,506 )
                                                                                 

Cash flows from financing activities:

                     

Proceeds from exercise of warrants and stock options

    —         —       —         —       —       —         2,989       —         —         —         2,989  

Capital contributions from Holdings

    127,202       —       —         —       —       127,202       (127,202 )     —         —         —         —    

Capital contributions from outside investor to minority interest

    —         —       —         —       —       —         —         57,700       —         (57,700 )     —    

Proceeds from issuance of debt by minority interest

    —         —       —         —       —       —         —         230,800       —         (230,800 )     —    

Proceeds from sale-leaseback transaction

    —         —       —         —       —       —         —         —         —         288,500       288,500  

Repayment of mortgages on corporate facilities

    —         —       —         —       —       —         —         —         (38,877 )     —         (38,877 )

Payment of premiums on de-leveraging transactions

    —         —       —         —       —       —         —         —         (2,965 )     —         (2,965 )

Payments on other borrowings

    —         —       (7,592 )     —       —       (7,592 )     —         —         —         —         (7,592 )

Deferred financing costs

    (4,203 )     —       —         —       —       (4,203 )     —         —         —         —         (4,203 )
                                                                                 

Net cash provided by (used in) financing activities

    122,999       —       (7,592 )     —       —       115,407       (124,213 )     288,500       (41,842 )     —         237,852  
                                                                                 

Net increase (decrease) in cash and cash equivalents

    10,736       —       (24 )     —       —       10,712       46,607       —         (143 )     —         57,176  

Cash and cash equivalents at beginning of period

    92,445       —       32       —       —       92,477       125,593       —         146       —         218,216  
                                                                                 

Cash and cash equivalents at
end of period

  $ 103,181     $ —     $ 8     $ —     $ —     $ 103,189     $ 172,200     $ —       $ 3     $ —       $ 275,392  
                                                                                 

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Continued)

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

 

(in thousands)   XM
Satellite
Radio Inc.
    XM
Radio Inc.
  XM
Equipment
Leasing LLC
    XMSR
Non-
Guarantor
Subsidiaries
  Eliminations   Consolidated
XM Satellite
Radio Inc.
    XM Satellite
Radio
Holdings Inc.
    Satellite
Leasing
(702-4),
LLT
  XM Holdings
Non-
Guarantor
Subsidiaries
    Eliminations   Consolidated
XM Satellite
Radio
Holdings Inc.
 

Net cash (used in) provided by operating activities

  $ (440,784)     $       —     $ (1,936)     $       —     $       —     $ (442,720 )   $ 6,217     $       —     $ 3,134     $       —     $ (433,369 )

Cash flows from investing activities:

                     

Purchase of property and equipment

    (34,457 )     —       —         —       —       (34,457 )     —         —       —         —       (34,457 )

Additions to system under construction

    —         —       —         —       —       —         (62,735 )     —       —         —       (62,735 )

Proceeds from sale of assets

    —         —       7,182       —       —       7,182       —         —       —         —       7,182  

Net maturity (purchase) of restricted investments

    —         —       —         —       —       —         —         —       2,781       —       2,781  
                                                                             

Net cash (used in) provided by investing activities

    (34,457 )     —       7,182       —       —       (27,275 )     (62,735 )     —       2,781       —       (87,229 )
                                                                             

Cash flows from financing activities:

                     

Proceeds from exercise of warrants and stock options

    —         —       —         —       —       —         4,510       —       —         —       4,510  

Capital contributions from Holdings

    238,224       —       —         —         238,224       (238,224 )     —       —         —       —    

Proceeds from issuance of 9.75% senior notes due 2014

    600,000       —       —         —       —       600,000       —         —       —         —       600,000  

Proceeds from issuance of senior floating rate notes due 2013

    200,000       —       —         —       —       200,000       —         —       —         —       200,000  

Repayment of 14% senior secured discount notes due 2009

    (186,545 )     —       —         —       —       (186,545 )     —         —       —         —       (186,545 )

Repayment of 12% senior secured notes due 2010

    (100,000 )     —       —         —       —       (100,000 )     —         —       —         —       (100,000 )

Repayment of senior secured floating rate notes due 2009

    (200,000 )     —       —         —       —       (200,000 )     —         —       —         —       (200,000 )

Payment of premiums on de-leveraging transactions

    (26,732 )     —       —         —       —       (26,732 )     (625 )     —       —         —       (27,357 )

Repurchase of Series B preferred stock

    —         —       —         —       —       —         (23,960 )     —       —         —       (23,960 )

Payments on other borrowings

    —         —       (5,232 )     —       —       (5,232 )     —         —       (316 )     —       (5,548 )

Deferred financing costs

    (20,406 )     —       —         —       —       (20,406 )     —         —       —         —       (20,406 )
                                                                             

Net cash provided by (used in) financing activities

    504,541       —       (5,232 )     —       —       499,309       (258,299 )     —       (316 )     —       240,694  
                                                                             

Net increase (decrease) in cash and cash equivalents

    29,300       —       14       —       —       29,314       (314,817 )     —       5,599       —       (279,904 )

Cash and cash equivalents at beginning of period

    57,598       —       6       —       —       57,604       638,246       —       15,141       —       710,991  
                                                                             

Cash and cash equivalents at end of period

  $ 86,898     $ —     $ 20     $ —     $ —     $ 86,918     $ 323,429     $ —     $ 20,740     $ —     $ 431,087  
                                                                             

 

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Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read together with our unaudited Condensed Consolidated Financial Statements and accompanying Notes in Item 1. to Part I of this Form 10-Q, and with our Management’s Discussion and Analysis of Financial Condition and Results of Operations and audited Consolidated Financial Statements, included in our Annual Report on Form 10-K for the year ended December 31, 2006 filed with the SEC on March 1, 2007.

Proposed Merger

On February 19, 2007, XM and Sirius Satellite Radio Inc. (“Sirius”) entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which XM and Sirius will combine our businesses through a merger of XM and a newly formed, wholly owned subsidiary of Sirius (the “Merger”).

Each of XM and Sirius has made customary representations and warranties and covenants in the Merger Agreement. The completion of the Merger is subject to various closing conditions, including obtaining the approval of XM’s and Sirius’ stockholders and receiving certain regulatory and antitrust approvals (including from the Federal Communications Commission (“FCC”) and under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended).

We filed a Notification and Report Form pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“the HSR Act”), with respect to the transactions contemplated by the Merger Agreement between XM and Sirius. On April 12, 2007, both we and Sirius received from the Department of Justice requests for additional information and documentary material relating to the merger, generally referred to as a “Second Request.” The effect of the Second Request is to extend the waiting period imposed by the HSR Act until 30 days after we and Sirius have substantially complied with the Second Request.

On March 20, 2007, we and Sirius filed a Consolidated Application for Authority to Transfer Control with the FCC with respect to the Merger Agreement. On June 8, 2007, the FCC released a Public Notice announcing that the application had been accepted for filing and establishing deadlines of July 9, 2007 for comments and July 24, 2007 for reply comments. On July 24, 2007, we and Sirius filed a reply to the comments to our merger application. On June 27, 2007, the FCC released a related Notice of Proposed Rule Making asking for comment on whether language in the FCC’s 1997 Order establishing the satellite radio service concerning the transfer of such licenses constitutes a binding rule and, if so, whether the FCC should waive, modify, or repeal the rule if the FCC determines that the proposed merger would serve the public interest. The FCC will accept comments on this issue until August 13, 2007 and reply comments until August 27, 2007.

Executive Summary

We are America’s leading satellite radio service company, providing music, news, talk, information, entertainment and sports programming for reception by vehicle, home and portable radios nationwide and over the Internet to over 8.3 million subscribers to date. Our basic monthly subscription fee is $12.95. We believe XM Radio appeals to consumers because of our innovative and diverse programming, nationwide coverage, many commercial-free music channels and digital sound quality.

Our channel lineup includes more than 170 digital channels of choice from coast to coast. We broadcast from our studios in Washington, DC, New York City, including Jazz at Lincoln Center, Chicago and the Country Music Hall of Fame in Nashville. We have added new and innovative programming to our core channel categories of music, sports, news, talk and entertainment. Also included in the XM Radio service, at no additional charge, are the XM customizable sports and stock tickers available to users of certain receivers and other online services.

Our target market includes the more than 240 million registered vehicles including the 16.5 million new cars sold each year as well as the over 110 million households in the United States. In addition, some of our recent and upcoming product offerings focus on the portable and wearable audio markets. Broad distribution of XM Radio through new automobiles and through mass market retailers is central to our business strategy. We are the leader in satellite-delivered entertainment and data services for new automobiles through partnerships with General Motors, Honda/Acura, Toyota/Lexus/Scion, Hyundai, Nissan/Infiniti, Porsche, Suzuki and Isuzu and available in more than

 

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140 different vehicle models for model year 2007. XM radios are available under the Delphi, Pioneer, Samsung, Alpine, Audiovox, Polk and other brand names at national consumer electronics retailers, such as Best Buy, Circuit City, Wal-Mart, Target and other national and regional retailers. These mass market retailers support our expanded line of car stereo, home stereo, plug and play and portable handheld products.

Operational Highlights

We summarize our business growth and operational results through the metrics of subscriber growth, revenue growth, ARPU, SAC, CPGA and Adjusted operating loss (formerly referred to as Adjusted EBITDA) as follows:

 

 

Ending subscribers increased from 6.90 million at the end of the second quarter of 2006 to over 8.25 million at the end of the second quarter of 2007.

 

 

Total revenue increased from $435.9 million in the six months ended June 30, 2006 to $541.4 million in the six months ended June 30, 2007, a 24% year over year increase.

 

 

Average monthly subscription revenue per subscriber (ARPU) increased from $10.08 in the second quarter of 2006 to $10.15 in the second quarter of 2007.

 

 

Subscriber Acquisition Costs (SAC) increased from $67 in the second quarter of 2006 to $75 in the second quarter of 2007.

 

 

Cost Per Gross Acquisition (CPGA) increased from $112 in the second quarter of 2006 to $121 in the second quarter of 2007.

 

 

Adjusted operating loss decreased from $94.7 million in the six months ended June 30, 2006 to $74.4 million in the six months ended June 30, 2007.

 

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We summarize our business growth and operational results through the metrics of subscriber data, revenue data, SAC, CPGA and Adjusted Operating Loss. Greater detail regarding these key metrics we use to monitor our business growth and our operational results are as follows:

 

     Three months ended
June 30,
    Change  
     2007     2006     Amount      %  

Subscriber Data (in thousands, except percentages) :

         

OEM and Rental Car Company Gross Subscriber Additions

     618       518       100      19 %

Aftermarket and Data Gross Subscriber Additions

     323       409       (86 )    -21 %
                           

Total Gross Subscriber Additions (1)

     942       926       16      2 %

OEM and Rental Car Company Net Subscriber Additions

     295       230       65      28 %

Aftermarket and Data Net Subscriber Additions

     43       168       (125 )    -74 %
                           

Total Net Subscriber Additions (2)

     338       398       (60 )    -15 %

Conversion Rate (3)

     52.7 %     54.5 %     (1.8 )    -3 %

Churn Rate (4)

     1.84 %     1.83 %     0.01      1 %

Aftermarket Subscribers

     4,476       4,046       430      11 %

OEM Subscribers

     3,047       2,212       835      38 %

Subscribers in OEM Promotional Periods

     649       573       76      13 %

XM Activated Vehicles with Rental Car Companies

     40       42       (2 )    -5 %

Data Services Subscribers

     40       27       13      48 %
                           

Total Ending Subscribers (5)

     8,252       6,900       1,352      20 %

Percentage of Ending Subscribers on Annual and Multi-Year Plans (6)

     43.6 %     42.3 %     1.3      3 %

Percentage of Ending Subscribers on Family Plans (6)

     23.5 %     20.7 %     2.8      14 %

Revenue Data (monthly average) :

         

Subscription Revenue per Aftermarket, OEM & Other Subscriber

   $ 10.37     $ 10.38     $ (0.01 )    0 %

Subscription Revenue per Subscriber in OEM Promotional Periods

   $ 6.18     $ 6.29     $ (0.11 )    -2 %

Subscription Revenue per XM Activated Vehicle with Rental Car Companies

   $ 7.07     $ 5.55     $ 1.52      27 %

Subscription Revenue per Subscriber of Data Services

   $ 33.96     $ 29.93     $ 4.03      13 %

Average Monthly Subscription Revenue per Subscriber (“ARPU”) (7)

   $ 10.15     $ 10.08     $ 0.07      1 %

Net Ad Sales Revenue per Subscriber (8)

   $ 0.42     $ 0.45     $ (0.03 )    -7 %

Activation, Equipment and Other Revenue per Subscriber

   $ 0.88     $ 0.83     $ 0.05      6 %
                           

Total Revenue per Subscriber

   $ 11.45     $ 11.36     $ 0.09      1 %

Expense Data:

         

Subscriber Acquisition Costs (“SAC”) (9)

   $ 75     $ 67     $ 8      12 %

Cost Per Gross Addition (“CPGA”) (10)

   $ 121     $ 112     $ 9      8 %

Adjusted operating loss (in thousands) (11)

   $ (47,406 )   $ (45,895 )     (1,511 )    3 %
(Certain totals may not add due to the effects of rounding)  

(1) Gross Subscriber Additions are paying subscribers newly activated in the reporting period. OEM subscribers include both newly activated promotional and non-promotional subscribers.
(2) Net Subscriber Additions represent the total net incremental paying subscribers added during the period (Gross Subscriber Additions less Disconnects).
(3) Conversion Rate—See definition and further discussion under OEM Promotional Subscribers on page 48.
(4) Churn Rate represents the percentage of self-paying Aftermarket, OEM & Other Subscribers who discontinued service during the period divided by the monthly weighted average ending subscribers. Churn Rate does not include OEM promotional period deactivations or deactivations resulting from the change-out of XM-enabled rental car activity.

 

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(5) Subscribers—See definition and further discussion under Subscribers on page 47.
(6) XM receives a range of $9.99—$11.87 per month for its audio service for annual and multi-year plans and $6.99 per month for a family plan.
(7) Subscription Revenue includes monthly subscription revenues for our satellite audio service and data services, net of any promotions or discounts.
(8) Net Ad Sales Revenue includes sales of advertisements and program sponsorships on the XM system, including barter recorded at fair value, net of agency commissions.
(9) SAC—See definition and further discussion under Subscriber Acquisition Costs on page 53. The previously reported amount under the prior definition for the three months ended June 30, 2006 was $64.
(10) CPGA—See definition and further discussion under Cost Per Gross Addition on page 53. The previously reported amount under the prior definition for the three months ended June 30, 2006 was $112.
(11) Adjusted operating loss—See Reconciliation of Net Loss to Adjusted operating loss on page 54.

 

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Results of Operations

 

     Three months ended
June 30,
     Change     

Six months ended

June 30,

     Change  
(in thousands, except percentages)    2007      2006      $      %      2007      2006      $      %  

Revenue:

                       

Subscription

   $ 245,778      $ 202,165      $ 43,613      22 %    $ 482,264      $ 390,267      $ 91,997      24 %

Activation

     4,766        3,942        824      21 %      9,419        7,521        1,898      25 %

Merchandise

     5,658        4,928        730      15 %      10,955        8,479        2,476      29 %

Net ad sales

     10,153        8,982        1,171      13 %      17,631        15,500        2,131      14 %

Other

     10,921        7,869        3,052      39 %      21,118        14,085        7,033      50 %
                                                           

Total revenue

     277,276        227,886        49,390      22 %      541,387        435,852        105,535      24 %
                                                           

Variable costs of revenue(1):

                       

Revenue share & royalties

     49,723        37,923        11,800      31 %      97,149        72,200        24,949      35 %

Customer care & billing operations

     30,749        26,395        4,354      16 %      58,677        48,850        9,827      20 %

Cost of merchandise

     12,694        10,254        2,440      24 %      30,970        18,247        12,723      70 %

Ad sales

     5,480        4,460        1,020      23 %      8,866        7,815        1,051      13 %
                                                           

Total variable cost of revenue

     98,646        79,032        19,614      25 %      195,662        147,112        48,550      33 %

Non-variable costs of revenue(2):

                       

Satellite & terrestrial

     13,472        11,571        1,901      16 %      27,354        24,620        2,734      11 %

Broadcast & operations:

                       

Broadcast

     6,885        5,169        1,716      33 %      13,429        11,022        2,407      22 %

Operations

     9,683        8,805        878      10 %      19,399        17,692        1,707      10 %
                                                           

Total broadcast & operations

     16,568        13,974        2,594      19 %      32,828        28,714        4,114      14 %

Programming & content

     41,827        42,253        (426 )    -1 %      85,779        79,896        5,883      7 %
                                                           

Total non-variable cost of revenue

     71,867        67,798        4,069      6 %      145,961        133,230        12,731      10 %
                                                           

Total cost of revenue

     170,513        146,830        23,683      16 %      341,623        280,342        61,281      22 %

Other operating expenses:

                       

Research & development

     8,159        8,518        (359 )    -4 %      15,469        19,499        (4,030 )    -21 %

General & administrative

     35,869        18,672        17,197      92 %      70,053        36,301        33,752      93 %

Retention & support

     10,618        7,443        3,175      43 %      20,374        15,490        4,884      32 %

Subsidies & distribution

     63,855        56,696        7,159      13 %      107,457        112,169        (4,712 )    -4 %

Advertising & marketing

     43,244        42,096        1,148      3 %      76,053        76,022        31      0 %

Amortization of GM liability

     6,504        7,440        (936 )    -13 %      13,008        16,753        (3,745 )    -22 %

Depreciation & amortization

     46,506        41,847        4,659      11 %      93,387        81,729        11,658      14 %
                                                           

Total other operating expenses

     214,755        182,712        32,043      18 %      395,801        357,963        37,838      11 %
                                                           

Total operating expenses

     385,268        329,542        55,726      17 %      737,424        638,305        99,119      16 %
                                                           

Operating loss

     (107,992 )      (101,656 )      (6,336 )    6 %      (196,037 )      (202,453 )      6,416      -3 %

Other income (expense):

                       

Interest income

     4,238        6,376        (2,138 )    -34 %      7,781        12,949        (5,168 )    -40 %

Interest expense

     (32,423 )      (29,317 )      (3,106 )    11 %      (60,032 )      (62,553 )      2,521      -4 %

Loss from de-leveraging transactions

     —          (82,345 )      82,345      -100 %      (2,965 )      (100,724 )      97,759      -97 %

Loss from impairment of investments

     (35,824 )      (18,926 )      (16,898 )    89 %      (35,824 )      (18,926 )      (16,898 )    89 %

Equity in net loss of affiliate

     (2,752 )      (4,206 )      1,454      -35 %      (8,177 )      (13,090 )      4,913      -38 %

Minority interest

     (3,266 )      —          (3,266 )    0 %      (4,962 )      —          (4,962 )    0 %

Other income (expense)

     413        (212 )      625      -295 %      856        4,422        (3,566 )    -81 %
                                                           

Net loss before income taxes

     (177,606 )      (230,286 )      52,680      -23 %      (299,360 )      (380,375 )      81,015      -21 %

Benefit from deferred income taxes

     1,859        1,177        682      58 %      1,175        2,045        (870 )    -43 %
                                                           

Net loss

   $ (175,747 )    $ (229,109 )    $ 53,362      -23 %    $ (298,185 )    $ (378,330 )    $ 80,145      -21 %
                                                           

 

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     Three months ended
June 30,
     Change     

Six months ended

June 30,

     Change
(in thousands, except percentages)    2007      2006      $      %      2007      2006      $      %

Reconciliation of Net loss to Adjusted operating loss:

                       

Net loss as reported

   $ (175,747 )    $ (229,109 )    $ 53,362      -23 %    $ (298,185 )    $ (378,330 )    $ 80,145      -21%

Add back Net loss items excluded from Adjusted operating loss:

                       

Interest income

     (4,238 )      (6,376 )      2,138      -34 %      (7,781 )      (12,949 )      5,168      -40%

Interest expense

     32,423        29,317        3,106      11 %      60,032        62,553        (2,521 )    -4%

Benefit from deferred income taxes

     (1,859 )      (1,177 )      (682 )    58 %      (1,175 )      (2,045 )      870      -43%

Loss from de-leveraging transactions

     —          82,345        (82,345 )    -100 %      2,965        100,724        (97,759 )    -97%

Loss from impairment of investments

     35,824        18,926        16,898      89 %      35,824        18,926        16,898      89%

Equity in net loss of affiliate

     2,752        4,206        (1,454 )    -35 %      8,177        13,090        (4,913 )    -38%

Minority interest

     3,266        —          3,266      0 %      4,962        —          4,962      0%

Other (income) expense

     (413 )      212        (625 )    -295 %      (856 )      (4,422 )      3,566      -81%
                                                           

Operating loss

     (107,992 )      (101,656 )      (6,336 )    6 %      (196,037 )      (202,453 )      6,416      -3%

Depreciation & amortization

     46,506        41,847        4,659      11 %      93,387        81,729        11,658      14%

Stock-based compensation

     14,080        13,914        166      1 %      28,211        25,975        2,236      9%
                                                           

Adjusted operating loss(3)

   $ (47,406 )    $ (45,895 )    $ (1,511 )    3 %    $ (74,439 )    $ (94,749 )    $ 20,310      -21%
                                                           

(1) Variable costs of revenue are costs that vary with fluctuations in revenue generating activity such as changes in the number of subscribers, the number of advertising spots sold, the quantity of merchandise sold or changes in rates.
(2) Non-variable costs of revenue are costs of revenue that generally do not vary with fluctuations in revenue generating activity such as changes in the number of subscribers, the number of advertising spots sold, the quantity of merchandise sold or changes in rates.
(3) Adjusted operating loss (formerly Adjusted EBITDA) is net loss before interest income, interest expense, income taxes, depreciation and amortization, loss from de-leveraging transactions, loss from impairment of investments, equity in net loss of affiliate, minority interest, other income (expense) and stock-based compensation. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe Adjusted operating loss is a useful measure of our operating performance and improves comparability between periods. Adjusted operating loss is a significant basis used by management to measure our success in acquiring, retaining and servicing subscribers because we believe this measure provides insight into our ability to grow revenues in a cost-effective manner. We believe Adjusted operating loss is a calculation used as a basis for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performances and value of our company and similar companies in our industry.

 

     Because we have funded the build-out of our system through the raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. We believe Adjusted operating loss provides helpful information about the operating performance of our business apart from the expenses associated with our physical plant or capital structure. We believe it is appropriate to exclude depreciation, amortization and interest expense due to the variability of the timing of capital expenditures, estimated useful lives and fluctuation in interest rates. We exclude income taxes due to our tax losses and timing differences, so that certain periods will reflect a tax benefit, while others an expense, neither of which is reflective of our operating results. Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation expense enhances the ability of management and investors to compare our core operating results with those of similar companies in our industry.

 

     Equity in net loss of affiliate represents our share of losses in a non-US affiliate in a similar business and over which we exercise significant influence, but do not control. Management believes it is appropriate to exclude this loss when evaluating the performance of our own operations. Additionally, we exclude loss from de-leveraging transactions, loss from impairment of investments, minority interest and other income (expense) because these items represent activity outside of our core business operations and can distort period to period comparisons of operating performance.

 

     There are limitations associated with the use of Adjusted operating loss in evaluating our company compared with net loss, which reflects overall financial performance. Adjusted operating loss does not reflect the impact on our financial results of (1) interest income, (2) interest expense, (3) income taxes, (4) depreciation and amortization, (5) loss from de-leveraging transactions, (6) loss from impairment of investments, (7) equity in net loss of affiliate, (8) minority interest, (9) other income (expense) and (10) stock-based compensation, which are included in the computation of net loss. Users that wish to compare and evaluate our company based on our net loss should refer to our unaudited Condensed Consolidated Statements of Operations. Adjusted operating loss does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under United States generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance. In addition, our measure of Adjusted operating loss may not be comparable to similarly titled measures of other companies.

 

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The following table sets forth select performance measures on an average subscriber basis and as a percentage of total revenue:

 

Monthly amount per
Average Subscriber(1)

Three Months Ended June 30,

       

Amounts as a Percentage of

Total Revenue

 
        Three Months Ended
June 30,
    Six Months Ended
June 30,
 
2007    2006         2007     2006     2007     2006  
$11.45    $ 11.36    Total revenue (2)    100 %   100 %   100 %   100 %
10.15      10.08   

Subscription revenue (3)

   89     89     89     90  
0.42      0.45   

Net ad sales (4)

   4     4     3     4  
7.03      7.30    Total cost of revenue    61     64     63     64  
2.05      1.89   

Revenue share & royalties

   18     17     18     17  
1.27      1.31   

Customer care & billing operations

   11     12     11     11  
0.56      0.58   

Satellite & terrestrial

   5     5     5     6  
0.68      0.70   

Broadcast & operations

   6     6     6     7  
1.72      2.10   

Programming & content

   15     19     16     18  
0.34      0.42    Research & development    3     4     3     4  
1.48      0.93    General & administrative    13     8     13     8  
5.12      5.65    Total marketing    45     50     40     51  
0.44      0.37   

Retention & support

   4     3     4     4  
2.63      2.82   

Subsidies & distribution

   23     25     20     26  
1.78      2.09   

Advertising & marketing

   16     18     14     17  
1.96      2.28    Adjusted operating loss (5)    17     20     14     22  

(1) Average subscriber is calculated as the average of the beginning and ending subscriber balances for each period presented.
(2) Monthly average total revenue per subscriber is derived from the total of earned subscription revenue (net of promotions and rebates), net ad sales revenue, activation, equipment and other revenue divided by the monthly weighted average subscriber.
(3) Average monthly subscription revenue per subscriber (“ARPU”)—See definition and further discussion under Average Monthly Subscription Revenue Per Subscriber on page 49.
(4) Net ad sales revenue per subscriber is calculated as net ad sales revenue divided by the monthly weighted average subscriber.
(5) Adjusted operating loss—See definition and further discussion under Adjusted Operating Loss on page 54.

Subscribers

Subscribers —Subscribers are those who are receiving and have agreed to pay for our service, including those who are currently in promotional periods paid in part by vehicle manufacturers, as well as XM activated radios in vehicles for which we have a contractual right to receive payment for the use of our service. We count radios individually as subscribers. Aftermarket subscribers consist primarily of subscribers who purchased their radio at retail outlets, distributors, or through XM’s direct sales efforts. OEM subscribers are self-paying subscribers whose XM radio was installed by an OEM and are not currently in OEM promotional programs. OEM promotional subscribers are subscribers who receive a fixed period of XM service where XM receives revenue from the OEM for the trial period following the initial purchase or lease of the vehicle. In situations where XM receives no revenue from the OEM during the trial period, the subscriber is not included in XM’s subscriber count. At the time of sale, some vehicle owners receive a three month prepaid trial subscription. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. The automated activation program provides activated XM radios on dealer lots for test drives but XM does not include these vehicles in their subscriber count. XM’s OEM partners generally indicate the inclusion of three months free of XM service on the window sticker of XM-enabled vehicles. XM, historically and including the 2006 model year, receives a negotiated rate for providing audio service to rental car companies. Beginning with the 2007 model year, XM has entered into marketing arrangements which govern the rate which XM receives for providing audio service on certain rental fleet vehicles. Data services subscribers are those subscribers that are receiving services that include stand-alone XM WX Satellite Weather service, stand-alone XM Radio Online service and stand-alone NavTraffic service. Stand-alone XM WX Satellite Weather service packages range in price from $29.99 to $99.99 per month. Stand-alone XM Radio Online service is $7.99 per month. Stand-alone NavTraffic service is $9.95 per month.

 

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Subscribers are the primary source of our revenues. We target the over 240 million registered vehicles and over 110 million households in the United States. As of June 30, 2007, we had over 8.25 million subscribers, which includes 7.56 million self-paying subscribers, 0.65 million subscribers in OEM promotion periods (typically ranging from three months to one year in duration) paid in part by the vehicle manufacturers and 0.04 million paying XM activated vehicles with rental car companies. The rate of growth of our aftermarket subscriber base fluctuates with our promotional activities as well as the impact of seasonality. OEM subscriber growth is driven primarily by the number of XM-enabled vehicles manufactured and with OEM promotional activity.

OEM Promotional Subscribers —OEM promotional subscribers are subscribers who receive a fixed period of XM service where XM receives revenue from the OEM for the trial period following the initial purchase or lease of the vehicle. In situations where XM receives no revenue from the OEM during the trial period, the subscriber is not included in XM’s subscriber count. At the time of sale, some vehicle owners receive a three month prepaid trial subscription. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure the success of these promotional programs included in our OEM promotional subscriber count based on the percentage of new promotional subscribers that elect to receive the XM service and convert to self-paying subscribers after the initial promotion period. We refer to this as the “conversion rate.” 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 subscribers to respond to our marketing communications and become self-paying subscribers. As of June 30, 2007, XM was available on over 140 vehicle models, with over 60 of those as standard equipment and over 100 of those offered as OEM factory-installed options. As of June 30, 2007, XM’s OEM partners represented approximately 60% of the U.S. auto market.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 . Gross subscriber additions for the three months ended June 30, 2007 were 942 thousand compared to 926 thousand for the same period in 2006. Net subscriber additions for the three months ended June 30, 2007 were 338 thousand compared to 398 thousand for the same period in 2006. The churn rate increased to 1.84% from 1.83%.

Retail Subscribers —Gross retail subscriber additions for the three months ended June 30, 2007 were 323 thousand compared to 409 thousand for the same period in 2006. Gross additions were negatively impacted by a general weakening demand for satellite radio and competitive pressures. Net retail subscriber additions for the three months ended June 30, 2007 were 43 thousand compared to 168 thousand for the same period in 2006. We attribute the decrease in net retail subscriber additions to fewer gross retail subscriber additions and churn on a larger subscriber base.

OEM Subscribers —Gross OEM subscriber additions for the three months ended June 30, 2007 were 618 thousand compared to 518 thousand for the same period in 2006. Net OEM subscriber additions for the three months ended June 30, 2007 were 295 thousand compared to 230 thousand for the same period in 2006. We attribute the increase in net OEM subscriber additions primarily to an increase in gross additions, partially offset by churn on a larger subscriber base. The conversion rate for the three months ended June 30, 2007 was 52.7% compared to 54.5% for the same period in 2006.

Rental Car Subscribers —Starting in the third quarter of 2006, we no longer include certain rental car fleets in our subscription total. This change is a result of a new marketing program that we implemented with certain rental fleet partners for 2007 model year vehicles. The goal of this program is to increase the number of rental cars equipped with XM Satellite Radio and expose more potential customers to our service.

 

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Table of Contents

Revenue and Variable Cost of Revenue

Subscription Revenue —Subscription revenue consists primarily of our monthly subscription fees for our satellite audio service and data services charged to consumers, commercial establishments and fleets, which are recognized as the service is provided. Revenues received for promotional service programs are included in Subscription revenue. Our subscriber arrangements are generally cancelable without penalty. Subscription revenue growth is predominantly driven by the growth in our subscriber base and to a lesser extent by our overall increase in ARPU.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006.  Subscription revenue increased $43.6 million or 22% during the three months ended June 30, 2007 compared to the same period in 2006. This increase was due primarily to the 20% increase in ending subscribers. During the three months ended June 30, 2007 and 2006, Subscription revenue included $11.3 million and $10.7 million, respectively, from related parties for subscription fees paid under OEM promotional agreements.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006.  Subscription revenue increased $92.0 million or 24% during the six months ended June 30, 2007 compared to the same period in 2006. This increase was due primarily to the 20% increase in ending subscribers. During the six months ended June 30, 2007 and 2006, Subscription revenue included $21.9 million and $19.7 million, respectively, from related parties for subscription fees paid under OEM promotional agreements.

Average Monthly Subscription Revenue Per Subscriber (“ARPU”) —Average monthly subscription revenue per subscriber is derived from the total of earned subscription revenue (net of promotions and rebates) divided by the monthly weighted average number of subscribers for the period reported. Average monthly subscription revenue per subscriber will fluctuate based on promotions, changes in our rates, as well as the proportion of subscribers on annual and multi-year prepayment plans, multi-radio discount plans (such as the family plan) and premium services.

 

   

Three Months Ended: June 30, 2007 vs. June 30, 2006.  ARPU increased as a result of the addition of new subscribers at higher rates as well as the effect of the transition of existing subscribers to higher rates. An increase in the basic monthly subscription price became effective for all billing cycles on or after April 2, 2005, and therefore, is being implemented over time. The impact of the April 2005 basic plan rate increase was offset partially by an increase in the percentage of subscribers on discount plans (annual, multi-year and family) as well as the revenue impact of certain marketing campaigns, which costs are treated as a reduction to revenue. The percentage of subscribers as of June 30, 2007 on ‘annual and multi-year plans’ and family plans increased to 43.6% and 23.5% from 42.3% and 20.7%, respectively, compared to June 30, 2006.

Revenue Share & Royalties —Revenue share & royalties includes performance rights obligations to composers, artists, and copyright owners for public performances of their creative works broadcast on XM, and royalties paid to radio technology providers and revenue share expenses associated with manufacturing and distribution partners and content providers. These costs are driven primarily by the growth in our subscriber revenue and net ad sales and subscriber base and to a lesser extent by other contracts with various partners. We expect these costs to continue to increase with the growth in subscription and net ad sales revenue and the growth in overall subscribers, but may fluctuate throughout the year based on new agreements, the renegotiation of existing contracts and the resolution of the pending CRB proceedings.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006.  These costs increased $11.8 million or 31%, and have increased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily driven by an increase in shared revenue with distribution partners and an increase in performance rights royalties due to an increase in subscribers, subscription revenue and net ad sales revenue.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006.  These costs increased $24.9 million or 35%, and have increased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily driven by an increase in shared revenue with distribution partners and an increase in performance rights royalties due to an increase in subscribers, subscription revenue and net ad sales revenue.

Customer Care & Billing Operations —Customer care & billing operations includes expenses from customer care functions as well as internal information technology costs associated with subscriber management applications. These costs are primarily driven by the growth of our subscriber base.

 

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Three Months Ended: June 30, 2007 vs. June 30, 2006 . These costs increased $4.4 million or 16%, but have decreased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by our subscriber growth that resulted in increased support costs and payment processing fees. In addition, personnel costs increased compared to the same period in 2006.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 . These costs increased $9.8 million or 20%, but have remained relatively flat as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by our subscriber growth that resulted in increased support costs and payment processing fees. In addition, personnel costs increased compared to the same period in 2006.

Gross profit on merchandise revenue —We calculate gross profit on merchandise revenue as Merchandise revenue less Cost of merchandise. For the three and six months ended June 30, 2007, gross profit on merchandise revenue was ($7.0) million and ($20.0) million, respectively; while for the comparative periods in 2006, gross profit on merchandise revenue was ($5.3) million and ($9.8) million, respectively . We consider gross profit on merchandise revenue a cost of acquiring subscribers through our direct sales channel and include it as a component of SAC.

Merchandise Revenue —We record Merchandise revenue from direct sales to consumers through XM’s online store, XM’s direct-to-consumer programs and XM kiosks.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006.  Merchandise revenue increased $0.7 million or 15% during the three months ended June 30, 2007 compared to the same period in 2006 which was driven primarily by an increase in the volume of radios sold.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006.  Merchandise revenue increased $2.5 million or 29% during the six months ended June 30, 2007 compared to the same period in 2006 which was driven primarily by an increase in the volume of radios sold.

Cost of Merchandise —Cost of merchandise consists primarily of the cost of radios and accessories related to XM’s direct-to-consumer sales efforts, including hardware manufacturer subsidies, and related fulfillment costs. These costs are primarily driven by the volume of radios sold, which are affected by promotional programs. We expect these costs to fluctuate throughout the year based on the volume, price and model mix of radios sold.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006.  These costs increased $2.4 million or 24%. This dollar increase was primarily the result of $2.1 million in excess and obsolete inventory charges and an increase in the volume of radios sold.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006.  These costs increased $12.7 million or 70%. This dollar increase was primarily the result of $6.9 million in excess and obsolete inventory charges and an increase in the volume of radios sold.

Gross profit on net ad sales revenue —We calculate gross profit on net ad sales revenue as Net ad sales revenue less Ad sales expense. For the three and six months ended June 30, 2007, gross profit on net ad sales revenue was $4.7 million and $8.8 million, respectively; while for the comparative periods in 2006, gross profit on net ad sales revenue was $4.5 million, and $7.7 million, respectively. Gross profit on net ad sales revenue continued to improve due to increases in the number of advertisers and advertising rates related to a larger subscriber base as well as controlling the related costs, which have not increased in proportion to the revenue. For the three and six months ended June 30, 2007, gross margin on Net ad sales revenue was 46.0% and 49.7%, respectively; while for the comparative periods in 2006, gross margin on Net ad sales revenue was 50.4% and 49.6%, respectively.

Net Ad Sales Revenue —Net ad sales revenue consists of sales of advertisements and program sponsorships on the XM network that are recognized in the period in which they are broadcast. Net ad sales revenue includes advertising aired in exchange for goods and services (barter), which is recorded at fair value. Net ad sales revenue is presented net of agency commissions.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 . Net ad sales revenue increased $1.2 million or 13% during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven by increased spending by existing advertisers as well as the addition of new advertisers and increased rates driven by a larger subscriber base.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 . Net ad sales revenue increased $2.1 million or 14% during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven by increased spending by existing advertisers as well as the addition of new advertisers and increased rates driven by a larger subscriber base.

 

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Ad Sales Expense —Ad sales expense consists of direct costs associated with the generation of Net ad sales revenue, including production, staffing and marketing.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 . These costs increased $1.0 million or 23% during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven by costs associated with supporting Net ad sales revenue growth.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 . These costs increased $1.1 million or 13% during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven by the costs associated with supporting Net ad sales revenue growth.

Other Revenue —Other revenue consists primarily of revenue related to various agreements with XM Canada, as well as other miscellaneous revenue that includes content licensing fees and billing fees.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 . Other revenue increased $3.1 million or 39% during the three months ended June 30, 2007 compared to the same period in 2006. This increase was primarily driven by an increase in content licensing fees and barter revenue.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 . Other revenue increased $7.0 million or 50% during the six months ended June 30, 2007 compared to the same period in 2006. This increase was primarily driven by an increase in content licensing fees and barter revenue.

Non-variable Cost of Revenue

Satellite & Terrestrial —Satellite & terrestrial includes costs related to: telemetry, tracking and control of our satellites, in-orbit satellite insurance and incentive payments, satellite uplink, and all costs associated with operating our terrestrial repeater network such as power, maintenance and operating lease payments. We do not expect these costs to change substantially since we have completed the deployment of our in-orbit satellite network.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $1.9 million or 16%, but have remained relatively flat as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily driven by insurance, operating and performance incentives of XM-4.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $2.7 million or 11%, but have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily driven by insurance, operating and performance incentives of XM-4.

Broadcast & Operations —Broadcast and operations include costs associated with the management and maintenance of systems and facilities as well as information technology expense. Broadcast expenses include costs associated with the management and maintenance of the systems, software, hardware, production and performance studios used in the creation and distribution of XM-original and third party content via satellite broadcast, web, wireless and other new distribution platforms. The advertising trafficking (scheduling and insertion) functions are also included. Operations expense includes facilities and information technology expense.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $2.6 million or 19%, but have remained relatively flat as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. The $1.7 million increase in Broadcast expenses was driven primarily by increased costs associated with new content initiatives and enhancements to and maintenance of the broadcast systems infrastructure. The $0.9 million increase in Operations expenses was driven primarily by an increase in the general operating costs associated with expanded facilities and accompanying infrastructure.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $4.1 million or 14%, but have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. The $2.4 million increase in Broadcast expenses was driven primarily by increased costs associated with new content initiatives and enhancements to and maintenance of the broadcast systems infrastructure. The $1.7 million increase in Operations expenses was driven primarily by an increase in the general operating costs associated with expanded facilities and accompanying infrastructure.

 

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Programming & Content —Programming & content includes the creative, production and licensing costs associated with our over 170 channels of XM-original and third party content. We view Programming & content expenses as a cost of attracting and retaining subscribers. Programming & content includes staffing costs and fixed payments for third party content, which are primarily driven by programming initiatives. These expenses have increased over time and have varied on a per subscriber basis. We expect these costs to continue to increase, but by lesser amounts, as we have substantially completed our channel lineup.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs remained relatively flat, but have decreased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $5.9 million or 7%, but have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by costs in support of new programming initiatives. In addition, personnel costs increased compared to the same period in 2006.

Other Operating Expenses

Research & Development —Research & development expense primarily includes the cost of new product development, chipset design, software development and engineering. We expect these costs to continue to fluctuate based on the nature and timing of research and development activities.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs remained relatively flat, but have decreased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs decreased $4.0 million or 21%, and have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar decrease was driven primarily by lower development costs of telematics applications and lower engineering builds during the six months ended June 30, 2007 compared to the same period in 2006.

General & Administrative —General & administrative expense primarily includes management’s salaries and benefits, professional fees, general business insurance, as well as other corporate expenses. The growth in these costs has been predominantly driven by personnel costs, professional fees and infrastructure expenses to support our growing subscriber base. We expect these costs to increase due in part to merger-related activities, various legal proceedings and regulatory inquiries (see “ Legal Proceedings ” in Item 1. to Part II of this Form 10-Q).

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $17.2 million or 92%, and have increased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by an increase in consulting fees and legal fees associated with various legal proceedings, regulatory inquiries and transactions, such as the pending merger with Sirius.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $33.8 million or 93%, and have increased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by an increase in consulting fees and legal fees associated with various legal proceedings, regulatory inquiries and transactions, such as the pending merger with Sirius.

Retention & Support —Retention & support expense primarily includes payroll and payroll related costs of our sales and marketing employees.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $3.2 million or 43%, and have increased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by an increase in personnel costs.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $4.9 million or 32%, but have remained relatively flat as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by an increase in personnel costs.

 

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Subsidies & Distribution —These direct costs include the subsidization of radios manufactured, commissions for the sale and activation of radios and certain promotional costs. These costs are primarily driven by the volume of XM-enabled vehicles manufactured, the sales and activations of radios through our retail channel as well as promotional activity associated with the sale of XM radios. We expect these costs to increase during 2007 as we add subscribers, but may fluctuate throughout the year, with changes in the volume of the manufacture, installation, sale and activation of radios, which historically has been significant during the fourth quarter.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $7.2 million or 13%, but have decreased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was driven primarily by an increase in the number of OEM radios installed and activated under our automotive contracts.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs decreased $4.7 million or 4%, and have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006. This dollar decrease was driven primarily by a reduction in the number of retail radios sold and activated, and retail promotions; offset partially by an increase in the number of OEM radios installed and activated under our automotive contracts.

Subscriber Acquisition Costs —As noted in our Form 10-K for the year ended December 31, 2006, we have revised our calculation of SAC to allow for the direct calculation of this metric using certain line items from our Results of Operations and Key Metrics tables within this Item 2. of this Form 10-Q. Subscriber acquisition costs include Subsidies & distribution and the negative gross profit on merchandise revenue. Subscriber acquisition costs are divided by gross additions to calculate what we refer to as “SAC.”

 

   

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    During the three months ended June 30, 2007 and 2006, we incurred subscriber acquisition costs of $70.9 million and $62.0 million, respectively. SAC for the three months ended June 30, 2007 and 2006 was $75 and $67, respectively, using the revised calculation. SAC included $10 for inventory-related charges as well as a $10 increase as a result of continued OEM growth from increased production by our newer automotive partners.

Advertising & Marketing —Advertising & marketing includes advertising, media and other discretionary marketing expenses. These activities drive our sales, establish our brand recognition, and facilitate our growth. We achieve success in these areas through coordinated marketing campaigns that include retail advertising through various media, cooperative advertising with our retail and OEM partners, sponsorships and ongoing market research. We expect these costs to fluctuate throughout 2007 based on the timing of our spending on consumer media advertising, which historically has been significant during the fourth quarter.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs remained relatively flat, but have decreased as a percentage of total revenue and on an average cost per subscriber basis during the three months ended June 30, 2007 compared to the same period in 2006.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs remained relatively flat, but have decreased as a percentage of total revenue during the six months ended June 30, 2007 compared to the same period in 2006.

Cost Per Gross Addition (“CPGA”) —As noted in our Form 10-K for the year ended December 31, 2006, we have revised our calculation of CPGA to allow for the direct calculation of this metric using certain line items from our Results of Operations and Key Metrics tables within this Item 2. of this Form 10-Q. CPGA costs include the amounts in SAC, as well as Advertising & marketing. These costs are divided by the gross additions for the period to calculate CPGA. CPGA costs do not include marketing staff (included in Retention & support) or the amortization of the GM guaranteed payments (included in Amortization of GM liability).

 

   

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    During the three months ended June 30, 2007 and 2006, we incurred CPGA expenses of $114.1 million and $104.1 million, respectively. CPGA for the three months ended June 30, 2007 and 2006 was $121 and $112, respectively, using the revised calculation. The increase in CPGA is primarily attributable to the increase in SAC.

Depreciation & Amortization —Depreciation and amortization expense primarily relates to our satellites, ground support systems that include our terrestrial repeater network, broadcast facilities, computer hardware and software. We expect these costs to continue to increase, but by lesser amounts, primarily as a result of the inclusion of XM-4, which was placed into service in December 2006.

 

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Three Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $4.7 million or 11% during the three months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily due to a higher depreciable asset base, reflecting a full quarter of depreciation on XM-4, which was placed into service in December 2006, higher capital spending for system development, computer hardware, software and leased equipment.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    These costs increased $11.7 million or 14% during the six months ended June 30, 2007 compared to the same period in 2006. This dollar increase was primarily due to a higher depreciable asset base, reflecting a full quarter of depreciation on XM-4, which was placed into service in December 2006, higher capital spending for system development, computer hardware, software and leased equipment.

Provision for Deferred Income Taxes— In 2004, we recorded a deferred tax liability related to indefinite lived assets that are amortized and deducted for tax purposes but are not amortized under United States generally accepted accounting principles. We will continue to incur $2.3 million in annual tax expense as the indefinite lived assets are amortized for tax purposes over the next 11 years.

 

 

Three and Six Months Ended: June 30, 2007 vs. June 30, 2006.     For the three and six months ended June 30, 2007 and 2006, we recognized a deferred tax benefit related to the cumulative translation adjustment on our investment in XM Canada, which offset the deferred tax expense for 2006 related to our indefinite lived assets. The net tax benefit for the three and six months ended June 30, 2007 was $1.9 million and $1.2 million, respectively.

Non-operating Income and Expenses

Non-operating Income and Expense —Non-operating income and expense consists primarily of net costs associated with financing and cash management activities, Loss from impairment of investments, Equity in net loss of affiliate and Minority interest. Net costs associated with financing and cash management activities include Interest income, Interest expense and Loss from de-leveraging transactions.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .

 

   

Loss from de-leveraging transactions decreased $82.3 million due to the absence of refinancing transactions during the three months ended June 30, 2007.

 

   

Loss from impairment of investments increased $16.9 million as a result of the impairment recorded on our investment in XM Canada during the three months ended June 30, 2007 and the impairment recorded on our investment in WorldSpace during the comparable period in 2006.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .

 

   

Loss from de-leveraging transactions decreased $97.8 million due to the absence of major refinancing transactions during the six months ended June 30, 2007.

 

   

Loss from impairment of investments increased $16.9 million as a result of the impairment recorded on our investment in XM Canada during the three months ended June 30, 2007 and the impairment recorded on our investment in WorldSpace during the comparable period in 2006.

Adjusted Operating Loss

Adjusted Operating Loss —Adjusted operating loss (formerly Adjusted EBITDA) is net loss before interest income, interest expense, income taxes, depreciation and amortization, loss from de-leveraging transactions, loss from impairment of investments, equity in net loss of affiliate, minority interest, other income (expense) and stock-based compensation. This non-GAAP measure should be used in addition to, but not as a substitute for, the analysis provided in the statement of operations. We believe Adjusted operating loss is a useful measure of our operating performance and improves comparability between periods. Adjusted operating loss is a significant basis used by management to measure our success in acquiring, retaining and servicing subscribers because we believe this measure provides insight into our ability to grow revenues in a cost-effective manner. We believe Adjusted operating loss is a calculation used as a basis for investors, analysts and credit rating agencies to evaluate and compare the periodic and future operating performances and value of our company and similar companies in our industry.

 

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Because we have funded the build-out of our system through the raising and expenditure of large amounts of capital, our results of operations reflect significant charges for depreciation, amortization and interest expense. We believe Adjusted operating loss provides helpful information about the operating performance of our business apart from the expenses associated with our physical plant or capital structure. We believe it is appropriate to exclude depreciation, amortization and interest expense due to the variability of the timing of capital expenditures, estimated useful lives and fluctuation in interest rates. We exclude income taxes due to our tax losses and timing differences, so that certain periods will reflect a tax benefit, while others an expense, neither of which is reflective of our operating results. Because of the variety of equity awards used by companies, the varying methodologies for determining stock-based compensation expense and the subjective assumptions involved in those determinations, we believe excluding stock-based compensation expense enhances the ability of management and investors to compare our core operating results with those of similar companies in our industry.

Equity in net loss of affiliate represents our share of losses in a non-US affiliate in a similar business and over which we exercise significant influence, but do not control. Management believes it is appropriate to exclude this loss when evaluating the performance of our own operations. Additionally, we exclude loss from de-leveraging transactions, loss from impairment of investments, minority interest and other income (expense) because these items represent activity outside of our core business operations and can distort period to period comparisons of operating performance.

There are limitations associated with the use of Adjusted operating loss in evaluating our company compared with net loss, which reflects overall financial performance. Adjusted operating loss does not reflect the impact on our financial results of (1) interest income, (2) interest expense, (3) income taxes, (4) depreciation and amortization, (5) loss from de-leveraging transactions, (6) loss from impairment of investments, (7) equity in net loss of affiliate, (8) minority interest, (9) other income (expense) and (10) stock-based compensation, which are included in the computation of net loss. Users that wish to compare and evaluate our company based on our net loss should refer to our unaudited Condensed Consolidated Statements of Operations. Adjusted operating loss does not purport to represent operating loss or cash flow from operating activities, as those terms are defined under United States generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance. In addition, our measure of Adjusted operating loss may not be comparable to similarly titled measures of other companies. Adjusted operating loss is continuing to decrease as a percentage of total revenue and on an average cost per subscriber basis.

 

 

Three Months Ended: June 30, 2007 vs. June 30, 2006 .    Adjusted operating loss increased by $1.5 million or 3%, but has decreased as a percentage of total revenue to 17% from 20% during the three months ended June 30, 2007 compared to the same period in 2006. The decrease as a percentage of total revenue reflects our ability to leverage greater revenue across our fixed cost base. The increase in Adjusted operating loss is primarily related to the $23.7 million increase in Cost of revenue, $17.2 million increase in General & administrative, $7.2 million increase in Subsidies & distribution and $3.2 million increase in Retention & support (less $0.4 million related to Stock-based compensation). The overall increase was offset partially by a $43.6 million increase in Subscription revenue, $0.8 million increase in Activation revenue, $3.1 million increase in Other revenue, $1.2 million increase in Net ad sales revenue and $0.9 million decrease in Amortization of GM liability.

 

 

Six Months Ended: June 30, 2007 vs. June 30, 2006 .    Adjusted operating loss decreased by $20.3 million or 21%, and has decreased as a percentage of total revenue to 14% from 22% during the six months ended June 30, 2007 compared to the same period in 2006. The decrease as a percentage of total revenue reflects our ability to leverage greater revenue across our fixed cost base. The decrease in Adjusted operating loss is primarily related to the $92.0 million increase in Subscription revenue, $7.0 million increase in Other revenue, $2.5 million increase in Merchandise revenue, $3.7 million decrease in Amortization of GM liability, $4.7 million decrease in Subsidies & distribution and $4.0 million decrease in Research & development (less $0.2 million related to Stock-based compensation). The overall decrease was offset partially by a $61.3 million increase in Cost of revenue (less $0.6 million related to Stock-based compensation) and $33.8 million increase in General & administrative (less $0.8 million related to Stock-based compensation).

 

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Liquidity and Capital Resources

Overview

The growth in demand for our products and services has required and will continue to require us to invest significant amounts in our business. Since inception through June 30, 2007, we have raised proceeds of $4.5 billion, net of offering costs, through equity and debt offerings. Our ability to become profitable depends upon many factors, some of which are identified below under the caption entitled “ Future Operating Liquidity and Capital Resource Requirements. ” Our principal sources of liquidity are our existing cash and cash equivalents and cash receipts for pre-paid subscriptions. We also have access to significant liquidity through our bank revolving credit facility and our GM credit facility, as amended in April 2006. We also have significant outstanding contracts and commercial commitments that need to be paid in cash or through credit facilities over the next several years. These contractual commitments are comprised of subsidies and distribution costs, rights and royalty fees, revenue share arrangements, programming costs, repayment of long-term debt, satellite related costs, lease payments and service payments. Our ability to become profitable also depends upon other factors identified below under the caption entitled “ Future Operating Liquidity and Capital Resource Requirements.

The following table presents a summary of our cash flows, beginning and ending cash balances for six months ended June 30, 2007 and 2006 (in thousands, except percentages):

 

    

Six months ended

June 30,

    Change  
     2007     2006     $     %  

Cash flows used in operating activities

   $ (70,170 )   $ (433,369 )   $ 363,199     -84 %

Cash flows used in investing activities

     (110,506 )     (87,229 )     (23,277 )   27 %

Cash flows provided by financing activities

     237,852       240,694       (2,842 )   -1 %
                          

Net increase (decrease) in cash and cash equivalents

     57,176       (279,904 )     337,080     -120 %

Cash and cash equivalents at beginning of period

     218,216       710,991       (492,775 )   -69 %
                          

Cash and cash equivalents at end of period

   $ 275,392     $ 431,087     $ (155,695 )   -36 %
                          

Operating Activities —Operating activities primarily consist of net loss adjusted for certain non-cash items including depreciation, amortization, net non-cash loss on conversion of notes, non-cash loss on equity-based investments, stock-based compensation and the effect of changes in working capital.

 

 

For the six months ended June 30, 2007, net cash used in operating activities was $70.2 million, consisting of a net loss of $298.2 million adjusted for net non-cash expenses of $179.9 million and $48.2 million provided by working capital as well as other operating activities. Included in cash provided by working capital is a $52.0 million increase in Subscriber deferred revenue, as a result of subscribers signing up for discounted annual and multi-year pre-payment plans and a $10.9 million decrease in Accounts receivable; offset partially by a $31.1 million increase in Prepaid programming content due primarily to the $60 million prepayment of our obligation to Major League Baseball ® for the 2007 season.

 

 

For the six months ended June 30, 2006, cash used in operating activities was $433.4 million, consisting of a net loss of $378.3 million adjusted for net non-cash expenses of $264.5 million, $4.5 million gain on sale of fixed assets and $315.0 million used in working capital as well as other operating activities. Included in cash used in working capital is a $125.6 million decrease in Accounts payable, accrued expenses and other liabilities due primarily to the effort to reduce our previous year’s balance to more normative levels and a $236.2 million increase in Prepaid and other assets due primarily to the prepayment of our liability to GM; partially offset by a $38.6 million increase in Subscriber deferred revenue, as a result of subscribers signing up for discounted annual and multi-year pre-payment plans and a $14.5 million increase in Accrued interest due to having fully accreted interest on outstanding principal balances and the issuance of new debt.

 

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Investing Activities —Investing activities primarily consist of capital expenditures and proceeds from the sale of equipment.

 

 

For the six months ended June 30, 2007, net cash used in investing activities was $110.5 million, consisting of $112.4 million in capital expenditures for the construction of XM-5, computer systems infrastructure and building improvements, offset partially by $1.9 million in proceeds received from the maturity of restricted investments.

 

 

For the six months ended June 30, 2006, cash used in investing activities was $87.2 million, primarily consisting of $97.2 million in capital expenditures for the construction of XM-4, computer systems infrastructure and building improvements, offset by $7.2 million in proceeds received from the sale of terrestrial repeaters to XM Canada and $2.8 million in proceeds received from the maturity of restricted investments.

Financing Activities —Financing activities primarily consist of proceeds from debt and equity financings, issuance of common stock pursuant to stock option exercises, and repayments of debt.

 

 

For the six months ended June 30, 2007, net cash provided by financing activities was $237.9 million; consisting of $288.5 million of proceeds received in conjunction with the sale-leaseback of the transponders on the XM-4 satellite and $3.0 million in proceeds from the exercise of warrants and stock options; offset partially by the repayment of $38.9 million related to our corporate headquarters mortgages and $3.0 million in premiums associated with the above-mentioned retired mortgages, as well as $7.6 million in capital lease payments and $4.2 million in deferred financing costs.

 

 

For the six months ended June 30, 2006, cash provided by financing activities was $240.7 million; primarily consisting of $600.0 million provided by the issuance of 9.75% Senior Notes due 2014, $200.0 million provided by the issuance of Senior Floating Rate Notes due 2013 and $4.5 million in proceeds from the exercise of warrants and stock options; offset primarily by the repayment of $186.5 million of 14% Senior Secured Discount Notes due 2009, $100.0 million of 12% Senior Secured Notes due 2010 and $200.0 million of Senior Secured Floating Rate Notes due 2009, as well as $27.4 million in premiums associated with the above-mentioned retired debt. In addition to the debt repayment, all shares of Series B preferred stock were redeemed for $24.0 million and $20.4 million of deferred financing costs were paid in conjunction with the new debt issuances.

Future Operating Liquidity and Capital Resource Requirements

Our projected funding requirements are based on our current business plan, which in turn is based on our operating experience to date and our available resources. We are pursuing a business plan designed to increase subscribers and revenues while maintaining reasonable subscriber acquisition costs in the long-term. Our plan contemplates our focusing on the new automobile market where we have relationships with automobile manufacturers, the continuing introduction of innovative yet affordable technology in the retail aftermarket and the use of our more productive distribution channels.

Provided that we meet the revenue, expense and cash flow projections of our business plan, we expect to be fully funded and will not need to add additional liquidity to continue operations. Our business plan is based on estimates regarding expected future costs and expected future revenue. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds, which would require us to seek additional financing to continue implementing our current business plan. In addition, we may seek additional financing, such as the sale of additional equity and debt securities, to undertake initiatives not contemplated by our current business plan or for other business reasons.

In the event of unfavorable future developments we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors; including future market conditions, our success or lack of success in developing, implementing and marketing our satellite audio service and data services, our future creditworthiness and restrictions contained in agreements with our investors or lenders. If we fail to obtain necessary financing on a timely basis, a number of adverse effects could occur, or we may have to revise our business plan.

Our merger agreement with Sirius Satellite Radio restricts our ability to incur additional debt financing beyond existing credit facilities (or equivalent funding) and limits the amount of new equity we can issue, in each case without approval from Sirius. Sirius is under similar restrictions not to incur new debt or issue additional equity beyond agreed limits without our approval.

 

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On February 13, 2007, we entered into a sale-leaseback transaction with respect to the transponders on the XM-4 satellite, which was launched in October 2006 and placed into service during December 2006. We received net proceeds of $288.5 million from the transaction, of which $44 million (inclusive of interest) was used to retire outstanding mortgages on real property and the remainder of which provides additional liquidity available for working capital and general corporate purposes. For a further discussion, see Note 6, to the Notes to the unaudited Condensed Consolidated Financial Statements in Item 1. to Part I of this Form 10-Q under the heading “Capital Lease—XM-4 Satellite.”

Commitments and Contingencies —We are obligated to make significant payments under a variety of contracts and other commercial arrangements, including the following:

 

 

XM-4 Satellite Lease obligation— In February 2007, we entered into a sale-leaseback transaction of the transponders on the XM-4 satellite. Under the terms of the lease, we are obligated to make payments that total $437.4 million over the nine year base lease term. For a further discussion, see Note 6, to the Notes to the unaudited Condensed Consolidated Financial Statements in Item 1. to Part I of this Form 10-Q under the heading, “Capital Lease – XM-4 Satellite” .

 

 

Programming and Marketing Agreements— We have entered into certain programming and marketing agreements that broaden our content offering and increase brand awareness. Under the terms of these agreements, we are obligated to make payments that total $67.5 million in the remaining six months of 2007, $101.2 million in 2008, $74.1 million in 2009, $43.0 million in 2010, $39.1 million in 2011 and $73.2 million in 2012 and beyond. These payments include fixed payments, advertising commitments and revenue sharing arrangements.

 

 

Major League Baseball ® —We have a multi-year agreement with Major League Baseball ® (“MLB”) to broadcast MLB games live nationwide. In the first quarter of 2007, we made a payment in the amount of $60 million for the 2007 season and will pay $60 million per year thereafter through 2012. MLB has the option to extend the agreement for the 2013, 2014 and 2015 seasons at the same $60 million annual compensation rate. We will also make incentive payments to MLB for XM subscribers obtained through MLB and baseball club verifiable promotional programs. No stock or warrants were included in this agreement. The agreement requires us to deposit $120 million into escrow or furnish other credit support in such amount. In July 2006, we furnished a $120 million surety bond to MLB as part of an amendment to the agreement with MLB that permitted us to provide various types of credit support in lieu of its $120 million escrow deposit requirement.

 

 

Satellite Contracts —We successfully launched our fourth satellite (“XM-4”) into geosynchronous transfer orbit on October 30, 2006 and handover of the satellite occurred in December 2006. In February 2007, we entered into a sale leaseback transaction for the transponders on XM-4. Under our existing satellite construction and launch contracts, remaining costs for the construction and launch of our fifth satellite (“XM-5”) are expected to be $5 million in 2007, $33 million in 2008 and $25 million in 2009. These costs exclude launch insurance and in-orbit performance incentives. Our contractual agreements for our satellites are more fully described in Note 11 of the Notes to the unaudited Condensed Consolidated Financial Statements in Item 1. to Part I of this Form 10-Q under the heading “ Satellite System .”

 

 

General Motors Distribution Agreement —We have a long-term distribution agreement with General Motors (“GM”). The agreement had been assigned by GM to its subsidiary OnStar, but was assigned back to GM in June 2006. During the term of the agreement, which expires twelve years from the commencement date of our commercial operations in 2001, GM has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The agreement was amended in June 2002 and January 2003 to clarify certain terms in the agreement, including extending the dates when certain initial payments were due to GM and confirming the date of our commencement of commercial operations, and to provide that we could make certain payments to GM in shares of our Class A common stock. Our total cash payment obligations were not increased. Under the distribution agreement, we are required to make a subscriber acquisition payment to GM for each person who becomes and remains an XM subscriber through the purchase of a GM vehicle.

In April 2006, we amended the distribution agreement pursuant to which we made a prepayment in May 2006 in the amount of $237 million to GM to retire at a discount $320 million of the remaining fixed payment obligations that would have come due in 2007, 2008, and 2009. The April 2006 amendments eliminated our ability to make up to $35 million of subscriber acquisition payments in shares of our Class A common stock. In addition, our credit facility with GM was increased from $100 million to $150 million. The facility will terminate, and all draws will become due, upon the earlier of December 31, 2009 and six months after we achieve investment grade status. The amendments also provide that the security arrangements on the GM facility will be unsecured until the first draw under the bank credit facility and then secured on a second priority basis behind the secured indebtedness permitted to be

 

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incurred under the bank credit facility. As of June 30, 2007, we have $26.0 million of current prepaid expense to related party and $136.6 million of non-current prepaid expense to related party in connection with the guaranteed fixed payments, as the result of a prepayment of $237 million to GM in May 2006.

In order to encourage the broad installation of XM radios in GM vehicles, we have agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to our service. We must also share with GM a percentage of the subscription revenue attributable to GM vehicles with installed XM radios, which percentage increases until there are more than eight million GM vehicles with installed XM radios (at which point the percentage remains constant). Accordingly, the revenue share expense is recognized as the related subscription revenue is earned. As of June 30, 2007, we have $49.1 million of current prepaid expense to related party and $13.1 million of non-current prepaid expense to related party in connection with this revenue sharing arrangement. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we must reimburse GM. The agreement is subject to renegotiation at any time based upon the installation of radios that are compatible with a common receiver platform or capable of receiving Sirius Satellite Radio’s service. The agreement was subject to renegotiation in November 2005, and will be subject to renegotiation at two-year intervals thereafter, if GM did or does not achieve and maintain specified installation levels of GM vehicles capable of receiving our service. The specified installation level of 1,240,000 units by November 2005 was achieved in 2004. The specified installation levels in future years are the lesser of 600,000 units per year or amounts proportionate to target market shares in the satellite digital radio service market. There can be no assurances as to the outcome of any such renegotiations. GM’s exclusivity obligations will discontinue if, by November 2007 and at two-year intervals thereafter, we fail to achieve and maintain specified minimum market share levels in the satellite digital radio service market. We were significantly exceeding the minimum levels at June 30, 2007. For the three and six months ended June 30, 2007, we incurred total costs of $70.5 million and $131.8 million, respectively, under the distribution agreement; while for the comparable periods in 2006, we incurred costs of $56.7 million and $113.6 million, respectively.

 

 

Long-term debt— For a further discussion of long-term debt, see Note 6 of the Notes to the unaudited Condensed Consolidated Statements in Item 1. to Part I of this Form 10-Q. Based on the various terms of our long-term debt, our ability to redeem any long-term debt is limited. We have and may continue to take advantage of opportunities to reduce our level of indebtedness in exchange for issuing equity securities, if these transactions can be completed on favorable terms.

Related Party Transactions

For a discussion of related party transactions, see Note 9 of the Notes to the unaudited Condensed Consolidated Financial Statements in Item 1. of this Form 10-Q.

Recent Accounting Pronouncements

For a discussion of recently issued accounting pronouncements, see Note 2 of the Notes to the unaudited Condensed Consolidated Financial Statements in Item 1. of this Form 10-Q.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Fair Value of Financial Instruments —The carrying value of the following financial instruments approximates fair value because of their short maturities: cash and cash equivalents, accounts receivable, due from related parties, accounts payable, accrued expenses, accrued satellite liability, due to related parties and restricted investments.

The estimated fair value of our long-term debt is determined by discounting the future cash flows of each instrument at rates currently offered to the Company for similar debt instruments of comparable maturities by the Company’s bankers or quoted market prices at the reporting date for the traded debt securities. As of June 30, 2007, the carrying value of our long-term debt was $1,490 million, compared to an estimated fair value of $1,507 million. The estimated fair value of our long-term debt is not necessarily indicative of the amount which could be realized in a current market exchange.

Interest Rate Risk —As of June 30, 2007, we had $1,490 million of total debt, of which $1,290 million was fixed-rate debt and $200 million was variable-rate debt. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to

 

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interest rate fluctuations. An increase of 100 basis points in the interest rate applicable to the $200 million of variable-rate debt as of June 30, 2007 would result in an increase of $2 million in our annual interest expense. We believe that our exposure to interest rate risk is not material to our results of operations.

 

ITEM 4. CONTROLS AND PROCEDURES

Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that these disclosure controls and procedures are effective. During the three months ended June 30, 2007, no changes were made in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

We are currently subject to claims, potential claims, inquiries or investigations, or party to legal proceedings, in various matters described below. In addition, in the ordinary course of business we become aware from time to time of claims, potential claims, inquiries or investigations, or may become party to legal proceedings arising out of various matters, such as contract matters, employment related matters, issues relating to our repeater network, product liability issues, copyright, patent, trademark or other intellectual property matters and other federal regulatory matters.

Litigation and Arbitration

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. —Plaintiffs filed this action in the United States District Court for the Southern District of New York on May 16, 2006. The complaint seeks monetary damages and equitable relief, alleging that recently introduced XM radios that also have MP3 functionality infringe upon plaintiffs’ copyrighted sound recordings. Our motion to dismiss this matter was denied in January 2007. We believe these allegations are without merit and that these products comply with applicable copyright law, including the Audio Home Recording Act, and we intend to vigorously defend the matter. Music publishing companies and certain other record companies also have filed lawsuits, purportedly on a class basis, with similar allegations. There can be no assurance regarding the ultimate outcome of these matters, or the significance, if any, to our business, consolidated results of operations or financial position.

Matthew Enderlin v. XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. —Plaintiff filed this action in the United States District Court for the Eastern District of Arkansas on January 10, 2006 on behalf of a purported nationwide class of all XM subscribers. The complaint alleges that we engaged in a deceptive trade practice under Arkansas and other state laws by representing that our music channels are commercial-free. We have filed an answer to the complaint and instituted arbitration with the American Arbitration Association pursuant to the compulsory arbitration clause in our customer service agreement. The arbitration has been stayed pending judicial determination of Enderlin’s objections to the arbitration. The United States Court of Appeals for the Eighth Circuit held on April 17, 2007 that those objections are to be decided by the trial court, not the arbitrator. We believe the suit is without merit and intend to vigorously defend the matter. There can be no assurance regarding the ultimate outcome of this matter, or the significance, if any, to our business, consolidated results of operations or financial position.

Copyright Royalty Board Arbitration —We are participating in a Copyright Royalty Board (CRB) proceeding in order to set the royalty rate payable by XM under the statutory license covering our performance of sound recordings over the XM system for the six year period starting in January 2007. XM and Sirius have recently filed their direct cases with the CRB proposing a rate of 0.88% of each of their adjusted gross revenues for this statutory license. SoundExchange, a collective operated on behalf of owners of copyrighted recordings, such as the major record labels, has filed a direct case proposing a rate increasing from 10% of adjusted gross revenues for the first year of the license increasing each year to over 23% during the final year of the license term; their requested guaranteed minimums could result in a rate in excess of the foregoing percentages. We are also participating in a concurrent proceeding to set the royalty rate payable by XM under the statutory license covering our performance of sound recordings over XM channels transmitted over the DIRECTV satellite television system. Hearings in these matters are taking place in 2007, and we anticipate that the CRB will render its decision by the end of 2007. There can be no assurance regarding the ultimate outcome of these matters, or their significance to our business, consolidated results of operations or financial position.

Regulatory Matters and Inquiries

Federal Communication Commission (“FCC”)

FCC Receiver Matter —As we have previously disclosed, we have received inquiries from, and responded to, the FCC regarding FM modulator wireless transmitters in various XM radios not in compliance with permissible emission limits. No health or safety issues have been involved with these wireless XM radios. We have implemented a series of design and installation modifications and we have obtained new certifications for numerous models of modified XM radios using our new SureConnect technology. In addition, we have

 

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implemented a regulatory compliance plan, including the appointment of an FCC regulatory compliance officer, to monitor FCC regulatory compliance, specifically with reference to the design, verification/certification, and production of XM radio receivers. We have been submitting documents to the FCC and are in discussions with the FCC to resolve this matter. We cannot predict at this time the extent of any further actions that we will need to undertake or any financial obligations we may incur. There can be no assurance regarding the ultimate outcome of this matter, or its significance to our business, consolidated results of operations or financial position.

FCC Repeater Network Matter —In October 2006, we filed for both a 30-day Special Temporary Authority (“STA”) and a 180-day STA with respect to our terrestrial repeater network, seeking authority to continue to operate our entire repeater network despite the fact that the technical characteristics of certain repeaters, as built, differ from the technical characteristics in the original STAs granted for our repeater network. These differences include some repeaters not being built in the exact locations, or with the same antenna heights, power levels, or antenna characteristics than set forth in the earlier STAs. Prior to making these recent filings, we reduced the power or discontinued operation of certain repeaters. As a result, we believe that service quality in portions of the affected metro areas has been somewhat reduced, including in terms of more frequent interruptions and/or occasional outages to the service. There has been no impact on the satellite signal. We continue to hold meetings with the staff of the FCC regarding these matters. In February 2007, we received a letter of inquiry from the FCC relating to these matters, to which we have responded. This proceeding may result in the imposition of financial penalties against us or adverse changes to our repeater network resulting from having repeaters turned off or otherwise modified in a manner that would reduce service quality in the affected areas. There can be no assurance regarding the ultimate outcome of this matter, or its significance to our business, consolidated results of operations or financial position.

These recent STA requests are distinct from (and if granted would modify) the STAs originally granted by the FCC relating to our commencing and continuing operation of the repeater network. As we have been disclosing for many years, the FCC has not yet issued final rules permitting us (or Sirius) to deploy terrestrial repeaters, and we have been deploying and operating our repeater network based on those early STAs and requests we have filed previously to extend the time periods of those STAs, which have expired. We (and Sirius) and others have been requesting that the FCC establish final rules for repeater deployment.

Federal Trade Commission (“FTC”)

FTC Inquiry —On April 25, 2006, we received a letter from the FTC stating that they are conducting an inquiry into whether our activities are in compliance with various acts, including the FTC Act, the Telemarketing Sales Rule, the Truth in Lending Act and the CAN-SPAM Act. This letter requests information about a variety of our marketing activities, including free trial periods, rebates, telemarketing activities, billing and customer complaints.

We have been submitting documents to the agency in response to the letter and are cooperating fully with this inquiry. There can be no assurance regarding the ultimate outcome of this matter, or the significance, if any, to our business, consolidated results of operations or financial position.

Securities and Exchange Commission (“SEC”)

SEC Inquiry —As previously disclosed, the Staff of the SEC has requested that we voluntarily provide documents to the Staff, including information relating to our subscriber targets, costs associated with attempting to reach those targets during the third and fourth quarters of 2005, the departure of Mr. Roberts from our board of directors, our historic practices regarding stock options and certain other matters. In this connection we retained outside counsel, who engaged an independent accounting advisor, to conduct a review of our stock option practices. The inquiry did not reveal the existence of material errors in any prior financial statements.

We have been submitting documents to the SEC in response to their requests and are cooperating fully with this inquiry. There can be no assurance regarding the ultimate outcome of these SEC matters, or the significance, if any, to our business, consolidated results of operations or financial position.

 

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Purchases of Equity Securities

The following purchases of the Company’s Class A common stock were completed during the three months ended June 30, 2007.

 

     Total Number of
Shares Purchased
(1)
   Average Price
Paid per Share
   Total Number of
Shares Purchased
as Part of Publicly
Announced Plans or
Programs
  

Maximum Number
(or Approximate Dollar Value)
of Shares that May Yet Be
Purchased Under the

Plans or Programs

April 1, 2007—April 30, 2007

   —      $ —      —      —  

May 1, 2007—May 31, 2007

   167,523    $ 11.30    —      —  

June 1, 2007—June 30, 2007

   —      $ —      —      —  

(1) Represents the number of shares acquired as payment by employees of applicable statutory minimum withholding taxes owed upon vesting of restricted stock granted under the Company’s 1998 Shares Award Plan.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The following matters were submitted to a vote of security holders at XM’s Annual Meeting of Stockholders held on May 25, 2007.

 

Proposal 1

   Votes
For
   Votes
Withheld
    

Election of Eleven Directors to Board of Directors

        

Gary M. Parsons

   282,640,475    4,591,151   

Hugh Panero

   282,414,662    4,816,964   

Nathaniel A. Davis

   282,573,231    4,658,395   

Joan L. Amble

   284,647,072    2,584,554   

Thomas J. Donohue

   278,842,950    8,388,676   

Eddy W. Hartenstein

   283,481,788    3,749,838   

Chester A. Huber, Jr.

   278,023,803    9,207,823   

John Mendel

   278,133,931    9,097,695   

Jarl Mohn

   278,983,315    8,248,311   

Jack Shaw

   278,869,998    8,361,628   

Jeffrey D. Zients

   284,527,480    2,704,146   

Proposal 2

   Votes
For
   Votes
Against
   Votes
Abstained

Adoption of the XM Satellite Radio Holdings Inc.
2007 Stock Incentive Plan

   185,195,702    19,409,651    1,196,192

Proposal 3

   Votes
For
   Votes
Against
   Votes
Abstained

Appointment of KPMG LLP as Independent Auditors

   284,871,977    1,263,152    1,096,497

 

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ITEM 6. EXHIBITS

 

Exhibit
No.
  

Description

10.1    Amendment No. 1 to Employment Agreement, dated as of April 4, 2007, between Gary Parsons and XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. (incorporated by reference to XM’s Current Report on Form 8-K filed April 10, 2007).
10.2    Amendment No. 1 to Employment Agreement, dated as of April 4, 2007, between Hugh Panero and XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. (incorporated by reference to XM’s Current Report on Form 8-K filed April 10, 2007).
10.3    Amendment No. 1 to Employment Agreement, dated as of April 4, 2007, between Nathaniel Davis and XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. (incorporated by reference to XM’s Current Report on Form 8-K filed April 10, 2007).
10.4    Form of Severance Agreement for executive officers other than Chairman, CEO and President and COO (incorporated by reference to XM’s Current Report on Form 8-K filed April 10, 2007).
10.5    XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan.
10.6    Form of Non-qualified Stock Option Agreement (incorporated by reference to XM’s Current Report on Form 8-K filed June 1, 2007).
10.7    Form of Restricted Stock Agreement (incorporated by reference to XM’s Current Report on Form 8-K filed June 1, 2007).
31.1    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
31.2    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
31.3    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
31.4    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.1    Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).
32.2    Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

   

XM S ATELLITE R ADIO H OLDINGS I NC .

   

(Registrant)

Date: July 30, 2007     /s/    H UGH P ANERO        
    Hugh Panero
    Chief Executive Officer
    (principal executive officer)
Date: July 30, 2007     /s/    J OSEPH J. E UTENEUER        
    Joseph J. Euteneuer
    Executive Vice President and Chief Financial Officer
    (principal financial and accounting officer)
   

XM S ATELLITE R ADIO I NC .

   

(Registrant)

Date: July 30, 2007     /s/    H UGH P ANERO        
    Hugh Panero
    Chief Executive Officer
    (principal executive officer)
Date: July 30, 2007     /s/    J OSEPH J. E UTENEUER        
    Joseph J. Euteneuer
    Executive Vice President and Chief Financial Officer
    (principal financial and accounting officer)

Exhibit 10.5

 


XM SATELLITE RADIO HOLDINGS INC.

2007 STOCK INCENTIVE PLAN

 



XM SATELLITE RADIO HOLDINGS INC.

2007 STOCK INCENTIVE PLAN

XM Satellite Radio Holdings Inc., a Delaware corporation (the “Company”), sets forth herein the terms of its 2007 Stock Incentive Plan (the “Plan”), as follows:

 

1. PURPOSE

The Plan is intended to enhance the Company’s and its Affiliates’ (as defined herein) ability to attract and retain highly qualified officers, outside directors, key employees, and other persons, and to motivate such persons to serve the Company and its Affiliates and to expend maximum effort to improve the business results and earnings of the Company, by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Company. To this end, the Plan provides for the grant of stock options, stock appreciation rights, restricted stock, stock units, dividend equivalent rights, cash awards and any other stock-based award under the Plan. Any of these awards may, but need not, be made as performance incentives to reward attainment of annual or long-term performance goals in accordance with the terms hereof. Stock options granted under the Plan may be non-qualified stock options or incentive stock options, as provided herein.

 

2. DEFINITIONS

For purposes of interpreting the Plan and related documents (including Award Agreements), the following definitions shall apply:

2.1     “Affiliate” means, with respect to the Company, any company or other trade or business that controls, is controlled by or is under common control with the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any Subsidiary. For purposes of granting stock options or stock appreciation rights, an entity may not be considered an Affiliate if it results in noncompliance with Code Section 409A.

2.2     “Annual Incentive Award” means an Award made subject to attainment of performance goals (as described in Section 14 ) over a performance period of up to one year (the Company’s fiscal year, unless otherwise specified by the Committee).

2.3     “Award” means a grant of an Option, Stock Appreciation Right, Restricted Stock, Stock Unit, Dividend Equivalent Rights, cash award, or any Other Stock-Based Award under the Plan.

2.4     “Award Agreement” means the written agreement between the Company and a Grantee that evidences and sets out the terms and conditions of an Award. The Committee may provide for the use of electronic, Internet, or other nonpaper Award Agreements, and the use of electronic, Internet, or other nonpaper means for the acceptance thereof and actions thereunder by a Grantee.

2.5     “Benefit Arrangement” shall have the meaning set forth in Section 15 hereof.

2.6     “Board” means the Board of Directors of the Company.

2.7     “Cause” means, with respect to any Grantee, the meaning of such term as set forth in the employment agreement between the Company (or any Affiliate) and the Grantee or, in the event there is no such employment agreement (or if any such employment agreement does not contain such a definition), such term shall mean (i) willful or gross misconduct or willful or gross negligence in the performance of his or her duties for the Company or any Affiliate, (ii) neglect of his or her duties for the Company or any Affiliate after written notice and opportunity to cure, (iii) dishonesty, fraud, theft, embezzlement or misappropriation of funds, properties or assets of the Company or of any Affiliate, (iv) conviction of a felony or (v) a direct or indirect material breach of the terms of any agreement with the Company or any Affiliate.

2.8     “Code” means the Internal Revenue Code of 1986, as now in effect or as hereafter amended.

2.9     “Committee” means a committee of, and designated from time to time by resolution of, the Board, which shall be constituted as provided in Section 3.2 .

 

1


2.10     “Company” means XM Satellite Radio Holdings Inc.

2.11     “Corporate Transaction” shall be deemed to have occurred if (i) any person or group of persons (as defined in Section 13(d) and 14(d) of the Exchange Act) together with its affiliates, excluding employee benefit plans of the Company, is or becomes, directly or indirectly, the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act) of securities of the Company representing 40% or more of the combined voting power of the Company’s then outstanding securities; or (ii) individuals who at the beginning of any two-year period constitute the Board, plus new directors of the Company whose election or nomination for election by the Company’s shareholders is approved by a vote of a at least two-thirds of the directors of the Company still in office who were directors of the Company at the beginning of such two-year period, cease for any reason during such two-year period to constitute at least two-thirds of the members of the Board; or (iii) a merger or consolidation of the Company with any other corporation or entity is consummated regardless of which entity is the survivor, other than a merger of consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or being converted into voting securities of the surviving entity) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation; or (iv) the Company is completely liquidated or all or substantially all of the Company’s assets are sold.

2.12     “Covered Employee” means a Grantee who is a covered employee within the meaning of Section 162(m)(3) of the Code.

2.13     “Disability” means the Grantee is unable to perform each of the essential duties of such Grantee’s position by reason of a medically determinable physical or mental impairment which is potentially permanent in character or which can be expected to last for a continuous period of not less than 12 months; provided, however, that, with respect to rules regarding expiration of an Incentive Stock Option following termination of the Grantee’s Service, Disability shall mean the Grantee is unable to engage in any substantial gainful activity by reason of a medically determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

2.14     “Dividend Equivalent Right” means a right, granted to a Grantee under Section 12 hereof, to receive cash, Stock, other Awards or other property equal in value to dividends paid with respect to a specified number of shares of Stock, or other periodic payments.

2.15     “Effective Date” means May 25, 2007, the date the Plan is approved by the shareholders.

2.16     “Exchange Act” means the Securities Exchange Act of 1934, as now in effect or as hereafter amended.

2.17     “Fair Market Value” with respect to a share of Stock means the value of a share of such Stock determined as follows: if on the Grant Date or other determination date the Stock is listed on an established national or regional stock exchange, is admitted to quotation on The NASDAQ Stock Market, Inc. or is publicly traded on an established securities market, the Fair Market Value of a share of Stock shall be the closing price of the Stock on such exchange or in such market (if there is more than one such exchange or market the Committee shall determine the appropriate exchange or market) on the Grant Date or such other determination date (or if there is no such reported closing price, the Fair Market Value shall be the mean between the highest bid and lowest asked prices or between the high and low sale prices on such trading day) or, if no sale of Stock is reported for such trading day, on the next preceding day on which any sale shall have been reported. If the Stock is not listed on such an exchange, quoted on such system or traded on such a market, Fair Market Value of the share of Stock shall be the value of the Stock as determined by the Committee in good faith in a manner consistent with Code Section 409A. “Fair Market Value” with respect to an Award means the value of the Award as determined by the Committee in good faith, taking into consideration applicable tax and accounting rules and regulations.

2.18     “Family Member” means a person who is a spouse, former spouse, child, stepchild, grandchild, parent, stepparent, grandparent, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother, sister, brother-in-law, or sister-in-law, including adoptive relationships, of the Grantee, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which any one or more of these persons have more than fifty percent of the beneficial interest, a foundation in which any one or more of these persons (or the Grantee) control the management of assets, and any other entity in which one or more of these persons (or the Grantee) own more than fifty percent of the voting interests.

2.19    “ Good Reason ” means (a) a substantial adverse alteration in the Grantee’s title or responsibilities from those in effect immediately prior to the Corporate Transaction; (b) a reduction in the Grantee’s annual base salary as of immediately prior to the

 

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Corporate Transaction (or as the same may be increased from time to time) or a material reduction in the Grantee’s annual target bonus opportunity as of immediately prior to the Corporate Transaction; or (c) the relocation of the Grantee’s principal place of employment to a location more than 35 miles from the Grantee’s principal place of employment as of the Corporate Transaction or the Company’s requiring the Grantee to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company’s business to an extent substantially consistent with the Grantee’s business travel obligations as of immediately prior to the Corporate Transaction. The Grantee’s continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder, provided that the Grantee provides the Company with a written notice of resignation within ninety (90) days following the occurrence of the event constituting Good Reason.

2.20     “Grant Date” means, as determined by the Committee, the latest to occur of (i) the date as of which the Committee approves an Award, (ii) the date on which the recipient of an Award first becomes eligible to receive an Award under Section 6 hereof, or (iii) such other date as may be specified by the Committee.

2.21     “Grantee” means a person who receives or holds an Award under the Plan.

2.22     “Incentive Stock Option” means an “incentive stock option” within the meaning of Section 422 of the Code, or the corresponding provision of any subsequently enacted tax statute, as amended from time to time.

2.23     “Non-qualified Stock Option” means an Option that is not an Incentive Stock Option.

2.24     “Option” means an option to purchase one or more shares of Stock pursuant to the Plan.

2.25     “Option Price” means the exercise price for each share of Stock subject to an Option.

2.26     “Other Agreement” shall have the meaning set forth in Section 15 hereof.

2.27     “Other Stock-Based Award” shall mean any right granted under Section 13 of the Plan.

2.28     “Outside Director” means a member of the Board who is not an officer or employee of the Company.

2.29     “Performance Award” means an Award made subject to the attainment of performance goals (as described in Section 14 ) over a performance period of up to ten (10) years.

2.30     “Plan” means this XM Satellite Radio Holdings Inc. 2007 Stock Incentive Plan.

2.31     “Purchase Price” means the purchase price for each share of Stock pursuant to a grant of Restricted Stock or Other Stock-Based Award.

2.32     “Reporting Person” means a person who is required to file reports under Section 16(a) of the Exchange Act.

2.33     “Restricted Stock” means shares of Stock, awarded to a Grantee pursuant to Section 10 hereof.

2.34     “SAR Exercise Price” means the per share exercise price of an SAR granted to a Grantee under Section 9 hereof.

2.35     “Securities Act” means the Securities Act of 1933, as now in effect or as hereafter amended.

2.36     “Service” means service as a Service Provider to the Company or an Affiliate. Unless otherwise stated in the applicable Award Agreement, a Grantee’s change in position or duties shall not result in interrupted or terminated Service, so long as such Grantee continues to be a Service Provider to the Company or an Affiliate. Subject to the preceding sentence, whether a termination of Service shall have occurred for purposes of the Plan shall be determined by the Committee, which determination shall be final, binding and conclusive.

 

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2.37     “Service Provider” means an employee, officer or director of the Company or an Affiliate, or a consultant or adviser currently providing services to the Company or an Affiliate.

2.38     “Stock” means the common stock, par value $.01 per share, of the Company.

2.39     “Stock Appreciation Right” or “SAR” means a right granted to a Grantee under Section 9 hereof.

2.40     “Stock Unit” means a bookkeeping entry representing the equivalent of one share of Stock awarded to a Grantee pursuant to Section 10 hereof.

2.41     “Subsidiary” means any “subsidiary corporation” of the Company within the meaning of Section 424(f) of the Code.

2.42     “Substitute Awards” means Awards granted upon assumption of, or in substitution for, outstanding awards previously granted by a company or other entity acquired by the Company or any Affiliate or with which the Company or any Affiliate combines.

2.43     “Ten Percent Stockholder” means an individual who owns more than ten percent (10%) of the total combined voting power of all classes of outstanding stock of the Company, its parent or any of its Subsidiaries. In determining stock ownership, the attribution rules of Section 424(d) of the Code shall be applied.

 

3. ADMINISTRATION OF THE PLAN

3.1.    Board

The Board shall have such powers and authorities related to the administration of the Plan as are consistent with the Company’s certificate of incorporation and by-laws and applicable law. The Board shall have full power and authority to take all actions and to make all determinations required or provided for under the Plan, any Award or any Award Agreement, and shall have full power and authority to take all such other actions and make all such other determinations not inconsistent with the specific terms and provisions of the Plan that the Board deems to be necessary or appropriate to the administration of the Plan, any Award or any Award Agreement. All such actions and determinations shall be by the affirmative vote of a majority of the members of the Board present at a meeting or by unanimous consent of the Board executed in writing in accordance with the Company’s certificate of incorporation and by-laws and applicable law. The interpretation and construction by the Board of any provision of the Plan, any Award or any Award Agreement shall be final, binding and conclusive.

3.2.    Committee.

The Board has delegated to the Committee the powers and authorities related to the administration and implementation of the Plan, as set forth in Section 3.1 above and other applicable provisions, consistent with the certificate of incorporation and by-laws of the Company and applicable law.

(i)    Except as provided in Subsection (ii) and except as the Board may otherwise determine, the Committee appointed by the Board to administer the Plan shall consist of two or more Outside Directors of the Company who: (a) qualify as “outside directors” within the meaning of Section 162(m) of the Code and who (b) meet such other requirements as may be established from time to time by the Securities and Exchange Commission for plans intended to qualify for exemption under Rule 16b-3 (or its successor) under the Exchange Act and (c) who comply with the independence requirements of the stock exchange on which the Common Stock is listed.

(ii)    The Board may also appoint one or more separate committees of the Board, each composed of one or more directors of the Company who need not be Outside Directors, who may administer the Plan with respect to employees or other Service Providers who are not officers or directors of the Company, may grant Awards under the Plan to such employees or other Service Providers, and may determine all terms of such Awards.

In the event that the Plan, any Award or any Award Agreement entered into hereunder provides for any action to be taken by or determination to be made by the Committee, such action may be taken or such determination may be made by the Board. Unless otherwise expressly determined by the Board, any action or determination by the Committee shall be final, binding and conclusive. To the extent permitted by law, the Committee may delegate its authority under the Plan to a member of the Board .

 

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3.3.    Terms of Awards.

Subject to the other terms and conditions of the Plan, the Committee shall have full and final authority to:

(i)    designate Grantees,

(ii)    determine the type or types of Awards to be made to a Grantee,

(iii)    determine the number of shares of Stock to be subject to an Award,

(iv)    establish the terms and conditions of each Award (including, but not limited to, the exercise price of any Option, the nature and duration of any restriction or condition (or provision for lapse thereof) relating to the vesting, exercise, transfer, or forfeiture of an Award or the shares of Stock subject thereto, and any terms or conditions that may be necessary to qualify Options as Incentive Stock Options),

(v)    prescribe the form of each Award Agreement evidencing an Award, and

(vi)    amend, modify, or supplement the terms of any outstanding Award. Such authority specifically includes the authority, in order to effectuate the purposes of the Plan but without amending the Plan, to modify Awards to eligible individuals who are foreign nationals or are individuals who are employed outside the United States to recognize differences in local law, tax policy, or custom. Notwithstanding the foregoing, no amendment, modification or supplement of any Award shall, without the consent of the Grantee, impair the Grantee’s rights under such Award other than amendments or modifications necessary to comply with Section 409A and amendments pursuant to Section 5.3 .

The Company may retain the right in an Award Agreement to cause a forfeiture of the gain realized by a Grantee on account of actions taken by the Grantee in violation or breach of or in conflict with any employment agreement, non-competition agreement, any agreement prohibiting solicitation of employees or clients of the Company or any Affiliate thereof or any confidentiality obligation with respect to the Company or any Affiliate thereof or otherwise in competition with the Company or any Affiliate thereof, to the extent specified in such Award Agreement applicable to the Grantee. Furthermore, the Company may annul an Award if the Grantee is an employee of the Company or an Affiliate thereof and is terminated for Cause as defined in the applicable Award Agreement or the Plan, as applicable.

Notwithstanding the foregoing, no amendment or modification may be made to an outstanding Option or SAR, including without limitation by replacement of underwater Options or SARs with cash or other award type, that would be treated as a repricing under the rules of the stock exchange on which the Stock is listed or result in replacement of underwater Options or SARs with cash or other award with an exercise price below the Fair Market Value as of the date of such replacement award, in each case, without the approval of the stockholders of the Company, provided, that, appropriate adjustments may be made to outstanding Options and SARs pursuant to Section 17 or Section 5.3 and may be made to make changes to achieve compliance with applicable law, including Internal Revenue Code Section 409A.

3.4.    Deferral Arrangement.

The Committee may permit or require the deferral of any award payment into a deferred compensation arrangement, subject to such rules and procedures as it may establish, which may include provisions for the payment or crediting of interest or dividend equivalents, including converting such credits into deferred Stock equivalents, and restricting deferrals to comply with hardship distribution rules affecting 401(k) plans. Any such deferrals shall be made in a manner that complies with Code Section 409A.

3.5.    No Liability.

No member of the Board or of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Award or Award Agreement.

3.6.    Share Issuance/Book-Entry

Notwithstanding any provision of this Plan to the contrary, the issuance of the Stock under the Plan may be evidenced in such a manner as the Committee, in its discretion, deems appropriate, including, without limitation, book-entry registration or issuance of one or more Stock certificates.

 

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4. STOCK SUBJECT TO THE PLAN

Subject to adjustment as provided in Section 17 hereof, the number of shares of Stock available for issuance under the Plan shall be twenty five million shares (25,000,000). Stock issued or to be issued under the Plan shall be authorized but unissued shares; or, to the extent permitted by applicable law, issued shares that have been reacquired by the Company. If any shares covered by an Award are not purchased or are forfeited, or if an Award otherwise terminates without delivery of any Stock subject thereto, then the number of shares of Stock counted against the aggregate number of shares available under the Plan with respect to such Award shall, to the extent of any such forfeiture or termination, again be available for making Awards under the Plan. The number of shares available for issuance under the Plan shall be reduced by the number of shares subject to Options and SARs. Upon a grant of Awards other than Awards of Options or SARs, the number of shares available for issuance under the Plan shall be reduced by 1.5 times the number of shares of Stock subject to such Awards.

The Committee shall have the right to substitute or assume Awards in connection with mergers, reorganizations, separations, or other transactions to which Section 424(a) of the Code applies. The number of shares of Stock reserved pursuant to Section 4 may be increased by the corresponding number of Awards assumed and, in the case of a substitution, by the net increase in the number of shares of Stock subject to Awards before and after the substitution. The Committee may adopt reasonable counting procedures to ensure appropriate counting, to avoid double counting (as, for example, in the case of tandem or substitute awards) and to make adjustments if the number of shares of Stock actually delivered differs from the number of shares of Stock previously counted in connection with a Grant.

 

5. EFFECTIVE DATE, DURATION AND AMENDMENTS

5.1.    Effective Date.

The Plan shall be effective as of the Effective Date, subject to approval of the Plan by the Company’s stockholders within one year of the Effective Date. Upon approval of the Plan by the stockholders of the Company as set forth above, all Awards made under the Plan on or after the Effective Date shall be fully effective as if the stockholders of the Company had approved the Plan on the Effective Date. If the stockholders fail to approve the Plan within one year of the Effective Date, any Awards made hereunder shall be null and void and of no effect.

5.2.    Term.

The Plan shall terminate automatically ten (10) years after its adoption by the Board and may be terminated on any earlier date as provided in Section 5.3 .

5.3.    Amendment and Termination of the Plan

The Board may, at any time and from time to time, amend, suspend, or terminate the Plan as to any shares of Stock as to which Awards have not been made. An amendment shall be contingent on approval of the Company’s stockholders to the extent stated by the Board, required by applicable law or required by applicable stock exchange listing requirements. In addition, an amendment will be contingent on approval of the Company’s stockholders if the amendment would: (i) materially increase the benefits accruing to participants under the Plan, (ii) materially increase the aggregate number of shares of Stock that may be issued under the Plan, or (iii) materially modify the requirements as to eligibility for participation in the Plan. No Awards shall be made after termination of the Plan. No amendment, suspension, or termination of the Plan shall, without the consent of the Grantee, impair rights or obligations under any Award theretofore awarded under the Plan.

5.4.    Additional Provisions

Any provision of the Plan or any Award Agreement notwithstanding, the Committee may cause any Award granted hereunder to be amended, modified or cancelled in consideration of a cash payment, an alternative Award or both made to the holder of such cancelled Award equal to or greater than the Fair Market Value of such cancelled Award.

 

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6. AWARD ELIGIBILITY AND LIMITATIONS

6.1.    Service Providers and Other Persons

Subject to this Section 6 , Awards may be made under the Plan to: (i) any Service Provider to the Company or of any Affiliate, including any Service Provider who is an officer or director of the Company, or of any Affiliate, as the Committee shall determine and designate from time to time and (ii) any other individual whose participation in the Plan is determined to be in the best interests of the Company by the Committee.

6.2.    Successive Awards and Substitute Awards.

An eligible person may receive more than one Award, subject to such restrictions as are provided herein. Notwithstanding Sections 8.1 and 9.1 , the Option Price of an Option or the grant price of an SAR that is a Substitute Award may be less than 100% of the Fair Market Value of a share of Common Stock on the original date of grant; provided, that, the Option Price or grant price is determined in accordance with the principles of Code Section 424 and the regulations thereunder.

6.3.    Limitation on Shares of Stock Subject to Awards and Cash Awards.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act:

(i)    the maximum number of shares of Stock subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under Section 6 hereof is one million five hundred shares (1,500,000) per calendar year; provided, however, the maximum number of shares of Stock subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under Section 6 in the year that the person is first employed by the Company is three million (3,000,000).

(ii)    the maximum number of shares that can be awarded under the Plan, other than pursuant to an Option or SAR, to any person eligible for an Award under Section 6 hereof is one million (1,000,000) per calendar year; provided, however, the maximum number of shares of Stock subject to Options or SARs that can be awarded under the Plan to any person eligible for an Award under Section 6 in the year that the person is first employed by the Company is two million (2,000,000).

(iii)    the maximum amount that may be earned as an Annual Incentive Award or other cash Award in any calendar year by any one Grantee shall be $1,000,000 and the maximum amount that may be earned as a Performance Award or other cash Award in respect of a performance period of greater than one year by any one Grantee shall be $3,000,000.

The preceding limitations in this Section 6.3 are subject to adjustment as provided in Section 17 hereof.

 

7. AWARD AGREEMENT

Each Award granted pursuant to the Plan shall be evidenced by an Award Agreement, in such form or forms as the Committee shall from time to time determine. Award Agreements granted from time to time or at the same time need not contain similar provisions but shall be consistent with the terms of the Plan. Each Award Agreement evidencing an Award of Options shall specify whether such Options are intended to be Non-qualified Stock Options or Incentive Stock Options, and in the absence of such specification such options shall be deemed Non-qualified Stock Options.

 

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8. TERMS AND CONDITIONS OF OPTIONS

8.1.    Option Price

The Option Price of each Option shall be fixed by the Committee and stated in the Award Agreement evidencing such Option. The Option Price of each Option shall be at least the Fair Market Value on the Grant Date of a share of Stock; provided , however , that in the event that a Grantee is a Ten Percent Stockholder, the Option Price of an Option granted to such Grantee that is intended to be an Incentive Stock Option shall be not less than 110 percent of the Fair Market Value of a share of Stock on the Grant Date. In no case shall the Option Price of any Option be less than the par value of a share of Stock.

8.2.    Vesting.

Subject to Sections 8.3 and 17.3 hereof, each Option granted under the Plan shall become exercisable at such times and under such conditions as shall be determined by the Committee and stated in the Award Agreement. For purposes of this Section 8.2 , fractional numbers of shares of Stock subject to an Option shall be rounded down to the next nearest whole number.

8.3    Term.

Each Option granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such Option is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such Option; provided , however , that in the event that the Grantee is a Ten Percent Stockholder, an Option granted to such Grantee that is intended to be an Incentive Stock Option shall not be exercisable after the expiration of five years from its Grant Date.

8.4.    Termination of Service.

Each Award Agreement shall set forth the extent to which the Grantee shall have the right to exercise the Option following termination of the Grantee’s Service. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service.

8.5.    Limitations on Exercise of Option.

Notwithstanding any other provision of the Plan, in no event may any Option be exercised, in whole or in part, prior to the date the Plan is approved by the stockholders of the Company as provided herein or after the occurrence of an event referred to in Section 17 hereof which results in termination of the Option.

8.6.    Method of Exercise.

An Option that is exercisable may be exercised by the Grantee’s delivery to the Company of written notice of exercise on any business day, at the Company’s principal office, on the form specified by the Company. Such notice shall specify the number of shares of Stock with respect to which the Option is being exercised and shall be accompanied by payment in full of the Option Price of the shares for which the Option is being exercised plus the amount (if any) of federal and/or other taxes which the Company may, in its judgment, be required to withhold with respect to an Award. The minimum number of shares of Stock with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of (i) 100 shares or such lesser number set forth in the applicable Award Agreement and (ii) the maximum number of shares available for purchase under the Option at the time of exercise.

8.7.    Rights of Holders of Options

Unless otherwise stated in the applicable Award Agreement, an individual holding or exercising an Option shall have none of the rights of a stockholder (for example, the right to receive cash or dividend payments or distributions attributable to the subject shares of Stock or to direct the voting of the subject shares of Stock ) until the shares of Stock covered thereby are fully paid and issued to him. Except as provided in Section 17 hereof, no adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such issuance.

 

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8.8.    Delivery of Stock Certificates.

Promptly after the exercise of an Option by a Grantee and the payment in full of the Option Price, such Grantee shall be entitled to the issuance of a stock certificate or certificates evidencing his or her ownership of the shares of Stock subject to the Option. Notwithstanding any other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the delivery of stock certificates through the use of book-entry.

8.9.    Transferability of Options

Except as provided in Section 8.10 , during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may exercise an Option. Except as provided in Section 8.10 , no Option shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

8.10.    Family Transfers.

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of an Option which is not an Incentive Stock Option to any Family Member. For the purpose of this Section 8.10 , a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 8.10 , any such Option shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred Options are prohibited except to Family Members of the original Grantee in accordance with this Section 8.10 or by will or the laws of descent and distribution. The events of termination of Service of Section 8.4 hereof shall continue to be applied with respect to the original Grantee, following which the Option shall be exercisable by the transferee only to the extent, and for the periods specified, in Section 8.4 .

8.11.    Limitations on Incentive Stock Options.

An Option shall constitute an Incentive Stock Option only (i) if the Grantee of such Option is an employee of the Company or any Subsidiary of the Company; (ii) to the extent specifically provided in the related Award Agreement; and (iii) to the extent that the aggregate Fair Market Value (determined at the time the Option is granted) of the shares of Stock with respect to which all Incentive Stock Options held by such Grantee become exercisable for the first time during any calendar year (under the Plan and all other plans of the Grantee’s employer and its Affiliates) does not exceed $100,000. This limitation shall be applied by taking Options into account in the order in which they were granted.

8.12.    Notification of Disqualifying Disposition

If any Grantee shall make any disposition of Shares issued pursuant to the exercise of an Incentive Stock Option under the circumstances described in Code Section 421(b) (relating to certain disqualifying dispositions), such Grantee shall notify the Company of such disposition within ten (10) days thereof.

 

9. TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS

9.1.    Right to Payment and Grant Price.

A SAR shall confer on the Grantee to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one share of Stock on the date of exercise over (B) the grant price of the SAR as determined by the Committee. The Award Agreement for a SAR shall specify the grant price of the SAR, which shall be at least the Fair Market Value of a share of Stock on the date of grant. SARs may be granted in conjunction with all or part of an Option granted under the Plan or at any subsequent time during the term of such Option, in conjunction with all or part of any other Award or without regard to any Option or other Award; provided that an SAR that is granted subsequent to the Grant Date of a related Option must have an SAR Price that is no less than the Fair Market Value of one share of Stock on the SAR Grant Date.

 

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9.2.    Other Terms.

The Committee shall determine at the date of grant or thereafter, the time or times at which and the circumstances under which an SAR may be exercised in whole or in part (including based on achievement of performance goals and/or future service requirements), the time or times at which SARs shall cease to be or become exercisable following termination of Service or upon other conditions, the method of exercise, method of settlement, form of consideration payable in settlement, method by or forms in which Stock will be delivered or deemed to be delivered to Grantees, whether or not an SAR shall be in tandem or in combination with any other Award, and any other terms and conditions of any SAR.

9.3.    Term.

Each SAR granted under the Plan shall terminate, and all rights to purchase shares of Stock thereunder shall cease, upon the expiration of ten years from the date such SAR is granted, or under such circumstances and on such date prior thereto as is set forth in the Plan or as may be fixed by the Committee and stated in the Award Agreement relating to such SAR.

9.4.    Transferability of SARS

Except as provided in Section 9.5 , during the lifetime of a Grantee, only the Grantee (or, in the event of legal incapacity or incompetency, the Grantee’s guardian or legal representative) may exercise a SAR. Except as provided in Section 9.5 , no SAR shall be assignable or transferable by the Grantee to whom it is granted, other than by will or the laws of descent and distribution.

9.5.    Family Transfers.

If authorized in the applicable Award Agreement, a Grantee may transfer, not for value, all or part of a SAR to any Family Member. For the purpose of this Section 9.5 , a “not for value” transfer is a transfer which is (i) a gift, (ii) a transfer under a domestic relations order in settlement of marital property rights; or (iii) a transfer to an entity in which more than fifty percent of the voting interests are owned by Family Members (or the Grantee) in exchange for an interest in that entity. Following a transfer under this Section 9.5 , any such SAR shall continue to be subject to the same terms and conditions as were applicable immediately prior to transfer. Subsequent transfers of transferred SARs are prohibited except to Family Members of the original Grantee in accordance with this Section 9.5 or by will or the laws of descent and distribution.

 

10. TERMS AND CONDITIONS OF RESTRICTED STOCK AND STOCK UNITS

10.1.    Grant of Restricted Stock.

Awards of Restricted Stock or Stock Units may be made for no consideration (other than par value of the shares which is deemed paid by Services already rendered).

10.2.    Restrictions.

At the time a grant of Restricted Stock or Stock Units is made, the Committee may, in its sole discretion, establish a period of time (a “restricted period”) applicable to such Restricted Stock or Stock Units. Each Award of Restricted Stock or Stock Units may be subject to a different restricted period. The Committee may, in its sole discretion, at the time a grant of Restricted Stock or Stock Units is made, prescribe restrictions in addition to or other than the expiration of the restricted period, including the satisfaction of corporate or individual performance objectives, which may be applicable to all or any portion of the Restricted Stock or Stock Units in accordance with Section 14.1 and 14.2 . Restricted Stock, Stock Units Awards or Other Stock- Based Awards may be granted or sold as described in the preceding sentence in respect of past or future services and other valid consideration, or in lieu of, or in addition to, any cash compensation due to such Grantee. Restricted Stock for which vesting may be accelerated by achieving performance targets shall not vest in full in less than one (1) year from the Grant Date. Neither Restricted Stock nor Stock Units may be sold, transferred, assigned, pledged or otherwise encumbered or disposed of during the restricted period or prior to the satisfaction of any other restrictions prescribed by the Committee with respect to such Restricted Stock or Stock Units.

 

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10.3.    Restricted Stock Certificates.

The Company shall issue, in the name of each Grantee to whom Restricted Stock has been granted, stock certificates representing the total number of shares of Restricted Stock granted to the Grantee, as soon as reasonably practicable after the Grant Date. The Committee may provide in an Award Agreement that either (i) the Secretary of the Company shall hold such certificates for the Grantee’s benefit until such time as the Restricted Stock is forfeited to the Company or the restrictions lapse, or (ii) such certificates shall be delivered to the Grantee, provided , however , that such certificates shall bear a legend or legends that comply with the applicable securities laws and regulations and makes appropriate reference to the restrictions imposed under the Plan and the Award Agreement. Notwithstanding any other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the delivery of stock certificates through the use of book-entry.

10.4.    Rights of Holders of Restricted Stock.

Unless the Committee otherwise provides in an Award Agreement, holders of Restricted Stock shall have the right to vote such Stock and the right to receive any dividends declared or paid with respect to such Stock. The Committee may provide that any dividends paid on Restricted Stock must be reinvested in shares of Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to such Restricted Stock. All distributions, if any, received by a Grantee with respect to Restricted Stock as a result of any stock split, stock dividend, combination of shares, or other similar transaction shall be subject to the restrictions applicable to the original Grant.

10.5.    Rights of Holders of Stock Units.

10.5.1    Voting and Dividend Rights.

Holders of Stock Units shall have no rights as stockholders of the Company. The Committee may provide in an Award Agreement evidencing a grant of Stock Units that the holder of such Stock Units shall be entitled to receive, upon the Company’s payment of a cash dividend on its outstanding Stock, a cash payment for each Stock Unit held equal to the per-share dividend paid on the Stock. Such Award Agreement may also provide that such cash payment will be deemed reinvested in additional Stock Units at a price per unit equal to the Fair Market Value of a share of Stock on the date that such dividend is paid.

10.5.2    Creditor’s Rights.

A holder of Stock Units shall have no rights other than those of a general creditor of the Company. Stock Units represent an unfunded and unsecured obligation of the Company, subject to the terms and conditions of the applicable Award Agreement.

10.6.    Termination of Service.

Unless the Committee otherwise provides in an Award Agreement or in writing after the Award Agreement is issued, upon the termination of a Grantee’s Service, any Restricted Stock or Stock Units held by such Grantee that have not vested, or with respect to which all applicable restrictions and conditions have not lapsed, shall immediately be deemed forfeited. Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Restricted Stock and Stock Unit Awards issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Service. Upon forfeiture of Restricted Stock or Stock Units, the Grantee shall have no further rights with respect to such Award, including but not limited to any right to vote Restricted Stock or any right to receive dividends with respect to shares of Restricted Stock or Stock Units.

10.7.    Purchase of Restricted Stock.

The Grantee shall be required, to the extent required by applicable law, to purchase the Restricted Stock from the Company at a Purchase Price equal to the greater of (i) the aggregate par value of the shares of Stock represented by such Restricted Stock or (ii) the Purchase Price, if any, specified in the Award Agreement relating to such Restricted Stock. The Purchase Price shall be payable in a form described in Section 11 or, in the discretion of the Committee, in consideration for past or future Services rendered to the Company or an Affiliate.

 

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10.8.    Delivery of Stock.

Upon the expiration or termination of any restricted period and the satisfaction of any other conditions prescribed by the Committee, the restrictions applicable to shares of Restricted Stock or Stock Units settled in Stock shall lapse, and, unless otherwise provided in the Award Agreement, a stock certificate for such shares shall be delivered, free of all such restrictions, to the Grantee or the Grantee’s beneficiary or estate, as the case may be. Neither the Grantee, nor the Grantee’s beneficiary or estate, shall have any further rights with regard to a Stock Unit once the share of Stock represented by the Stock Unit has been delivered.

 

11. FORM OF PAYMENT FOR OPTIONS AND RESTRICTED STOCK

11.1.    General Rule.

Payment of the Option Price for the shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock shall be made in cash or in cash equivalents acceptable to the Company.

11.2.    Surrender of Stock.

To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option or the Purchase Price for Restricted Stock, if any, may be made all or in part through the tender to the Company of shares of Stock, which shall be valued, for purposes of determining the extent to which the Option Price or Purchase Price has been paid thereby, at their Fair Market Value on the date of exercise or surrender.

11.3.    Cashless Exercise.

With respect to an Option only (and not with respect to Restricted Stock), to the extent permitted by law and to the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to the exercise of an Option may be made all or in part by delivery (on a form acceptable to the Committee) of an irrevocable direction to a licensed securities broker acceptable to the Company to sell shares of Stock and to deliver all or part of the sales proceeds to the Company in payment of the Option Price and any withholding taxes described in Section 18.3 .

11.4.    Other Forms of Payment.

To the extent the Award Agreement so provides, payment of the Option Price for shares purchased pursuant to exercise of an Option or the Purchase Price for Restricted Stock may be made in any other form that is consistent with applicable laws, regulations and rules.

 

12. TERMS AND CONDITIONS OF DIVIDEND EQUIVALENT RIGHTS

12.1.    Dividend Equivalent Rights.

A Dividend Equivalent Right is an Award entitling the recipient to receive credits based on cash distributions that would have been paid on the shares of Stock specified in the Dividend Equivalent Right (or other award to which it relates) if such shares had been issued to and held by the recipient. A Dividend Equivalent Right may be granted hereunder to any Grantee. The terms and conditions of Dividend Equivalent Rights shall be specified in the grant. Dividend equivalents credited to the holder of a Dividend Equivalent Right may be paid currently or may be deemed to be reinvested in additional shares of Stock, which may thereafter accrue additional equivalents. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Dividend Equivalent Rights may be settled in cash or Stock or a combination thereof, in a single installment or installments, all determined in the sole discretion of the Committee. A Dividend Equivalent Right granted as a component of another Award may provide that such Dividend Equivalent Right shall be settled upon exercise, settlement, or payment of, or lapse of restrictions on, such other award, and that such Dividend Equivalent Right shall expire or be forfeited or annulled under the same conditions as such other award. A Dividend Equivalent Right granted as a component of another Award may also contain terms and conditions different from such other award.

 

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12.2.    Termination of Service.

Except as may otherwise be provided by the Committee either in the Award Agreement or in writing after the Award Agreement is issued, a Grantee’s rights in all Dividend Equivalent Rights or interest equivalents shall automatically terminate upon the Grantee’s termination of Service for any reason.

 

13. OTHER STOCK-BASED AWARDS

The Committee shall have the discretion and authority to grant to eligible persons an “Other Stock-Based Award,” which shall consist of any right that is (i) not an Award previously described in this Plan and (ii) an Award of Shares or an Award denominated or payable in, valued in whole or in part by reference to, or otherwise based on or related to, Shares (including, without limitation, securities or rights convertible into Shares), as deemed by the Committee to be consistent with the purposes of the Plan. Subject to the terms of the Plan and any applicable Award Agreement, the Committee shall determine the terms and conditions of any such Other Stock-Based Award.

 

14. TERMS AND CONDITIONS OF Performance and Annual Incentive Awards

14.1.    Performance Conditions

The right of a Grantee to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and other measures of performance as it may deem appropriate in establishing any performance conditions, and may exercise its discretion to reduce the amounts payable under any Award subject to performance conditions, except as limited under Sections 14.2 hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). If and to the extent required under Code Section 162(m), any power or authority relating to a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m), shall be exercised by the Committee and not the Board.

14.2.    Performance or Annual Incentive Awards Granted to Designated Covered Employees

If and to the extent that the Committee determines that a Performance or Annual Incentive Award to be granted to a Grantee who is designated by the Committee as likely to be a Covered Employee should qualify as “performance-based compensation” for purposes of Code Section 162(m), the grant, exercise and/or settlement of such Performance or Annual Incentive Award shall be contingent upon achievement of pre-established performance goals and other terms set forth in this Section 14.2 .

14.2.1    Performance Goals Generally.

The performance goals for such Performance or Annual Incentive Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each of such criteria, as specified by the Committee consistent with this Section 14.2 . Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being “substantially uncertain.” The Committee may determine that such Performance or Annual Incentive Awards shall be granted, exercised and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise and/or settlement of such Performance or Annual Incentive Awards. Performance goals may differ for Performance or Annual Incentive Awards granted to any one Grantee or to different Grantees.

14.2.2    Business Criteria.

One or more of the following business criteria for the Company, on a consolidated basis, and/or specified subsidiaries or business units of the Company (except with respect to the total stockholder return and earnings per share criteria), shall be used by the Committee (and not by the Board) in establishing performance goals for such Performance or Annual Incentive Awards: (1) total stockholder return; (2) such total stockholder return as compared to total return (on a comparable basis) of a publicly available index such as, but not limited to, the Standard & Poor’s 500 Stock Index; (3) net income; (4) pretax earnings; (5) earnings before interest expense, taxes, depreciation and amortization, with or without adjustments used from time to time by the Company in its publicly filed financial statements; (6) pretax operating earnings after interest expense and before bonuses, service fees, and extraordinary or special items; (7) operating

 

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margin; (8) earnings per share; (9) return on equity; (10) return on capital; (11) return on investment; (12) operating earnings; (13) working capital; (14) ratio of debt to stockholders’ equity (15) revenue; (16) subscribers; (17) conversion ratio; (18) subscriber acquisition cost or cost per gross add; and (19) any other business criteria used in the Company’s publicly announced guidance. Business criteria may be measured on an absolute basis or on a relative basis (i.e., performance relative to peer companies) and on a GAAP or non-GAAP basis. The Committee may provide, in a manner that meets the requirements of Code Section 162(m) that any evaluation of performance may include or exclude any of the following events that occur during the applicable performance period: (a) asset write-downs; (b) litigation or claim judgments or settlements; (c) the effect of changes in tax laws, accounting principles or other laws or provisions affecting reported results; (d) any reorganization or restructuring programs; (e) extraordinary nonrecurring items; (f) acquisitions or divestitures; and (g) foreign exchange gains and losses.

14.2.3.    Timing For Establishing Performance Goals.

Performance goals shall be established not later than 90 days after the beginning of any performance period applicable to such Performance or Annual Incentive Awards, or at such other date as may be required or permitted for “performance-based compensation” under Code Section 162(m).

14.2.4.    Settlement of Performance or Annual Incentive Awards; Other Terms.

Settlement of such Performance or Annual Incentive Awards shall be in cash, Stock, other Awards or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance or Annual Incentive Awards. The Committee shall specify the circumstances in which such Performance or Annual Incentive Awards shall be paid or forfeited in the event of termination of Service by the Grantee prior to the end of a performance period or settlement of Performance Awards.

14.3.    Written Determinations.

All determinations by the Committee as to the establishment of performance goals, the amount of any potential Performance Awards and as to the achievement of performance goals relating to Performance Awards, and the amount of any potential individual Annual Incentive Awards and the amount of final Annual Incentive Awards, shall be made in writing in the case of any Award intended to qualify under Code Section 162(m). To the extent permitted by Section 162(m), the Committee may delegate any responsibility relating to such Performance Awards or Annual Incentive Awards.

14.4.    Status of Section 14.2 Awards Under Code Section 162(m)

It is the intent of the Company that Performance Awards and Annual Incentive Awards under Section 14.2 hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder shall, if so designated by the Committee, constitute “qualified performance-based compensation” within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Section 14.2 , including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Grantee will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of Performance Awards or an Annual Incentive Award, as likely to be a Covered Employee with respect to that fiscal year. If any provision of the Plan or any agreement relating to such Performance Awards or Annual Incentive Awards does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements.

 

15. PARACHUTE LIMITATIONS

Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Grantee with the Company or any Affiliate, except an agreement, contract, or understanding that expressly addresses Section 280G or Section 4999 of the Code (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Grantee (including groups or classes of Grantees or beneficiaries

 

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of which the Grantee is a member), whether or not such compensation is deferred, is in cash, or is in the form of a benefit to or for the Grantee (a “Benefit Arrangement”), if the Grantee is a “disqualified individual,” as defined in Section 280G(c) of the Code, any Option, Restricted Stock or Stock Unit held by that Grantee and any right to receive any payment or other benefit under this Plan shall not become exercisable or vested (i) to the extent that such right to exercise, vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Grantee under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Grantee under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (ii) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Grantee from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Grantee without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to exercise, vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Grantee under any Other Agreement or any Benefit Arrangement would cause the Grantee to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Grantee as described in clause (ii) of the preceding sentence, then the Grantee shall have the right, in the Grantee’s sole discretion, to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Grantee under this Plan be deemed to be a Parachute Payment.

 

16. REQUIREMENTS OF LAW

16.1.    General.

The Company shall not be required to sell or issue any shares of Stock under any Award if the sale or issuance of such shares would constitute a violation by the Grantee, any other individual exercising an Option, or the Company of any provision of any law or regulation of any governmental authority, including without limitation any federal or state securities laws or regulations. If at any time the Company shall determine, in its discretion, that the listing, registration or qualification of any shares subject to an Award upon any securities exchange or under any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the issuance or purchase of shares hereunder, no shares of Stock may be issued or sold to the Grantee or any other individual exercising an Option pursuant to such Award unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Company, and any delay caused thereby shall in no way affect the date of termination of the Award. Without limiting the generality of the foregoing, in connection with the Securities Act, upon the exercise of any Option or any SAR that may be settled in shares of Stock or the delivery of any shares of Stock underlying an Award, unless a registration statement under such Act is in effect with respect to the shares of Stock covered by such Award, the Company shall not be required to sell or issue such shares unless the Committee has received evidence satisfactory to it that the Grantee or any other individual exercising an Option may acquire such shares pursuant to an exemption from registration under the Securities Act. Any determination in this connection by the Committee shall be final, binding, and conclusive. The Company may, but shall in no event be obligated to, register any securities covered hereby pursuant to the Securities Act. The Company shall not be obligated to take any affirmative action in order to cause the exercise of an Option or a SAR or the issuance of shares of Stock pursuant to the Plan to comply with any law or regulation of any governmental authority. As to any jurisdiction that expressly imposes the requirement that an Option (or SAR that may be settled in shares of Stock) shall not be exercisable until the shares of Stock covered by such Option (or SAR) are registered or are exempt from registration, the exercise of such Option (or SAR) (under circumstances in which the laws of such jurisdiction apply) shall be deemed conditioned upon the effectiveness of such registration or the availability of such an exemption.

16.2.    Rule 16b-3.

During any time when the Company has a class of equity security registered under Section 12 of the Exchange Act, it is the intent of the Company that Awards pursuant to the Plan and the exercise of Options and SARs granted hereunder will qualify for the exemption provided by Rule 16b-3 under the Exchange Act. To the extent that any provision of the Plan or action by the Committee does not comply with the requirements of Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and deemed advisable by the Committee, and shall not affect the validity of the Plan. In the event that Rule 16b-3 is revised or replaced, the Committee may exercise its discretion to modify this Plan in any respect necessary to satisfy the requirements of, or to take advantage of any features of, the revised exemption or its replacement.

 

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17. EFFECT OF CHANGES IN CAPITALIZATION

17.1.    Changes in Stock.

If the number of outstanding shares of Stock is increased or decreased or the shares of Stock are changed into or exchanged for a different number or kind of shares or other securities of the Company on account of any recapitalization, reclassification, stock split, reverse split, combination of shares, exchange of shares, stock dividend or other distribution payable in capital stock, or other increase or decrease in such shares effected without receipt of consideration by the Company occurring after the Effective Date, the number and kinds of shares for which grants of Options and other Awards may be made under the Plan shall be adjusted proportionately and accordingly by the Company. In addition, the number and kind of shares for which Awards are outstanding shall be adjusted proportionately and accordingly so that the proportionate interest of the Grantee immediately following such event shall, to the extent practicable, be the same as immediately before such event. Any such adjustment in outstanding Options or SARs shall not change the aggregate Option Price or SAR Exercise Price payable with respect to shares that are subject to the unexercised portion of an outstanding Option or SAR, as applicable, but shall include a corresponding proportionate adjustment in the Option Price or SAR Exercise Price per share. The conversion of any convertible securities of the Company shall not be treated as an increase in shares effected without receipt of consideration. Notwithstanding the foregoing, in the event of any distribution to the Company’s stockholders of securities of any other entity or other assets (including an extraordinary dividend but excluding a non-extraordinary dividend of the Company) without receipt of consideration by the Company, the Company shall, in such manner as the Company deems appropriate, adjust (i) the number and kind of shares subject to outstanding Awards and/or (ii) the exercise price of outstanding Options and Stock Appreciation Rights to reflect such distribution.

 

17.2.    Reorganization   in Which the Company Is the Surviving Entity Which does not Constitute a Corporate Transaction.

Subject to Section 17.3 hereof, if the Company shall be the surviving entity in any reorganization, merger, or consolidation of the Company with one or more other entities which does not constitute a Corporate Transaction, any Option or SAR theretofore granted pursuant to the Plan shall pertain to and apply to the securities to which a holder of the number of shares of Stock subject to such Option or SAR would have been entitled immediately following such reorganization, merger, or consolidation, with a corresponding proportionate adjustment of the Option Price or SAR Exercise Price per share so that the aggregate Option Price or SAR Exercise Price thereafter shall be the same as the aggregate Option Price or SAR Exercise Price of the shares remaining subject to the Option or SAR immediately prior to such reorganization, merger, or consolidation. Subject to any contrary language in an Award Agreement evidencing an Award, any restrictions applicable to such Award shall apply as well to any replacement shares received by the Grantee as a result of the reorganization, merger or consolidation. In the event of a transaction described in this Section 17.2 , Stock Units shall be adjusted so as to apply to the securities that a holder of the number of shares of Stock subject to the Stock Units would have been entitled to receive immediately following such transaction.

17.3.    Corporate Transaction.

Subject to the exceptions set forth in the last sentence of this Section 17.3 and the last sentence of Section 17.4 , upon the occurrence of a Corporate Transaction :

(i)    all outstanding shares of Restricted Stock shall be deemed to have vested, and all Stock Units shall be deemed to have vested and the shares of Stock subject thereto shall be delivered, immediately prior to the occurrence of such Corporate Transaction, and

(ii)    either of the following two actions shall be taken:

(A)    fifteen days prior to the scheduled consummation of a Corporate Transaction, all Options and SARs outstanding hereunder shall become immediately exercisable and shall remain exercisable for a period of fifteen days, or

(B)    the Committee may elect, in its sole discretion, to cancel any outstanding Awards of Options, Restricted Stock, Stock Units and/or SARs and pay or deliver, or cause to be paid or delivered, to the holder thereof an amount in cash or securities having a value (as determined by the Committee acting in good faith), in the case of Restricted Stock or Stock Units, equal to the formula or fixed price per share paid to holders of shares of Stock and, in the case of Options or SARs, equal to the product of the number of shares of Stock subject to the Option or SAR (the “Award Shares”) multiplied by the amount, if any, by which (I) the formula or fixed price per share paid to holders of shares of Stock pursuant to such transaction exceeds (II) the Option Price or SAR Exercise Price applicable to such Award Shares.

 

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With respect to the Company’s establishment of an exercise window, (i) any exercise of an Option or SAR during such fifteen-day period shall be conditioned upon the consummation of the event and shall be effective only immediately before the consummation of the event, and (ii) upon consummation of any Corporate Transaction the Plan, and all outstanding but unexercised Options and SARs shall terminate. The Committee shall send written notice of an event that will result in such a termination to all individuals who hold Options and SARs not later than the time at which the Company gives notice thereof to its stockholders. This Section 17.3 shall not apply to any Corporate Transaction to the extent that provision is made in writing in connection with such Corporate Transaction for the assumption or continuation of the Options, SARs, Stock Units and Restricted Stock theretofore granted, or for the substitution for such Options, SARs, Stock Units and Restricted Stock for new common stock options and stock appreciation rights and new common stock units and restricted stock relating to the stock of a successor entity, or a parent or subsidiary thereof, with appropriate adjustments as to the number of shares (disregarding any consideration that is not common stock) and option and stock appreciation right exercise prices (an “Equivalent Award”), in which event the Plan, Options, SARs, Stock Units and Restricted Stock theretofore granted shall continue in the manner and under the terms so provided. If the Grantee receives an Equivalent Award in connection with a Corporate Transaction and his employment is terminated by the Company without Cause or by the employee with Good Reason within one year following the Corporate Transaction, the Equivalent Award may be exercised in full beginning on the date of such termination and for such period as the Committee shall determine.

17.4.    Adjustments.

Adjustments under this Section 17 related to shares of Stock or securities of the Company shall be made by the Committee, whose determination in that respect shall be final, binding and conclusive. No fractional shares or other securities shall be issued pursuant to any such adjustment, and any fractions resulting from any such adjustment shall be eliminated in each case by rounding downward to the nearest whole share. The Committee shall determine the effect of a Corporate Transaction upon Awards other than Options, SARs, Stock Units and Restricted Stock, and such effect shall be set forth in the appropriate Award Agreement. The Committee may provide in the Award Agreements at the time of grant, or any time thereafter with the consent of the Grantee, for different provisions to apply to an Award in place of those described in Sections 17.1, 17.2 and 17.3 .

17.5.    No Limitations on Company.

The making of Awards pursuant to the Plan shall not affect or limit in any way the right or power of the Company to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure or to merge, consolidate, dissolve, or liquidate, or to sell or transfer all or any part of its business or assets.

 

18. GENERAL PROVISIONS

18.1.    Disclaimer of Rights

No provision in the Plan or in any Award or Award Agreement shall be construed to confer upon any individual the right to remain in the employ or service of the Company or any Affiliate, or to interfere in any way with any contractual or other right or authority of the Company either to increase or decrease the compensation or other payments to any individual at any time, or to terminate any employment or other relationship between any individual and the Company. In addition, notwithstanding anything contained in the Plan to the contrary, unless otherwise stated in the applicable Award Agreement, no Award granted under the Plan shall be affected by any change of duties or position of the Grantee, so long as such Grantee continues to be a director, officer, consultant or employee of the Company or an Affiliate. The obligation of the Company to pay any benefits pursuant to this Plan shall be interpreted as a contractual obligation to pay only those amounts described herein, in the manner and under the conditions prescribed herein. The Plan shall in no way be interpreted to require the Company to transfer any amounts to a third party trustee or otherwise hold any amounts in trust or escrow for payment to any Grantee or beneficiary under the terms of the Plan.

18.2.    Nonexclusivity of the Plan

Neither the adoption of the Plan nor the submission of the Plan to the stockholders of the Company for approval shall be construed as creating any limitations upon the right and authority of the Committee to adopt such other incentive compensation arrangements (which arrangements may be applicable either generally to a class or classes of individuals or specifically to a particular individual or particular

 

17


individuals) as the Committee in its discretion determines desirable, including, without limitation, the granting of equity awards otherwise than under the Plan.

18.3.    Withholding Taxes

The Company or an Affiliate, as the case may be, shall have the right to deduct from payments of any kind otherwise due to a Grantee any federal, state, or local taxes of any kind required by law to be withheld with respect to the vesting of or other lapse of restrictions applicable to an Award or upon the issuance of any shares of Stock upon the exercise of an Option or pursuant to an Award. At the time of such vesting, lapse, or exercise, the Grantee shall pay to the Company or the Affiliate, as the case may be, any amount that the Company or the Affiliate may reasonably determine to be necessary to satisfy such withholding obligation. Subject to the prior approval of the Company or the Affiliate, which may be withheld by the Company or the Affiliate, as the case may be, in its sole discretion, the Grantee may elect to satisfy such obligations, in whole or in part, (i) by causing the Company or the Affiliate to withhold shares of Stock otherwise issuable to the Grantee or (ii) by delivering to the Company or the Affiliate shares of Stock already owned by the Grantee. The shares of Stock so delivered or withheld shall have an aggregate Fair Market Value equal to such withholding obligations. The Fair Market Value of the shares of Stock used to satisfy such withholding obligation shall be determined by the Company or the Affiliate as of the date that the amount of tax to be withheld is to be determined. A Grantee who has made an election pursuant to this Section 18.3 may satisfy his or her withholding obligation only with shares of Stock that are not subject to any repurchase, forfeiture, unfulfilled vesting, or other similar requirements. The maximum number of shares of Stock that may be withheld from any Award to satisfy any federal, state or local tax withholding requirements upon the exercise, vesting, lapse of restrictions applicable to such Award or payment of shares pursuant to such Award, as applicable, cannot exceed such number of shares having a Fair Market Value equal to the minimum statutory amount required by the Company to be withheld and paid to any such federal, state or local taxing authority with respect to such exercise, vesting, lapse of restrictions or payment of shares.

18.4.    Captions

The use of captions in this Plan or any Award Agreement is for the convenience of reference only and shall not affect the meaning of any provision of the Plan or such Award Agreement.

18.5.    Other Provisions

Each Award granted under the Plan may contain such other terms and conditions not inconsistent with the Plan as may be determined by the Committee, in its sole discretion.

18.6.    Number and Gender

With respect to words used in this Plan, the singular form shall include the plural form, the masculine gender shall include the feminine gender, etc., as the context requires.

18.7.    Severability

If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance with their terms, and all provisions shall remain enforceable in any other jurisdiction.

18.8.    Governing Law

The validity and construction of this Plan and the instruments evidencing the Awards hereunder shall be governed by the laws of the State of Delaware, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Plan and the instruments evidencing the Awards granted hereunder to the substantive laws of any other jurisdiction.

 

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18.9.    Section 409A of the Code

The Committee intends to comply with Section 409A of the Code (“Section 409A”), or an exemption to Section 409A, with regard to Awards hereunder that constitute nonqualified deferred compensation within the meaning of Section 409A. To the extent that the Committee determines that a Grantee would be subject to the additional 20% tax imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of any Award granted under this Plan, such provision may be deemed amended to the minimum extent necessary to avoid application of such additional tax. The nature of any such amendment shall be determined by the Committee.

*    *    *

 

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To record adoption of the Plan by the Board in April 2007, and approval of the Plan by the stockholders on May 25, 2007, the Company has caused its authorized officer to execute the Plan.

 

    XM SATELLITE RADIO HOLDINGS INC.
   

By:

 

/s/    Joseph M. Titlebaum

 

Title:

  General Counsel & Secretary

 

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Exhibit 31.1

CERTIFICATIONS

I, Hugh Panero, Chief Executive Officer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of XM Satellite Radio Holdings Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 30, 2007    

/s/    H UGH P ANERO

    Hugh Panero
    Chief Executive Officer

Exhibit 31.2

CERTIFICATIONS

I, Hugh Panero, Chief Executive Officer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of XM Satellite Radio Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 30, 2007    

/s/    H UGH P ANERO

    Hugh Panero
    Chief Executive Officer

Exhibit 31.3

CERTIFICATIONS

I, Joseph Euteneuer, Executive Vice President and Chief Financial Officer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of XM Satellite Radio Holdings Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 30, 2007    

/s/    J OSEPH J. E UTENEUER

    Joseph J. Euteneuer
    Executive Vice President and Chief Financial Officer

Exhibit 31.4

CERTIFICATIONS

I, Joseph Euteneuer, Executive Vice President and Chief Financial Officer, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of XM Satellite Radio Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

  a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

  b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

  c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

  d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

  a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

  b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: July 30, 2007    

/s/    J OSEPH J. E UTENEUER

    Joseph J. Euteneuer
    Executive Vice President and Chief Financial Officer

Exhibit 32.1

Written Statement of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not deemed to be filed pursuant to the Securities Exchange Act of 1934 and does not constitute a part of the Quarterly Report on Form 10-Q accompanying this statement.

The undersigned, the Chief Executive Officer and the Executive Vice President and Chief Financial Officer of XM Satellite Radio Holdings Inc., each hereby certifies that, to his knowledge on the date hereof:

 

(a) the Form 10-Q of XM Satellite Radio Holdings Inc. for the period ended June 30, 2007 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of XM Satellite Radio Holdings Inc.

 

     

/s/    H UGH P ANERO

    Hugh Panero
   

Chief Executive Officer

July 30, 2007

     

/s/    J OSEPH J. E UTENEUER

    Joseph J. Euteneuer
   

Executive Vice President and Chief Financial Officer

July 30, 2007

A signed original of this written statement required by Section 906 has been provided to XM Satellite Radio Holdings Inc. and will be retained by XM Satellite Radio Holdings Inc. and furnished to the Securities and Exchange Commission or its staff upon request.

Exhibit 32.2

Written Statement of Chief Executive Officer and Chief Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

The certification set forth below is being submitted to the Securities and Exchange Commission solely for the purpose of complying with Section 1350 of Chapter 63 of Title 18 of the United States Code. This certification is not deemed to be filed pursuant to the Securities Exchange Act of 1934 and does not constitute a part of the Quarterly Report on Form 10-Q accompanying this statement.

The undersigned, the Chief Executive Officer and the Executive Vice President and Chief Financial Officer of XM Satellite Radio Inc., each hereby certifies that, to his knowledge on the date hereof:

 

(a) the Form 10-Q of XM Satellite Radio Inc. for the period ended June 30, 2007 filed on the date hereof with the Securities and Exchange Commission (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

 

(b) information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of XM Satellite Radio Inc.

 

     

/s/    H UGH P ANERO

    Hugh Panero
   

Chief Executive Officer

July 30, 2007

     

/s/    J OSEPH J. E UTENEUER

    Joseph J. Euteneuer
   

Executive Vice President and Chief Financial Officer

July 30, 2007

A signed original of this written statement required by Section 906 has been provided to XM Satellite Radio Inc. and will be retained by XM Satellite Radio Inc. and furnished to the Securities and Exchange Commission or its staff upon request.