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EX-31.3 - EXHIBIT 31.3 - XM SATELLITE RADIO INCc92017exv31w3.htm
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EX-31.4 - EXHIBIT 31.4 - XM SATELLITE RADIO INCc92017exv31w4.htm
EX-31.1 - EXHIBIT 31.1 - XM SATELLITE RADIO INCc92017exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - XM SATELLITE RADIO INCc92017exv32w1.htm
EX-31.2 - EXHIBIT 31.2 - XM SATELLITE RADIO INCc92017exv31w2.htm
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
 
         
Commission       I.R.S. Employer
File       Identification
Number   Exact name of registrant as specified in its charter   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
(Address of principal executive offices)
  20002-2194
(Zip Code)
Registrant’s telephone number, including area code: (202) 380-4000
 
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether each registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
         
XM Satellite Radio Holdings Inc.
  Large Accelerated Filer þ   Accelerated Filer o
 
  Non-Accelerated Filer o   Smaller Reporting Company o
 
       
XM Satellite Radio Inc.
  Large Accelerated Filer o   Accelerated Filer o
 
  Non-Accelerated Filer þ   Smaller Reporting Company o
Indicate by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
     
(Class)   (Outstanding as of October 31, 2009)
XM SATELLITE RADIO HOLDINGS INC.    
COMMON STOCK, $0.01 PAR VALUE    
(all shares are issued to Sirius XM Radio Inc.)   100 SHARES
     
XM SATELLITE RADIO INC.    
COMMON STOCK, $0.10 PAR VALUE    
(all shares are issued to XM Satellite Radio Holdings Inc.)   125 SHARES
 
 

 

 


 

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
INDEX TO FORM 10-Q
             
Item No.   Description        
   
 
       
           
   
 
       
Item 1.       1  
   
 
       
        2  
   
 
       
        3  
   
 
       
        4  
   
 
       
        5  
   
 
       
Item 2.       32  
   
 
       
Item 3.       60  
   
 
       
Item 4.       60  
   
 
       
           
   
 
       
Item 1.       61  
   
 
       
Item 1A.       61  
   
 
       
Item 2.       61  
   
 
       
Item 3.       61  
   
 
       
Item 4.       61  
   
 
       
Item 5.       61  
   
 
       
Item 6.       62  
   
 
       
        69  
   
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 31.3
 Exhibit 31.4
 Exhibit 32.1
 Exhibit 32.2

 

 


Table of Contents

PART I: FINANCIAL INFORMATION
ITEM 1.   FINANCIAL STATEMENTS
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                                           
    Successor Entity       Predecessor Entity  
    Three Months     Nine Months     August 1, 2008       July 1, 2008     January 1, 2008  
    Ended     Ended     Through       Through     Through  
(in thousands)   September 30, 2009     September 30, 2009     September 30, 2008       July 31, 2008     July 31, 2008  
 
                               
Revenue:
                                       
Subscriber revenue, including effects of rebates
  $ 304,714     $ 884,038     $ 183,033     $ 95,684     $ 670,870  
Advertising revenue, net of agency fees
    4,147       13,475       5,165       3,193       22,743  
Equipment revenue
    5,657       17,681       3,351       1,585       13,397  
Other revenue
    10,955       19,344       4,054       4,242       24,184  
 
                             
Total revenue
    325,473       934,538       195,603       104,704       731,194  
Operating expenses (depreciation and amortization shown separately below) (1):
                                       
Cost of services:
                                       
Satellite and transmission
    11,484       36,952       12,458       6,644       46,566  
Programming and content
    27,811       84,353       18,046       15,991       117,156  
Revenue share and royalties
    46,976       142,997       38,539       24,198       166,606  
Customer service and billing
    31,064       96,168       23,819       12,249       82,947  
Cost of equipment
    5,142       12,049       5,020       2,406       20,013  
Sales and marketing
    26,055       84,565       28,951       17,268       126,054  
Subscriber acquisition costs
    35,049       83,524       27,482       33,366       174,083  
General and administrative
    25,216       91,689       19,215       33,209       116,444  
Engineering, design and development
    5,413       16,798       5,191       2,611       23,045  
Impairment of goodwill
                5,026,838              
Depreciation and amortization
    41,587       146,462       34,620       10,828       88,749  
Restructuring, impairments and related costs
    3,029       29,614                    
 
                             
Total operating expenses
    258,826       825,171       5,240,179       158,770       961,663  
 
                             
Income (loss) from operations
    66,647       109,367       (5,044,576 )     (54,066 )     (230,469 )
Other income (expense):
                                       
Interest and investment income
    729       1,848       3,963       594       3,013  
Interest expense, net of amounts capitalized
    (70,616 )     (226,935 )     (47,798 )     (14,130 )     (73,937 )
Gain (loss) on change in value of embedded derivatives
    (33,700 )     (111,703 )     242,223              
Loss on extinguishment of debt and credit facilities, net
    (3,787 )     (111,863 )                  
Loss on investments
    (2,870 )     (6,660 )     (3,089 )     (4,460 )     (13,010 )
Other income (expense)
    1,324       2,548       (4,074 )     5       900  
 
                             
Total other income (expense)
    (108,920 )     (452,765 )     191,225       (17,991 )     (83,034 )
 
                             
Loss before income taxes
    (42,273 )     (343,398 )     (4,853,351 )     (72,057 )     (313,503 )
Income tax expense
    (578 )     (1,733 )     (672 )     (508 )     (1,512 )
 
                             
Net loss
    (42,851 )     (345,131 )     (4,854,023 )     (72,565 )     (315,015 )
Add: net loss attributable to noncontrolling interests
                      (1,053 )     (7,443 )
 
                             
Net loss — XM Satellite Radio Holdings Inc Inc and Subsidiaries
  $ (42,851 )   $ (345,131 )   $ (4,854,023 )   $ (73,618 )   $ (322,458 )
 
                             
 
(1)   Amounts related to share-based payment expense included in operating expenses were as follows:
                                           
Satellite and transmission
  $ 273     $ 1,073     $ 570     $ 305     $ 2,745  
Programming and content
    859       3,368       961       586       4,949  
Customer service and billing
    345       1,077       332       228       1,869  
Sales and marketing
    1,261       3,862       1,038       770       7,047  
General and administrative
    4,355       21,122       2,000       1,634       13,200  
Engineering, design and development
    514       2,037       710       510       4,675  
 
                             
Total share-based payment expense
  $ 7,607     $ 32,539     $ 5,611     $ 4,033     $ 34,485  
 
                             
See accompanying Notes to the unaudited consolidated financial statements.

 

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Table of Contents

XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
                 
    September 30,     December 31,  
    2009     2008  
    (unaudited)        
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 326,022     $ 206,740  
Accounts receivable, net of allowance for doubtful accounts of $6,577 and $6,199, respectively
    45,243       52,727  
Inventory, net
    2,923       4,489  
Prepaid expenses
    79,235       37,351  
Related party current assets
    105,674       112,363  
Other current assets
    57,320       50,412  
 
           
Total current assets
    616,417       464,082  
Property and equipment, net
    798,247       874,588  
FCC license
    2,000,000       2,000,000  
Restricted investments
    250       120,250  
Deferred financing fees, net
    27,309       30,303  
Intangible assets, net
    629,288       688,671  
Related party long-term assets
    114,073       124,607  
Other long-term assets
    41,560       34,284  
 
           
Total assets
  $ 4,227,144     $ 4,336,785  
 
           
LIABILITIES AND STOCKHOLDER’S DEFICIT
               
Current liabilities:
               
Accounts payable and accrued expenses
  $ 196,612     $ 237,299  
Accrued interest
    52,258       50,543  
Current portion of deferred revenue
    472,723       419,707  
Current portion of deferred credit on executory contracts
    247,566       234,774  
Current maturities of long-term debt
    101,300       355,739  
Related party current liabilities
    187,101       83,930  
 
           
Total current liabilities
    1,257,560       1,381,992  
Deferred revenue
    165,901       131,255  
Deferred credit on executory contracts
    851,955       1,037,190  
Long-term debt
    1,636,868       1,439,102  
Long-term related party debt
    159,275        
Deferred tax liability
    899,889       886,475  
Related party long-term liabilities
    21,928        
Other long-term liabilities
    33,982       36,325  
 
           
Total liabilities
    5,027,358       4,912,339  
 
           
 
               
Commitments and contingencies (Note 14)
               
Stockholder’s deficit:
               
Common stock, par value $0 01; 1,000 shares authorized; 100 shares issued and outstanding as of September 30, 2009 and December 31, 2008
           
Accumulated other comprehensive loss, net of tax
    (6,598 )     (7,871 )
Additional paid-in capital
    5,989,700       5,870,502  
Accumulated deficit
    (6,783,316 )     (6,438,185 )
 
           
Total stockholder’s deficit
    (800,214 )     (575,554 )
 
           
Total liabilities and stockholder’s deficit
  $ 4,227,144     $ 4,336,785  
 
           
See accompanying Notes to the unaudited consolidated financial statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE LOSS
                                                 
                                    Accumulated        
                    Additional             Other     Total  
    Common Stock     Paid-in     Accumulated     Comprehensive     Stockholder’s  
(in thousands, except share data)   Shares     Amount     Capital     Deficit     Loss     Deficit  
 
                                               
Balance at December 31, 2008
    100     $     $ 5,870,502     $ (6,438,185 )   $ (7,871 )   $ (575,554 )
 
                                               
Net loss — XM Satellite Radio Holdings Inc and Subsidiaries
                      (345,131 )           (345,131 )
Other comprehensive income:
                                               
Unrealized gain on available-for-sale securities, net of tax
                            579       579  
Foreign currency translation adjustment, net of tax
                            694       694  
 
                                             
 
                                               
Total comprehensive loss
                                            (343,858 )
Non-cash capital contributions from SIRIUS XM
                119,198                   119,198  
 
                                   
 
                                               
Balance at September 30, 2009
    100     $     $ 5,989,700     $ (6,783,316 )   $ (6,598 )   $ (800,214 )
 
                                   
See accompanying Notes to the unaudited consolidated financial statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                           
    Successor Entity       Predecessor Entity  
    Nine Months     August 1, 2008       January 1, 2008  
    Ended     Through       Through  
(in thousands)   September 30, 2009     September 30, 2008       July 31, 2008  
 
                   
Cash flows from operating activities:
                       
Net loss — XM Satellite Radio Holdings Inc and Subsidiaries
  $ (345,131 )   $ (4,854,023 )   $ (322,458 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
                       
Depreciation and amortization
    146,462       34,620       88,749  
Impairment of goodwill
          5,026,838        
Non-cash interest expense
    68,379       10,023       7,023  
Provision for doubtful accounts
    12,642       3,028       8,523  
Amortization of deferred income related to equity method investment
    (2,082 )     (471 )     (5,829 )
Loss on investments
    6,660       3,089       13,010  
Loss on extinguishment of debt and credit facilities, net
    111,863              
Restructuring, impairments and related costs
    26,401              
Share-based payment expense
    32,539       5,611       34,485  
(Gain) loss on change in value of embedded derivatives
    111,703       (242,223 )      
Deferred income taxes
    1,733       672       1,512  
Other non-cash purchase price adjustments
    (142,487 )     (23,770 )      
Other
          1,644       7,412  
Changes in operating assets and liabilities:
                       
Accounts receivable
    (5,158 )     (6,044 )     7,597  
Inventory
    1,566       (206 )     5,558  
Related party assets
    17,223       (1,357 )     2,050  
Prepaid expenses and other current assets
    9,278       (11,945 )     (20,599 )
Restricted investments
                (120,000 )
Other long-term assets
    47,465       29,590       378  
Accounts payable and accrued expenses
    (38,868 )     17,776       (30,477 )
Accrued interest
    5,870       7,003       12,558  
Deferred revenue
    59,635       2,616       47,599  
Related party liabilities
    93,715       3,315       6,557  
Other long-term liabilities
    9,210       (183 )     5,266  
 
                 
Net cash provided by (used in) operating activities
    228,618       5,603       (251,086 )
 
                 
 
                       
Cash flows from investing activities:
                       
Additions to property and equipment
    (38,811 )     (7,893 )     (30,843 )
Purchase of restricted and other investments
                (34,825 )
Sale of restricted and other investments
          25,400        
 
                 
Net cash (used in) provided by investing activities
    (38,811 )     17,507       (65,668 )
 
                 
 
                       
Cash flows from financing activities:
                       
Proceeds from exercise of warrants and stock options
                964  
Long-term borrowings, net of costs
    387,184       533,941       1,023,190  
Related party long-term borrowings, net of costs
    95,093              
Payment of premiums on redemption of debt
    (17,075 )     (18,693 )      
Payments to minority interest holder
          (61,880 )     (6,897 )
Repayment of long-term borrowings
    (435,727 )     (1,080,553 )     (35,210 )
Repayment of long-term related party borrowings
    (100,000 )            
Other, net
          (98 )     (2,458 )
 
                 
Net cash (used in) provided by financing activities
    (70,525 )     (627,283 )     979,589  
 
                 
Net increase in cash and cash equivalents
    119,282       (604,173 )     662,835  
Cash and cash equivalents at beginning of period
    206,740       819,521       156,686  
 
                 
Cash and cash equivalents at end of period
  $ 326,022     $ 215,348     $ 819,521  
 
                 
 
                       
Supplemental Disclosure of Cash and Non-Cash Flow Information
                       
Cash paid during the period for:
                       
Interest, net of amounts capitalized
  $ 148,106     $ 37,704     $ 54,626  
Non-cash investing and financing activities:
                       
Non-cash capital contributions from SIRIUS XM
    119,198              
Property acquired through capital leases
    1,337             4,465  
Release of restricted investments
    120,000              
See accompanying Notes to the unaudited consolidated financial statements.

 

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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands, unless otherwise stated)
(1) Business
We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States on a subscription fee basis through our proprietary satellite radio system. Our system consists of four in-orbit satellites, over 650 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers can also receive certain of our music and other channels over the Internet.
On July 28, 2008 XM Satellite Radio Holdings Inc. (“XM Holdings”) merged with and into Vernon Merger Corporation, a wholly owned subsidiary of Sirius Satellite Radio Inc. (the “Merger”) and, as a result, XM Holdings is now a wholly owned subsidiary of SIRIUS. Sirius Satellite Radio Inc. was later renamed Sirius XM Radio Inc. (“SIRIUS”). The accounting for the Merger has been “pushed-down” in the accompanying unaudited consolidated financial statements. XM, together with its subsidiaries, is operated as an unrestricted subsidiary under SIRIUS’ existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our debt instruments. For purposes of these Notes to unaudited consolidated financial statements, “we,” “us,” “our,” “the company,” and similar terms refer to XM Satellite Radio Holdings Inc. and its consolidated subsidiaries.
Our satellite radios are primarily distributed through automakers (“OEMs”), retailers and our website. We have agreements with major automakers to offer our satellite radios as factory or dealer-installed equipment in their vehicles. Our radios are also offered to customers of rental car companies.
Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers and dealers for prepaid subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet programs; subscribers to XM Radio Online, our Internet service; and certain subscribers to our weather, traffic and data services.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for prepaid and long-term subscriptions as well as discounts for multiple subscriptions. We also derive revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as our data and weather services. In August 2009, we began charging our subscribers a U.S. Music Royalty Fee (the “MRF”).
In certain cases, automakers include a subscription to our radio services in the sale or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically three months. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
We also have an interest in a satellite radio service offered in Canada through our affiliate, Canadian Satellite Radio Holdings Inc. (“XM Canada”). Subscribers to the XM Canada service are not included in our subscriber count.
XM Satellite Radio Inc. (“XM”) was incorporated on December 15, 1992 in the State of Delaware. XM Satellite Radio Holdings Inc. was formed as a holding company for XM on May 16, 1997.
As of September 30, 2009, the principal differences between the financial conditions of XM Holdings and XM were:
    the ownership by XM Holdings of the corporate headquarters and data center buildings and the lease of these buildings to XM;
    XM-1, XM-2, and the transponders of XM-3 and XM-4 are owned by XM; and XM-5 and the bus portions of XM-3 and XM-4 are owned by XM Holdings;
    the presence at XM Holdings of additional indebtedness, primarily the 10% Convertible Senior Notes due 2009 and 10% Senior PIK Secured Notes due 2011, both of which are not guaranteed by XM;
    the investment by XM Holdings in XM Canada (including related revenue and deferred income); and
    the existence of additional cash balances at XM Holdings.

 

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

(Dollar amounts in thousands, unless otherwise stated)
Accordingly, the results of operations for XM and its subsidiaries are substantially the same as the results of operations for XM Holdings and its subsidiaries except that XM has:
    additional rent, less depreciation and amortization expense and less other income, in each case principally related to XM’s rental of its corporate headquarters and data center buildings from XM Holdings, which are intercompany transactions that have been eliminated in XM Holdings’ consolidated financial statements;
    less interest expense, principally related to the additional indebtedness at XM Holdings, and gains and losses on embedded derivatives;
    less revenue associated with the amortization of deferred income and equity in losses from XM Holdings’ investment in XM Canada;
    no gains or losses on XM Holdings’ investment in XM Canada; and
    less interest income because of additional cash balances at XM Holdings.
(2) Principles of Consolidation and Basis of Presentation
Principles of Consolidation
The accompanying unaudited consolidated financial statements of XM Satellite Radio Holdings Inc. and subsidiaries have been prepared in accordance with U.S. generally accepted accounting principles, the instructions to Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. All intercompany transactions have been eliminated in consolidation.
Basis of Presentation
In presenting unaudited consolidated financial statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Additionally, estimates were used when recording the fair values of our assets acquired and liabilities assumed in the Merger. Estimates, by their nature, are based on judgment and available information. Actual results could differ from those estimates. In the opinion of management, all normal recurring adjustments necessary for a fair presentation of our unaudited consolidated financial statements as of September 30, 2009, the successor periods of the three and nine months ended September 30, 2009 and August 1, 2008 through September 30, 2008 and the predecessor periods of July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, have been made.
XM Holdings operates as an unrestricted subsidiary of SIRIUS under its existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual restrictions in our existing debt instruments. SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs incurred by us benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously. As a result of the Merger, certain of our predecessor accounting policies were changed to conform with SIRIUS’ current accounting policies. These changes have not had, and are not expected to have, a significant impact on our unaudited consolidated financial statements.
Interim results are not necessarily indicative of the results that may be expected for a full year. This Quarterly Report on Form 10-Q should be read together with our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the SEC on March 13, 2009.
In connection with the Merger, our assets and liabilities were adjusted to fair value at the acquisition date by application of “push-down” accounting. Accordingly, our financial position and results of operations may not be comparable between the accompanying Successor and Predecessor periods.
We have evaluated events subsequent to the balance sheet date and prior to filing of this Quarterly Report on Form 10-Q for the quarter ended September 30, 2009 through November 5, 2009 and determined there have not been any events that have occurred that would require adjustment to our unaudited consolidated financial statements.

 

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

(Dollar amounts in thousands, unless otherwise stated)
(3) Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and related disclosures.
Significant estimates inherent in the preparation of the accompanying unaudited consolidated financial statements include revenue recognition, asset impairment, useful lives of our satellites and valuation allowances against deferred tax assets. The financial market volatility and economic conditions in the United States have impacted our business and may continue to impact our business. Such conditions could have a material impact to our significant accounting estimates.
Inventory
Inventory consists of finished goods, refurbished goods, and other raw material components used in manufacturing radios. Inventory is stated at the lower of cost or market. We record an estimated allowance for inventory that is considered slow moving and obsolete or whose carrying value is in excess of net realizable value. The provision related to products purchased for our direct to consumer distribution channel is reported as a component of Cost of equipment in our unaudited consolidated statements of operations. The remaining provision is reported as a component of Subscriber acquisition costs in our unaudited consolidated statements of operations.
Inventory, net, consists of the following:
                 
    September 30,     December 31,  
    2009     2008  
Raw materials
  $ 6,303     $ 5,781  
Finished goods
    4,987       6,898  
Allowance for obsolescence
    (8,367 )     (8,190 )
 
           
Total inventory, net
  $ 2,923     $ 4,489  
 
           
Reclassifications
Certain amounts in our prior period unaudited consolidated financial statements have been reclassified to conform to our current period presentation.
Recent Accounting Pronouncements
In September 2009, Accounting Standards Codification (“ASC”) became the source of authoritative U.S. GAAP recognized by the Financial Accounting Standards Board (“FASB”) for nongovernmental entities, except for certain FASB Statements not yet incorporated into ASC. Rules and interpretive releases of the SEC under federal securities laws are also sources of authoritative U.S. GAAP for registrants. The discussion below includes the applicable ASC reference.
We adopted ASC 810-10-65, Transition and Open Effective Date Information, which requires a parent with one or more less-than-wholly-owned subsidiaries to disclose, on the face of the consolidated financial statements, the amount of consolidated net income attributable to the parent and noncontrolling interest. We adopted this guidance effective January 1, 2009, with no impact on our consolidated results of operations and financial position.
We adopted ASC 855, Subsequent Events, which requires disclosure of events occurring after the balance sheet date but before financial statements are issued or are available to be issued. We adopted this guidance effective April 1, 2009, with no impact on our consolidated results of operations or financial position.
In June 2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation No. 46(R), to require an analysis to determine whether our variable interest(s) give us a controlling financial interest in a variable interest entity. Statement 167 has not been incorporated into ASC and is effective for fiscal years beginning after November 15, 2009. We are currently evaluating the impact, if any, the adoption of this guidance will have on our consolidated results of operations and financial position.
In June 2009, the FASB issued Statement No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, which integrated existing accounting standards with other authoritative guidance to provide a single source of authoritative U.S. GAAP for nongovernmental entities. Statement 168 has not been incorporated into ASC and is effective for interim and annual periods ending after September 15, 2009. We adopted this guidance effective July 1, 2009, with no impact on our consolidated results of operations or financial position.

 

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

(Dollar amounts in thousands, unless otherwise stated)
(4) Intangible Assets
Intangible assets consisted of the following:
                                                         
            September 30, 2009     December 31, 2008  
    Weighted Average     Gross Carrying     Accumulated     Net Carrying     Gross Carrying     Accumulated     Net Carrying  
    Useful Lives     Value     Amortization     Value     Value     Amortization     Value  
 
                                                       
Indefinite life intangible assets
                                                       
FCC licenses
  Indefinite   $ 2,000,000     $     $ 2,000,000     $ 2,000,000     $     $ 2,000,000  
Trademark
  Indefinite     250,000             250,000       250,000             250,000  
 
                                                       
Definite life intangible assets
                                                       
Subscriber relationships
  9 years   $ 380,000     $ (76,670 )   $ 303,330     $ 380,000     $ (29,226 )   $ 350,774  
Proprietary software
  6 years     16,552       (6,020 )     10,532       16,552       (2,285 )     14,267  
Developed technology
  10 years     2,000       (233 )     1,767       2,000       (83 )     1,917  
Licensing agreements
  9.1 years     75,000       (11,452 )     63,548       75,000       (4,090 )     70,910  
Leasehold interests
  7.4 years     132       (21 )     111       908       (105 )     803  
 
                                         
Total intangible assets
          $ 2,723,684     $ (94,396 )   $ 2,629,288     $ 2,724,460     $ (35,789 )   $ 2,688,671  
 
                                           
Indefinite Life Intangible Assets
We have identified our FCC licenses and our trademark as indefinite life intangibles after considering the expected use of the assets, the regulatory and economic environment within which they are being used, and the effects of obsolescence on their use.
We hold FCC licenses to operate our satellite digital audio radio service and provide ancillary services. Our FCC licenses for our satellites expire in 2013 and 2014. Prior to the expirations, we will be required to apply for a renewal of our FCC licenses. The renewal and extension of our licenses is reasonably certain at minimal cost which is expensed as incurred. The FCC licenses authorize us to use the broadcast spectrum, which is a renewable, reusable resource that does not deplete or exhaust over time.
In connection with the Merger, $250,000 of the purchase price was allocated to our trademark. As of September 30, 2009 there are no legal, regulatory or contractual limitations associated with our trademark.
We evaluate our indefinite life intangible assets for impairment on an annual basis. During the three and nine months ended September 30, 2009, no impairment loss was recorded for intangible assets with indefinite lives.
Definite Life Intangible Assets
Definite life intangible assets consist primarily of subscriber relationships of $380,000 that were fair valued as a result of the Merger. Subscriber relationships are amortized on an accelerated basis over 9 years, which reflects the estimated pattern in which the economic benefits will be consumed. Other definite life intangibles include certain licensing agreements of $75,000, which are being amortized over a weighted average useful life of 9.1 years on a straight-line basis.

 

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

(Dollar amounts in thousands, unless otherwise stated)
Amortization expense was $18,648 and $58,759 for the three and nine months ended September 30, 2009, respectively, and $9,232 for the period August 1, 2008 through September 30, 2008. Expected amortization expense for each of the fiscal years through December 31, 2013 and for periods thereafter is as follows:
         
Year ending December 31,   Amount  
 
Remaining 2009
  $ 17,827  
2010
    65,916  
2011
    58,850  
2012
    53,420  
2013
    47,097  
Thereafter
    136,178  
 
     
 
       
Total intangibles, net
  $ 379,288  
 
     
(5) Subscriber Revenue
Subscriber revenue consists of subscription fees, non-refundable activation fees and the effects of rebates. Revenues received from automakers for prepaid subscriptions included in the sale or lease price of vehicles are also included in subscriber revenue over the service period upon activation and sale to the customer.
Subscriber revenue consists of the following:
                                           
    Successor Entity       Predecessor Entity  
    Three Months     Nine Months     August 1, 2008       July 1, 2008     January 1, 2008  
    Ended     Ended     Through       Through     Through  
    September 30, 2009     September 30, 2009     September 30, 2008       July 31, 2008     July 31, 2008  
 
                               
Subscription fees
  $ 303,785     $ 881,860     $ 183,144     $ 94,074     $ 659,775  
Activation fees
    963       2,351       48       1,667       11,855  
Effect of rebates
    (34 )     (173 )     (159 )     (57 )     (760 )
 
                             
Total subscriber revenue
  $ 304,714     $ 884,038     $ 183,033     $ 95,684     $ 670,870  
 
                             
(6) Interest Costs
We capitalize a portion of the interest on funds borrowed to finance the construction costs of our satellites. The following is a summary of our interest costs:
                                           
    Successor Entity       Predecessor Entity  
    Three Months     Nine Months     August 1, 2008       July 1, 2008     January 1, 2008  
    Ended     Ended     Through       Through     Through  
    September 30, 2009     September 30, 2009     September 30, 2008       July 31, 2008     July 31, 2008  
 
                               
Interest costs charged to expense
  $ 70,616     $ 226,935     $ 47,798     $ 14,130     $ 73,937  
Interest costs capitalized
    7,495       25,053       3,927       1,009       6,852  
 
                             
Total interest costs incurred
  $ 78,111     $ 251,988     $ 51,725     $ 15,139     $ 80,789  
 
                             

 

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

(Dollar amounts in thousands, unless otherwise stated)
(7) Property and Equipment
Property and equipment, net, consists of the following:
                 
    September 30,     December 31,  
    2009     2008  
Satellite system
  $ 490,126     $ 490,126  
Terrestrial repeater network
    41,603       41,850  
Leasehold improvements
    6,852       6,762  
Broadcast studio equipment
    7,934       7,804  
Capitalized software and hardware
    53,768       53,986  
Satellite telemetry, tracking and control facilities
    32,958       33,542  
Furniture, fixtures, equipment and other
    27,269       26,076  
Land
    38,100       38,100  
Building
    53,803       53,887  
Construction in progress — satellite system
    194,980       181,856  
 
           
Total property and equipment
    947,393       933,989  
Accumulated depreciation and amortization
    (149,146 )     (59,401 )
 
           
Property and equipment, net
  $ 798,247     $ 874,588  
 
           
Depreciation and amortization expense on property and equipment was $22,939 and $87,703 for the three and nine months ended September 30, 2009, respectively, and $25,388, $10,828 and $88,749 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
Satellites
We own four orbiting satellites; two of which, XM-3 and XM-4, currently transmit our signal and two of which, XM-1 and XM-2, serve as in-orbit spares. Our satellites were launched in March 2001, May 2001, February 2005 and October 2006.
Space Systems/Loral has constructed our fifth satellite, XM-5, for use in our system. In 2006, we entered into an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code and as a result, we recorded a charge of $24,196 to Restructuring, impairments and related costs in our unaudited consolidated statements of operations for amounts previously paid, including capitalized interest. In October 2009, XM Holdings terminated its satellite launch agreement with Sea Launch with the consent of the Bankruptcy Court. In October 2009, SIRIUS entered into an agreement with International Launch Services (“ILS”) to secure a satellite launch for XM-5 on a Proton rocket. We currently expect to launch XM-5 in the second or third quarter of 2010.
(8) Related Party Transactions
Liberty Media
Liberty Media Corporation and its affiliate, Liberty Media, LLC (collectively, “Liberty Media”) is the holder of SIRIUS’ Convertible Perpetual Preferred Stock, Series B (the “Series B Preferred Stock”), has representatives on SIRIUS’ board of directors and is considered a related party. See Note 11, Debt, to our unaudited consolidated financial statements for further information regarding indebtedness previously owed to Liberty Media.
Investment Agreement
On February 17, 2009, SIRIUS entered into an Investment Agreement (the “Investment Agreement”) with Liberty Media. Pursuant to the Investment Agreement, SIRIUS agreed to issue to Liberty Radio, LLC 12,500,000 shares of Series B Preferred Stock with a liquidation preference of $0.001 per share in partial consideration for certain loan investments. The Series B Preferred Stock was issued on March 6, 2009.
As a result of SIRIUS’ issuance of Series B Preferred Stock to Liberty Radio, LLC, we recorded a $113,280 increase to additional paid-in capital.
Loan Investments
On February 17, 2009, XM entered into a Credit Agreement with Liberty Media Corporation, as administrative agent and collateral agent, and Liberty Media, LLC, as lender. On March 6, 2009, XM amended and restated that credit agreement (the “Second-Lien Credit Agreement”) with Liberty Media Corporation. In June 2009, XM repaid all amounts due and terminated the Second-Lien Credit Agreement in connection with the issue and sale of our 11.25% Senior Secured Notes due 2013.

 

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

(Dollar amounts in thousands, unless otherwise stated)
On March 6, 2009, XM amended and restated the $100,000 Term Loan, dated as of June 26, 2008 and the $250,000 Credit Agreement, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media, LLC, purchased $100,000 aggregate principal amount of such loans from the existing lenders. In June 2009, XM used a portion of the net proceeds from the sale of our 11.25% Senior Secured Notes due 2013 to extinguish the Amended and Restated Credit Agreement.
In June 2009, Liberty Media Corporation purchased $100,000 aggregate principal amount of our 11.25% Senior Secured Notes due 2013 as part of the offering of such notes. As of September 30, 2009, we recorded $159,275 as Long-term related party debt related to the 11.25% Notes. This amount included the following principal amounts; $87,000 of our 11.25% Senior Secured Notes due 2013, $76,000 of our 13% Senior Notes due 2013 and $11,000 of our 7% Exchangeable Senior Subordinated Notes due 2014. As of September 30, 2009, we recorded $4,350 related to accrued interest with Liberty Media to Related party current liabilities.
We recognized Interest expense related to Liberty Media of $6,609 and $33,651 for the three and nine months ended September 30, 2009, respectively.
XM Canada
In 2005, we entered into agreements to provide XM Canada with the right to offer XM satellite radio service in Canada. The agreements have an initial term of ten years and XM Canada has the unilateral option to extend the term of the agreements for an additional five years at no additional cost beyond the current financial arrangements. XM Canada has expressed its intent to exercise this option at the end of the initial term of the agreements. We have the right to receive a 15% royalty for all subscriber fees earned by XM Canada each month for its basic service and a nominal activation fee for each gross activation of an XM Canada subscriber on XM’s system. XM Canada is obligated to pay us a total of $71,800 for the rights to broadcast and market National Hockey League (“NHL”) games for the 10-year term of our contract with the NHL. We recognize these payments on a gross basis as a principal obligor pursuant to the provisions of ASC 605, Revenue Recognition.
The estimated fair value of deferred revenue from XM Canada as of the Merger date was approximately $34,000, and is being amortized on a straight-line basis over the remaining expected term of the agreements. Subsequent to the Merger date, we began to record additional deferred revenue on our agreements with XM Canada involving royalties on subscriber and activation fees. As of September 30, 2009 and December 31, 2008, the carrying value of Deferred revenue related to XM Canada was $39,566 and $36,002, respectively.
We have extended a Cdn$45,000 standby credit facility to XM Canada which can be utilized to purchase terrestrial repeaters or finance the payment of subscription fees. The facility matures on December 31, 2012 and bears interest at a rate of 17.75% per annum. We have the right to convert unpaid principal amounts into Class A subordinate voting shares of XM Canada at the price of Cdn$16.00 per share. As of September 30, 2009 and December 31, 2008, amounts drawn by XM Canada on this facility in lieu of payment of subscription fees recorded in Related party long-term assets were $15,522 and $8,311, respectively.
In connection with the deferred income related to XM Canada, we recorded amortization of $694 and $2,082 for the three and nine months ended September 30, 2009, respectively, and $1,665, $833 and $5,829 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. The royalty fees we earn related to subscriber and activation fees are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recorded royalty fees of $225 and $499 for the three and nine months ended September 30, 2009, respectively, and $146, $76 and $523 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. XM Canada pays us a licensing fee and reimburses us for advertising, both of which are reported as a component of Other revenue in our unaudited consolidated statements of operations. We recognized licensing fee revenue of $1,500 and $4,500 for the three and nine months ended September 30, 2009, respectively, and $1,000, $500 and $3,500 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. We recognized advertising reimbursements of $0 and $733 for the three and nine months ended September 30, 2009, respectively, and $0, $0 and $833 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. As of September 30, 2009 and December 31, 2008, amounts due from XM Canada recorded in Related party current assets were $3,408 and $5,594, respectively. As of September 30, 2009 and December 31, 2008, amounts due from XM Canada (in addition to the amounts drawn on the standby credit facility) recorded in Related party long-term assets were $6,000 and $0, respectively.

 

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

(Dollar amounts in thousands, unless otherwise stated)
General Motors
We have a long-term distribution agreement with General Motors Company (“GM”). GM has a representative on SIRIUS’ board of directors and is considered a related party. During the term of the agreement, GM has agreed to distribute the XM service. We subsidize a portion of the cost of XM radios and make incentive payments to GM when the owners of GM vehicles with installed XM radios become subscribers to XM’s service. We also share with GM a percentage of the subscriber revenue attributable to GM vehicles with installed XM radios. As part of the agreement, GM provides certain call-center related services directly to XM subscribers who are also GM customers for which we reimburse GM.
XM makes bandwidth available to OnStar Corporation for audio and data transmissions to owners of XM-enabled GM vehicles, regardless of whether the owner is an XM subscriber. OnStar’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. We also granted to OnStar a certain amount of time to use our studios on an annual basis and agreed to provide certain audio content for distribution on OnStar’s services.
We recorded total revenue from GM, primarily consisting of subscriber revenue, of $8,831 and $22,087 for the three and nine months ended September 30, 2009, respectively, and $6,733, $4,041 and $25,394 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
We recognized Sales and marketing expense with GM of $7,720 and $23,387 for the three and nine months ended September 30, 2009, respectively, and $8,539, $4,220 and $28,377 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. We recognized Revenue share and royalties expense with GM of $15,008 and $46,664 for the three and nine months ended September 30, 2009, respectively, and $26,021, $12,172 and $79,869 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. We recognized Subscriber acquisition costs with GM of $9,035 and $25,066 for the three and nine months ended September 30, 2009, respectively, and $29,530, $11,692 and $88,300 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
As of September 30, 2009, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $8,089 and $91,902, respectively. As of September 30, 2009, prepaid expenses with GM recorded in Related party long-term assets were $92,551. As of December 31, 2008, amounts due from GM and prepaid expenses with GM recorded in Related party current assets were $10,132 and $94,444, respectively. As of December 31, 2008, prepaid expenses with GM recorded in Related party long-term assets were $116,296. As of September 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party current liabilities were $79,813 and $63,023, respectively.
As of September 30, 2009 and December 31, 2008, amounts due to GM recorded in Related party long-term liabilities were $21,928 and $0, respectively.
American Honda
We have an agreement to make a certain amount of our bandwidth available to American Honda. American Honda has a representative on SIRIUS’ board of directors and is considered a related party. American Honda’s use of our bandwidth must be in compliance with applicable laws, must not compete or adversely interfere with our business, and must meet our quality standards. This agreement remains in effect so long as American Honda holds a certain amount of its investment in SIRIUS. We make incentive payments to American Honda for each purchaser of a Honda or Acura vehicle that becomes a self-paying XM subscriber and shares with American Honda a portion of the subscriber revenue attributable to Honda and Acura vehicles with installed XM radios.
We recorded total revenue from American Honda, primarily consisting of subscriber revenue, of $3,374 and $9,201 for the three and nine months ended September 30, 2009, respectively, and $3,321, $1,738 and $10,599 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
We recognized Sales and marketing expense with American Honda of $1,647 and $4,391 for the three and nine months ended September 30, 2009, respectively, and $1,848, $1,046 and $5,330 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. We recognized Revenue share and royalties expense with American Honda of $1,636 and $4,601 for the three and nine months ended September 30, 2009, respectively, and $747, $376 and $1,901 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
As of September 30, 2009 and December 31, 2008, amounts due from American Honda recorded in Related party current assets were $2,274 and $2,194, respectively.

 

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

(Dollar amounts in thousands, unless otherwise stated)
As of September 30, 2009 and December 31, 2008, amounts due to American Honda recorded in Related party current liabilities were $4,014 and $4,190, respectively.
SIRIUS
SIRIUS allocates certain expenses to us based on the estimated costs incurred by SIRIUS that pertain to us. Additionally, certain costs incurred by us benefit SIRIUS and are allocated to SIRIUS based on estimated costs incurred by us pertaining to SIRIUS. We settle amounts due between the parties on a semi-monthly and monthly basis, except for share-based payment arrangements which are settled at times agreed to between us and SIRIUS. Our financial position, results of operations and cash flows could differ from those that might have resulted had we operated autonomously.
We recorded total advertising revenue allocated from SIRIUS of $2,473 and $7,321 for the three and nine months ended September 30, 2009, respectively, and $0 for the period August 1, 2008 through September 30, 2008.
We recognized total allocated net operating expenses with SIRIUS of $39,532 and $129,502 for the three and nine months ended September 30, 2009, respectively, and $773 for the period August 1, 2008 through September 30, 2008.
As of September 30, 2009 and December 31, 2008, net costs attributable to these costs (in addition to direct payments made by SIRIUS on our behalf) recorded in Related party current liabilities were $98,924 and $16,717, respectively.
(9) Investments
Investments consist of the following:
                 
    September 30,     December 31,  
    2009     2008  
Marketable securities
  $ 11,555     $ 10,525  
Restricted investments
    250       120,250  
Embedded derivative accounted for separately from the host contract
    26       2  
Equity method investments
    2,679       8,873  
 
           
 
               
Total investments
  $ 14,510     $ 139,650  
 
           
XM Canada
We have a 23.33% economic interest in XM Canada. The amount of the Merger purchase price allocated to the fair value of our investment in XM Canada was $41,188. Our investment in XM Canada is recorded using the equity method (on a one-month lag) since we have significant influence, but less than a controlling voting interest in XM Canada. Under this method, our investment in XM Canada is adjusted quarterly to recognize our share of net earnings or losses as they occur, rather than at the time dividends or other distributions are received, limited to the extent of our investment in, advances to, and commitments to fund XM Canada. Our share of net earnings or losses of XM Canada is recorded to Loss on investments in our unaudited consolidated statements of operations. We recorded $2,870 and $1,926 for the three and nine months ended September 30, 2009, respectively, for our share of XM Canada’s net loss and $3,089, $1,835 and $10,385 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively, for our share of XM Canada’s net loss. During the three and nine months ended September 30, 2009, we reduced the carrying value of our investment in XM Canada due to decreases in fair value that were considered to be other than temporary and recorded impairment charges of $0 and $4,734, respectively. In addition, during the three and nine months ended September 30, 2009, we recorded ($35) and $466, respectively, as a foreign exchange gain (loss) to Accumulated other comprehensive loss, net of tax.
We hold an investment in Cdn$4,000 face value of 8% convertible unsecured subordinated debentures issued by XM Canada for which the embedded conversion feature is bifurcated from the host contract. The host contract is accounted for as an available-for-sale security at fair value with changes in fair value recorded to Accumulated other comprehensive loss, net of tax. The embedded conversion feature is accounted for as a derivative at fair value with changes in fair value recorded in earnings as Interest and investment income. As of September 30, 2009, the carrying value of our equity method investment in XM Canada was $2,679, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,967 and $26, respectively. As of December 31, 2008, the carrying value of our equity method investment in XM Canada was $8,873, while the carrying values of the host contract and embedded derivative related to our investment in the debentures was $2,540 and $2, respectively.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
Auction Rate Certificates
Auction rate certificates are long-term securities structured to reset their coupon rates by means of an auction. We account for our investment in auction rate certificates as available-for-sale securities. As of September 30, 2009 and December 31, 2008, the carrying value of these securities was $8,588 and $7,985, respectively.
Restricted Investments
Restricted investments relate to deposits placed into escrow for the benefit of third parties pursuant to programming agreements. As of September 30, 2009 and December 31, 2008, the carrying value of our long-term restricted investments was $250 and $120,250, respectively.
(10) Fair Value
The following table summarizes the fair value of our financial instruments at September 30, 2009:
                                 
    Fair Value Measurements Using  
    Quoted Prices in Active             Significant        
    Markets for Identical     Significant Other     Unobservable        
(in thousands)   Assets (Level 1)     Observable Inputs (Level 2)     Inputs (Level 3)     Carrying Value  
Assets:
                               
Auction rate securities
    N/A       N/A     $ 8,588     $ 8,588  
Debentures and embedded derivatives
    N/A       N/A       2,993       2,993  
 
                           
 
Total assets
                  $ 11,581     $ 11,581  
 
                           
 
                               
Liabilities:
                               
Debt-related embedded derivatives
  $     $     $ 134,361     $ 134,361  
 
                       
 
Total liabilities
  $     $     $ 134,361     $ 134,361  
 
                       
The following table presents the changes in the Level 3 fair-value category for the nine months ended September 30, 2009. We classify financial instruments in Level 3 of the fair-value hierarchy when there is reliance on at least one significant unobservable input to the valuation model. In addition to these unobservable inputs, the valuation models for Level 3 financial instruments typically also rely on a number of inputs that are readily observable either directly or indirectly. Thus, the gains and losses presented below include changes in the fair value related to both observable and unobservable inputs. Fair values are determined using lattice models or market quotes. We recognized net unrealized (losses) gains in earnings of ($33,666) and ($111,609) for the three and nine months ended September 30, 2009, respectively, and $241,847, $14 and ($551) for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively.
                         
    Fair Value Measurements Using Significant Unobservable Inputs (Level 3)  
            Debentures and     Debt-Related  
    Auction Rate Securities     Embedded Derivatives     Embedded Derivatives  
Balance at December 31, 2008
  $ 7,985     $ 2,542     $ 22,658  
 
Total gains and losses (realized /unrealized)
          118       111,703  
Included in other comprehensive income
    603       333        
 
                 
 
Balance at September 30, 2009
  $ 8,588     $ 2,993     $ 134,361  
 
                 
As of September 30, 2009 and December 31, 2008, the aggregate carrying value of our long-term debt was $1,763,082 and $1,772,183 (excludes embedded derivatives), respectively; while the aggregate fair value approximated $1,993,820 and $760,897, respectively.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
(11) Debt
Our debt consists of the following:
                         
    Conversion     Long-term debt  
    Price (per     September 30,     December 31,  
    (SIRIUS share)     2009     2008  
10% Convertible Senior Notes due 2009
  $ 10.87       48,450       400,000  
Less: discount
            (404 )     (17,367 )
10% Senior Secured Discount Convertible Notes due 2009
  $ 0.69       33,249       33,249  
Less: discount
            (1,519 )     (5,471 )
10% Senior PIK Secured Notes due 2011
    N/A       172,485        
Less: discount
            (13,460 )      
11.25% Senior Secured Notes due 2013
    N/A       525,750        
Less: discount
            (34,525 )      
13% Senior Notes due 2013
    N/A       778,500       778,500  
Less: discount
            (66,538 )     (74,986 )
9.75% Senior Notes due 2014
    N/A       5,260       5,260  
7% Exchangeable Senior Subordinated Notes due 2014
  $ 1.875       550,000       550,000  
Less: discount
            (252,056 )     (270,368 )
Senior Secured Term Loan due 2009
    N/A             100,000  
Senior Secured Revolving Credit Facility due 2009
    N/A             250,000  
Add: premium
                  151  
Other debt:
                       
Capital leases
    N/A       17,890       23,215  
Embedded derivatives
            134,361       22,658  
 
                   
Total debt
            1,897,443       1,794,841  
 
                       
Less: current maturities
            101,300       355,739  
 
                   
Total long-term
            1,796,143       1,439,102  
Less: related party
            159,275        
 
                 
Total long-term, excluding related party
          $ 1,636,868     $ 1,439,102  
 
                   
10% Convertible Senior Notes due 2009
We have issued $400,000 aggregate principal amount of 10% Convertible Senior Notes due 2009 (the “10% Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Convertible Notes mature on December 1, 2009. The 10% Convertible Notes may be converted by the holder, at its option, into shares of SIRIUS’ common stock at a conversion rate of 92.0 shares of SIRIUS common stock per $1,000 principal amount, which is equivalent to a conversion price of $10.87 per share of SIRIUS common stock (subject to adjustment in certain events). As a result of the fair valuation at the acquisition date, we recognized an initial discount of $23,700.
In February 2009, we exchanged $172,485 aggregate principal amount of the outstanding 10% Convertible Notes for a like principal amount of XM Holdings’ 10% Senior PIK Secured Notes due 2011. We accounted for the exchange as a modification of debt and recorded $2,008 to General and administrative expense in our unaudited consolidated statements of operations and $10,990 of additional debt discount in our unaudited consolidated balance sheets.
In July 2009, we used a portion of the net proceeds received from the issuance of our 11.25% Senior Secured Notes due 2013 plus cash on hand to purchase at par $179,065 aggregate principal amount of the 10% Convertible Notes. We recorded a loss of $3,285 related to the unamortized discount to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations as a result of this transaction.
10% Senior Secured Discount Convertible Notes due 2009
XM Holdings (with XM as co-obligors) have outstanding $33,249 aggregate principal amount of 10% Senior Secured Discount Convertible Notes due 2009 (the “10% Discount Convertible Notes”). Interest is payable semi-annually at a rate of 10% per annum. The 10% Discount Convertible Notes mature on December 31, 2009. At any time, a holder of the notes may convert all or part of the accreted value of the notes at a conversion price of $0.69 per share of SIRIUS common stock. As a result of the fair valuation at the acquisition date, we recognized an initial discount of $7,324.

 

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

(Dollar amounts in thousands, unless otherwise stated)
10% Senior PIK Secured Notes due 2011
In February 2009, we exchanged $172,485 aggregate principal amount of outstanding 10% Convertible Notes for a like principal amount of XM Holdings’ 10% Senior PIK Secured Notes due 2011 (the “PIK Notes”). Interest is payable on the PIK Notes semiannually in arrears on June 1 and December 1 of each year at a rate of 10% per annum paid in cash from December 1, 2008 to December 1, 2009; at a rate of 10% per annum paid in cash and 2% per annum paid in kind from December 1, 2009 to December 1, 2010; and at a rate of 10% per annum paid in cash and 4% per annum paid in kind from December 1, 2010 to the maturity date.
The PIK Notes are fully and unconditionally guaranteed by XM 1500 Eckington LLC and XM Investment LLC (together, the “Subsidiary Guarantors”) and are secured by a first-priority lien on substantially all of the property of the Subsidiary Guarantors. XM Holdings may, at its option, redeem some or all of the PIK Notes at any time at 100% of the principal amount prepaid, together with accrued and unpaid interest, if any.
We paid a fee equal to, at each exchanging noteholders’ election, either (i) 833 shares of SIRIUS’ common stock (the “Structuring Fee Shares”) for every $1 principal amount of 10% Convertible Notes exchanged or (ii) an amount in cash equal to $0.05 for every $1 principal amount of 10% Convertible Notes exchanged. The total number of Structuring Fee Shares delivered was 59,178,819, and the aggregate cash delivered was approximately $5,100.
In October 2009, we purchased $58,800 aggregate principal amount of the PIK Notes at a price of $60,499, which included accrued interest of $2,287. We will record a net loss of $3,869, related to the unamortized discount and the discount on the purchase, to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations as a result of this transaction.
Amended and Restated Credit Agreement due 2011
In March 2009, we amended and restated the $100,000 Senior Secured Term Loan due 2009, dated as of June 26, 2008 and the $250,000 Senior Secured Revolving Credit Facility due 2009, dated as of May 5, 2006. These facilities were combined as term loans into the Amended and Restated Credit Agreement, dated as of March 6, 2009. Liberty Media LLC (“Liberty”) purchased $100,000 aggregate principal amount of such loans from the lenders.
In June 2009, we used net proceeds from the sale of our 11.25% Senior Secured Notes due 2013 to repay amounts due under and extinguish the Amended and Restated Credit Agreement. We paid a repayment premium of $6,500. We recorded an aggregate loss on extinguishment of the Amended and Restated Credit Agreement of $49,786 consisting primarily of the unamortized discount, deferred financing fees and unaccreted portion of the repayment premium to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.
11.25% Senior Secured Notes due 2013
In June 2009, XM issued $525,750 aggregate principal amount of 11.25% Senior Secured Notes due 2013 (the “11.25% Notes”). Interest is payable semi-annually in arrears on June 15 and December 15 of each year at a rate of 11.25% per annum. The 11.25% Notes mature on June 15, 2013. The 11.25% Notes were issued for $489,952, resulting in an aggregate original issuance discount, including fees, of $35,798.
XM Holdings and the domestic subsidiaries of XM that guarantee certain of the indebtedness of XM and its restricted subsidiaries guarantee XM’s obligations under the 11.25% Notes. The 11.25% Notes and related guarantees are secured by first-priority liens on substantially all of the assets of XM Holdings, XM and the guarantors.
In June 2009, XM used a portion of the net proceeds from the sale of the 11.25% Notes to repay in full $325,000 principal amount outstanding under the Amended and Restated Credit Agreement. In connection with the sale of the 11.25% Notes, XM terminated the Second-Lien Credit Agreement and repaid all amounts due thereunder.
13% Senior Notes due 2013
In July 2008, XM issued $778,500 aggregate principal amount of 13% Senior Notes due 2013 (the “13% Notes”). Interest is payable semi-annually in arrears on February 1 and August 1 of each year at a rate of 13% per annum. The 13% Notes were issued for $700,105, resulting in an original issuance discount of $78,395. The 13% Notes are unsecured and mature on August 1, 2013.

 

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

(Dollar amounts in thousands, unless otherwise stated)
9.75% Senior Notes due 2014
XM has outstanding $5,260 aggregate principal amount of 9.75% Senior Notes due 2014 (the “9.75% Notes”). Interest on the 9.75% Notes is payable semi-annually on May 1 and November 1 at a rate of 9.75% per annum. The 9.75% Notes are unsecured and mature on May 1, 2014. XM, at its option, may redeem the 9.75% Notes at declining redemption prices at any time on or after May 1, 2010, subject to certain restrictions. Prior to May 1, 2010, XM may redeem the 9.75% Notes, in whole or in part, at a price equal to 100% of the principal amount thereof, plus a make-whole premium and accrued and unpaid interest to the date of redemption.
In March 2009, XM executed and delivered a Third Supplemental Indenture (the “9.75% Notes Supplemental Indenture”). The 9.75% Notes Supplemental Indenture amended the indenture to eliminate substantially all of the restrictive covenants, eliminated certain events of default and modified or eliminated certain other provisions contained in the indenture and the 9.75% Notes.
7% Exchangeable Senior Subordinated Notes due 2014
In August 2008, XM issued $550,000 aggregate principal amount of 7% Exchangeable Senior Subordinated Notes due 2014 (the “Exchangeable Notes”). The Exchangeable Notes are senior subordinated obligations of XM and rank junior in right of payment to its existing and future senior debt and equally in right of payment with its existing and future senior subordinated debt. XM Holdings, XM Equipment Leasing LLC and XM Radio Inc. have guaranteed the Exchangeable Notes on a senior subordinated basis. Interest is payable semi-annually in arrears on June 1 and December 1 of each year at a rate of 7% per annum. The Exchangeable Notes mature on December 1, 2014. The Exchangeable Notes are exchangeable at any time at the option of the holder into shares of SIRIUS’ common stock at an initial exchange rate of 533.3333 shares of SIRIUS common stock per $1,000 principal amount of Exchangeable Notes, which is equivalent to an approximate exchange price of $1.875 per share of SIRIUS common stock.
Second-Lien Credit Agreement
In February 2009, we entered into a Credit Agreement (the “Credit Agreement”) with Liberty Media Corporation, as administrative agent and collateral agent. The Credit Agreement provided for a $150,000 term loan. On March 6, 2009, we amended and restated the Credit Agreement (the “Second-Lien Credit Agreement”) with Liberty Media.
In June 2009, we terminated the Second-Lien Credit Agreement in connection with the sale of the 11.25% Notes and repaid all amounts due thereunder. We recorded a loss on termination of the Second-Lien Credit Agreement of $57,663 related to deferred financing fees to Loss on extinguishment of debt and credit facilities in our unaudited consolidated statements of operations.
Embedded Derivatives
We issued convertible debt securities, including the 10% Convertible Senior Notes due 2009, the 10% Senior Secured Discount Convertible Notes due 2009 and 7% Exchangeable Senior Subordinated Notes due 2014 containing non-detachable conversion or exchange features. Upon completion of the Merger, these debt agreements were amended such that the settlement of conversion features is into shares of SIRIUS common stock.
The convertible and exchangeable features are embedded derivatives, and subsequent to the Merger are required to be separated from the host contract for accounting purposes in accordance with SFAS No. 133, Accounting for Hedging and Derivative Instruments . The embedded derivatives are recorded as derivative liabilities and included in our debt balances in our statement of financial position and the changes in fair value of those derivatives are reported as a realized investment gain or loss in the period in which the fair value changes.
Due to the change in fair value of these embedded derivatives, we recognized $33,700 and $111,703 of Loss on change in value of embedded derivatives during the three and nine months ended September 30, 2009, respectively, and $242,223 of Gain on change in value of embedded derivatives for the period August 1, 2008 through September 30, 2008. The balance of derivative liabilities was $134,361 and $22,658 as of September 30, 2009 and December 31, 2008, respectively.
Covenants and Restrictions
Our non-convertible debt generally requires compliance with certain covenants that restrict our ability to, among other things, (i) incur additional indebtedness, (ii) incur liens, (iii) pay dividends or make certain other restricted payments, investments or acquisitions, (iv) enter into certain transactions with affiliates, (v) merge or consolidate with another person, (vi) sell, assign, lease or otherwise dispose of all or substantially all of our assets, and (vii) make voluntary prepayments of certain debt, in each case subject to exceptions. XM Holdings operates as an unrestricted subsidiary of SIRIUS for purposes of compliance with the covenants contained in our debt instruments. If we fail to comply with these covenants, our debt could become immediately payable.
At September 30, 2009, we were in compliance with all financial covenants.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
(12) Benefit Plans
During the second quarter of 2009, we merged the XM Satellite Radio 401(k) Savings Plan (the “Savings Plan”) into the Sirius Satellite Radio 401(k) Savings Plan (the “Sirius Plan”), which is sponsored by SIRIUS. Eligible employees under the Savings Plan became subject to the contribution, matching and vesting rules of the Sirius Plan.
The Sirius Plan allows eligible employees to voluntarily contribute from 1% to 50% of their pre-tax salary subject to certain defined limits. SIRIUS matches 50% of an employee’s voluntary contributions, up to 6% of an employee’s pre-tax salary, in the form of shares of SIRIUS common stock. Matching contributions under the Sirius Plan vest at a rate of 331/3% for each year of employment and are fully vested after three years of employment.
(13) Income Taxes
We recorded income tax expense of $578 and $1,733 for the three and nine months ended September 30, 2009, respectively, and $672, $508 and $1,512 for the periods August 1, 2008 through September 30, 2008, July 1, 2008 through July 31, 2008 and January 1, 2008 through July 31, 2008, respectively. Such expense primarily represents the recognition of a deferred tax liability related to the difference in accounting for the FCC license intangible asset, which is amortized over 15 years for tax purposes but is not amortized for book purposes.
(14) Commitments and Contingencies
The following table summarizes our expected contractual cash commitments as of September 30, 2009:
                                                         
    Remaining                                      
(in thousands)   2009     2010     2011     2012     2013     Thereafter     Total  
Long-term debt obligations
  $ 85,121     $ 11,242     $ 175,389     $ 166     $ 1,304,406     $ 555,260     $ 2,131,584  
Cash interest payments
    59,707       217,466       208,148       199,403       169,811       38,756       893,291  
Lease obligations
    8,268       18,109       7,247       4,033       1,680       2,069       41,406  
Satellite and transmission
    12,087       29,609                         8,635       50,331  
Programming and content
    30,249       56,470       110,021       100,326       20,683       14,350       332,099  
Satellite performance incentive payments
    1,051       4,384       4,695       5,030       5,392       42,831       63,383  
Marketing and distribution
    15,574       10,198       9,272       9,033       3,000       4,500       51,577  
Other
    568       883       337       45                   1,833  
 
                                         
 
Total
  $ 212,625     $ 348,361     $ 515,109     $ 318,036     $ 1,504,972     $ 666,401     $ 3,565,504  
 
                                         
Long-term debt obligations. Long-term debt obligations include principal payments on outstanding debt.
Cash interest payments. Cash interest payments include interest due on outstanding debt through maturity.
Satellite and transmission. We have entered into agreements with third parties to operate and maintain the off-site satellite telemetry, tracking and control facilities and certain components of our terrestrial repeater network. We have also entered into various agreements to design and construct satellites for use in our systems and to launch those satellites.
Space Systems/Loral has constructed a fifth satellite, XM-5, for use in our system. In 2006, we entered into an agreement with Sea Launch to secure a launch for XM-5. In June 2009, Sea Launch filed for bankruptcy protection under Title 11 of the United States Code. In October 2009, XM Holdings terminated its satellite launch agreement with Sea Launch with the consent of the Bankruptcy Court. In October 2009, SIRIUS entered into an agreement with International Launch Services (“ILS”) to secure a satellite launch for XM-5 on a Proton rocket. We currently expect to launch XM-5 in the second or third quarter of 2010.
Programming and content. We have entered into various programming agreements. Under the terms of these agreements, we are obligated to provide payments to other entities that may include fixed payments, advertising commitments and revenue sharing arrangements.
Marketing and distribution. We have entered into various marketing, sponsorship and distribution agreements to promote our brand and are obligated to make payments to sponsors, retailers, automakers and radio manufacturers under these agreements. Certain programming and content agreements also require us to purchase advertising on properties owned or controlled by the licensors. We also reimburse automakers for certain engineering and development costs associated with the incorporation of satellite radios into vehicles they manufacture. In addition, in the event certain new products are not shipped by a distributor to its customers within 90 days of the distributor’s receipt of goods, we have agreed to purchase and take title to the product.

 

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NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — Continued

(Dollar amounts in thousands, unless otherwise stated)
Satellite incentive payments. Boeing Satellite Systems International, Inc., the manufacturer of our four in-orbit satellites, may be entitled to future in-orbit performance payments with respect to two of our four satellites. As of September 30, 2009, we have accrued $28,655 related to contingent in-orbit performance payments for XM-3 and XM-4 based on expected operating performance over their fifteen year design life. Boeing may also be entitled to an additional $10,000 if XM-4 continues to operate above baseline specifications during the five years beyond the satellite’s fifteen year design life.
Operating lease obligations. We have entered into cancelable and non-cancelable operating leases for office space, equipment and terrestrial repeaters. These leases provide for minimum lease payments, additional operating expense charges, leasehold improvements, and rent escalations that have initial terms ranging from one to fifteen years, and certain leases that have options to renew. The effect of the rent holidays and rent concessions are recognized on a straight-line basis over the lease term.
Other. We have entered into various agreements with third parties for general operating purposes. In addition to the minimum contractual cash commitments described above, we have entered into agreements with other variable cost arrangements. These future costs are dependent upon many factors, including subscriber growth, and are difficult to anticipate; however, these costs may be substantial. We may enter into additional programming, distribution, marketing and other agreements that contain similar provisions.
We are required under the terms of certain agreements to deposit monies in escrow, which place restrictions on cash and cash equivalents. As of September 30, 2009 and December 31, 2008, $250 and $120,250, respectively, were classified as Restricted investments as a result of obligations under these escrow deposits.
We do not have any other significant off-balance sheet arrangements that are reasonably likely to have a material effect on our financial condition, results of operations, liquidity, capital expenditures or capital resources.
Legal Proceedings
FCC Merger Order. On July 25, 2008, the FCC adopted an order approving the Merger. The order became effective immediately upon adoption. In September 2008, Mt. Wilson FM Broadcasters, Inc. filed a Petition for Reconsideration of this order. This Petition for Reconsideration remains pending.
Atlantic Recording Corporation, BMG Music, Capital Records, Inc., Elektra Entertainment Group Inc., Interscope Records, Motown Record Company, L.P., Sony BMG Music Entertainment, UMG Recordings, Inc., Virgin Records, Inc. and Warner Bros. Records Inc. v. XM Satellite Radio Inc. In May 2006, the plaintiffs filed this action in the United States District Court for the Southern District of New York. The complaint seeks monetary damages and equitable relief, and alleges that XM radios that include advanced recording functionality infringe upon plaintiffs’ copyrighted sound recordings. XM filed a motion to dismiss this matter, and that motion was denied in January 2007. XM has resolved the lawsuit with respect to Universal Music Group, Warner Music Group, Sony BMG Music Entertainment and EMI Group, and each of these parties has withdrawn as a party to the lawsuit, and this lawsuit has been dismissed with respect to such parties.
Music publishing companies and certain other record companies also have filed lawsuits, purportedly on a class basis, with similar allegations. We believe these allegations are without merit and that our products comply with applicable copyright law, including the Audio Home Recording Act. We intend to vigorously defend this matter. There can be no assurance regarding the ultimate outcome of these matters, or the significance, if any, to our business, consolidated results of operations or financial position.
Other Matters. In the ordinary course of business, we are a defendant in various lawsuits and arbitration proceedings, including actions filed by former employees, parties to contracts or leases and owners of patents, trademarks, copyrights or other intellectual property. None of these actions are, in our opinion, likely to have a material adverse effect on our cash flows, financial position or results of operations.
(15) Condensed Consolidating Financial Information
XM 1500 Eckington LLC, XM Investment LLC, XM Satellite Radio Inc. and its wholly owned subsidiaries, XM Radio Inc. and XM Equipment Leasing LLC (collectively, the “XM Holdings Guarantor Subsidiaries”) are wholly owned subsidiaries of XM Holdings. The XM Holdings Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, certain of the debt issued by XM Holdings.
XM Radio Inc. and XM Equipment Leasing LLC (collectively, the “XM Guarantor Subsidiaries”) are wholly owned subsidiaries of XM. The XM Guarantor Subsidiaries have fully and unconditionally, jointly and severally, directly or indirectly, guaranteed, on an unsecured basis, the debt issued by XM in connection with certain of XM’s financings.

 

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

(Dollar amounts in thousands, unless otherwise stated)
These condensed consolidating financial statements should be read in conjunction with the consolidated financial statements of XM Satellite Radio Holdings Inc. and Subsidiaries.
Basis of Presentation
In presenting our condensed consolidating financial statements of XM Holdings and XM, the equity method of accounting has been applied to (i) XM Holdings’ interests in the XM Holdings Guarantor Subsidiaries, (ii) XM’s interests in the XM Guarantor Subsidiaries and (iii) XM’s interests in the XM Non-Guarantor Subsidiaries, where applicable, even though all such subsidiaries meet the requirements to be consolidated under U.S. generally accepted accounting principles. All intercompany balances and transactions between XM Holdings, the XM Holdings Guarantor Subsidiaries, XM Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column “Eliminations.”
Our accounting bases in all subsidiaries, including goodwill and identified intangible assets, have been “pushed down” to the applicable subsidiaries.

 

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Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF SEPTEMBER 30, 2009
                                                                                         
                    XM                                                             Consolidated  
                    Equipment     XM Non-             Consolidated     XM Satellite     XM 1500     XM             XM Satellite  
    XM Satellite             Leasing     Guarantor             XM Satellite     Radio     Eckington     Investment             Radio Holdings  
(in thousands)   Radio Inc.     XM Radio Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLC     LLC     Eliminations     Inc.  
Current assets:
                                                                                       
Cash and cash equivalents
  $ 497,692     $     $ 10     $     $     $ 497,702     $ 2,873     $ 3,848     $ 664     $ (179,065 )   $ 326,022  
Accounts receivable, net
    45,243                               45,243                               45,243  
Due from subsidiaries/affiliates
    4,820       737,886       61,062       759,655       (1,563,480 )     (57 )           46,669       5,994       (52,606 )      
Inventory, net
    2,923                               2,923                               2,923  
Prepaid expenses
    79,235                               79,235                               79,235  
Related party current assets
    132,169             (105 )                 132,064             (1,317 )     (221 )     (24,852 )     105,674  
Other current assets
    56,972             64                   57,036             395       (111 )           57,320  
 
                                                                 
 
                                                                                       
Total current assets
    819,054       737,886       61,031       759,655       (1,563,480 )     814,146       2,873       49,595       6,326       (256,523 )     616,417  
 
                                                                                       
Property and equipment, net
    487,633             (51 )                 487,582       240,127       58,038       12,500             798,247  
Investment in subsidiaries/affiliates
    2,804,547                         (2,804,547 )           (530,523 )                 530,523        
FCC license
          2,000,000                         2,000,000                               2,000,000  
Restricted investments
    250                               250                               250  
Deferred financing fees, net
    27,309                               27,309                               27,309  
Intangible assets, net
    629,288                               629,288                               629,288  
Related party long-term assets
    114,073                               114,073                               114,073  
Other long-term assets
    25,250                               25,250       14,260       2,050                   41,560  
 
                                                                 
 
                                                                                       
Total assets
  $ 4,907,404     $ 2,737,886     $ 60,980     $ 759,655     $ (4,368,027 )   $ 4,097,898     $ (273,263 )   $ 109,683     $ 18,826     $ 274,000     $ 4,227,144  
 
                                                                 
 
                                                                                       
Current liabilities:
                                                                                       
Accounts payable and accrued expenses
  $ 226,264     $     $ 104     $     $ (40,946 )   $ 185,422     $ 11,596     $ (3 )   $ 168     $ (571 )   $ 196,612  
Accrued interest
    43,249                               43,249       9,009                         52,258  
Due to subsidiaries/affiliates
    1,528,898                         (1,522,534 )     6,364       44,808       3,493       491       (55,156 )      
Current portion of deferred revenue
    469,947                               469,947       2,776                         472,723  
Current portion of deferred credit
                                                                                       
on executory contracts
    247,566                               247,566                               247,566  
Current maturities of long-term debt
    46,247                               46,247       55,053                         101,300  
Current maturities of long-term related party debt
                                        177,572                   (177,572 )      
Related party current liabilities
    168,081                               168,081       38,961       4       5       (19,950 )     187,101  
 
                                                                 
Total current liabilities
    2,730,252             104             (1,563,480 )     1,166,876       339,775       3,494       664       (253,249 )     1,257,560  
 
                                                                                       
Deferred revenue
    137,915                               137,915       27,986                         165,901  
Deferred credit on executory contracts
    851,955                               851,955                               851,955  
Long-term debt
    1,477,843                               1,477,843       159,025                         1,636,868  
Long-term related party debt
    159,275                               159,275                               159,275  
Deferred tax liability
    145,854       753,870                         899,724       165                         899,889  
Related party long-term liability
    21,928                               21,928                               21,928  
Other long-term liabilities
    38,571                               38,571             (1,315 )           (3,274 )     33,982  
 
                                                                 
 
                                                                                       
Total liabilities
    5,563,593       753,870       104             (1,563,480 )     4,754,087       526,951       2,179       664       (256,523 )     5,027,358  
 
                                                                 
 
                                                                                       
Commitments and contingencies
                                                                                       
Stockholder’s equity (deficit):
                                                                                       
Capital stock
                                                                 
Accumulated other comprehensive loss
                                        (6,598 )                       (6,598 )
Additional paid-in-capital
    (563,335 )     1,781,641       57,853       691,811       (2,531,305 )     (563,335 )     5,989,700       99,348       17,615       446,372       5,989,700  
Retained earnings (deficit)
    (92,854 )     202,375       3,023       67,844       (273,242 )     (92,854 )     (6,783,316 )     8,156       547       84,151       (6,783,316 )
 
                                                                 
 
                                                                                       
Total stockholder’s equity (deficit)
    (656,189 )     1,984,016       60,876       759,655       (2,804,547 )     (656,189 )     (800,214 )     107,504       18,162       530,523       (800,214 )
 
                                                                 
 
                                                                                       
Total liabilities and stockholder’s equity (deficit)
  $ 4,907,404     $ 2,737,886     $ 60,980     $ 759,655     $ (4,368,027 )   $ 4,097,898     $ (273,263 )   $ 109,683     $ 18,826     $ 274,000     $ 4,227,144  
 
                                                                 

 

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF DECEMBER 31, 2008
                                                                                         
                                                                                    Consolidated  
                    XM     XM Non-             Consolidated     XM Satellite     XM 1500     XM             XM Satellite  
    XM Satellite             Equipment     Guarantor             XM Satellite     Radio     Eckington     Investment             Radio Holdings  
(in thousands)   Radio Inc.     XM Radio Inc.     Leasing LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLC     LLC     Eliminations     Inc.  
Current assets:
                                                                                       
Cash and cash equivalents
  $ 199,938     $     $ 15     $     $     $ 199,953     $ 5,923     $ 760     $ 104     $     $ 206,740  
Accounts receivable, net
    52,727                               52,727                               52,727  
Due from subsidiaries/affiliates
    554,882       605,231       55,425       742,499       (1,957,994 )     43             42,213       5,337       (47,593 )      
Inventory, net
    4,489                               4,489                               4,489  
Prepaid expenses
    37,351                               37,351                               37,351  
Related party current assets
    112,232                               112,232       131                         112,363  
Other current assets
    50,090             64                   50,154       155       258             (155 )     50,412  
 
                                                                 
 
                                                                                       
Total current assets
    1,011,709       605,231       55,504       742,499       (1,957,994 )     456,949       6,209       43,231       5,441       (47,748 )     464,082  
 
                                                                                       
Property and equipment, net
    577,368             3,912                   581,280       221,011       59,454       12,843             874,588  
Investment in subsidiaries/affiliates
    2,625,148                         (2,625,148 )           (351,193 )                 351,193        
FCC license
          2,000,000                         2,000,000                               2,000,000  
Restricted investments
    120,250                               120,250                               120,250  
Deferred financing fees, net
    30,303                               30,303                               30,303  
Intangible assets, net
    688,671                               688,671                               688,671  
Related party long-term assets
    124,607                               124,607                               124,607  
Other long-term assets
    12,830                               12,830       19,400       2,054                   34,284  
 
                                                                 
 
                                                                                       
Total assets
  $ 5,190,886     $ 2,605,231     $ 59,416     $ 742,499     $ (4,583,142 )   $ 4,014,890     $ (104,573 )   $ 104,739     $ 18,284     $ 303,445     $ 4,336,785  
 
                                                                 
 
                                                                                       
Current liabilities:
                                                                                       
Accounts payable and accrued expenses
  $ 237,139     $     $ 97     $     $     $ 237,236     $ 153     $ 268     $ 84     $ (442 )   $ 237,299  
Accrued interest
    47,118                               47,118       3,425                         50,543  
Due to subsidiaries/affiliates
    1,929,803       271       3,121       26,373       (1,957,994 )     1,574             3,669       493       (5,736 )      
Current portion of deferred revenue
    416,931                               416,931       2,776                         419,707  
Current portion of deferred credit on executory contracts
    234,774                               234,774                               234,774  
Current portion of long-term debt
    135,257                               135,257       220,482                         355,739  
Related party current liabilities
    83,930                               83,930       4,057                   (4,057 )     83,930  
 
                                                                 
 
                                                                                       
Total current liabilities
    3,084,952       271       3,218       26,373       (1,957,994 )     1,156,820       230,893       3,937       577       (10,235 )     1,381,992  
 
                                                                                       
Deferred revenue
    101,187                               101,187       30,068                         131,255  
Deferred credit on executory contracts
    1,037,190                               1,037,190                               1,037,190  
Long-term debt
    1,274,149                               1,274,149       164,953                         1,439,102  
Deferred tax liability
    134,301       752,174                         886,475                               886,475  
Other long-term liabilities
    32,805       (38 )                       32,767       45,067       (1,315 )           (40,194 )     36,325  
 
                                                                 
 
                                                                                       
Total liabilities
    5,664,584       752,407       3,218       26,373       (1,957,994 )     4,488,588       470,981       2,622       577       (50,429 )     4,912,339  
 
                                                                 
 
                                                                                       
Commitments and contingencies
                                                                                       
Stockholder’s equity (deficit):
                                                                                       
Capital stock
                                                                 
Accumulated other comprehensive loss
                                        (7,871 )                       (7,871 )
Additional paid-in-capital
    (673,156 )     1,781,641       55,262       691,811       (2,528,715 )     (673,157 )     5,870,502       99,347       17,557       556,253       5,870,502  
Retained earnings (deficit)
    199,458       71,183       936       24,315       (96,433 )     199,459       (6,438,185 )     2,770       150       (202,379 )     (6,438,185 )
 
                                                                 
 
                                                                                       
Total stockholder’s equity (deficit)
    (473,698 )     1,852,824       56,198       716,126       (2,625,148 )     (473,698 )     (575,554 )     102,117       17,707       353,874       (575,554 )
 
                                                                 
 
                                                                                       
Total liabilities and stockholder’s equity (deficit)
  $ 5,190,886     $ 2,605,231     $ 59,416     $ 742,499     $ (4,583,142 )   $ 4,014,890     $ (104,573 )   $ 104,739     $ 18,284     $ 303,445     $ 4,336,785  
 
                                                                 

 

22


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 (SUCCESSOR ENTITY)
                                                                                         
                    XM                                                             Consolidated  
    XM             Equipment     XM Non-             Consolidated     XM Satellite     XM 1500     XM             XM Satellite  
    Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio     Eckington     Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLC     LLC     Eliminations     Holdings Inc.  
Revenue
  $ 324,779     $     $     $     $     $ 324,779     $ 694     $ 2,605     $ 333     $ (2,938 )   $ 325,473  
 
                                                                                       
Cost of services
    122,703             (12 )           (214 )     122,477                               122,477  
Sales and marketing
    26,055                               26,055                               26,055  
Subscriber acquisition costs
    35,049                               35,049                               35,049  
General and administrative
    26,668             30             320       27,018       128       292       87       (2,309 )     25,216  
Engineering, design and development
    5,413                               5,413                               5,413  
Depreciation and amortization
    38,769             1,114                   39,883       1,093       508       103             41,587  
Restructuring, impairments and related costs
    3,029                               3,029                               3,029  
 
                                                                 
 
                                                                                       
Total operating expenses
    257,686             1,132             106       258,924       1,221       800       190       (2,309 )     258,826  
 
                                                                 
 
                                                                                       
Income (loss) from operations
    67,093             (1,132 )           (106 )     65,855       (527 )     1,805       143       (629 )     66,647  
 
                                                                                       
Other income (expense):
                                                                                       
Interest and investment income
    4,250                               4,250       160                   (3,681 )     729  
Interest expense, net of amounts capitalized
    (68,476 )                             (68,476 )     (7,612 )                 5,472       (70,616 )
Gain (loss) on change in value of embedded derivative
    (33,700 )                             (33,700 )                             (33,700 )
Loss on extinguishment of debt and credit facilities, net
    (502 )                             (502 )                       (3,285 )     (3,787 )
Gain (loss) on investments
                                        (2,870 )                       (2,870 )
Other income (expense)
    (1,000 )     46,185       2,872       14,637       (61,878 )     816       (31,424 )                 31,932       1,324  
 
                                                                 
 
                                                                                       
Net income (loss) before income taxes
    (32,335 )     46,185       1,740       14,637       (61,984 )     (31,757 )     (42,273 )     1,805       143       29,809       (42,273 )
 
                                                                 
Benefit from (provision for) income taxes
          (578 )                       (578 )     (578 )                 578       (578 )
 
                                                                 
Net income (loss)
    (32,335 )     45,607       1,740       14,637       (61,984 )     (32,335 )     (42,851 )     1,805       143       30,387       (42,851 )
 
Add: net loss attributable to noncontrolling interests
                                                                 
 
                                                                 
Net income (loss): XM Satellite Radio Holdings and Subsidiaries
  $ (32,335 )   $ 45,607     $ 1,740     $ 14,637     $ (61,984 )   $ (32,335 )   $ (42,851 )   $ 1,805     $ 143     $ 30,387     $ (42,851 )
 
                                                                 

 

23


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (SUCCESSOR ENTITY)
                                                                                         
                    XM                                                             Consolidated  
                    Equipment     XM Non-             Consolidated     XM Satellite     XM 1500     XM             XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio     Eckington     Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLC     LLC     Eliminations     Holdings Inc.  
 
                                                                                       
Revenue
  $ 932,457     $     $     $     $     $ 932,457     $ 2,082     $ 7,740     $ 997     $ (8,738 )   $ 934,538  
 
                                                                                       
Cost of services
    372,513             6                   372,519                               372,519  
Sales and marketing
    84,565                               84,565                               84,565  
Subscriber acquisition costs
    83,524                               83,524                               83,524  
General and administrative
    95,552             30             320       95,902       1,515       938       259       (6,925 )     91,689  
Engineering, design and development
    16,798                               16,798                               16,798  
Depreciation and amortization
    134,958             6,554                   141,512       3,192       1,416       342             146,462  
Restructuring, impairments and related costs
    5,418                               5,418       24,196                         29,614  
 
                                                                 
 
                                                                                       
Total operating expenses
    793,328             6,590             320       800,238       28,903       2,354       601       (6,925 )     825,171  
 
                                                                 
 
                                                                                       
Income (loss) from operations
    139,129             (6,590 )           (320 )     132,219       (26,821 )     5,386       396       (1,813 )     109,367  
 
                                                                                       
Other income (expense):
                                                                                       
Interest and investment income
    5,087                               5,087       442                   (3,681 )     1,848  
Interest expense, net of amounts capitalized
    (212,907 )                             (212,907 )     (19,500 )                 5,472       (226,935 )
Gain (loss) on change in value of embedded derivative
    (111,703 )                             (111,703 )                             (111,703 )
Loss on extinguishment of debt and credit facilities, net
    (104,373 )                             (104,373 )     (4,205 )                 (3,285 )     (111,863 )
Gain (loss) on investments
                                        (6,660 )                       (6,660 )
Other income (expense)
    (7,544 )     132,925       8,676       43,530       (176,488 )     1,099       (286,654 )                 288,103       2,548  
 
                                                                 
Net income (loss) before income taxes
    (292,311 )     132,925       2,086       43,530       (176,808 )     (290,578 )     (343,398 )     5,386       396       284,796       (343,398 )
 
                                                                 
Benefit from (provision for) income taxes
          (1,733 )                       (1,733 )     (1,733 )                 1,733       (1,733 )
 
                                                                 
Net income (loss)
    (292,311 )     131,192       2,086       43,530       (176,808 )     (292,311 )     (345,131 )     5,386       396       286,529       (345,131 )
 
                                                                                       
Add: net loss attributable to noncontrolling interests
                                                                 
 
                                                                 
Net income (loss): XM Satellite Radio Holdings and Subsidiaries
  $ (292,311 )   $ 131,192     $ 2,086     $ 43,530     $ (176,808 )   $ (292,311 )   $ (345,131 )   $ 5,386     $ 396     $ 286,529     $ (345,131 )
 
                                                                 

 

24


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PERIOD JULY 1, 2008 THROUGH JULY 31, 2008 (PREDECESSOR ENTITY)
                                                                                                 
                    XM                                     Satellite                             Consolidated  
                    Equipment     XM Non-             Consolidated     XM Satellite     Leasing     XM 1500     XM             XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio     (702-4),     Eckington     Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLT     LLC     LLC     Eliminations     Holdings Inc.  
Revenue
  $ 103,821     $ 17,031     $ 913     $     $ (17,944 )   $ 103,821     $ 833     $ 2,976     $ 856     $ 109     $ (3,891 )   $ 104,704  
 
                                                                                               
Cost of services
    61,453                         35       61,488                                     61,488  
Sales and marketing
    17,268                               17,268                                     17,268  
Subscriber acquisition costs
    33,366                               33,366                                     33,366  
General and administrative
    33,647                               33,647       149             110       26       (723 )     33,209  
Engineering, design and development
    2,611                               2,611                                     2,611  
Depreciation and amortization
    10,337             997                   11,334       16             116       51       (689 )     10,828  
 
                                                                       
 
                                                                                               
Total operating expenses
    158,682             997             35       159,714       165             226       77       (1,412 )     158,770  
 
                                                                       
 
                                                                                               
Income (loss) from operations
    (54,861 )     17,031       (84 )           (17,979 )     (55,893 )     668       2,976       630       32       (2,479 )     (54,066 )
 
                                                                                               
Other income (expense):
                                                                                               
Interest and investment income
    506             50       4,977       (5,027 )     506       88                               594  
Interest expense, net of amounts capitalized
    (16,739 )                 (50 )     5,025       (11,764 )     (2,924 )     (1,923 )                 2,481       (14,130 )
Loss on extinguishment of debt and credit facilities, net
                                                                       
Gain (loss) on investments
                                        (4,460 )                             (4,460 )
Other income (expense)
    3,615             1             (3,752 )     (136 )     (66,482 )                       66,623       5  
 
                                                                       
 
                                                                                               
Net income (loss) before income taxes
    (67,479 )     17,031       (33 )     4,927       (21,733 )     (67,287 )     (73,110 )     1,053       630       32       66,625       (72,057 )
 
                                                                       
Benefit from (provision for) income taxes
          (192 )                       (192 )     (508 )                       192       (508 )
 
                                                                       
Net income (loss)
    (67,479 )     16,839       (33 )     4,927       (21,733 )     (67,479 )     (73,618 )     1,053       630       32       66,817       (72,565 )
 
                                                                                               
Add: net loss attributable to noncontrolling interests
                                                                (1,053 )     (1,053 )
 
                                                                       
Net income (loss): XM Satellite Radio Holdings and Subsidiaries
  $ (67,479 )   $ 16,839     $ (33 )   $ 4,927     $ (21,733 )   $ (67,479 )   $ (73,618 )   $ 1,053     $ 630     $ 32     $ 65,764     $ (73,618 )
 
                                                                       

 

25


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PERIOD JANUARY 1, 2008 THROUGH JULY 31, 2008 (PREDECESSOR ENTITY)
                                                                                                 
                    XM                                     Satellite                            
                    Equipment     XM Non-             Consolidated     XM Satellite     Leasing     XM 1500     XM             Consolidated  
    XM Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio     (702-4),     Eckington     Investment             XM Satellite  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Holdings Inc.     LLT     LLC     LLC     Eliminations     Radio Holdings Inc.  
Revenue
  $ 725,314     $ 104,112     $ 6,394     $     $ (110,506 )   $ 725,314     $ 5,829     $ 21,001     $ 7,676     $ 757     $ (29,383 )   $ 731,194  
 
                                                                                               
Cost of services
    433,011             21             256       433,288                                     433,288  
Sales and marketing
    126,054                               126,054                                     126,054  
Subscriber acquisition costs
    174,083                               174,083                                     174,083  
General and administrative
    120,349                               120,349       287             611       181       (4,984 )     116,444  
Engineering, design and development
    23,045                               23,045                                     23,045  
Depreciation and amortization
    85,302             6,990                   92,292       112             811       360       (4,826 )     88,749  
 
                                                                       
 
Total operating expenses
    961,844             7,011             256       969,111       399             1,422       541       (9,810 )     961,663  
 
                                                                       
 
                                                                                               
Income (loss) from operations
    (236,530 )     104,112       (617 )           (110,762 )     (243,797 )     5,430       21,001       6,254       216       (19,573 )     (230,469 )
 
                                                                                               
Other income (expense):
                                                                                               
Interest and investment income
    2,618             369       34,193       (34,562 )     2,618       395                               3,013  
Interest expense, net of amounts capitalized
    (108,239 )                 (369 )     34,560       (74,048 )     (3,950 )     (13,558 )                 17,619       (73,937 )
Loss on extinguishment of debt and credit facilities, net
                                                                       
Gain (loss) on investments
                                        (13,010 )                             (13,010 )
Other income (expense)
    25,362             152             (25,728 )     (214 )     (309,811 )                       310,925       900  
 
                                                                       
 
                                                                                               
Net income (loss) before income taxes
    (316,789 )     104,112       (96 )     33,824       (136,492 )     (315,441 )     (320,946 )     7,443       6,254       216       308,971       (313,503 )
 
                                                                       
Benefit from (provision for) income taxes
          (1,348 )                       (1,348 )     (1,512 )                       1,348       (1,512 )
 
                                                                       
Net income (loss)
    (316,789 )     102,764       (96 )     33,824       (136,492 )     (316,789 )     (322,458 )     7,443       6,254       216       310,319       (315,015 )
Add: net loss attributable to noncontrolling interests
                                                                (7,443 )     (7,443 )
 
                                                                       
Net income (loss): XM Satellite Radio Holdings and Subsidiaries
  $ (316,789 )   $ 102,764     $ (96 )   $ 33,824     $ (136,492 )   $ (316,789 )   $ (322,458 )   $ 7,443     $ 6,254     $ 216     $ 302,876     $ (322,458 )
 
                                                                       

 

26


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE PERIOD AUGUST 1, 2008 THROUGH SEPTEMBER 30, 2008 (SUCCESSOR ENTITY)
                                                                                                 
                    XM                                                                     Consolidated  
                    Equipment     XM Non-             Consolidated     XM Satellite     Satellite     XM 1500     XM             XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio Holdings     Leasing (702-4),     Eckington     Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Inc.     LLT     LLC     LLC     Eliminations     Holdings Inc.  
Revenue
  $ 195,183     $ 31,095     $ 1,827     $     $ (32,923 )   $ 195,182     $ 471     $ 4,409     $ 1,608     $ 219     $ (6,286 )   $ 195,603  
 
                                                                                               
Cost of services
    97,804             7             71       97,882                                     97,882  
Sales and marketing
    28,951                               28,951                                     28,951  
Subscriber acquisition costs
    27,482                               27,482                                     27,482  
General and administrative
    20,296                               20,296       153             166       52       (1,452 )     19,215  
Engineering, design and development
    5,191                               5,191                                     5,191  
Impairment of goodwill
                                        5,026,838                               5,026,838  
Depreciation and amortization
    32,667             1,957                   34,624       194             232       103       (533 )     34,620  
 
                                                                       
 
Total operating expenses
    212,391             1,964             71       214,426       5,027,185             398       155       (1,985 )     5,240,179  
 
                                                                       
 
                                                                                               
Income (loss) from operations
    (17,208 )     31,095       (137 )           (32,994 )     (19,244 )     (5,026,714 )     4,409       1,210       64       (4,301 )     (5,044,576 )
 
                                                                                               
Other income (expense):
                                                                                               
Interest and investment income
    4,219             99       9,792       (9,891 )     4,219       (256 )                             3,963  
Interest expense, net of amounts capitalized
    (55,146 )                 (99 )     9,892       (45,353 )     (6,115 )                       3,670       (47,798 )
Gain (loss) on change in value of embedded derivative
    241,431                               241,431       792                               242,223  
Loss on extinguishment of debt and credit facilities, net
                                                                       
Gain (loss) on investments
                                        (3,089 )                             (3,089 )
Other income (expense)
    7,284                         (7,372 )     (88 )     182,031       (2,821 )                 (183,196 )     (4,074 )
 
                                                                       
 
                                                                                               
Net income (loss) before income taxes
    180,580       31,095       (38 )     9,693       (40,365 )     180,965       (4,853,351 )     1,588       1,210       64       (183,827 )     (4,853,351 )
 
                                                                       
Benefit from (provision for) income taxes
          (385 )                       (385 )     (672 )                       385       (672 )
 
                                                                       
Net income (loss)
    180,580       30,710       (38 )     9,693       (40,365 )     180,580       (4,854,023 )     1,588       1,210       64       (183,442 )     (4,854,023 )
 
                                                                                               
Add: net loss attributable to noncontrolling interests
                                                                       
 
                                                                       
Net income (loss): XM Satellite Radio Holdings and Subsidiaries
  $ 180,580     $ 30,710     $ (38 )   $ 9,693     $ (40,365 )   $ 180,580     $ (4,854,023 )   $ 1,588     $ 1,210     $ 64     $ (183,442 )   $ (4,854,023 )
 
                                                                       

 

27


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENT OF STOCKHOLDER’S DEFICIT AND COMPREHENSIVE LOSS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
                                                                                         
                    XM     XM Non-             Consolidated XM                                     Consolidated XM  
    XM Satellite     XM Radio     Equipment     Guarantor             Satellite Radio     XM Satellite Radio     XM 1500     XM Investment             Satellite Radio  
(in thousands)   Radio Inc.     Inc.     Leasing LLC     Subsidiaries     Eliminations     Inc.     Holdings Inc.     Eckington LLC     LLC     Eliminations     Holdings Inc.  
Balance at December 31, 2008
  $ (473,697 )   $ 1,852,825     $ 56,198     $ 716,125     $ (2,625,148 )   $ (473,697 )   $ (575,554 )   $ 102,117     $ 17,707     $ 353,873     $ (575,554 )
 
                                                                                       
Net income (loss)
    (292,311 )     131,192       2,086       43,530       (176,808 )     (292,311 )     (345,131 )     5,386       396       286,529       (345,131 )
Other comprehensive loss:
                                                                                       
Unrealized loss on available-for-sale securities
                                        579                         579  
Foreign currency translation adjustment
                                        694                         694  
 
                                                                                   
Comprehensive loss
                                                    (343,858 )                             (343,858 )
Contributions (distributions) to (from) paid-in capital
    109,819             2,592             (2,591 )     109,819       119,198             59       (109,878 )     119,198  
 
                                                                 
Balance at September 30, 2009
  $ (656,189 )   $ 1,984,017     $ 60,876     $ 759,655     $ (2,804,547 )   $ (656,189 )   $ (800,214 )   $ 107,503     $ 18,162     $ 530,524     $ (800,214 )
 
                                                                 

 

28


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 (SUCCESSOR ENTITY)
                                                                                         
                    XM                                                             Consolidated  
                    Equipment     XM Non-             Consolidated XM     XM Satellite     XM 1500                     XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             Satellite Radio     Radio Holdings     Eckington     XM Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Inc.     Inc.     LLC     LLC     Eliminations     Holdings Inc.  
Net cash (used in) provided by operating activities
  $ 195,359     $     $ (5 )   $     $     $ 195,354     $ 29,616     $ 3,088     $ 560     $     $ 228,618  
 
                                                                                       
Cash flows from investing activities:
                                                                                       
Additions to property and equipment
    (11,217 )                             (11,217 )     (27,594 )                       (38,811 )
Sale of restricted and other investments
                                                                 
 
                                                                 
Net cash used in investing activities
    (11,217 )                             (11,217 )     (27,594 )                       (38,811 )
 
                                                                 
 
                                                                                       
Cash flows from financing activities:
                                                                                       
Long-term borrowings, net of costs
    387,184                               387,184                               387,184  
Related party long-term borrowings, net of costs
    95,093                               95,093                               95,093  
Repayment of long-term borrowings
    (256,662 )                             (256,662 )                       (179,065 )     (435,727 )
Repayment of long-term related party borrowings
    (100,000 )                             (100,000 )                             (100,000 )
Payment of premiums on redemption of debt
    (12,003 )                             (12,003 )     (5,072 )                       (17,075 )
 
                                                                 
Net cash provided by (used in) financing activities
    113,612                               113,612       (5,072 )                 (179,065 )     (70,525 )
 
                                                                 
 
                                                                                       
Net increase (decrease) in cash and cash equivalents
    297,754             (5 )                 297,749       (3,050 )     3,088       560       (179,065 )     119,282  
Cash and cash equivalents at beginning of period
    199,938             15                   199,953       5,923       760       104             206,740  
 
                                                                 
 
                                                                                       
Cash and cash equivalents at end of period
  $ 497,692     $     $ 10     $     $     $ 497,702     $ 2,873     $ 3,848     $ 664     $ (179,065 )   $ 326,022  
 
                                                                 

 

29


Table of Contents

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE PERIOD JANUARY 1, 2008 THROUGH JULY 31, 2008 (PREDECESSOR ENTITY)
                                                                                                 
                    XM                                     Satellite                             Consolidated  
                    Equipment     XM Non-             Consolidated     XM Satellite     Leasing     XM 1500     XM             XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             XM Satellite     Radio Holdings     (702-4),     Eckington     Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Radio Inc.     Inc.     LLT     LLC     LLC     Eliminations     Holdings Inc.  
Net cash (used in) provided by operating activities
  $ (278,970 )   $     $ 22     $     $     $ (278,948 )   $ 20,961     $ 6,897     $ 4     $     $     $ (251,086 )
 
                                                                                               
Cash flows from investing activities:
                                                                                               
Additions to property and equipment
    (23,854 )                             (23,854 )     (6,989 )                             (30,843 )
Purchases of restricted and other investments
                                        (34,825 )                             (34,825 )
Sale of restricted and other investments
                                                                       
 
                                                                       
Net cash used in investing activities
    (23,854 )                             (23,854 )     (41,814 )                             (65,668 )
 
                                                                       
 
                                                                                               
Cash flows from financing activities:
                                                                                               
Proceeds from exercise of warrants and stock options
                                        964                               964  
Capital contributions from Holdings
    13,125                                 13,125       (13,125 )                              
Long-term borrowings, net of costs
    1,023,190                               1,023,190                                     1,023,190  
Payments to minority interest holder
                                              (6,897 )                       (6,897 )
Repayment of long-term borrowings
    (35,210 )                             (35,210 )                                   (35,210 )
Other, net
                                        (2,458 )                             (2,458 )
 
                                                                       
Net cash provided by (used in) financing activities
    1,001,105                               1,001,105       (14,619 )     (6,897 )                       979,589  
 
                                                                       
 
                                                                                               
Net increase (decrease) in cash and cash equivalents
    698,281             22                   698,303       (35,472 )           4                   662,835  
Cash and cash equivalents at beginning of period
    100,111             11                   100,122       56,554             10                   156,686  
 
                                                                       
 
                                                                                               
Cash and cash equivalents at end of period
  $ 798,392     $     $ 33     $     $     $ 798,425     $ 21,082     $     $ 14     $     $     $ 819,521  
 
                                                                       

 

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

(Dollar amounts in thousands, unless otherwise stated)
XM SATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES
UNAUDITED CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE PERIOD AUGUST 1, 2008 THROUGH SEPTEMBER 30, 2008 (PREDECESSOR ENTITY)
                                                                                                 
                    XM                                     Satellite                             Consolidated  
                    Equipment     XM Non-             Consolidated XM     XM Satellite     Leasing                             XM Satellite  
    XM Satellite     XM Radio     Leasing     Guarantor             Satellite Radio     Radio Holdings     (702-4),     XM 1500     XM Investment             Radio  
(in thousands)   Radio Inc.     Inc.     LLC     Subsidiaries     Eliminations     Inc.     Inc.     LLT     Eckington LLC     LLC     Eliminations     Holdings Inc.  
Net cash (used in) provided by operating activities
  $ 8,391     $     $ (15 )   $     $     $ 8,376     $ (4,249 )   $ 1,479     $ (3 )   $     $     $ 5,603  
 
                                                                                               
Cash flows from investing activities:
                                                                                               
Additions to property and equipment
    (7,727 )                             (7,727 )     (166 )                             (7,893 )
Purchases of restricted and other investments
                                                                       
Sale of restricted and other investments
                                        25,400                               25,400  
 
                                                                       
Net cash (used in) provided by investing activities
    (7,727 )                             (7,727 )     25,234                               17,507  
 
                                                                       
 
                                                                                               
Cash flows from financing activities:
                                                                                               
Proceeds from exercise of warrants and stock options
                                                                       
Capital contributions from Holdings
                                                                         
Long-term borrowings, net of costs
    533,941                               533,941                                     533,941  
Payments to minority interest holder
    (60,401 )                             (60,401 )           (1,479 )                       (61,880 )
Repayment of long-term borrowings
    (1,080,553 )                             (1,080,553 )                                   (1,080,553 )
Payment of premiums on redemption of debt
                                        (18,693 )                             (18,693 )
Other, net
                                        (98 )                             (98 )
 
                                                                       
Net cash used in financing activities
    (607,013 )                             (607,013 )     (18,791 )     (1,479 )                       (627,283 )
 
                                                                       
 
                                                                                               
Net increase (decrease) in cash and cash equivalents
    (606,349 )           (15 )                 (606,364 )     2,194             (3 )                 (604,173 )
Cash and cash equivalents at beginning of period
    798,392             33                   798,425       21,082             14                   819,521  
 
                                                                       
 
                                                                                               
Cash and cash equivalents at end of period
  $ 192,043     $     $ 18     $     $     $ 192,061     $ 23,276     $     $ 11     $     $     $ 215,348  
 
                                                                       

 

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ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(All dollar amounts referenced in this Item 2 are in thousands, unless otherwise stated)
Special Note Regarding Forward-Looking Statements
The following cautionary statements identify important factors that could cause our actual results to differ materially from those projected in forward-looking statements made in this Quarterly Report on Form 10-Q and in other reports and documents published by us from time to time. Any statements about our beliefs, plans, objectives, expectations, assumptions, future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimated,” “intend,” “plan,” “projection” and “outlook.” Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout our Annual Report on Form 10-K for the year ended December 31, 2008 (the “Form 10-K”), and in other reports and documents published by us from time to time, particularly the risk factors described under “Business — Risk Factors” in Item 1A of the Form 10-K.
Among the significant factors that could cause our actual results to differ materially from those expressed in the forward-looking statements are:
    the substantial indebtedness of XM Holdings and XM;
    the useful life of our satellites, which have experienced component failures including, with respect to a number of satellites, failures on their solar arrays and in certain cases, are not insured;
    our dependence upon automakers, many of which have experienced a dramatic drop in sales and are in financial distress, and other third parties, such as manufacturers and distributors of satellite radios, retailers and programming providers; and
    our competitive position versus other forms of audio and video entertainment including terrestrial radio, HD radio, internet radio, mobile phones, iPods and other MP3 devices, and emerging next-generation networks and technologies.
Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Executive Summary
We broadcast our music, sports, news, talk, entertainment, traffic and weather channels in the United States on a subscription fee basis through our proprietary satellite radio system. On July 28, 2008, XM Satellite Radio Holdings Inc. merged with and into Vernon Merger Corporation, a wholly owned subsidiary of SIRIUS; and as a result, XM Satellite Radio Holdings Inc. is now a wholly owned subsidiary of SIRIUS. Our system consists of four in-orbit satellites, over 650 terrestrial repeaters that receive and retransmit signals, satellite uplink facilities and studios. Subscribers can also receive certain of our music and other channels over the Internet, including through an app on the Apple iPhone.
Our satellite radios are primarily distributed through automakers (“OEMs”), retailers and through our website. We have agreements with major automakers to offer satellite radios as factory or dealer-installed equipment in their vehicles. Our radios are also offered to customers of rental car companies.
As of September 30, 2009, we had 9,704,886 subscribers. Our subscriber totals include subscribers under our regular pricing plans; discounted pricing plans; subscribers that have prepaid, including payments either made or due from automakers and dealers for prepaid subscriptions included in the sale or lease price of a vehicle; certain radios activated for daily rental fleet programs; subscribers to XM Radio Online, our Internet service; and certain subscribers to our weather, traffic and data services.
Our primary source of revenue is subscription fees, with most of our customers subscribing on an annual, semi-annual, quarterly or monthly basis. We offer discounts for pre-paid and long-term subscriptions as well as discounts for multiple subscriptions. In 2009, we increased the discounted price for additional subscriptions from $6.99 per month to $8.99 per month. We also derive revenue from activation fees, the sale of advertising on select non-music channels, the direct sale of satellite radios, components and accessories, and other ancillary services, such as data and weather services.

 

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In August 2009, we began charging our subscribers a U.S. Music Royalty Fee (the “MRF”). The MRF is $1.98 a month on our base subscriptions and $.97 for plans that are eligible for a second radio discount. The MRF also varies depending upon subscriber package and plan term. Amounts we collect through the MRF are included in Other revenue on our unaudited consolidated statements of operations. The FCC decision approving the Merger permits us to pass through to subscribers increases in music royalties since March 20, 2007, the date we asked the FCC to approve the Merger. The MRF is the implementation of that FCC decision.
In certain cases, automakers include a subscription to our radio services in the sale or lease price of vehicles. The length of these prepaid subscriptions varies, but is typically three months. We also reimburse various automakers for certain costs associated with satellite radios installed in their vehicles.
We also have an interest in a satellite radio service offered in Canada. Subscribers to the Canadian Satellite Radio Holdings Inc. (“XM Canada”) service are not included in our subscriber count.
XM Satellite Radio Holdings Inc., together with its subsidiaries, now operates as an unrestricted subsidiary under the agreements governing SIRIUS’ existing indebtedness. As an unrestricted subsidiary, transactions between the companies are required to comply with various contractual provisions in our respective debt instruments.
Unaudited Actual and Pro Forma Information
Our discussion of our unaudited pro forma information includes non-GAAP financial results that assume the Merger occurred on January 1, 2008. These financial results exclude the impact of purchase price accounting adjustments and refinancing transactions related to the Merger. The discussion also includes the following non-GAAP financial measures: average self-pay monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and adjusted income (loss) from operations. We believe this non-GAAP financial information provides meaningful supplemental information regarding our operating performance and is used for internal management purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes (pages 49 through 59) following our discussion of results of operations for the definitions and a further discussion of the usefulness of such non-GAAP financial information and reconciliation to GAAP.

 

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Subscriber and Key Operating Metrics. The following tables contain our actual and pro forma subscriber and key operating metrics for the three and nine months ended September 30, 2009 and 2008, respectively:
Unaudited Actual and Pro Forma Quarterly Subscribers and Metrics:
                                 
    Unaudited  
    Three Months     Nine Months     Three Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30, 2009     September 30, 2009     September 30, 2008     September 30, 2008  
 
                               
Beginning subscribers
    9,641,800       9,850,741       9,652,691       9,026,837  
Gross subscriber additions
    833,684       2,289,360       1,041,242       3,161,844  
Deactivated subscribers
    (770,598 )     (2,435,215 )     (797,861 )     (2,292,609 )
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Retail
    3,777,646       3,777,646       4,418,746       4,418,746  
OEM
    5,840,637       5,840,637       5,387,851       5,387,851  
Rental
    86,603       86,603       89,475       89,475  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Retail
    (175,144 )     (541,986 )     (90,392 )     (179,260 )
OEM
    237,950       397,913       333,906       1,020,215  
Rental
    280       (1,782 )     (133 )     28,280  
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
 
                               
Self-pay
    8,897,480       8,897,480       8,916,700       8,916,700  
Paid promotional
    807,406       807,406       979,372       979,372  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Self-pay
    (23,551 )     (198,099 )     229,857       728,418  
Paid promotional
    86,637       52,244       13,524       140,817  
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
 
                               
Daily weighted average number of subscribers
    9,691,620       9,682,252       9,779,397       9,481,219  
 
                       
                                 
    Unaudited  
    Three Months     Nine Months     Three Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30, 2009     September 30, 2009     September 30, 2008     September 30, 2008  
Average self-pay monthly churn (1)(7)
    2.0 %     2.1 %     1.7 %     1.7 %
Conversion rate (2)(7)
    50.4 %     48.9 %     49.7 %     51.9 %
ARPU (3)(7)
  $ 10.94     $ 10.77     $ 10.41     $ 10.55  
SAC, as adjusted, per gross subscriber addition (4)(7)
  $ 65     $ 53     $ 73     $ 70  
Customer service and billing expenses, as adjusted, per average subscriber (5)(7)
  $ 1.06     $ 1.09     $ 1.21     $ 1.23  
Total revenue
  $ 336,424     $ 980,998     $ 319,936     $ 946,426  
Free cash flow (6)(7)
  $ 92,524     $ 189,807     $ (21,758 )   $ (284,194 )
Adjusted income (loss) from operations (8)
  $ 66,327     $ 191,184     $ (36,449 )   $ (104,479 )
Net loss
  $ (26,303 )   $ (242,382 )   $ (142,958 )   $ (391,798 )
 
     
Note: See pages 49 through 59 for footnotes.
Subscribers. At September 30, 2009 we had 9,704,886 subscribers, a decrease of 191,186 subscribers, or 2%, from the 9,896,072 subscribers as of September 30, 2008. The decrease was principally the result of 171,966 fewer paid promotional trials due to the decline in the North American auto sales and 19,220 fewer self-pay subscribers compared to September 30, 2008. Gross subscriber additions decreased approximately 20% and 28% during the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008. OEM gross subscriber additions decreased due to the decline in the North American automobile sales and retail gross subscriber additions decreased due to declines in consumer spending. Deactivation rates for self-pay subscriptions in the quarter increased to 2.0% per month reflecting reductions in consumer discretionary spending, subscriber response to our increase in prices for multi-subscription accounts, channel line-up changes in 2008, the institution of a monthly charge for our streaming service and the introduction of U.S. Music Royalty Fee.

 

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ARPU. ARPU is derived from total earned subscriber revenue and net advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. See accompanying footnotes for more details.
    Three Months: For the three months ended September 30, 2009 and 2008, total ARPU was $10.94 and $10.41, respectively. The increase was driven mainly by the sale of “Best of” programming, increased rates on our multi-subscription packages and revenues earned on our internet packages, partially offset by lower ad revenue.
    Nine Months: For the nine months ended September 30, 2009 and 2008, total ARPU was $10.77 and $10.55, respectively. Increases in subscriber revenue were driven mainly by the sale of “Best of” programming, increased rates on our multi-subscription packages and revenues earned on our internet packages, partially offset by lower ad revenue.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense divided by the number of gross subscriber additions for the period. See accompanying footnotes for more details.
    Three Months: For the three months ended September 30, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $65 and $73, respectively. The decrease in SAC was primarily driven by fewer OEM installations relative to gross subscriber additions, lower aftermarket inventory settlements and lower OEM subsidies compared to the three months ended September 30, 2008.
    Nine Months: For the nine months ended September 30, 2009 and 2008, SAC, as adjusted, per gross subscriber addition was $53 and $70, respectively. The decrease was primarily driven by lower aftermarket inventory settlements, fewer OEM installations relative to gross subscriber additions, and lower OEM subsidies in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008.
Customer Service and Billing Expenses, As Adjusted, Per Average Subscriber. Customer service and billing expenses, as adjusted, per average subscriber is derived from total customer service and billing expenses, excluding share-based payment expense, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. See accompanying footnotes for more details.
    Three Months: For the three months ended September 30, 2009 and 2008, customer service and billing expenses, as adjusted, per weighted average subscriber was $1.06 and $1.21, respectively. The decline was primarily due to decreases in personnel costs and customer call center expenses.
    Nine Months: For the nine months ended September 30, 2009 and 2008, customer service and billing expenses, as adjusted, per weighted average subscriber was $1.09 and $1.23, respectively. The decline was primarily due to decreases in personnel costs and customer call center expenses.
Adjusted Income (Loss) from Operations. We refer to net loss before interest and investment income; interest expense, net of amounts capitalized; income tax expense, loss on extinguishment of debt and credit facilities, net; gain (loss) on investments, other expense (income), restructuring, impairments and related costs, depreciation and amortization, and share-based payment expense as adjusted income (loss) from operations. See accompanying footnotes for more details.
    Three Months: For the three months ended September 30, 2009 and 2008, our adjusted income (loss) from operations was $66,327 and ($36,449), respectively. Adjusted income (loss) from operations was favorably impacted by an increase of 5%, or $16,488, in revenues and a decrease of 24%, or $86,288, in total expenses included in adjusted income (loss) from operations. The increase in revenue was due mainly to increased rates on multi-subscription packages, the introduction of the U.S. Music Royalty Fee, revenues earned on internet packages and the sale of “Best of” programming. The decreases in expenses were primarily driven by lower Subscriber acquisition costs, lower Sales and marketing discretionary spend, lower legal and consulting costs in General and administrative expenses.
    Nine Months: For the nine months ended September 30, 2009 and 2008, our adjusted income (loss) from operations was $191,184 and ($104,479), respectively. Adjusted income (loss) from operations was favorably impacted by an increase of 4%, or $34,572, in revenues and a decrease of 25%, or $261,091, in total expenses included in adjusted income (loss) from operations. The increase in revenue was due mainly to an increase in weighted average subscribers as well as increased rates on multi-subscription packages, the introduction of the U.S. Music Royalty Fee, revenues earned on internet packages and the sale of “Best of” programming. The decreases in expenses were primarily driven by lower Subscriber acquisition costs, lower Sales and marketing discretionary spend, lower legal and consulting costs in General and administrative expenses.

 

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Unaudited Pro Forma Results of Operations. Set forth below are certain pro forma items that give effect to the Merger as if it had occurred on January 1, 2008. The pro forma information below does not give effect to any adjustments as a result of the purchase price accounting for the Merger. See footnote 8 (pages 50 to 51) for a reconciliation of net loss to adjusted income (loss) from operations.
                                 
    Three Months     Nine Months     Three Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30, 2009     September 30, 2009     September 30, 2008     September 30, 2008  
Revenue:
                               
Subscriber revenue, including effects of rebates
  $ 313,852     $ 925,060     $ 297,151     $ 872,337  
Advertising revenue, net of agency fees
    4,147       13,475       8,358       27,908  
Equipment revenue
    5,657       17,681       4,936       16,748  
Other revenue
    12,768       24,782       9,491       29,433  
 
                       
Total revenue
    336,424       980,998       319,936       946,426  
 
                               
Operating expenses:
                               
Satellite and transmission
    11,431       36,541       18,829       56,311  
Programming and content
    44,904       135,192       46,207       143,009  
Revenue share and royalties
    69,949       208,605       73,747       216,155  
Customer service and billing
    30,719       95,090       35,508       104,565  
Cost of equipment
    5,142       12,049       7,426       25,033  
Sales and marketing
    27,813       90,176       46,126       148,635  
Subscriber acquisition costs
    54,379       126,833       73,343       214,060  
General and administrative
    20,861       70,567       48,790       120,459  
Engineering, design and development
    4,899       14,761       6,409       22,678  
Depreciation and amortization
    17,484       60,434       31,957       109,878  
Share-based payment expense
    8,732       36,287       11,415       41,867  
Restructuring, impairments and related costs
    3,029       29,614              
 
                       
Total operating expenses
    299,342       916,149       399,757       1,202,650  
 
                       
Income (loss) from operations
    37,082       64,849       (79,821 )     (256,224 )
Other expense
    (62,807 )     (305,498 )     (60,904 )     (125,947 )
 
                       
Loss before income taxes
    (25,725 )     (240,649 )     (140,725 )     (382,171 )
Income tax expense
    (578 )     (1,733 )     (1,180 )     (2,184 )
 
                       
Net loss
    (26,303 )     (242,382 )     (141,905 )     (384,355 )
Add: net loss attributable to noncontrolling interests
                (1,053 )     (7,443 )
 
                       
Net loss — XM Satellite Radio Holdings Inc. and Subsidiaries
  $ (26,303 )   $ (242,382 )   $ (142,958 )   $ (391,798 )
 
                       
Highlights for the Three Months Ended September 30, 2009. Our revenue grew 5%, or $16,488, in the three months ended September 30, 2009 compared to the same period in 2008. Subscriber revenue increased 6%, or $16,701, in the three months ended September 30, 2009 compared to the same period in 2008. The increase in subscriber revenue was driven by the sale of “Best of” programming and the rate increases to our multi-subscription and internet packages. Advertising revenue decreased 50%, or $4,211, in the three months ended September 30, 2009 compared to the same period in 2008. The decrease in advertising revenue was driven by the current economic environment. Equipment revenue increased 15%, or $721, in the three months ended September 30, 2009 compared to the same period in 2008. The increase in equipment revenue was driven by increase in royalties. Other revenue increased 35%, or $3,277, in the three months ended September 30, 2009 compared to the same period in 2008. The increase in other revenue was driven by the U.S. Music Royalty Fee introduced this quarter. The overall increase in revenue, combined with a decrease of 24%, or $86,288, in adjusted operating costs (total operating expense excluding restructuring, impairments and related costs, depreciation and amortization, impairment of goodwill and share-based payment expense), resulted in improved adjusted income (loss) from operations of $66,327 in the three months ended September 30, 2009 compared to ($36,449) in the same three month period in 2008.
Satellite and transmission costs decreased 39%, or $7,398, in the three months ended September 30, 2009 compared to the same period in 2008 due to reductions in maintenance costs, repeater lease expense and personnel costs. Programming and content costs decreased 3%, or $1,303, in the three months ended September 30, 2009 compared to the same period in 2008, due mainly to reductions in personnel and on-air talent costs as well as savings on content agreements. Revenue share and royalties decreased 5%, or $3,798, primarily due to decreases in our royalties due to certain OEM partners, partially offset by an increase in the statutory royalty rate for the performance of sound recordings. Customer service and billing costs decreased 13%, or $4,789, in the three months ended September 30, 2009 compared to the same period in 2008 primarily due to decreases in personnel costs and customer call center expenses across a larger subscriber base. Cost of equipment decreased 31%, or $2,284, in the three months ended September 30, 2009 compared to the same period in 2008 as a result of a decrease in our direct to customer sales and lower inventory write-downs.

 

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Sales and marketing costs decreased 40%, or $18,313, and decreased as a percentage of revenue to 8% from 14% in the three months ended September 30, 2009 compared to the same period in 2008 due to reduced advertising and cooperative marketing spend, as well as reductions to personnel costs and third party distribution support expenses. Subscriber acquisition costs decreased 26%, or $18,964, and decreased as a percentage of revenue to 16% from 23% in the three months ended September 30, 2009 compared to the same period in 2008. This improvement was driven by fewer OEM installations relative to gross subscriber additions, decreased production of certain radios, lower OEM subsidies and lower aftermarket inventory reserves compared to the three months ended September 30, 2008. Subscriber acquisition costs also decreased as a result of the 20% decline in gross additions during the three months ended September 30, 2009.
General and administrative costs decreased 57%, or $27,929, mainly due to the absence of certain legal and regulatory costs incurred in 2008 and lower personnel costs. Engineering, design and development costs decreased 24%, or $1,510, in the three months ended September 30, 2009 compared to the same period in 2008, due to lower costs associated with manufacturing of radios, OEM tooling and manufacturing, and personnel.
Restructuring, impairments and related costs were $3,029 mainly due to charges related to revisions in estimated cash flows for vacated leases.
Other expenses increased 3%, or $1,903, in the three months ended September 30, 2009 compared to the same period in 2008 driven mainly by increases from losses on extinguishment of debt and credit facilities and increases in interest expense, offset by increases in gains on investments. The loss on the extinguishment of debt and credit facilities was incurred on the repayment of our 10% Convertible Senior Notes due 2009. Interest expense increased due primarily to the issuance of the 13% Senior Notes due 2013 and the 7% Exchangeable Senior Subordinated Notes due 2014 in the third quarter of 2008 and the Amended and Restated Credit Agreement in the first quarter of 2009.
Highlights for the Nine Months Ended September 30, 2009. Our subscriber revenue grew 6%, or $52,723, in the nine months ended September 30, 2009 compared to the same period in 2008. This revenue growth was driven by the sale of “Best of” programming, rate increases on our multi-subscription and Internet packages, as well as a 2% growth in weighted average subscribers. Advertising revenue decreased 52%, or $14,433, in the nine months ended September 30, 2009 compared to the same period in 2008. The decrease in advertising revenue was driven by the current economic environment. Equipment revenue increased 6%, or $933, in the nine months ended September 30, 2009 compared to the same period in 2008. The increase in equipment revenue was primarily due to the reduction in incentives offered at the time of purchase. Other revenue decreased 16%, or $4,651, in the nine months ended September 30, 2009 compared to the same period in 2008. Total revenue increased 4%, or $34,572, and combined with a decrease of 25%, or $261,091, in adjusted operating costs (total operating expenses excluding restructuring, impairments and related costs, depreciation and amortization, impairment of goodwill and share-based payment expense), resulted in improved adjusted income (loss) from operations of $191,184 in the nine months ended September 30, 2009 compared to ($104,479) in the same period in 2008.
Satellite and transmission costs decreased 35%, or $19,770, in the nine months ended September 30, 2009 compared to the same period in 2008 due to reductions in maintenance costs, repeater lease expense, and personnel costs. Programming and content costs decreased 5%, or $7,817, in the nine months ended September 30, 2009 compared to the same period in 2008, due mainly to reductions in personnel and on-air talent costs as well as savings on certain content agreements. Revenue share and royalties decreased 3%, or $7,550, in the nine months ended September 30, 2009 compared to the same period in 2008. Customer service and billing costs decreased 9%, or $9,475, in the nine months ended September 30, 2009 compared to the same period in 2008 due to scale efficiencies over a larger subscriber base. Cost of equipment decreased 52%, or $12,984, in the nine months ended September 30, 2009 compared to the same period in 2008 as a result of a decrease in direct to customer sales and lower inventory write-downs.
Sales and marketing costs decreased 39%, or $58,459, and have decreased as a percentage of revenue to 9% from 16% in the nine months ended September 30, 2009 compared to the same period in 2008 due to reduced advertising and cooperative marketing spend as well as reductions to personnel costs and third party distribution support expenses. Subscriber acquisition costs decreased 41%, or $87,227, and decreased as a percentage of revenue to 13% from 23% in the nine months ended September 30, 2009 compared to the same period in 2008. This decrease was driven by a 24% improvement in SAC, as adjusted, per gross addition due to fewer OEM installations relative to gross subscriber additions, decreased production of certain radios, lower OEM subsidies and lower aftermarket inventory reserves in the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008. Subscriber acquisition costs also decreased as a result of the 28% decline in gross additions during the nine months ended September 30, 2009.

 

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General and administrative costs decreased 41%, or $49,892, mainly due to the absence of certain legal and regulatory charges incurred in 2008 and lower personnel costs. Engineering, design and development costs decreased 35%, or $7,917, in the nine months ended September 30, 2009 compared to the same period in 2008, due to lower costs associated with manufacturing of radios, OEM tooling and manufacturing, and personnel.
Restructuring, impairments and related costs increased $29,614, mainly due to a loss of $24,196 on capitalized installment payments, which are expected to provide no future benefit due to the counterparty’s bankruptcy filing, for the launch of a satellite, and to charges related to revisions in estimated cash flows for vacated leases.
Other expenses increased 143%, or $179,551, in the nine months ended September 30, 2009 compared to the same period in 2008 driven mainly by the loss on extinguishment of debt and credit facilities of $111,863 and an increase in interest expense of $77,721. The loss on the extinguishment of debt and credit facilities was incurred on the full repayment of our Amended and Restated Credit Agreement and termination of our Second-Lien Credit Agreement. Interest expense increased due primarily to the issuance of the 13% Senior Notes due 2013 and the 7% Exchangeable Senior Subordinated Notes due 2014 in the third quarter of 2008 and the issuance of Amended and Restated Credit Agreement in the first quarter of 2009.
Unaudited Actual Results of Operations
Our discussion of our results of operations, along with the selected financial information in the tables that follow, includes the following non-GAAP financial measures: average self-pay monthly churn; conversion rate; average monthly revenue per subscriber, or ARPU; subscriber acquisition cost, or SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; free cash flow; and adjusted income (loss) from operations. We believe these non-GAAP financial measures provide meaningful supplemental information regarding our operating performance and are used for internal management purposes, when publicly providing the business outlook, and as a means to evaluate period-to-period comparisons. Please refer to the footnotes (pages 49 through 59) following our discussion of results of operations for the definitions and a further discussion of the usefulness of such non-GAAP financial measures.
Subscriber and Key Operating Metrics:
The following tables contain our subscriber and key operating metrics for the three and nine months ended September 30, 2009 and 2008:
Unaudited Actual Quarterly Subscribers and Metrics:
                                 
    Unaudited  
    Three Months     Nine Months     Three Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30, 2009     September 30, 2009     September 30, 2008     September 30, 2008  
Beginning subscribers
    9,641,800       9,850,741       9,652,691       9,026,837  
Gross subscriber additions
    833,684       2,289,360       1,041,242       3,161,844  
Deactivated subscribers
    (770,598 )     (2,435,215 )     (797,861 )     (2,292,609 )
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Retail
    3,777,646       3,777,646       4,418,746       4,418,746  
OEM
    5,840,637       5,840,637       5,387,851       5,387,851  
Rental
    86,603       86,603       89,475       89,475  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Retail
    (175,144 )     (541,986 )     (90,392 )     (179,260 )
OEM
    237,950       397,913       333,906       1,020,215  
Rental
    280       (1,782 )     (133 )     28,280  
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
 
                               
Self-pay
    8,897,480       8,897,480       8,916,700       8,916,700  
Paid promotional
    807,406       807,406       979,372       979,372  
 
                       
Ending subscribers
    9,704,886       9,704,886       9,896,072       9,896,072  
 
                       
 
                               
Self-pay
    (23,551 )     (198,099 )     229,857       728,418  
Paid promotional
    86,637       52,244       13,524       140,817  
 
                       
Net additions
    63,086       (145,855 )     243,381       869,235  
 
                       
 
                               
Daily weighted average number of subscribers
    9,691,620       9,682,252       9,779,397       9,481,219  
 
                       

 

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    Unaudited  
    Three Months     Nine Months     Three Months     Nine Months  
    Ended     Ended     Ended     Ended  
    September 30, 2009     September 30, 2009     September 30, 2008     September 30, 2008  
Average self-pay monthly churn (1)(7)
    2.0 %     2.1 %     1.7 %     1.7 %
Conversion rate (2)(7)
    50.4 %     48.9 %     49.7 %     51.9 %
ARPU (7)(10)
  $ 10.62     $ 10.30     $ 9.79     $ 10.33  
SAC, as adjusted, per gross subscriber
addition (7)(11)
  $ 41     $ 34     $ 61     $ 66  
Customer service and billing expenses, as adjusted, per average subscriber (7)(12)
  $ 1.06     $ 1.09     $ 1.21     $ 1.23  
Total revenue
  $ 325,473     $ 934,538     $ 300,307     $ 926,797  
Free cash flow (7)(13)
  $ 92,524     $ 189,807     $ (21,758 )   $ (284,194 )
Adjusted income (loss) from operations (14)
  $ 118,870     $ 317,982     $ (16,712 )   $ (84,742 )
Net loss
  $ (42,851 )   $ (345,131 )   $ (4,927,641 )   $ (5,176,481 )
 
     
Note: See pages 49 through 59 for footnotes.
Subscribers. At September 30, 2009 we had 9,704,886 subscribers, a decrease of 191,186 subscribers, or 2%, from the 9,896,072 subscribers as of September 30, 2008. The decrease was principally the result of 171,966 fewer paid promotional trials due to the decline in North American auto sales and 19,220 fewer self-pay subscribers compared to September 30, 2008. Gross subscriber additions decreased approximately 20% and 28% during the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2008. OEM gross subscriber additions decreased due to the decline in North American automobile sales and retail gross subscriber additions decreased due to declines in consumer spending. Deactivation rates for self-pay subscriptions in the quarter increased to 2.0% per month reflecting reductions in consumer discretionary spending, subscriber response to our increase in prices for multi-subscription accounts, channel line-up changes in 2008 and the institution of a monthly charge for our streaming service.
ARPU. ARPU is derived from total earned subscriber revenue and net advertising revenue, divided by the number of months in the period, divided by the daily weighted average number of subscribers for the period. See accompanying footnotes for more details.
    Three Months: For the three months ended September 30, 2009 and 2008, total ARPU was $10.62 and $9.79, respectively. The increase was driven by the revenue earned for “Best of” programming, increased rates on multi-subscription packages and internet subscriptions.
    Nine Months: For the nine months ended September 30, 2009 and 2008, total ARPU was $10.30 and $10.33, respectively. The decrease was driven by the effect of purchase accounting adjustments, offset partially by the revenue earned for “Best of” programming, increased rates on multi-subscription packages and internet subscriptions.
We expect ARPU to fluctuate based on the growth of our subscriber base, promotions, rebates offered to subscribers and corresponding take-rates, plan mix, subscription prices, advertising sales and the identification of additional revenue from subscribers.
SAC, As Adjusted, Per Gross Subscriber Addition. SAC, as adjusted, per gross subscriber addition is derived from subscriber acquisition costs and margins from the direct sale of radios and accessories, excluding share-based payment expense, divided by the number of gross subscriber additions for the period. See accompanying footnotes for more details.
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