10-Q 1 d10q.htm FORM 10-Q Form 10-Q
Table of Contents

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 September 30, 2006

 


 

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 Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

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

 

(Class)

  

(Outstanding as of September 30, 2006)

XM SATELLITE RADIO HOLDINGS INC.

CLASS A COMMON STOCK, $0.01 PAR VALUE

   268,540,874

XM SATELLITE RADIO INC.

COMMON STOCK, $0.10 PAR VALUE

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

   125

 



Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

INDEX

 

          Page
PART I: FINANCIAL INFORMATION   
        Item 1.    Financial Statements   
   Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2006 and 2005    3
   Condensed Consolidated Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005    5
   Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2006 and 2005    7
   Notes to the Unaudited Condensed Consolidated Financial Statements    8
        Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations    35
        Item 3.    Quantitative and Qualitative Disclosures About Market Risk    51
        Item 4.    Controls and Procedures    51
PART II: OTHER INFORMATION   
        Item 1.    Legal Proceedings    52
        Item 1A.    Risk Factors    54
        Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds    54
        Item 6.    Exhibits    55

FORWARD-LOOKING STATEMENTS

Except for any historical information, the matters we discuss in this Form 10-Q contain forward-looking statements. Any statements in this Form 10-Q that are not statements of historical fact, are intended to be, and are, “forward-looking statements” under the safe harbor provided by Section 27(a) of the Securities Act of 1933. Without limitation, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements. The important factors we discuss under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” as well as other factors identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Form 10-Q.

 

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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,” “us,” refers 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 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.

This quarterly report and all other reports and amendments filed by us with the SEC can be accessed, free of charge, through our website at http://www.xmradio.com/investor/investor_financial_and_company.html on the same day that 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

September 30,

   

Nine months ended

September 30,

 
(in thousands, except share and per share data)    2006     2005     2006     2005  

Revenue:

        

Subscription

   $ 214,817     $ 140,001     $ 605,084     $ 346,361  

Activation

     4,213       2,650       11,733       6,987  

Merchandise

     3,164       2,640       11,644       9,555  

Net ad sales

     8,786       5,332       24,285       12,820  

Other

     9,464       2,489       23,549       5,408  
                                

Total revenue

     240,444       153,112       676,295       381,131  
                                

Operating expenses:

        

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

        

Revenue share & royalties

     33,406       25,788       105,605       65,985  

Customer care & billing operations (1)

     27,171       17,794       76,021       51,662  

Cost of merchandise

     10,177       7,857       28,424       18,440  

Ad sales (1)

     3,378       2,547       11,193       6,414  

Satellite & terrestrial (1)

     11,670       11,813       36,290       31,003  

Broadcast & operations:

        

Broadcast (1)

     6,158       4,274       17,180       11,903  

Operations (1)

     7,827       6,498       25,519       17,608  
                                

Total broadcast & operations

     13,985       10,772       42,699       29,511  

Programming & content (1)

     38,873       28,388       118,769       70,457  
                                

Total cost of revenue

     138,660       104,959       419,001       273,472  

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

     8,849       7,885       28,348       20,970  

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

     21,997       12,534       58,299       30,651  

Marketing (excludes depreciation & amortization, shown below):

        

Retention & support (1)

     7,288       6,092       22,778       15,691  

Subsidies & distribution

     47,279       54,241       168,137       150,867  

Advertising & marketing

     27,518       29,581       94,851       96,609  
                                

Marketing

     82,085       89,914       285,766       263,167  

Amortization of GM liability

     6,504       9,313       23,256       27,938  
                                

Total marketing

     88,589       99,227       309,022       291,105  

Depreciation & amortization

     43,109       38,040       124,837       106,841  
                                

Total operating expenses (1)

     301,204       262,645       939,507       723,039  
                                

Operating loss

     (60,760 )     (109,533 )     (263,212 )     (341,908 )

(Continued)

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)

 

          Three months ended
September 30,
   

Nine months ended

September 30,

 
(in thousands, except share and per share data)         2006     2005     2006     2005  

Other income (expense):

           

Interest income

        5,216       7,266       18,165       16,368  

Interest expense

        (23,794 )     (26,733 )     (86,346 )     (71,234 )

Loss from de-leveraging transactions

        (21 )     (2,207 )     (100,746 )     (2,207 )

Loss from impairment of investments

        —         —         (18,926 )     —    

Equity in net loss of affiliates

        (4,853 )     —         (17,943 )     —    

Other income (expense)

        1,187       (83 )     5,609       2,328  
                                   

Net loss before income taxes

        (83,025 )     (131,290 )     (463,399 )     (396,653 )

Benefit from (provision for) deferred income taxes

        (794 )     (579 )     1,251       (1,737 )
                                   

Net loss

        (83,819 )     (131,869 )     (462,148 )     (398,390 )
                                   

8.25% Series B and C preferred stock dividend requirement

        (1,634 )     (2,149 )     (5,597 )     (6,448 )

8.25% Series B preferred stock retirement loss

        —         —         (755 )     —    
                                   

Net loss attributable to common stockholders

      $ (85,453 )   $ (134,018 )   $ (468,500 )   $ (404,838 )
                                   

Net loss per common share - basic and diluted

      $ (0.32 )   $ (0.60 )   $ (1.78 )   $ (1.88 )

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

        268,363,377       221,949,069       262,740,383       215,484,949  

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

      

 
         

Three months ended

September 30,

   

Nine months ended

September 30,

 
(in thousands)         2006     2005     2006     2005  

Customer care & billing operations

      $ 369     $ 15     $ 723     $ 30  

Ad sales

        579       76       1,527       158  

Satellite & terrestrial

        667       104       1,639       189  

Broadcast

        691       78       1,749       162  

Operations

        570       31       1,572       65  

Programming & content

        2,644       311       6,662       654  

Research & development

        2,161       319       5,398       710  

General & administrative

        6,337       486       17,414       1,295  

Retention & support

        2,029       501       5,338       961  
                                   

Total stock-based compensation

      $ 16,047     $ 1,921     $ 42,022     $ 4,224  
                                   

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)   

September 30,

2006

  

December 31,

2005

     (unaudited)     
ASSETS          

Current assets:

     

Cash and cash equivalents

   $ 285,339    $ 710,991

Accounts receivable, net of allowance for doubtful accounts of $6,312 and $3,722

     42,586      47,247

Due from related parties

     12,275      8,629

Related party prepaid expenses

     61,688      54,752

Prepaid programming content

     52,324      65,738

Prepaid and other current assets

     106,406      55,811
             

Total current assets

     560,618      943,168

Restricted investments

     2,674      5,438

System under construction

     332,418      216,527

Property and equipment, net of accumulated depreciation and amortization of $724,103 and $600,482

     620,851      673,672

DARS license

     141,388      141,276

Intangibles, net of accumulated amortization of $7,904 and $6,960

     4,958      5,902

Deferred financing fees, net of accumulated amortization of $20,647 and $20,922

     42,465      36,735

Related party prepaid expenses, net of current portion

     169,936      9,809

Investments

     147,603      187,403

Prepaid and other assets, net of current portion

     3,879      3,731
             

Total assets

   $ 2,026,790    $ 2,223,661
             
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)      

Current liabilities:

     

Accounts payable

   $ 31,996    $ 145,691

Accrued expenses

     103,105      154,125

Accrued satellite liability

     152,727      104,300

Accrued interest

     35,162      5,603

Current portion of long-term debt

     14,675      7,608

Due to related parties

     22,599      60,750

Subscriber deferred revenue

     305,754      275,944

Deferred income

     10,081      10,137
             

Total current liabilities

     676,099      764,158

Satellite liability, net of current portion

     —        23,285

Long-term debt, net of current portion

     1,342,645      1,035,584

Due to related parties, net of current portion

     —        53,901

Subscriber deferred revenue, net of current portion

     85,325      84,694

Deferred income, net of current portion

     134,882      141,073

Other non-current liabilities

     41,022      40,018
             

Total liabilities

     2,279,973      2,142,713
             

(Continued)

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS—(Continued)

 

(in thousands, except share and per share data)    September 30,
2006
    December 31,
2005
 
     (unaudited)        

Commitments and contingencies

    

Stockholders’ equity (deficit):

    

Series A convertible preferred stock, par value $0.01 (liquidation preference of $51,370 at September 30, 2006 and December 31, 2005); 15,000,000 shares authorized, 5,393,252 shares issued and outstanding at September 30, 2006 and December 31, 2005

     54       54  

Series B convertible redeemable preferred stock, par value $0.01 (liquidation preference of $0 and $23,714 at September 30, 2006 and December 31, 2005, respectively); 3,000,000 shares authorized, zero and 474,289 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively

     —         5  

Series C convertible redeemable preferred stock, par value $0.01 (liquidation preference of $119,417 and $114,514 at September 30, 2006 and December 31, 2005, respectively); 250,000 shares authorized, 79,246 shares issued and outstanding at September 30, 2006 and December 31, 2005

     1       1  

Series D preferred stock, par value $0.01 (liquidation preference of $0 at September 30, 2006 and December 31, 2005); 250,000 shares authorized, no shares issued and outstanding at September 30, 2006 and December 31, 2005

     —         —    

Class A common stock, par value $0.01; 600,000,000 shares authorized, 268,540,874 shares and 240,701,988 shares issued and outstanding at September 30, 2006 and December 31, 2005, respectively

     2,685       2,407  

Class C common stock, par value $0.01; 15,000,000 shares authorized, no shares issued and outstanding at September 30, 2006 and December 31, 2005

     —         —    

Accumulated other comprehensive income, net of tax

     4,533       5,985  

Additional paid-in capital

     2,981,296       2,852,100  

Accumulated deficit

     (3,241,752 )     (2,779,604 )
                

Total stockholders’ equity (deficit)

     (253,183 )     80,948  
                

Total liabilities and stockholders’ equity (deficit)

   $ 2,026,790     $ 2,223,661  
                

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

 

    

Nine months ended

September 30,

 
(in thousands)    2006     2005  

Cash flows from operating activities:

    

Net loss

   $ (462,148 )   $ (398,390 )

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

    

Provision for doubtful accounts

     11,685       5,304  

Depreciation and amortization

     124,837       106,841  

Amortization of deferred income

     (7,561 )     —    

Non-cash loss on impairment of investments

     18,926       —    

Interest accretion expense

     —         33,817  

Loss from de-leveraging transactions

     100,746       407  

Loss on investment in unconsolidated joint venture

     —         424  

Non-cash loss on equity in affiliates

     17,943       —    

Amortization of deferred financing fees and debt discount

     26,536       14,150  

Stock-based compensation

     42,022       4,186  

(Benefit from) provision for deferred income taxes

     (1,251 )     1,737  

Gain on sale of fixed assets

     (4,490 )     —    

Other

     73       157  

Changes in operating assets and liabilities:

    

Increase in accounts receivable

     (14,056 )     (5,979 )

Increase in due from related parties

     (3,646 )     (6,815 )

Decrease (increase) in prepaid programming content

     13,414       (65,921 )

Increase in prepaid and other assets

     (246,063 )     (21,115 )

Decrease in accounts payable, accrued expenses and other liabilities

     (150,257 )     (26,123 )

Increase (decrease) in accrued interest

     29,559       (4,052 )

(Decrease) increase in due to related parties

     (33,155 )     34,257  

Increase in subscriber deferred revenue

     30,441       151,098  

Increase in deferred income

     1,314       —    
                

Net cash used in operating activities

     (505,131 )     (176,017 )
                

Cash flows from investing activities:

    

Purchase of property and equipment

     (46,303 )     (42,635 )

Additions to system under construction

     (120,904 )     (102,824 )

Proceeds from sale of assets

     7,182       —    

Purchase of equity investments

     —         (27,000 )

Net maturity (purchase) of restricted investments

     2,815       (954 )
                

Net cash used in investing activities

     (157,210 )     (173,413 )
                

Cash flows from financing activities:

    

Proceeds from sale of common stock

     —         300,000  

Proceeds from exercise of warrants and stock options

     5,383       11,466  

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 issuance of 1.75% convertible senior notes

     —         100,000  

Repayment of 14% senior secured discount notes due 2009

     (186,545 )     —    

Repayment of 12% senior secured notes due 2010

     (100,000 )     (15,000 )

Repayment of senior secured floating rate notes due 2009

     (200,000 )     —    

Payment of premiums on de-leveraging transactions

     (27,378 )     —    

Repurchase of Series B convertible redeemable preferred stock

     (23,960 )     —    

Payments on other borrowings

     (9,360 )     (8,294 )

Deferred financing costs

     (21,451 )     (2,478 )
                

Net cash provided by financing activities

     236,689       385,694  
                

Net (decrease) increase in cash and cash equivalents

     (425,652 )     36,264  

Cash and cash equivalents at beginning of period

     710,991       717,867  
                

Cash and cash equivalents at end of period

   $ 285,339     $ 754,131  
                

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. (“Holdings”) 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.

The principal differences between the financial conditions of Holdings and Inc., are:

 

    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.; XM-4, XM-5 and the B702 bus portion of XM-3 are owned by Holdings;

 

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

 

    the investments by Holdings in Canadian Satellite Radio (including related 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 or equity in earnings 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.

(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, 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). As of September 30, 2006 and December 31, 2005, there were no variable interest entities subject to consolidation by the Company pursuant to FIN No. 46(R).

The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in conformity with United States generally accepted accounting principles. It is suggested that these interim unaudited Condensed Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed with the SEC on March 3, 2006. 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. Certain amounts reported in previous periods have been reclassified to conform to the current presentation.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES

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 $23.7 million and $26.1 million of inventory at September 30, 2006 and December 31, 2005, respectively, which are included in Prepaid and other current assets on the Condensed Consolidated Balance Sheets.

During the quarter ended September 30, 2006, the Company recorded an inventory write-down charge of $2.3 million as a result of obsolete and excess inventory. The 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 the Stockholders’ equity in the Condensed Consolidated Balance Sheet.

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 affiliates 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 affiliates 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 affiliates 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.

Stock-Based Compensation

Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised 2004), Share-Based Payment (“SFAS 123R”), which revises SFAS 123, Accounting for Stock-Based Compensation, and supersedes Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”). SFAS 123R requires all share-based compensation payments to be recognized in the financial statements based on their fair value using an option pricing model.

The Company adopted SFAS 123R using the modified prospective method which requires that compensation cost recognized subsequent to adoption include the applicable amounts of: (a) compensation cost for share-based payments granted prior to, but not yet vested, as of December 31, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosure, and (b) compensation cost for all share-based payments granted subsequent to December 31, 2005, based on the grant date fair value estimated in accordance with SFAS 123R. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from initial estimates. The Company uses the Black-Scholes option-pricing model to value stock option awards and has elected to treat awards with graded vesting as a single award. For stock option awards granted under the XM Talent Option Plan and stock option awards granted to non-employees under the 1998 Shares Award Plan already accounted for under the expense recognition provisions of SFAS 123, the adoption of SFAS 123R did not have a material impact on the unaudited Condensed Consolidated Statements of Operations or unaudited Condensed Consolidated Statements of Cash Flows.

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

 

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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 September 30, 2006 to purchase 94 million shares of common stock (90 million of which were vested) were not included in the computation of diluted net loss per common share for the three and nine months ended September 30, 2006 as their inclusion would have been anti-dilutive. Options, warrants and convertible instruments outstanding as of September 30, 2005 to purchase 127 million shares of common stock (120 million of which were vested) were not included in the computation of diluted net loss per common share for the three and nine months ended September 30, 2005 as their inclusion would have been anti-dilutive. Unvested shares of restricted stock in the amount of 2,398,943 and 766,044 as of September 30, 2006 and 2005, respectively, are not included in the computation of basic net loss per common share or in diluted net loss per common share. The Company had a net loss in each of the periods presented, therefore, basic and diluted net loss per common share are the same.

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 5, under the heading “WorldSpace”) and foreign currency translation adjustments (see Note 5, 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 as of December 31, 2005 included a $6.0 million unrealized loss on available-for-sale securities. The components of Comprehensive income or loss for the three and nine months ended September 30, 2006 and 2005 are as follows (in thousands):

 

    

Three months ended

September 30,

   

Nine months ended

September 30,

 
     2006     2005     2006     2005  

Net loss

   $ (83,819 )   $ (131,869 )   $ (462,148 )   $ (398,390 )

Unrealized (loss) on available-for-sale securities

     (234 )     —         (234 )     —    

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

     —         —         (5,985 )     —    

Foreign currency translation adjustment, net of tax

     (346 )     —         4,767       —    
                                

Total comprehensive loss

   $ (84,399 )   $ (131,869 )   $ (463,600 )   $ (398,390 )
                                

The Company did not record a tax benefit for the unrealized loss on available-for-sale securities for the three and nine months ended September 30, 2006. Reclassification adjustment for realized loss on available-for-sale securities, for the nine months ended September 30, 2006, is shown net of tax benefit of approximately ($3,747,000). Unrealized gain (loss) on the foreign currency translation adjustment, for the three and nine months ended September 30, 3006, is shown net of tax expense (benefit) of approximately ($216,000) and $2,984,000, respectively.

Recent Accounting Pronouncements

In September 2006, the FASB Emerging Issues Task Force issued EITF No. 06-1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for an End-Customer to Receive Service from the Service Provider, which states how a service provider company that depends on specialized equipment should account for consideration paid to the manufacturers and resellers of such equipment. EITF No. 06-1 requires that the service provider recognize payments based on the form of benefit the end-customer receives from the manufacturer or reseller. If the form of benefit is “other than cash” or the service provider does not control the form of benefit provided to the customer, the consideration would be classified as an expense. If the form of benefit is cash, the consideration would be classified as an offset to revenue. The consensus would require retrospective application to all prior periods as of the beginning of the first annual reporting period beginning after June 15, 2007. This Issue is effective for the first annual reporting period beginning after June 15, 2007. The Company is currently evaluating the impact of the adoption of EITF No. 06-1 on its consolidated results of operations and financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP) and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007.

 

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The Company will adopt this Statement effective January 1, 2008. Based on the Company’s current evaluation of this Statement, the Company does not expect the adoption of SFAS No. 157 to have a significant impact on its consolidated results of operations or financial position.

In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”) No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Current Year Misstatements. SAB No. 108 requires analysis of misstatements using both an income statement (rollover) approach and a balance sheet (iron curtain) approach in assessing materiality and provides for a one-time cumulative effect transition adjustment. SAB No. 108 is effective for annual financial statements issued for fiscal years ending after November 15, 2006. The Company is currently evaluating the impact of the adoption of SAB No. 108 on its consolidated results of operations and financial position.

(3) System Under Construction

The Company has capitalized costs including capitalized interest related to the development of its spacecraft system to the extent that they have future benefits. The amounts recorded as system under construction consist of its spacecraft system in the amount of $332.4 million and $216.5 million as of September 30, 2006 and December 31, 2005, respectively.

(4) Property and Equipment

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

 

     September 30,
2006
    December 31,
2005
 

Spacecraft system

   $ 645,036     $ 645,036  

Terrestrial repeater network

     264,224       262,255  

Spacecraft control and uplink facilities

     43,784       40,548  

Broadcast facilities

     64,802       64,126  

Land

     8,788       8,788  

Buildings and improvements

     72,877       66,741  

Computer systems, furniture and fixtures, and equipment

     245,443       186,660  
                

Total property and equipment

     1,344,954       1,274,154  

Accumulated depreciation and amortization

     (724,103 )     (600,482 )
                

Property and equipment, net

   $ 620,851     $ 673,672  
                

(5) Investments

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

 

     September 30,
2006
   December 31,
2005

Equity method investment

   $ 141,372    $ 152,337

Cost method investment

     480      12,060

Available-for-sale equity securities

     5,751      23,006
             

Total investments

   $ 147,603    $ 187,403
             

Equity Method Investment

Canadian Satellite Radio (“XM Canada”)

In November 2005, XM 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. In December 2005, XM Canada 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 a fair value of $152.1 million, based on the XM Canada initial public offering price of CDN$16.00 per share. 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 entered into in November 2005 are considered a single accounting unit in accordance with the Emerging Issues Task Force (“EITF”) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables (“EITF No. 00-21”), and as such are accounted for as follows:

 

    The $152.1 million fair value of the shares received is recorded as Deferred income on XM’s Condensed Consolidated Balance Sheets and amortized on a straight-line basis into income as Other revenue in the unaudited

 

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Condensed Consolidated Statements of Operations over the 15-year expected term of the Agreements. During the three and nine months ended September 30, 2006, XM amortized $2.5 million and $7.6 million, respectively, into income as Other revenue. As of September 30, 2006, the Deferred income balance related to the fair value of shares received was $143.6 million.

 

    XM 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 XM’s system. During the three and nine months ended September 30, 2006, XM accrued $621,000 and $1,353,000, respectively, in subscriber revenue royalty and activation fees and recognized revenue of $23,000 and $39,000, respectively, as Other revenue in the unaudited Condensed Consolidated Statements of Operations. The remaining unrecognized revenue was recorded as Deferred income and will be amortized on a straight-line basis into income over the remaining expected term of the Agreements in accordance with the EITF Issue No. 00-21. As of September 30, 2006, the Deferred income balance related to the subscriber revenue royalty and activation fees was $1.3 million. In subsequent periods, the Company will recognize the pro-rata portion of the current period’s accrued revenue in addition to the amortization for each previous periods’ accrued revenue.

In addition, XM Canada will pay XM $69.1 million for the rights to broadcast and market National Hockey League (“NHL”) games for the 10-year term of XM’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 $5.25 million to $7.50 million per year. In accordance with EITF No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent, XM recognizes these payments “gross as a principal” in Other revenue. During the three and nine months ended September 30, 2006, XM recognized $1.1 million and $3.4 million, respectively, of license fees; and $0 and $0.8 million, respectively, of advertising cost reimbursements, as Other revenue.

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

 

          August 31, 2006

Current assets

      $ 61,864

Non-current assets

      $ 259,703

Current liabilities

      $ 15,379

Non-current liabilities

      $ 100,280

Total shareholders’ equity

      $ 205,908
    

Three months
ended

August 31, 2006

  

Nine months
ended

August 31, 2006

Revenues

   $ 3,060    $ 6,120

Net loss

   $ 20,800    $ 76,930

XM’s share of net loss

   $ 4,853    $ 17,943

During the three and nine months ended September 30, 2006, XM recorded a currency translation loss of approximately $0.3 million and a currency translation gain of approximately $4.8 million, respectively, as a component of Accumulated other comprehensive income in Stockholders’ equity in the unaudited Condensed Consolidated Balance Sheet. The $0.3 million loss is net of a tax benefit of approximately $0.2 million, which is offset by a corresponding $0.2 million provision for deferred income taxes. The $4.8 million gain is net of a tax expense of approximately $3.0 million, which is offset by a corresponding $3.0 million benefit to the provision for deferred income taxes. As of September 30, 2006, the Company’s investment in XM Canada had a carrying value of approximately $141.3 million and the amount due from XM Canada was $2.3 million, which is included in Prepaid and other current assets in the unaudited Condensed Consolidated Balance Sheet.

 

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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 million. XM allocated its $25 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 certain programming in exchange for a fixed monthly fee under an amended programming agreement that extends through June 7, 2009.

During 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, to Other expense in the unaudited Condensed Consolidated Statements of Operations. As of September 30, 2006, the carrying values of the Company’s investments in WSI common stock and warrant were $5.8 million (which included $0.2 of unrealized losses) and $0.5 million, respectively.

(6) Deferred Financing Fees

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

 

    

September 30,

2006

   

December 31,

2005

 

14% senior secured discount notes due 2009

   $ —       $ 3,486  

12% senior secured notes due 2010

     —         3,590  

10% senior secured discount convertible notes due 2009

     4,305       7,740  

9.75% senior notes due 2014

     16,091       —    

Senior secured floating rate notes due 2009

     —         4,814  

Senior floating rate notes due 2013

     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

     1,623       2,288  

Valuation of warrants issued to vendors

     18       18  

Mortgage

     504       504  
                

Total deferred financing fees

     63,112       57,657  

Accumulated amortization

     (20,647 )     (20,922 )
                

Deferred financing fees, net

   $ 42,465     $ 36,735  
                

(7) Long-Term Debt

The following table presents a summary of the debt activity for the nine months ended September 30, 2006 (in thousands).

 

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December 31,

2005

   

Issuances /

Additions

  

Discount

Amortization

  

Principal

Payments

   

Retirements /

Extinguishments

   

September 30,

2006

 

14% senior secured discount notes due 2009

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

Less: discount

     (39,993 )     —        2,390      —         37,603       —    

12% senior secured notes due 2010

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

10% senior secured discount convertible notes due 2009

     179,898       —        —        —         (79,940 )     99,958  

Less: discount

     (36,426 )     —        3,403      —         14,934       (18,089 )

9.75% senior notes due 2014

     —         600,000      —        —         —         600,000  

Senior secured floating rate notes due 2009

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

Senior floating rate notes due 2013

     —         200,000      —        —         —         200,000  

1.75% convertible senior notes due 2009

     400,000       —        —        —         —         400,000  

Mortgages

     39,455       —        —        (439 )     —         39,016  

Notes payable

     3       —        —        (3 )     —         —    

Capital leases

     13,710       31,643      —        (8,918 )     —         36,435  
                                              

Total debt

     1,043,192     $ 831,643    $ 5,793    $ (9,360 )   $ (513,948 )     1,357,320  
                                  

Less: current portion

     7,608                 14,675  
                          

Long-term debt, net of current portion

   $ 1,035,584               $ 1,342,645  
                          

$800 million Private Debt Offering

On May 1, 2006, the Company announced that Inc. had completed an $800 million private debt offering consisting of $600 million of unsecured 9.75% Senior Notes due 2014 and $200 million of unsecured Senior Floating Rate Notes due 2013 with an initial interest rate of 9.6%. Inc. used the proceeds of the debt offering to repurchase or redeem existing secured notes due in 2009 and 2010 and to retire approximately $320 million of the remaining fixed payment obligations under Inc.’s distribution agreement with General Motors that would have come due in 2007, 2008 and 2009. The Company has effectively replaced $486.5 million of senior secured debt with interest rates ranging from 10.63% to 14% and maturities in 2009 and 2010 (as well as covering redemption premiums and transaction costs) and $320 million of fixed payment obligations to General Motors due in 2007 through 2009, or $806.5 million of obligations, with $800 million of senior unsecured debt with current interest rates from 9.75% to 9.87% and maturities in 2013 and 2014.

As part of the refinancing, the Company and Inc. conducted a cash tender offer for Inc.’s outstanding $186.5 million of 14% Senior Secured Discount Notes due 2009 (“14% Notes”), $100 million of 12% Senior Secured Notes due 2010 (“12% Notes”) and $200 million of Senior Secured Floating Rate Notes due 2009 (“Floating Rate Notes”), with a current interest rate of 10.63% (collectively, the “Existing Notes”). On May 1, 2006, the Company and Inc. completed the initial repurchase of approximately $390 million of the Existing Notes, including $99.6 million of 12% Notes and approximately $290.7 million of the 14% Notes and existing Floating Rate Notes. Under the terms of the indentures governing those notes, Inc. had the right to force the mandatory redemption of the remaining 14% Notes and existing Floating Rate Notes, and completed those redemptions in May 2006. Subsequent to the completion of the cash tender offer and redemptions of the Floating Rate Notes and 14% Notes, the Company and Inc. retired all of the remaining 12% Notes. For a further discussion of the debt repayments by instrument, see Note 8.

9.75% Senior Notes due 2014

The aggregate principal balance of the unsecured 9.75% Senior Notes due 2014 outstanding as of September 30, 2006 is $600 million. Interest is payable semi-annually on May 1 and November 1 at a rate of 9.75% per annum. The notes are unsecured and will mature on May 1, 2014. The Company, at its option, may redeem the notes at declining redemption prices at any time on or after May 1, 2010, subject to certain restrictions. Prior to May 1, 2010, the Company may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the date of redemption. The notes are subject to covenants that, among other things, limit Inc.’s ability and the ability of

 

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certain of Inc.’s subsidiaries to incur additional indebtedness; pay dividends on, redeem or repurchase Inc.’s capital stock; make investments; engage in transactions with affiliates; create certain liens; or consolidate, merge or transfer all or substantially all of Inc.’s assets and the assets of Inc.’s subsidiaries on a consolidated basis.

Senior Floating Rate Notes due 2013

The aggregate principal balance of the unsecured Senior Floating Rate Notes due 2013 outstanding as of September 30, 2006 is $200 million. Interest is payable quarterly on May 1, August 1, November 1 and February 1 at a rate currently set at 9.87% per annum through August 1, 2006. Thereafter, the rate is reset quarterly to 450 basis points over the three-month LIBOR. The notes are unsecured and will mature on May 1, 2013. The Company, at its option, may redeem the notes at declining redemption prices at any time on or after May 1, 2008, subject to certain restrictions. Prior to May 1, 2008, the Company may redeem the notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the date of redemption. The notes are subject to covenants that, among other things, limit Inc.’s ability and the ability of certain of Inc.’s subsidiaries to incur additional indebtedness; pay dividends on, redeem or repurchase Inc.’s capital stock; make investments; engage in transactions with affiliates; create certain liens; or consolidate, merge or transfer all or substantially all of Inc.’s assets and the assets of Inc.’s subsidiaries on a consolidated basis.

$250 million Senior Secured Revolving Credit Facility

On May 5, 2006, Inc., in conjunction with the refinancing, entered into a new $250 million revolving credit facility with a group of banks. Inc. has the right to increase the size of the facility by up to $100 million, with any increase to be syndicated on a “best efforts” basis with no lender being required to increase its commitment. For as long as more than $75 million in the aggregate of Inc.’s existing senior secured notes remain outstanding, borrowings under the facility will be limited to $50 million. As further discussed in Note 14, the Company incentivized the conversion of some of its 10% senior secured discount convertible notes due 2009 on October 24, 2006, which gave the Company full borrowing capacity under the facility.

The facility has a term of three years and is expected to serve as a standby facility for additional liquidity. Borrowings under the facility will bear interest at a rate of LIBOR plus 150 to 225 basis points or an alternate base rate, to be the higher of the JPMorgan Chase prime rate and the Federal Funds rate plus 50 basis points, in each case plus 50 to 125 basis points. The facility includes a $120 million sublimit for letters of credit and a $5 million sublimit for swingline loans. Inc. expects to pay a commitment fee of 37.5 to 50 basis points per year on unused portions of the facility. The new credit facility is secured by substantially all of Inc.’s assets other than specified property. The facility includes customary events of default and requires Inc. to maintain at all times unrestricted cash and cash equivalents of at least $75 million. The facility also includes customary conditions to draw, including Inc. not undergoing any material adverse change. As of September 30, 2006 there were no amounts outstanding or letters of credit issued under the credit facility.

(8) 2006 De-leveraging Transactions

Through the cash tender offer, redemptions and other transactions discussed in Note 7 and this Note 8, the Company de-leveraged $513.9 million carrying value, or $566.5 million fully accreted face value at maturity for $532.4 million in cash consideration, which included $19.3 million of accrued interest, and 26.2 million shares of Class A common stock. The Company recorded a de-leveraging loss of $100.7 million from these extinguishments in Other income (expense) on the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2006. This includes the following de-leveraging transactions:

14% Senior Secured Discount Notes due 2009

During the first nine months of 2006, the Company repurchased or redeemed $148.7 million aggregate carrying value, or $186.5 million aggregate fully accreted face value at maturity, of its 14% Senior Secured Discount Notes due 2009, for a redemption price of $209.6 million, including accrued interest of $9.6 million. As a result of the transaction, the Company recorded a de-leveraging charge of $52.7 million; consisting of a redemption premium of $13.5 million, unamortized debt issuance costs of $1.3 million and unamortized discounts of $37.6 million.

12% Senior Secured Notes due 2010

During the first nine months of 2006, the Company repurchased $100.0 million aggregate carrying value and fully accreted face value at maturity, of its 12% Senior Secured Notes due 2010 for a redemption price of $117.2 million, including accrued interest of $4.5 million. As a result of the redemption, the Company recorded a de-leveraging charge

 

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of $15.5 million; consisting of a redemption premium of $12.7 million and unamortized debt issuance costs of $2.4 million.

10% Senior Secured Discount Convertible Notes due 2009

During the first nine months of 2006, the Company exchanged $65.1 million aggregate carrying value, or $80.0 million aggregate fully accreted face value at maturity, of its 10% Senior Secured Discount Convertible Notes due 2009 by issuing approximately 26.2 million shares of Class A common stock. In connection with these exchanges, the Company recorded a de-leveraging charge consisting of a redemption premium of $28.4 million. In addition, the Company wrote-off an unamortized beneficial conversion feature of $14.9 million to interest expense and unamortized debt issuance costs of $2.1 million to Additional paid-in capital. Further de-leveraging after the end of the period is discussed in Note 14.

Senior Secured Floating Rate Notes due 2009

During the first nine months of 2006, the Company repurchased or redeemed $200.0 million aggregate carrying value and fully accreted face value at maturity, of its Senior Secured Floating Rate Notes due 2009 for a redemption price of $205.6 million, including accrued interest of $5.2 million. As a result of the transaction, the Company recorded a de-leveraging charge of $4.1 million; consisting of a redemption premium of $0.4 million and unamortized debt issuance costs of $3.7 million.

(9) Equity Transactions

Repurchases of Series B Convertible Redeemable Preferred Stock

In April 2006, the Company repurchased 366,304 shares of its 8.25% Series B convertible redeemable preferred stock, for approximately $18.3 million (or $50.00 per share). In June 2006, the Company repurchased the remaining 107,985 shares of 8.25% Series B convertible redeemable preferred stock, for approximately $5.6 million (or $51.65 per share). These repurchases included an aggregate premium of $755,000 and accrued dividends of $68,000 (included in net loss attributable to common stockholders), but excluded approximately $260,000 of accrued dividends that were forgiven.

Conversion of Series C Convertible Redeemable Preferred Stock

As further discussed in Note 14, the Company entered into agreements with its remaining holders of its 8.25% Series C convertible redeemable preferred stock to convert the outstanding shares into shares of the Company’s Class A common stock.

(10) 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 nine months ended September 30, 2006, the Company recognized compensation expense of $16.0 million and $42.0 million, respectively. During the three and nine months ended September 30, 2005, the Company recognized compensation expense of $1.9 million and $4.2 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 nine months ended September 30, 2006 and 2005, respectively. The Company did not realize any income tax benefits from stock-based payment plans during the three and nine months ended September 30, 2006 and 2005, respectively, as a result of a full valuation allowance that is maintained for substantially all net deferred tax assets.

1998 Shares Award Plan and XM Talent Option Plan

On June 1, 1998, the Company adopted the 1998 Shares Award Plan (“1998 Plan”) under which 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. Restrictions on restricted stock awards lapse as vesting occurs. 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. At September 30, 2006, there were 1,464,714 shares available under the 1998 Plan for future grant.

 

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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. These 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. At September 30, 2006, 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
September 30,
     2006    2005

Expected dividend yield

   0%    0%

Expected volatility (1)

   51%    40%

Risk-free interest rate (2)

   4.59%    4.13%

Expected term (3)

   6 Years        5 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 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 1998 Plan and the Talent Plan as of September 30, 2006, and activity during the nine 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, 2006

   14,569,012     $ 17.81      

Granted

   2,433,899     $ 18.95      

Exercised

   (500,658 )   $ 7.93      

Forfeited or expired

   (689,326 )   $ 27.33      
              

Outstanding, September 30, 2006

   15,812,927     $ 17.88    6.87    $ 28,996

Vested and expected to vest, September 30, 2006

   15,537,419     $ 17.88    6.87    $ 28,491

Exercisable, September 30, 2006

   10,992,098     $ 15.75    6.08    $ 28,541

The per share weighted-average fair value of stock option awards granted during the nine months ended September 30, 2006 and 2005 was $9.60 and $12.89, respectively, on the date of grant. The total intrinsic value of stock option awards exercised during the nine months ended September 30, 2006 and 2005 was $6.3 million, and $18.9 million, respectively. As of September 30, 2006, there was $42.3 million of total unrecognized compensation cost related to stock option awards granted under the 1998 Plan and Talent Plan. The weighted-average period over which the compensation expense for these awards is expected to be recognized was 1.72 years.

Restricted Stock—A summary of the status of the Company’s restricted stock as of September 30, 2006, and changes during the nine months then ended is presented below:

 

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     Shares    

Weighted-Average
Grant Date

Fair Value

Nonvested, January 1, 2006

   833,544     $ 28.70

Granted

   1,983,627     $ 18.99

Vested

   (274,394 )   $ 27.24

Forfeited

   (143,834 )   $ 25.84
        

Nonvested, September 30, 2006

   2,398,943     $ 21.01
        

The fair value of each restricted stock award is the market value, as determined by the last sale price of the Company’s Class A common stock on The NASDAQ National Market, of the stock as if it were vested and issued on the grant date. As of September 30, 2006 and December 31, 2005, there was $43.8 million and $18.1 million, respectively, of total unrecognized compensation cost related to restricted stock granted under the 1998 Plan. The September 30, 2006 unrecognized compensation cost is expected to be recognized over a weighted-average period of 2.3 years.

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. The purchase price for shares under the plan will be 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 123R, 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. As of September 30, 2006 and 2005, the Company had issued a cumulative total of 693,768 and 603,544 shares, respectively, under this plan. The weighted-average grant date fair value for shares issued during the three and nine months ended September 30, 2006 was $10.97 and $13.68, respectively, per share. The remaining shares available for issuance under the ESPP at September 30, 2006 were 306,232.

Pro Forma Presentation for Periods Prior to the Adoption of SFAS 123R—Under the modified prospective transition method, results for prior periods have not been restated to reflect the effects of implementing SFAS 123R. The following table illustrates the effect on net loss as if the Company had applied the fair value recognition provisions of SFAS 123, to stock-based employee compensation (in thousands).

 

     Three months ended
September 30, 2005
    Nine months ended
September 30, 2005
 

Net loss attributable to common stockholders, as reported

   $ (134,018 )   $ (404,838 )

Add: Stock-based employee compensation expense included in net loss

     1,816       3,603  

Less: Total stock-based employee compensation expense determined under fair value-based method for all awards

     (11,219 )     (31,097 )
                

Pro forma net loss

   $ (143,421 )   $ (432,332 )
                

As reported - net loss per common share: basic and diluted

   $ (0.60 )   $ (1.88 )

Pro forma - net loss per common share: basic and diluted

   $ (0.65 )   $ (2.01 )

For SFAS No. 123 disclosures purposes, the weighted average fair value of each employee option grant has been estimated as of the date of grant using the Black-Scholes option-pricing model.

 

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(11) Related Party Transactions

The Company developed strategic relationships with certain companies that were instrumental in the construction and development of its system. In connection with the Company granting to them large supply contracts, some of these strategic companies have become large investors in XM and have been granted rights to designate directors or observers to XM’s board of directors. The negotiation of these supply contracts and investments primarily occurred at or prior to the time these companies became related parties.

The Company is a party to a long-term distribution agreement with General Motors that provides for the installation of XM radios in General Motors vehicles, as further described in Note 13. 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. As of September 30, 2006, the Company is engaged in activities with GM and Honda to jointly promote new car buyers to subscribe to the XM service. At September 30, 2006, there were 613,854 subscribers in promotional periods (typically ranging from three months to one year in duration) paid for by the vehicle manufacturers. These subscriptions are included in the Company’s quarter-end subscriber total. Subscriber revenues received from GM and 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 General Motors, 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 Motor Co., Inc.

The Company had the following related party balances at September 30, 2006 and December 31, 2005 (in thousands):

 

     Due from    Prepaid expense    Due to
     September 30,
2006
   December 31,
2005
   September 30,
2006
   December 31,
2005
   September 30,
2006
   December 31,
2005

GM

   $ 11,000    $ 6,957    $ 230,374    $ 59,561    $ 21,626    $ 114,282

Honda

     1,275      1,672      1,250      5,000      973      369
                                         

Total

   $ 12,275    $ 8,629    $ 231,624    $ 64,561    $ 22,599    $ 114,651
                                         

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

 

     Three months ended
September 30,
   Nine months ended
September 30,
     2006    2005    2006    2005

GM

   $ 7,232    $ 9,312    $ 20,051    $ 20,923

Honda

     4,286      3,118      12,711      7,719
                           

Total

   $ 11,518    $ 12,430    $ 32,762    $ 28,642
                           

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
September 30, 2006
   Three months ended
September 30, 2005
     GM    Honda    GM    Honda

Research & development

   $ —      $ 1,250    $ —      $ 1,250

Customer care & billing operations

     75      —        63      —  

Marketing

     48,601      817      55,068      525
                           

Total

   $ 48,676    $ 2,067    $ 55,131    $ 1,775
                           

 

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     Nine months ended
September 30, 2006
   Nine months ended
September 30, 2005
     GM    Honda    GM    Honda

Research & development

   $ —      $ 3,750    $ —      $ 3,750

Customer care & billing operations

     263      —        174      —  

Marketing

     162,181      1,762      151,235      1,385
                           

Total

   $ 162,444    $ 5,512    $ 151,409    $ 5,135
                           

In addition to the aforementioned related parties, the Company has transactions with an equity method investee, XM Canada, which are more fully discussed in Note 5.

(12) Supplemental Cash Flows Disclosures

The Company paid $30.3 million and $27.3 million for interest, net of amounts capitalized to System under construction of $18.0 million and $18.6 million, during the nine months ended September 30, 2006 and 2005, respectively. Additionally, the Company incurred the following non-cash financing and investing activities (in thousands):

 

     Nine months ended
September 30,
     2006    2005

Accrued system construction costs

   $ 59,202    $ 16,310

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

     31,643      12,405

Assumption of debt on purchase of building

     —        6,630

Issuance of warrants for satellite contract

     —        4,868

Issuance of warrants for deferred financing fees

     —        150

(13) Commitments and Contingencies

Satellite System

Satellite Deployment Plan—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. 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 beginning in April 2005 is being 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. Following positioning in geostationary orbit and extensive in-orbit testing, XM-4 is currently scheduled for handover to the Company in December 2006. During the second quarter of 2005, XM entered into a contract to construct a fifth and spare satellite (“XM-5”), expected to be completed by late 2007 or early 2008, for use as a ground spare or to be available for launch in the event there is an early operations failure of XM-4.

Satellite Insurance Settlement Update— In July 2004, the Company reached agreement with insurers covering 80 percent of the aggregate sum insured in connection with the progressive solar array power degradation issue that is common to the first six Boeing 702 class satellites put in orbit (XM-2 and XM-1 were the fifth and sixth Boeing 702s launched). The settlement was at a rate equal to 44.5 percent of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. The Company was recently notified that it was not successful in its arbitration claim against the remaining insurers, and will not receive any further insurance proceeds with regard to this issue. The result of this arbitration did not affect the July 2004 agreements with respect to the 80 percent of the aggregate sum insured.

 

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Satellite Contracts and Other Costs: XM-1, XM-2, XM-3, XM-4 and XM-5—As of September 30, 2006, the Company has paid approximately $771.2 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 has subsequently amended the contract, including most recently in July 2006. Under the satellite contract, BSS has delivered three satellites in-orbit, XM-1, XM-2 and XM-3, and one satellite on the ground (XM-4), supplied ground equipment and software used in the XM Radio system and provided certain launch and operations support services. 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 its fifth satellite, XM-5. Construction of XM-5 is expected to be completed by late 2007 or early 2008.

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. As of September 30, 2006, with respect to XM-3, the Company has deferred payment of construction costs of $15 million at an interest rate of 8% through January 2007, which is included in Accrued satellite liability. 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 for XM-3 through February 2007.

XM-4—Under its contracts with BSS and Sea Launch, the Company has committed to pay a total of $187.7 million for XM-4 and the associated launch services, excluding in-orbit performance incentives and financing charges on certain amounts deferred prior to launch. As of September 30, 2006, satellite construction and launch costs aggregating approximately $174.2 million had been incurred, of which $93.7 million has been paid, $2.3 million is due currently and $78.2 million was deferred until launch (subsequently paid in October 2006) and is included in Accrued satellite liability. Interest on the deferred amount accrued monthly at a rate of 10.75% per annum and is being paid on a current basis. The remaining portion of the fixed costs for XM-4 and the associated launch services are payable during the remainder of 2006 with the last payment due one month following launch.

After launch of XM-4 on October 30, 2006, 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.

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 XM-5 contract, SS/L began construction of the 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 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 September 30, 2006, with respect to XM-5, the Company has paid $40.0 million and deferred payment of construction costs of $59.5 million at an interest rate of 8% through January 2007, which is included in Accrued satellite liability.

GM Distribution Agreement

The Company has a long-term distribution agreement with of General Motors. 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 the form of indebtedness or 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

 

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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 General Motors to retire approximately $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 the form of indebtedness or shares of the Company’s Class A common stock. In addition, the Company’s credit facility with General Motors was increased from $100 million to $150 million. The GM facility will terminate when 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 new credit facility and then secured on a second priority basis behind the secured indebtedness permitted to be incurred under the new credit facility. As of September 30, 2006, the Company has $26.0 million of current prepaid expense to related party and $156.1 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 September 30, 2006, the Company has $34.4 million of current prepaid expense to related party and $13.8 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 if as of November 2005, and will be subject to renegotiation at two-year intervals thereafter, 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 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, the Company fails to achieve and maintain specified minimum market share levels in the satellite digital radio service market. The Company was significantly exceeding the minimum levels at September 30, 2006. For the three and nine months ended September 30, 2006, the Company incurred total costs of $48.7 million and $162.4 million, respectively, under the distribution agreement. For the three and nine months ended September 30, 2005, the Company incurred total costs of $55.1 million and $151.4 million, respectively, under the distribution agreement.

Programming Agreements

The Company has a multi-year agreement with Major League Baseball® to broadcast MLB games live nationwide. The Company paid $50 million for the 2005 season, $60 million (which included $10 million paid in October 2004) for the 2006 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. The Company 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 the Company to deposit $120 million into escrow or furnish other credit support in such amount. In July 2006, the Company furnished a $120 million surety bond to MLB as part of an amendment to the agreement with MLB that permitted the Company to provide various types of credit support in lieu of its $120 million escrow deposit requirement.

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.

 

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Litigation and Arbitration

Securities class action — A consolidated action is pending in the United States District Court for the District of Columbia on behalf of a purported nationwide class of purchasers of the Company’s common stock between July 28, 2005 and February 16, 2006 against the Company and its chief executive officer. The complaint, as amended in September 2006, seeks an unspecified amount of damages and claims violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder, alleging various statements made during the putative class period by the Company and its management failed to project accurately or disclose in a timely manner the amount of higher costs to obtain subscribers during the fourth quarter of 2005. The Company anticipates filing a motion to dismiss this matter.

The Company believes the allegations are without merit, and intends to vigorously defend this 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.

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 has filed a motion to dismiss this matter.

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. 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.

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 an 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 whether a court or the arbitrator decides arbitrability. The matter is currently pending before the United States Court of Appeals for the Eight Circuit from the denial of a stay by the district court. 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. The Company anticipates that hearings in these matters will take place in early 2007, and 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.

Satellite Insurance Settlement Update — In July 2004, the Company reached agreement with insurers covering 80 percent of the aggregate sum insured in connection with the progressive solar array power degradation issue that is common to the first six Boeing 702 class satellites put in orbit (XM-2 and XM-1 were the fifth and sixth Boeing 702s launched). The settlement was at a rate equal to 44.5 percent of the proportionate amount covered by each of these insurers, representing a total recovery of approximately $142 million from these insurers. The Company was recently notified that it was not successful in its arbitration claim against the remaining insurers, and will not receive any further insurance proceeds with regard to this issue. The result of this arbitration did not affect the July 2004 agreements with respect to the 80 percent of the aggregate sum insured.

Regulatory Matters and Inquiries

Federal Communication Commission (“FCC”)

FCC Receiver Matter — As the Company has previously disclosed, it has received inquiries from, and responded to, the Federal Communications Commission 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.

The Company has implemented a series of design and installation modifications, and through October 2006, the Company obtained new certifications for six models of modified XM radios using its new SureConnect technology. Radios using the SureConnect technology are expected to be available at retail for the holiday shopping season. 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 — The Company has recently filed for both a 30-day Special Temporary Authority (STA) and a 180-day STA with respect to its terrestrial repeater network. The Company is seeking authority to continue to operate its entire repeater network despite the fact that the characteristics of certain repeaters, as built, differ from the submitted data 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 has recently held meetings with the staff of the FCC regarding these matters. The Company’s deployment of terrestrial repeaters may be affected by the FCC’s further actions, when taken. 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 for many years, 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.

 

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Federal Trade Commission (“FTC”)

FTC Inquiry — On April 25, 2006, the Company received a letter from the Federal Trade Commission 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, by letter dated August 31, 2006 and subsequent follow-up letters, the Staff of the Securities and Exchange Commission (“SEC”) 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.

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.

 

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14) Subsequent Events

On September 22, 2006, the Company entered into agreements to issue an aggregate of approximately 28.9 million shares of Class A common stock in exchange for approximately $42.6 million aggregate principal amount at maturity of its 10% Senior Secured Discount Convertible Notes due 2009 and 79,246 shares of its 8.25% Series C Convertible Redeemable Preferred Stock. The agreements were entered into with American Honda Motor Co., Inc., a holder of its 10% notes and Series C preferred stock, George Haywood, a former member of the board of directors and a holder of its 10% notes and another holder of its Series C preferred stock. These transactions closed on October 24, 2006 and November 8, 2006. The terms of these agreements with respect to the 10% notes were substantially similar to prior agreements entered into between the Company and Bear Stearns, Royal Bank of Canada and Eastbourne Capital in late 2005 and early 2006 except that the September 22 agreements were based on the closing price of its Class A common stock on September 21, 2006. The terms of these agreements with respect to the Series C preferred stock were as if the Company had called the Series C preferred stock for redemption in the normal course.

On September 26, 2006, the Company commenced a tender offer to incentivize the conversion of any and all of the other outstanding 10% notes by offering $320.80, payable solely in shares of the Company’s Class A common stock, for each $1,000 of 10% notes validly tendered for conversion. The tender offer is being made to all of the remaining holders of 10% notes. The terms for exchange of Class A common stock for 10% notes in the September 22 agreements and the tender offer are substantially similar except that pricing for the tender offer is based on the average closing price of the Company’s Class A common stock for the five-day period ending on November 8, 2006.

If all remaining holders tender their 10% notes, of which there can be no assurance, these transactions would result in the retirement of all of these secured notes and all of the Series C preferred stock, effectively converting all of these securities into shares of the Company’s Class A common stock. The Company would recognize an aggregate non-cash charge of approximately $51.1 million in connection with these transactions, representing interest and de-leveraging expenses. The Company will not pay any cash in connection with these transactions. The closing of two of the three September 22 agreements in October 2006 gave the Company full borrowing capacity under its recently obtained $250 million revolving credit facility, the availability of which was limited to $50 million until the Company retired $25 million of its remaining secured notes, and under the Company’s facility with General Motors, the availability of which was limited to $37.5 million until the Company retired $25 million of its remaining secured notes.

The 10% notes, issued in January 2003, are convertible into the Company’s Class A common stock at $3.18 per share under the terms of the initial issuance. The Company does not have a right to prepay or redeem these notes, they do not become subject to mandatory conversion until 2007 and they are not mandatorily convertible at or after that time unless various conditions regarding the amount of our outstanding indebtedness and other matters are met. The 10% notes finished accreting on December 31, 2005, and the Company would have had to make future interest payments on the notes in cash. By issuing stock in exchange for the 10% notes, both through the September 22 agreements and the tender offer, the Company estimates that it will be released from obligations to pay approximately $35 million in interest payments over the next three years prior to maturity of the notes.

The Series C preferred stock, issued in August 2000, was convertible, under the terms of the initial issuance, into the number of shares of the Company’s Class A common stock equal to the liquidation preference divided by $8.67. The liquidation preference of each of the 79,246 shares outstanding was approximately $1,512 per share, or an aggregate of approximately $119.9 million of liquidation preference. The Series C preferred stock was currently redeemable at 104.95% of the liquidation preference upon 30 days prior notice.

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

Closing of these transactions has completed or will complete the Company’s refinancing and retirement of its outstanding secured notes and preferred stock begun earlier this year in which the Company replaced three series of publicly-traded secured notes with two series of publicly-traded unsecured notes with lower interest rates and later maturity. The Company also eliminated three years of fixed payment obligations to General Motors due in 2007 through 2009 with the proceeds of the notes maturing in 2013 and 2014. As part of the refinancing, the Company put in place a new $250 million secured revolving credit facility and increased the size of its credit facility with General Motors to $150 million.

(15) 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. Accordingly, the Company provides the following condensed consolidating financial information.

 

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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 SEPTEMBER 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.
    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

  $ 237,921     $ 35,032     $ 2,741     $ —       $ (37,780 )   $ 237,914     $ 2,521     $ 2,541     $ (2,532 )   $ 240,444  

Cost of revenue

    140,234       —         7       —         112       140,353       —         204       (1,897 )     138,660  

Research & development

    8,849       —         —         —         —         8,849       —         —         —         8,849  

General & administrative

    22,022       —         —         —         —         22,022       101       —         (126 )     21,997  

Marketing

    88,589       —         —         —         —         88,589       —         —         —         88,589  

Depreciation & amortization

    38,359       —         3,285       —         —         41,644       963       502       —         43,109  
                                                                               

Total operating expenses

    298,053       —         3,292       —         112       301,457       1,064       706       (2,023 )     301,204  
                                                                               

Operating income (loss)

    (60,132 )     35,032       (551 )     —         (37,892 )     (63,543 )     1,457       1,835       (509 )     (60,760 )

Other income (expense):

                   

Interest income

    1,181       —         181       14,810       (14,991 )     1,181       3,984       51       —         5,216  

Interest expense

    (38,096 )     —         —         (182 )     14,991       (23,287 )     (64 )     (443 )     —         (23,794 )

Loss from de-leveraging transactions

    (21 )     —         —         —         —         (21 )     —         —         —         (21 )

Loss from impairment of investments

    —         —         —         —         —         —         —         —         —         —    

Equity in net loss of affiliates

    —         —         —         —         —         —         (4,853 )     —         —         (4,853 )

Other income (expense)

    10,785       —         —         —         (10,821 )     (36 )     (85,594 )     —         86,817       1,187  
                                                                               

Net income (loss) before income taxes

    (86,283 )     35,032       (370 )     14,628       (48,713 )     (85,706 )     (85,070 )     1,443       86,308       (83,025 )
                                                                               

Benefit from (provision for)deferred income taxes

    —         (577 )     —         —         —         (577 )     1,251       —         (1,468 )     (794 )
                                                                               

Net income (loss)

  $ (86,283 )   $ 34,455     $ (370 )   $ 14,628     $ (48,713 )   $ (86,283 )   $ (83,819 )   $ 1,443     $ 84,840     $ (83,819 )
                                                                               

 

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NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

 

XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES

UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

FOR THE NINE MONTHS ENDED SEPTEMBER 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.
    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

   $ 668,725     $ 97,120     $ 8,201     $ —       $ (105,321 )   $ 668,725     $ 7,561     $ 7,620     $ (7,611 )   $ 676,295  

Cost of revenue

     423,817       —         24       —         357       424,198       —         513       (5,710 )     419,001  

Research & development

     28,348       —         —         —         —         28,348       —         —         —         28,348  

General & administrative

     58,352       —         —         —         —         58,352       348       (26 )     (375 )     58,299  

Marketing

     309,022       —         —         —         —         309,022       —         —         —         309,022  

Depreciation & amortization

     110,581       —         9,870       —         —         120,451       2,880       1,506       —         124,837  
                                                                                

Total operating expenses

     930,120       —         9,894       —         357       940,371       3,228       1,993       (6,085 )     939,507  
                                                                                

Operating income (loss)

     (261,395 )     97,120       (1,693 )     —         (105,678 )     (271,646 )     4,333       5,627       (1,526 )     (263,212 )

Other income (expense):

                    

Interest income

     2,614       —         572       43,945       (44,460 )     2,671       15,068       426       —         18,165  

Interest expense

     (128,720 )     —         —         (516 )     44,460       (84,776 )     (907 )     (663 )     —         (86,346 )

Loss from de-leveraging transactions

     (100,120 )     —         —         —         —         (100,120 )     (626 )     —         —         (100,746 )

Loss from impairment of investments

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

Equity in net loss of affiliates

     —         —         —         —         —         —         (17,943 )     —         —         (17,943 )

Other income (expense)

     36,282       —         4,304       —         (36,321 )     4,265       (444,398 )     1       445,741       5,609  
                                                                                

Net income (loss) before income taxes

     (451,339 )     97,120       3,183       43,429       (141,999 )     (449,606 )     (463,399 )     5,391       444,215       (463,399 )
                                                                                

Benefit from (provision for) deferred income taxes

     —         (1,733 )     —         —         —         (1,733 )     1,251       —         1,733       1,251  
                                                                                

Net income (loss)

   $ (451,339 )   $ 95,387     $ 3,183     $ 43,429     $ (141,999 )   $ (451,339 )   $ (462,148 )   $ 5,391     $ 445,948     $ (462,148 )
                                                                                

 

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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 SEPTEMBER 30, 2005

 

(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.
    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

   $ 153,120     $ 22,958     $ 2,633     $ —       $ (25,591 )   $ 153,120     $ —       $ 2,243     $ (2,251 )   $ 153,112  

Cost of revenue

     106,262       —         8       —         111       106,381       —         183       (1,605 )     104,959  

Research & development

     7,885       —         —         —         —         7,885       —         —         —         7,885  

General & administrative

     12,343       —         —         —         —         12,343       73       243       (125 )     12,534  

Marketing

     99,227       —         —         —         —         99,227       —         —         —         99,227  

Depreciation & amortization

     33,165       —         3,510       —         —         36,675       966       399       —         38,040  
                                                                                

Total operating expenses

     258,882       —         3,518       —         111       262,511       1,039       825       (1,730 )     262,645  
                                                                                

Operating income (loss)

     (105,762 )     22,958       (885 )     —         (25,702 )     (109,391 )     (1,039 )     1,418       (521 )     (109,533 )

Other income (expense):

                    

Interest income

     687       —         146       14,810       (14,956 )     687       6,492       87       —         7,266  

Interest expense

     (40,280 )     —         —         (146 )     14,956       (25,470 )     (1,067 )     (196 )     —         (26,733 )

Loss from de-leveraging transactions

     (2,207 )     —         —         —         —         (2,207 )     —         —         —         (2,207 )

Equity in net loss of affiliates

     —         —         —         —         —         —         —         —         —         —    

Other income (expense)

     10,480       —         —         —         (10,601 )     (121 )     (136,195 )     2       136,231       (83 )
                                                                                

Net income (loss) before income taxes

     (137,082 )     22,958       (739 )     14,664       (36,303 )     (136,502 )     (131,809 )     1,311       135,710       (131,290 )
                                                                                

Provision for deferred income taxes

     —         (579 )     —         —         —         (579 )     —         —         —         (579 )
                                                                                

Net income (loss)

   $ (137,082 )   $ 22,379     $ (739 )   $ 14,664     $ (36,303 )   $ (137,081 )   $ (131,809 )   $ 1,311     $ 135,710     $ (131,869 )
                                                                                

 

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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 NINE MONTHS ENDED SEPTEMBER 30, 2005

 

(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.
    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings
Inc.
 

Revenue

   $ 381,162     $ 55,149     $ 7,897     $ —       $ (63,046 )   $ 381,162     $ —       $ 6,629     $ (6,660 )   $ 381,131  

Cost of revenue

     276,895       —         25       —         335       277,255       —         862       (4,645 )     273,472  

Research & development

     20,970       —         —         —         —         20,970       —         —         —         20,970  

General & administrative

     30,070       —         —         —         —         30,070       519       425       (363 )     30,651  

Marketing

     291,105       —         —         —         —         291,105       —         —         —         291,105  

Depreciation & amortization

     93,485       —         10,529       —         —         104,014       1,733       1,094       —         106,841  
                                                                                

Total operating expenses

     712,525       —         10,554       —         335       723,414       2,252       2,381       (5,008 )     723,039  
                                                                                

Operating income (loss)

     (331,363 )     55,149       (2,657 )     —         (63,381 )     (342,252 )     (2,252 )     4,248       (1,652 )     (341,908 )

Other income (expense):

                    

Interest income

     1,971       —         425       43,945       (44,370 )     1,971       14,188       209       —         16,368  

Interest expense

     (112,046 )     —         —         (425 )     44,370       (68,101 )     (2,701 )     (432 )     —         (71,234 )

Loss from de-leveraging transactions

     (2,207 )     —         —         —         —         (2,207 )     —         —         —         (2,207 )

Equity in net loss of affiliates

     —         —         —         —         —         —         —         —         —         —    

Other income (expense)

     31,175       —         —         —         (31,318 )     (143 )     (407,564 )     1,428       408,607       2,328  
                                                                                

Net income (loss) before income taxes

     (412,470 )     55,149       (2,232 )     43,520       (94,699 )     (410,732 )     (398,329 )     5,453       406,955       (396,653 )
                                                                                

Provision for deferred income taxes

     —         (1,737 )     —         —         —         (1,737 )     —         —         —         (1,737 )
                                                                                

Net income (loss)

   $ (412,470 )   $ 53,412     $ (2,232 )   $ 43,520     $ (94,699 )   $ (412,469 )   $ (398,329 )   $ 5,453     $ 406,955     $ (398,390 )
                                                                                

 

30


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 BALANCE SHEETS

AS OF SEPTEMBER 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.

    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings Inc.
 

Current assets:

                   

Cash and cash equivalents

  $ 46,260     $ —     $ —       $ —     $ —       $ 46,260     $ 238,660     $ 419     $ —       $ 285,339  

Accounts receivable, net

    42,586       —       —         —       —         42,586       —         —         —         42,586  

Due from subsidiaries/affiliates

    3,710       231,459     28,210       610,182     (873,387 )     174       —         26,481       (26,655 )     —    

Due from related parties

    12,275       —       —         —       —         12,275       —         —         —         12,275  

Related party prepaid expenses

    61,688       —       —         —       —         61,688       —         —         —         61,688  

Prepaid programming content

    52,324       —       —         —       —         52,324       —         —         —         52,324  

Prepaid and other current assets

    65,413       —       —         —       —         65,413       41,701       417       (1,125 )     106,406  
                                                                           

Total current assets

    284,256       231,459     28,210       610,182     (873,387 )     280,720       280,361       27,317       (27,780 )     560,618  

Restricted investments

    375       —       —         —       —         375       —         2,299       —         2,674  

System under construction

    —         —       —         —       —         —         332,418       —         —         332,418  

Property and equipment, net

    502,620       —       30,092       —       —         532,712       52,158       41,080       (5,099 )     620,851  

Investment in subsidiary/affiliates

    982,583       —       —         —       (982,583 )     —         (316,956 )     —         316,956       —    

DARS license

    —         141,388     —         —       —         141,388       —         —         —         141,388  

Intangibles, net

    4,958       —       —         —       —         4,958       —         —         —         4,958  

Deferred financing fees, net

    35,528       —       —         —       —         35,528       6,533       404       —         42,465  

Related party prepaid expenses

    169,936       —       —         —       —         169,936       —         —         —         169,936  

Equity investments

    —         —       —         —       —         —         147,603       —         —         147,603  

Prepaid and other current assets

    2,007       —       —         —       —         2,007       —         1,872       —         3,879  
                                                                           

Total assets

  $ 1,982,263     $ 372,847   $ 58,302     $ 610,182   $ (1,855,970 )   $ 1,167,624     $ 502,117     $ 72,972     $ 284,077     $ 2,026,790  
                                                                           

Current liabilities:

                   

Accounts payable

  $ 23,105     $ —     $ —       $ —     $ —       $ 23,105     $ 8,829     $ 62     $ —       $ 31,996  

Accrued expenses

    103,021       —       75       —       —         103,096       450       —         (441 )     103,105  

Accrued satellite liability

    15,000       —       —         —       —         15,000       137,727       —         —         152,727  

Accrued interest

    29,298       —       —         —       —         29,298       5,660       204       —         35,162  

Current portion of long-term debt

    14,112       —       —         —       —         14,112       —         563       —         14,675  

Due to related parties

    22,599       —       —         —       —         22,599       —         —         —         22,599  

Due to subsidiary/affiliates

    846,094       247     2,145       24,881     (873,367 )     —         26,480       284       (26,764 )     —    

Subscriber deferred revenue

    305,754       —       —         —       —         305,754       —         —         —         305,754  

Deferred income

    —         —       —         —       —         —         10,081       —         —         10,081  
                                                                           

Total current liabilities

    1,358,983       247     2,220       24,881     (873,367 )     512,964       189,227       1,113       (27,205 )     676,099  

Satellite liability, net of current portion

    —         —       —         —       —         —         —         —         —         —    

Long-term debt, net of current portion

    904,192       —       —         —       —         904,192       400,000       38,453       —         1,342,645  

Due to related parties, net of current     portion

    —         —       —         —       —         —         —         —         —         —    

Subscriber deferred revenue, net of current portion

    85,325       —       —         —       —         85,325       —         —         —         85,325  

Deferred income, net of current portion

    1,314       —       —         —       —         1,314       133,568       —         —         134,882  

Other non-current liabilities

    14,968       31,380     —         —       —         46,348       32,505       (1,314 )     (36,517 )     41,022  
                                                                           

Total liabilities

    2,364,782       31,627     2,220       24,881     (873,367 )     1,550,143       755,300       38,252       (63,722 )     2,279,973  
                                                                           

Commitments and contingencies

                   

Stockholders’ equity (deficit):

                   

Capital stock

    —         —       —         —       —         —         2,740       —         —         2,740  

Accumulated other comprehensive income

    —         —       —         —       —         —         4,533       —         —         4,533  

Additional paid-in-capital

    2,870,096       146,270     60,759       286,765     (493,794 )     2,870,096       2,978,679       10,831       (2,878,310 )     2,981,296  

Retained earnings (deficit)

    (3,252,615 )     194,950     (4,677 )     298,536     (488,809 )     (3,252,615 )     (3,239,135 )     23,889       3,226,109       (3,241,752 )
                                                                           

Total stockholders’ equity (deficit)

    (382,519 )     341,220     56,082       585,301     (982,603 )     (382,519 )     (253,183 )     34,720       347,799       (253,183 )
                                                                           

Total liabilities and stockholders’ equity (deficit)

  $ 1,982,263     $ 372,847   $ 58,302     $ 610,182   $ (1,855,970 )   $ 1,167,624     $ 502,117     $ 72,972     $ 284,077     $ 2,026,790  
                                                                           

 

31


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 BALANCE SHEETS

AS OF DECEMBER 31, 2005

 

(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.

    XM
Holdings
Non-
Guarantor
Subsidiaries
    Eliminations     Consolidated
XM Satellite
Radio
Holdings Inc.
 

Current assets:

                   

Cash and cash equivalents

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

Accounts receivable, net

    47,247       —       —         —       —         47,247       —         —         —         47,247  

Due from subsidiaries/affiliates

    3,859       134,339     48,229       566,237     (752,021 )     643       —         3,235       (3,878 )     —    

Due from related parties

    8,629       —       —         —       —         8,629       —         —         —         8,629  

Related party prepaid expenses

    54,752       —       —         —       —         54,752       —         —         —         54,752  

Prepaid programming content

    65,738       —       —         —       —         65,738       —         —         —         65,738  

Prepaid and other current assets

    47,322       —       7,798       —       —         55,120       1,347       469       (1,125 )     55,811  
                                                                           

Total current assets

    285,145       134,339     56,033       566,237     (752,021 )     289,733       639,593       18,845       (5,003 )     943,168  

Restricted investments

    375       —       —         —       —         375       —         5,063       —         5,438  

System under construction

    —         —       —         —       —         —         216,527       —         —         216,527  

Property and equipment, net

    541,300       —       39,817       —       —         581,117       55,045       42,609       (5,099 )     673,672  

Investment in subsidiary/affiliates

    876,844       —       —         —       (876,844 )     —         (304,165 )     —         304,165       —    

DARS license

    —         141,276     —         —       —         141,276       —         —         —         141,276  

Intangibles, net

    5,902       —       —         —       —         5,902       —         —         —         5,902  

Deferred financing fees, net

    28,288       —       —         —       —         28,288       8,005       442       —         36,735  

Related party prepaid expenses

    9,809       —       —         —       —         9,809       —         —         —         9,809  

Equity investments

    —         —       —         —       —         —         187,403       —         —         187,403  

Prepaid and other current assets

    1,961       —       —         —       —         1,961       —         1,770       —         3,731  
                                                                           

Total assets

  $ 1,749,624     $ 275,615   $ 95,850     $ 566,237   $ (1,628,865 )   $ 1,058,461     $ 802,408     $ 68,729     $ 294,063     $ 2,223,661  
                                                                           

Current liabilities:

                   

Accounts payable

  $ 126,353     $ —     $ 1     $ —     $ —       $ 126,354     $ 19,328     $ 9     $ —       $ 145,691  

Accrued expenses

    149,357       —       4,864       —       —         154,221       50       295       (441 )     154,125  

Accrued satellite liability

    —         —       —         —       —         —         104,300       —         —         104,300  

Accrued interest

    4,816       —       —         —       —         4,816       583       204       —         5,603  

Current portion of long-term debt

    7,200       —       —         —       —         7,200       —         408       —         7,608  

Due to related parties

    60,750       —       —         —       —         60,750       —         —         —         60,750  

Due to subsidiary/affiliates

    725,675       134     1,827       24,365     (752,001 )     —         3,159       783       (3,942 )     —    

Subscriber deferred revenue

    275,944       —       —         —       —         275,944       —         —         —         275,944  

Deferred income

    —         —       —         —       —         —         10,137       —         —         10,137  
                                                                           

Total current liabilities

    1,350,095       134     6,692       24,365     (752,001 )     629,285       137,557       1,699       (4,383 )     764,158  

Satellite liability, net of current portion

    —         —       —         —       —         —         23,285       —         —         23,285  

Long-term debt, net of current portion

    596,537       —       —         —       —         596,537       400,000       39,047       —         1,035,584  

Due to related parties, net of current portion

    53,901       —       —         —       —         53,901       —         —         —         53,901  

Subscriber deferred revenue, net of current portion

    84,694       —       —         —       —         84,694       —         —         —         84,694  

Deferred income, net of current portion

    —         —       —         —       —         —         141,073       —         —         141,073  

Other non-current liabilities

    27,110       29,647     —         —       —         56,757       19,545       (1,316 )     (34,968 )     40,018  
                                                                           

Total liabilities

    2,112,337       29,781     6,692       24,365     (752,001 )     1,421,174       721,460       39,430       (39,351 )     2,142,713