**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

 

**For TheQuarterly Period Ended March 31, 2003**

 

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**XM SATELLITE RADIO INC.**

(Exactname of registrant as specified in its charter)

** **

**Commission file number 333-39178**

 

| **Delaware**                                                     |   | **52-1805102**                         |
|------------------------------------------------------------------|--------|----------------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | (I.R.S.  Employer  Identification No.) |

 

**1500Eckington Place, NE**

**Washington,DC 20002-2194**

(Addressof principal executive offices) (Zip code)

 

**202-380-4000**

(Registrant’stelephone number, including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

 

Yes    ý        No    o

 

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Indicate by checkmark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes    o        No     ý

 

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

 

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| **(Class)**                   |   | **(Outstanding  as of March 31, 2003)**   |
|-------------------------------|--------|-------------------------------------------|
|                          |   |                                      |
| COMMON STOCK, $0.10 PAR VALUE |   | 125 SHARES                                |
|                          |   | (all of which are  issued to XM Satellite |
|                          |   | Radio Holdings Inc.)                      |

 

 

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**INDEX**

 
| PART I—FINANCIAL  INFORMATION |
|------------------------------------|
| Item  1.                           | Financial  Statements |
|                               |
|                               | Unaudited  Condensed Consolidated Statements of Operations for the three-month periods  ended March 31, 2003 and 2002 |
|                               | Condensed  Consolidated Balance Sheets as of March 31, 2003 (unaudited) and December 31,  2002 |
|                               | Unaudited Condensed  Consolidated Statements of Cash Flows for the three-month periods ended March  31, 2003 and 2002 |
|                               | Notes  to Unaudited Condensed Consolidated Financial Statements |
|                               |
| Item  2.                           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
| Item  3.                           | Quantitative  and Qualitative Disclosures About Market Risk |
|                               |   |
| PART II— OTHER INFORMATION    |
| Item  2.                           | Changes  in Securities and Use of Proceeds |
| Item  4.                           | Submission  of Matters to Vote of Security Holders |
| Item 6.                            | Exhibits  and Reports on Form 8-K |

 

i

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**EXPLANATORYNOTE**

 

This quarterly report isfiled by XM Satellite Radio Inc. (“XM”). Unless the context requires otherwise, the terms “we,” “our” and “us”refer to XM and its subsidiaries.  XM isa wholly-owned subsidiary of XM Satellite Radio Holdings Inc. (“Holdings”),which is separately filing a quarterly report with the SEC.

 

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

 

1

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**PART I: FINANCIAL INFORMATION**

 

**Item 1:    *Financial Statements***

 

**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

**UNAUDITEDCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 

**Three-Month Periods ended March 31, 2003 and March 31,2002**

 
|                                                                                |   | **March 31,  2003** |   | **March 31,  2002** |   |
|-------------------------------------------------------------------------------------|--------|---------------------|--------|---------------------|--------|
|                                                                                |   | **(in thousands)**  |   |
|                                                                                |   |                |   |                |   |
| Revenue:                                                                            |   |                |   |                |   |
| Subscriber  revenue                                                                 |   | $                   | 11,885 |                | $      | 1,389 |   |
| Equipment  revenue                                                                  |   | 592                 |   | —              |   |
| Net ad sales  revenue                                                               |   | 448                 |   | 391                 |   |
| Royalties & other                                                               |   | 127                 |   | 5                   |   |
|                                                                                |   |                |   |                |   |
| Total revenue                                                                       |   | 13,052              |   | 1,785               |   |
|                                                                                |   |                |   |                |   |
| Operating expenses:                                                                 |   |                |   |                |   |
| Cost of revenue  (excludes depreciation & amortization, shown below):           |   |                |   |                |   |
| Revenue share &  royalties                                                      |   | 3,883               |   | 612                 |   |
| Cost of  equipment                                                                  |   | 1,113               |   | —              |   |
| Ad sales                                                                            |   | 437                 |   | 167                 |   |
| Customer care  and billing operations                                               |   | 4,842               |   | 2,487               |   |
| Satellite &  terrestrial                                                        |   | 12,571              |   | 10,478              |   |
| Broadcast &  operations                                                         |   | 6,504               |   | 5,409               |   |
| Programming  & content                                                          |   | 4,787               |   | 6,024               |   |
|                                                                                |   |                |   |                |   |
| Cost of revenue                                                                     |   | 34,137              |   | 25,177              |   |
|                                                                                |   |                |   |                |   |
| Research &  development (excludes depreciation and amortization, shown below)   |   | 2,467               |   | 2,324               |   |
| General &  administrative (excludes depreciation and amortization, shown below) |   | 8,805               |   | 5,323               |   |
| Marketing (excludes  depreciation and amortization, shown below)                    |   | 35,611              |   | 46,330              |   |
| Depreciation &  amortization                                                    |   | 39,414              |   | 22,140              |   |
|                                                                                |   |                |   |                |   |
| Total operating  expenses                                                           |   | 120,434             |   | 101,294             |   |
|                                                                                |   |                |   |                |   |
| Operating loss                                                                      |   | (107,382            | )      | (99,509             | )      |
| Other income (expense):                                                             |   |                |   |                |   |
| Interest income                                                                     |   | 42                  |   | 960                 |   |
| Interest expense                                                                    |   | (21,340             | )      | (12,983             | )      |
| Other income (expense)                                                              |   | (2,316              | )      | (101                | )      |
|                                                                                |   |                |   |                |   |
| Net loss                                                                            |   | (130,996            | )      | (111,633            | )      |
|                                                                                     |        |                     |        |                     |        |  |  |

 

See accompanying notes to unaudited condensed consolidated financialstatements.

 

2

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

## **March 31, 2003 and December 31, 2002**

 
|                                                                                               |   | **March 31,  2003**                    |       | **December 31,  2002** |       |
|----------------------------------------------------------------------------------------------------|--------|----------------------------------------|------------|------------------------|------------|
|                                                                                               |   | **(in thousands,  except share data)** |       |
| **ASSETS**                                                                                         |   |                                   | ** ** |                   | ** ** |
| Current assets:                                                                                    |   |                                   |       |                   |       |
| Cash and cash  equivalents                                                                         |   | $                                      | 8,625      |                   | $          | 6,726 |   |
| Restricted  investments                                                                            |   | 7,278                                  |       | 25,014                 |       |
| Accounts  receivable, net of allowance for doubtful accounts of  $330 and $241                |   | 4,044                                  |       | 3,756                  |       |
| Due from related parties                                                                           |   | 205,150                                |       | 1,478                  |       |
| Related party prepaid expenses                                                                     |   | 22,261                                 |       | —                 |       |
| Prepaid and other  current assets                                                                  |   | 12,862                                 |       | 10,362                 |       |
| Total current assets                                                                               |   | 260,220                                |       | 47,336                 |       |
|                                                                                               |   |                                   |       |                   |       |
| Other Assets:                                                                                      |   |                                   |       |                   |       |
| Restricted investments, net of current portion                                                     |   | 1,611                                  |       | 1,673                  |       |
| System under construction                                                                          |   | 18,558                                 |       | 18,558                 |       |
| Property and equipment,  net of accumulated depreciation and amortization of $195,245 and $156,400 |   | 777,392                                |       | 814,966                |       |
| DARS license                                                                                       |   | 141,200                                |       | 144,042                |       |
| Intangibles, net of  accumulated amortization of $3,483 and $3,172                                 |   | 9,379                                  |       | 9,690                  |       |
| Deferred financing fees,  net of accumulated amortization of $4,236 and $2,474                     |   | 44,115                                 |       | 6,749                  |       |
| Related party prepaid  expenses, net of current portion                                            |   | 61,216                                 |       | —                 |       |
| Prepaid and other  assets, net of current portion                                                  |   | 1,888                                  |       | 1,333                  |       |
|                                                                                               |   |                                   |       |                   |       |
| Total assets                                                                                       |   | $                                      | 1,315,579  |                   | $          | 1,044,347 |   |
|                                                                                               |   |                                   | ** ** |                   | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                     |   |                                   | ** ** |                   | ** ** |
| Current liabilities:                                                                               |   |                                   |       |                   |       |
| Accounts payable                                                                                   |   | $                                      | 29,431     |                   | $          | 36,142 |   |
| Accrued expenses                                                                                   |   | 37,056                                 |       | 51,922                 |       |
| Accrued network  optimization expenses                                                             |   | 4,453                                  |       | 2,201                  |       |
| Current portion  of long-term debt                                                                 |   | 8,346                                  |       | 3,408                  |       |
| Due to related  parties                                                                            |   | 6,664                                  |       | 13,410                 |       |
| Accrued interest                                                                                   |   | 2,702                                  |       | 14,286                 |       |
| Deferred revenue                                                                                   |   | 12,892                                 |       | 9,925                  |       |
| Total current  liabilities                                                                         |   | 101,544                                |       | 131,294                |       |
|                                                                                               |   |                                   |       |                   |       |
| Related party  long-term debt, net of current portion                                              |   | 102,592                                |       | —                 |       |
| Long-term debt,  net of current portion                                                            |   | 344,581                                |       | 270,347                |       |
| Due to related  parties, net of current portion                                                    |   | 12,679                                 |       | 10,618                 |       |
| Deferred  revenue, net of current portion                                                          |   | 3,369                                  |       | 2,372                  |       |
| Other  non-current liabilities                                                                     |   | 15,767                                 |       | 15,190                 |       |
|                                                                                               |   |                                   |       |                   |       |
| Total liabilities                                                                                  |   | $                                      | 580,532    |                   | $          | 429,821 |   |
|                                                                                               |   |                                   |       |                   |       |
| Stockholder’s  equity:                                                                        |   |                                   |       |                   |       |
| Common stock,  par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding         |   | —                                 |       | —                 |       |
| Additional  paid-in capital                                                                        |   | 1,741,072                              |       | 1,489,555              |       |
| Accumulated  deficit                                                                               |   | (1,006,025                             | )          | (875,029               | )          |
|                                                                                               |   |                                   |       |                   |       |
| Total stockholder’s equity                                                                    |   | 735,047                                |       | 614,526                |       |
|                                                                                               |   |                                   |       |                   |       |
| Commitments and contingencies  Total liabilities and stockholder’s equity                     |   | $                                      | 1,315,579  |                   | $          | 1,044,347 |   |

 

See accompanying notes tounaudited condensed consolidated financial statements.

 

3

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**UNAUDITED CONDENSED CONSOLIDATED****STATEMENTS OF CASH FLOWS**

 

**Three-Month Periods ended March 31, 2003 and 2002**

 
|                                                                         |   | **March 31,  2003** |     | **March 31,  2002** |   |
|------------------------------------------------------------------------------|--------|---------------------|----------|---------------------|--------|
|                                                                         |   | **(in thousands)**  |     |
| Cash flows from operating activities:                                        |   |                |     |                |   |
| Net loss                                                                     |   | $                   | (130,996 | )                   | $      | (111,633 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |   |                |     |                |   |
| Bad debt expense                                                             |   | 208                 |     | 32                  |   |
| Ad sales barter  revenue                                                     |   | (13                 | )        | —              |   |
| Depreciation and  amortization                                               |   | 39,414              |     | 22,457              |   |
| Accretion of  interest                                                       |   | 5,290               |     | —              |   |
| Loss on disposal  of computer software                                       |   | 464                 |     | —              |   |
| Non-cash loss on  conversion of 14% senior secured notes                     |   | 2,212               |     | —              |   |
| Amortization of  deferred financing fees and debt discount                   |   | 3,515               |     | 1,049               |   |
| Non-cash  stock-based compensation                                           |   | 2,971               |     | 637                 |   |
| Changes in operating  assets and liabilities:                                |   |                |     |                |   |
| (Increase)  decrease in accounts receivable                                  |   | (496                | )        | (638                | )      |
| (Increase)  decrease in due from related parties                             |   | 253                 |     | —              |   |
| (Increase) decrease  in prepaid and other current assets                     |   | (2,487              | )        | (1,679              | )      |
| (Increase)  decrease in long-term prepaids and other assets                  |   | (554                | )        | 101                 |   |
| Increase  (decrease) in accounts payable and accrued expenses                |   | 1,009               |     | 4,141               |   |
| Increase  (decrease) in amounts due to related parties                       |   | 880                 |     | (6,550              | )      |
| Increase  (decrease) in deferred revenue                                     |   | 3,964               |     | —              |   |
| Increase (decrease) in  accrued interest                                     |   | (11,584             | )        | (11,092             | )      |
|                                                                         |   |                |     |                |   |
| Net cash used in  operating activities                                       |   | (85,950             | )        | (103,175            | )      |
|                                                                         |   |                |     |                |   |
| Cash flows from  investing activities:                                       |   |                |     |                |   |
| Purchase of  property and equipment                                          |   | (2,173              | )        | (1,399              | )      |
| Additions to  system under construction                                      |   | —              |     | (7,248              | )      |
| Net  purchase/maturity of restricted investments                             |   | 22,750              |     | 22,750              |   |
| Other investing  activities                                                  |   | (4,952              | )        | 7,272               |   |
|                                                                         |   |                |     |                |   |
| Net cash used in  investing activities                                       |   | 15,625              |     | 21,375              |   |
|                                                                         |   |                |     |                |   |
| Cash flows from  financing activities:                                       |   |                |     |                |   |
| Proceeds from  sale of common stock and capital contribution                 |   | 73,031              |     | —              |   |
| Capital  contribution from Parent through transfer of liabilities            |   | —              |     | 19,999              |   |
| Payment on  capital lease obligations                                        |   | (807                | )        | (567                | )      |
| Payments for deferred  financing costs                                       |   | —              |     | —              |   |
|                                                                         |   |                |     |                |   |
| Net cash provided by  financing activities                                   |   | 72,224              |     | 19,432              |   |
|                                                                         |   |                |     |                |   |
| Net increase  (decrease) in cash and cash equivalents                        |   | 1,899               |     | (62,368             | )      |
| Cash and cash  equivalents at beginning of period                            |   | 6,726               |     | 62,368              |   |
|                                                                         |   |                |     |                |   |
| Cash and cash  equivalents at end of period                                  |   | $                   | 8,625    |                | $      | — |   |

 

Seeaccompanying notes to unaudited condensed consolidated financial statements.

 

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TOUNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

 

**(1)   Nature of Business**

 

XMSatellite Radio Inc. (the “Company”), was incorporated on December 15, 1992 inthe State of Delaware for the purpose of operating a digital audio radioservice (“DARS”) under a license from the Federal Communications Commission(“FCC”).  XM Satellite Radio HoldingsInc. (the “Parent”) was formed as a holding company for XMSR on May 16,1997.  In 2001, the Company’s satellites,“Rock” and “Roll,” were successfully launched on March 18, 2001 and May 8,2001, respectively.  The Companycommenced commercial operations in two markets on September 25, 2001 andcompleted its national rollout on November 12, 2001.

 

**(2)  Principles of Consolidation and Basis of Presentation**

 

Theconsolidated financial statements include the accounts of XM Satellite RadioInc. and its subsidiaries.  Allsignificant intercompany transactions and accounts have been eliminated.

 

Inthe Company’s opinion, the accompanying unaudited condensed consolidatedfinancial statements reflect all adjustments, consisting of only normalrecurring entries, necessary for a fair presentation of the consolidatedfinancial position of XM Satellite Radio Inc. and its subsidiaries as of March31, 2003 and December 31, 2002, and the results of operations and cash flowsfor the three months ended March 31, 2003 and 2002.  The results of operations for the three months ended March 31, 2003are not necessarily indicative of the results that may be expected for the fullyear.  The accompanying financialstatements are unaudited and should be read in conjunction with the Company’s2002 consolidated financial statements, which are included in the Company’sAnnual Report on Form 10-K. Certain reclassifications have been made to prior-period amounts toconform with the 2003 presentation, including the reclassification of ad salesexpense and certain revenue share payments to cost of revenue.

 

**(3)  Stock-Based Compensation**

 

AtMarch 31, 2003, the Company had two stock-based employee compensationplans.  The Company accounts for theplans under the recognition and measurement principles of APB Opinion No. 25, *Accounting for Stock Issued to Employees,*and related Interpretations.  The followingtable illustrates the effect on net income (loss) if the Company had appliedthe fair value recognition provisions of SFAS No. 123, *Accounting for Stock-Based Compensation,*to stock-based employee compensation.

 
|                                                                                                                 |   | **Three months ended  March 31,**                  |     |
|----------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------|----------|
|                                                                                                                 |   | **2003**                                           |     | **2002** |   |
|                                                                                                                 |   | **(amounts in  thousands, except per share data)** |     |
|                                                                                                                 |   |                                               |     |   |   |
| Net income (loss) attributable to  common stockholders, as reported                                                  |   | $                                                  | (130,996 | ) | $ | (111,633 | ) |
| Add:   stock-based employee compensation expense included in net income  (loss), net of tax                     |   | $                                                  | —   |   | $ | 89 |   |
| Less:  Total stock-based employee compensation expense determined  under fair value-based method for all awards |   | $                                                  | (6,063   | ) | $ | (7,821 | ) |
|                                                                                                                 |   |                                               |     |   |   |
| Pro forma net loss                                                                                                   |   | $                                                  | (137,059 | ) | $ | (119,365 | ) |

 

**(4)  January 2003 Financing**

 

OnJanuary 28, 2003, the Company and the Parent completed (1) an exchange of over$300 million of the $325 million aggregate principal amount of outstanding debtissued by the Company, (2) a restructuring of $250 million in paymentobligations to General Motors Corporation (“GM”) through 2006, and (3) aprivate placement resulting in gross proceeds of $225 million.

 

*14% Senior SecuredDiscount Notes Issued in Exchange*

 

TheCompany accepted for exchange $300.2 million aggregate principal amount of thepreviously outstanding $325.0 million of its 14% Senior Secured Notes due2010.  For each $1,000 principal amountof notes tendered for exchange, the tendering holder received:

 

•                  $1,459 principalamount at maturity of 14% Senior Secured Discount Notes due 2009 issued byXM Satellite Radio Inc. and guaranteed by XM Satellite Radio HoldingsInc.; 

 

•                  a warrant topurchase 85 shares of the Parent’s Class A common stock at an exercise price of$3.18 per share; and 

 

•                  $70 in cash. 

 

Theexercise price of each warrant may be paid either in cash or without thepayment of cash by reducing the number of shares of Class A common stock thatwould be obtainable upon the exercise of a warrant.  The warrants are fully vested and expire December 31, 2009.   The face value of the 14% senior secureddiscount notes is reduced by a discount of $60,981,000 associated with the fairvalue of the related warrants.  The fairvalue was calculated using a Black-Scholes based methodology.  These notes are reported on the Company’scondensed consolidated balance sheet as of March 31, 2003 as follows (inthousands).

 
| Face amount of  notes at January 28, 2003                          |   | $       | 300,176 |   |
|--------------------------------------------------------------------|--------|---------|---------|--------|
| Warrant discount  at January 28, 2003                              |   | (60,981 | )       |
| Carrying amount  at January 28, 2003                               |   | 239,195 |    |
| Discount  amortization / interest accretion through March 31, 2003 |   | 4,156   |    |
| Extinguishments  through March 31, 2003 (see Note 5)               |   | (9,991  | )       |
| Carrying amount  at March 31, 2003                                 |   | $       | 233,360 |   |

 

5

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

 

*Restructuring of GMObligations*

 

Undercertain agreements with General Motors and its subsidiary, OnStar Corporation,the Company and the Parent issued to OnStar a 10% Senior Secured ConvertibleNote due December 31, 2009 with an aggregate principal amount of$89 million in lieu of the Company’s obligation to make $115 million inguaranteed payments from 2003 to 2006 under the distribution agreement withOnStar Corporation.  The Company and theParent entered into a $100 million credit facility with General Motors and theParent issued a warrant to General Motors to purchase 10 million shares ofClass A common stock at an exercise price of $3.18 per share.  The warrant is fully vested and expiresafter five years.  The Companydetermined that the fair value of the warrant was $25.2 million and theunamortized amount is included in deferred financing fees on the Company'scondensed consolidated balance sheet as of March 31, 2003.  The fair value of the warrant was calculatedusing a Black-Scholes based methodology. The note issued to OnStar is convertible and the warrant exercisableonly to the extent General Motors would not beneficially own more than 19.9% ofthe Parent’s Class A common stock, unless the Company and General Motorsotherwise agree and certain stockholder approvals are obtained.

 

OnStarwill be able to convert the note into shares of Class A common stock pursuantto a vesting schedule so that on each date prior to and including December 31,2006 that the Company would have been obligated to make scheduled guaranteedpayments under the distribution agreement, a pro rata portion of the OnStarnote corresponding to the scheduled guaranteed payment will become convertibleat the option of OnStar at a conversion price equal to 90% of the fair marketvalue of a share of Class A common stock (calculated as described above) on thedate of conversion; provided that, the conversion price will be not less than$5 per share nor greater than $10 per share during 2003, not less than $5 pershare nor greater than $15 per share during 2004, and not less than $5 pershare nor greater than $20 per share thereafter.

 

GeneralMotors provided the Company with a $100.0 million Senior Secured CreditFacility, maturing as late as December 2009, that enables us to make monthlydraws to finance payments that become due under the Company’s distributionagreement with OnStar Corporation and other GM payments.  The Company and the Parent are co-borrowersunder this credit facility.  Theoutstanding principal amount of all draws will be due December 31, 2009 andbear interest at the applicable 90-day LIBOR rate plus 10%.  The Company and the Parent will be able tomake interest payments in shares of Class A common stock having an aggregatefair market value at the time of payment equal to the amount of interestdue.  The fair market value will bebased on the average daily trading prices of the Class A common stock over theten business days prior to the day the interest payment is due.  The Company has the option to prepay alldraws in whole or in part at any time but will not be able to re-borrow anyprepaid amounts.  Beginning in 2005, theCompany will be required to prepay the amount of any outstanding advances in anamount equal to the lesser of (i) 50% of the Company’s excess cash and (ii) theamount necessary to prepay the draws in full. In order to make draws under the credit facility, the Company isrequired to have a certain minimum number of subscribers that are notoriginated by GM and a minimum pre-marketing cash flow.

 

GeneralMotors provided the Company with the ability to make up to $35.0 million infuture subscriber bounty payments (“subscriber acquisition payments”) that theCompany may owe to OnStar under the distribution agreement in shares of Class Acommon stock, valued at fair market value at the time of payment.

 

*Private Placement of10% Senior Secured Discount Convertible Notes and Class A Common Stock*

 

TheParent and the Company sold $210.0 million of 10% Senior Secured DiscountConvertible Notes due December 31, 2009 to certain institutional and accreditedinvestors, including some of its current investors.  The Company and the Parent are co-obligors on these new investornotes.  At any time, a holder of newinvestor notes may convert all or part of the accreted value of its notes at aconversion price of $3.18 per share. The face value of the 10% senior secured discount convertible notes isreduced by a discount of $2,842,000 associated with the fair value of the considerationprovided to certain of these investors at the time of issuance.  The face value of these notes is alsoreduced by a beneficial conversion feature of $68,879,000.  These notes are reported on the Company’scondensed consolidated balance sheet as of March 31, 2003 as follows (inthousands):

 
| Face amount of notes at January 28,  2003                          |   | $       | 210,000 |   |
|--------------------------------------------------------------------|--------|---------|---------|--------|
| Discount at January 28, 2003                                       |   | (2,842  | )       |
| Beneficial conversion feature at  January 28, 2003                 |   | (68,879 | )       |
| Carrying amount at January 28, 2003                                |   | 138,279 |    |
| Discount amortization / interest  accretion through March 31, 2003 |   | 3,766   |    |
| Carrying amount at March 31, 2003                                  |   | $       | 142,045 |   |

 

The Company isnot able to prepay or redeem the new investor notes.  Beginning four years after the issuance of the new investor notes,the Company will be able to convert all, but not less than all of the notes atthe conversion price if: (i) shares of the Parent’sClass A common stock have traded on the Nasdaq National Market or a nationalsecurities exchange for the previous 30 trading days at 200% of the conversionprice, (ii) the Company reported earnings before interest income and expense,other income, taxes, depreciation (including amounts related to research anddevelopment) and amortization greater than $0 for the immediately precedingquarterly period for which the Company reports its financial results, (iii)

6

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

immediately following such conversion, theaggregate amount of the Parent’s and its subsidiaries’ indebtedness is lessthan $250 million, and (iv) no shares of the Parent’s Series C preferred stockremain outstanding.

 

TheParent also sold $15.0 million of its Class A common stock at a per sharepurchase price of $2.70 to a private investor and issued a warrant to purchase900,000 shares of its Class A common stock at an exercise price of $3.18 pershare to R. Steven Hicks, who joined the Company’s board of directors inconnection with these transactions. This warrant was valued at $2.3 million using a Black-Scholes basedmethodology, and the unamortized amount is included in deferred financing feeson the condensed consolidated balance sheet as of March 31, 2003.

 

Theproceeds of the January 2003 financing transactions are held at the Parent andwill be used to fund the operations of the Company on an as-needed basis.

 

**(5)           OtherEquity Issuances**

 

In February and March 2003,the Parent issued 4,527,947 shares of Class A common stock for gross proceedsof $19.6 million under its Direct Stock Purchase Program (DSPP).

 

Concurrent with the fundsraised through the DSPP in February and March 2003, the Parent entered intoagreements with certain holders of its notes to exchange $38.9 million carryingvalue, or $46.1 million fully accreted face value at maturity, of their notes,for $6.7 million in cash consideration and 4,352,375 shares of Class A commonstock.  The Parent recorded a gain of$3.6 million from these debt extinguishments in other income on the condensedconsolidated statement of operations for the three months ended March 31,2003.  Also concurrent with the fundsraised through the DSPP in February and March 2003, the Parent entered intoagreements with certain holders of its 8.25% Series B convertible redeemablepreferred stock to exchange $12.3 million in shares of Series B preferred stockfor $5.0 million in cash consideration. The Parent recorded an increase of $7.3 million in additional paid incapital on the condensed consolidated balance sheet as of March 31, 2003 fromthe exchange of this preferred stock. Additionally, the Parent entered into agreements with certain holders ofClass A common stock warrants to exchange 28,145 warrants convertible into2,392,325 shares of Class A common stock for 1,669,400 shares of common stock.

 

In April 2003, the Parentissued 4,880,847 shares of Class A common stock for gross proceeds of $30.4million under its DSPP.  Concurrent withthe funds raised through the DSPP in April 2003, in April 2003 and through May6, 2003, the Parent entered into agreements with certain holders of its notesto exchange $49.5 million carrying value, or $70.9 million fully accreted facevalue at maturity, of their notes for 5,775,000 shares of Class A commonstock.  The Parent will record a loss ofapproximately $18.9 million from the extinguishment of these notes during thesecond quarter of 2003.  Also concurrentwith the funds raised through the DSPP in April 2003, the Parent entered intoagreements with certain holders of its 8.25% Series B convertible redeemablepreferred stock to exchange $7.4 million in shares of Series B preferred stockfor $5.2 million in cash consideration. Additionally, the Parent entered into agreements with certain holders ofClass A common stock warrants to exchange 15,000 warrants convertible into1,275,000 shares of Class A common stock for 978,000 shares of common stock.

 

The proceeds from theseissuances will be used to fund the operations of the Company.

 

**(6)  Long-TermDebt**

 

Long-term debt at March 31, 2003 and December 31, 2002 consisted of thefollowing (in thousands):

 
|                                                                         |   | **March 31,  2003** |    | **December  31,  2002** |   |
|------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                         |   |                |    |                    |   |
| 14% senior  secured notes — original issue due 2010                     |   | $                   | 22,824  |                    | $      | 325,000 |   |
| 14% senior  secured notes due 2009                                           |   | 284,263             |    | —                  |   |
| Add: accretion  of interest on 14% senior secured notes                      |   | 1,615               |    | —                  |   |
| Less:  unamortized discount on both issuances of 14% senior secured notes    |   | (108,897            | )       | (57,102                 | )      |
| 10% senior  secured discount convertible notes                               |   | 210,000             |    | —                  |   |
| Add: accretion  of interest on 10% senior secured discount convertible notes |   | 3,675               |    | —                  |   |
| Less:  unamortized discount on 10% senior secured discount convertible notes |   | (71,630             | )       | —                  |   |
| Notes payable                                                                |   | 6,027               |    | —                  |   |
| Related party  notes                                                         |   | 102,592             |    | —                  |   |
| Capital leases                                                               |   | 5,050               |    | 5,857                   |   |
| Total debt                                                                   |   | $                   | 455,519 |                    | $      | 273,755 |   |
| Less current  installments                                                   |   | (8,346              | )       | (3,408                  | )      |
|                                                                         |   |                |    |                    |   |
| Long-term debt,  excluding current installments                              |   | $                   | 447,173 |                    | $      | 270,347 |   |

 

(a) 14% Senior Secured Notes

 

On March 15, 2000, the Company closed a privateplacement of 325,000 units, each unit consisting of $1,000 principal amount of14%

 

7

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

senior securednotes due 2010 of XMSR and one warrant to purchase 8.024815 shares of theParent’s Class A common stock at a price of $49.50 per share. The Companyrealized net proceeds of $191,500,000, excluding $123,000,000 used to acquiresecurities that will be used to pay interest payments due under the notes forthe first three years. The $325,000,000 face value of the notes was offset by adiscount of $65,746,000 associated with the fair value of the related warrants.In January 2003, the Company completed an exchange of 300,176 14% seniorsecured notes due 2010 for $437,956,784 principal amount at maturity of 14%senior secured discount notes due 2009, warrants to purchase 25,514,960 sharesof the Parent’s Class A common stock at a price of $3.18 per share and$21,012,320 in cash.  The face value ofthe 14% senior secured discount notes was offset by a discount of $60,981,000associated with the fair value of the related warrants. See note 5 above forfurther discussion regarding the exchange of the notes. As of March 31, 2003and December 31, 2002, the Company had amortized $11,559,000 and $8,644,000 ofthe discount, respectively.  During thethree months ended March 31, 2003, the Company also negotiated the exchange of$2,107,000 carrying value, or $2,000,000 principal amount at maturity, of 14%senior secured notes due 2010 and $15,945,000 carrying value, or $23,267,000fully accreted face value at maturity, of 14% senior secured discount notes due2009 by issuing 2,661,500 shares of the Parent's Class A common stock.Subsequent to March 31, 2003 and through May 6, 2003, the Company alsonegotiated the exchange of $49,536,000 carrying value, or $70,941,000 fullyaccreted face value at maturity, of 14% senior secured discount notes due 2009for 5,775,000 shares of the Parent's Class A common stock.  See note 5 above for further discussionregarding these equity exchange transactions.

 

(b) 10% Senior Secured Discount Convertible Notes

 

On January 28, 2003, the Company and the Parent sold$210,000,000 of 10% senior secured discount convertible notes due December 31,2009 to certain institutional and accredited investors, including some of itscurrent investors.  The $210,000,000face value of the notes was offset by a discount of $2,842,000 associated withthe fair value of the consideration provided to certain of these investors atthe time of issuance. See note 4 above for further discussion regarding thistransaction.  In connection with thistransaction, the Company also recognized a beneficial conversion feature of$68,879,000.

 

(c) Notes Payable

 

The Company has established notes payable for creditfacilities to vendors for the deferral of $6.0 million in amounts owed.  These notes are payable in 2004 and 2005 andaccrue interest at 6%.  The Company alsoissued warrants in connection with these notes.  The fair value of these warrants of $169,000, calculated using aBlack-Scholes based methodology, is included in deferred financing fees on theCompany's condensed consolidated balance sheet as of March 31, 2003.

 

(d) Related Party Notes

 

On January 28, 2003, the Company and the Parent issuedto Onstar, a subsidiary of GM, a 10% senior secured convertible note dueDecember 31, 2009 with an aggregate principal amount of $89,042,000 in lieu ofXMSR’s obligation to make $115,000,000 in guaranteed payments from 2003 to 2006under the distribution agreement with Onstar. GM also provided the Company withthe ability to make up to

 

8

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

$35,000,000 in future subscriber acquisition payments that the Companymay owe to Onstar under the distribution agreement in shares of the Parent'sClass A common stock and provided the Company with a $100,000,000 creditfacility agreement.  As of March 31,2003, the Company has incurred $13,550,000 in subscriber acquisition paymentsdue to Onstar that may be converted into the Parent's Class A common stock.

 

**(7)  Liquidity**

** **

TheCompany is devoting its efforts to market its digital audio radio service andto increase its subscriber base.  Thiseffort involves substantial risk and future operating results will be subjectto significant business, economic, regulatory, technical, and competitive uncertaintiesand contingencies.  The Companycommenced commercial operations in the fourth quarter of 2001 and hasaccumulated deficit of $1.0 billion.  OnJanuary 28, 2003, the Company and the Parent completed a $475 millionfinancing, which included $225 million of new funds (bringing to $1.9 billionthe amount of equity and debt raised) and $250 million of payment deferrals anda line of credit.  Following completionof this January 2003 financing, so long as the Company meets the revenue,expense and cash flow projections of our refined business plan, the Companyexpects to be fully funded and will not need to raise additional financing tocontinue operations.  The Company'sbusiness plan contemplates the use of either insurance proceeds and/or vendor financingto launch replacement satellite(s).  TheCompany is dependent on the Parent to meet certain of its funding requirements,and the Parent has indicated that it presently intends to fund the Company'songoing business operations.

** **

**(8)  Revenue Recognition**

 

TheCompany derives revenue primarily from basic and premium subscribersubscription and activation fees as well as advertising.

 

Subscriberrevenue, which is generally billed in advance, consists of (i) fixed chargesfor service, which are recognized as the service is provided and (ii)non-refundable activation fees that are recognized ratably over the expected40-month life of the customer relationship. Direct activation costs are expensed as incurred. Promotions for free ordiscounted activation or service are treated as a reduction to revenue duringthe period of the promotion.  Rebates tosubscribers are recorded as reductions to revenue when claimed.

 

TheCompany recognizes advertising revenue from sales of advertisements toadvertisers that are recognized in the period in which the advertisement isbroadcast.  Agency fees are presented asa reduction to revenue in the unaudited condensed consolidated statement ofoperations.  Advertising revenue for thethree-months ended March 31, 2003 included advertisements sold in exchange forgoods and services (barter) recorded at fair value.  Revenue from barter transactions is recognized whenadvertisements are broadcast.  Merchandiseor services received are charged to expense when received or used. Bartertransactions are not significant to the Company’s unaudited condensedconsolidated financial statements.

 

Equipmentrevenue is recognized at the time of shipment of the equipment.  Royalties are recognized when earned.

 

 

** (9)  Related PartyTransactions**

 

TheCompany had the following amounts due from related parties at March 31, 2003and December 31, 2002 (in thousands):

 
|   |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------|--------|---------------------|--------|-------------------------|--------|
|   |   |                |   |                    |   |
| GM     |   | $                   | 1,225  |                    | $      | 1,478 |   |
|        |        |                     |        |                         |        |  |  |

 

9

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**XM SATELLITERADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

TheCompany had the following amount as related party prepaid expense at March 31,2003 and December 31, 2002 (in thousands):

 
|   |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------|--------|---------------------|--------|-------------------------|--------|
|   |   |                |   |                    |   |
| GM     |   | $                   | 83,477 |                    | $      | — |   |
|        |        |                     |        |                         |        |  |  |

 

TheCompany had the following amounts outstanding to related parties at March 31,2003 and December 31, 2002 (in thousands):

 
|          |   | **March 31,  2003** |   | **December  31,  2002** |   |
|---------------|--------|---------------------|--------|-------------------------|--------|
|          |   |                |   |                    |   |
| GM            |   | $                   | 14,864 |                    | $      | 20,908 |   |
| Hughes        |   | 29                  |   | 58                      |   |
| DIRECTV, Inc. |   | —              |   | 3                       |   |
| Clear Channel |   | 4,450               |   | 3,059                   |   |
|          |   | $                   | 19,343 |                    | $      | 24,028 |   |

 

TheCompany had the following related party debt at March 31, 2003 and December 31,2002 (in thousands):

 
|   |   | **March 31,  2003** |    | **December  31,  2002** |   |
|--------|--------|---------------------|---------|-------------------------|--------|
|   |   |                |    |                    |   |
| GM     |   | $                   | 102,592 |                    | $      | — |   |
|        |        |                     |         |                         |        |  |  |

 

DuringNovember 2002, the Company initiated joint promotional activities with GeneralMotors targeted at new GM car buyers who subscribe to XM service.  During the three months ended March 31,2003, approximately 54,000 subscribers took advantage of the jointpromotion.  In addition, during December2002, GM purchased XM service for approximately 7,000 of their dealers. Thesesubscribers are included in the Company’s three months subscriber totals.Subscriber revenues earned from related parties are as follows (in thousands):

 
|               |   | **March 31,  2003** |   | **December  31,  2002** |   |
|--------------------|--------|---------------------|--------|-------------------------|--------|
|               |   |                |   |                    |   |
| Subscriber revenue |   | $                   | 1,050  |                    | $      | — |   |
|                    |        |                     |        |                         |        |  |  |

 

TheCompany has relied upon certain related parties for legal, technical marketingand other services during the three months ended March 31, 2003 and 2002.  Total costs incurred in transactions withrelated parties are as follows (in thousands):

 

 
|                                                        |   | **Three months ended March 31, 2003** |   |
|-------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                        |   | **GM**                                |   | **Hughes** |   | **Clear Channel** | ** ** | **Parent** |   |
|                                                        |   |                                  |   |   |   |   |   |   |   |
| Terrestrial repeater network engineering and  manufacturing |   | $                                     | — |   | $ | 69 |   | — | — |   | — |   |
| Terrestrial repeater site leases                            |   | —                                |   | — |   | 15 |   | — |   |
| Customer care & billing operations                      |   | —                                |   | — |   | — |   | — |   |
| Ad sales                                                    |   | —                                |   | — |   | 1,834 |   | — |   |
| Marketing                                                   |   | 18,146                                |   | — |   | 1,072 |   | — |   |
| General and administrative                                  |   | —                                |   | — |   | — |   | — |   |
| Broadcast and operations                                    |   | —                                |   | — |   | — |   | 1,072 |   |
|                                                             |        |                                       |        |  |  |  |  |  |  |  |  |  |

 

10

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 
|                                                        |   | **Three months ended March 31, 2002** |
|-------------------------------------------------------------|--------|---------------------------------------|
|                                                        |   | **GM**                                |   | **Hughes** |   | **DIRECTV** |   | **Clear  Channel** |   | **LCCI** |   | **Motient** |   | **Parent** |
|                                                        |   |                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Terrestrial repeater network engineering and  manufacturing |   | $                                     | — |   | $ | 10,927 |   | $ | — |   | $ | — |   |   | 4,515 |   | $ | — |   | — |
| Terrestrial repeater site leases                            |   | —                                |   | — |   | — |   | 12 |   | — |   | — |   | — |
| Customer care & billing operations                      |   | 8                                     |   | — |   | 33 |   | — |   | — |   | — |   | — |
| Ad sales                                                    |   | —                                |   | — |   | — |   | 1,595 |   | — |   | **—** |   | — |
| Marketing                                                   |   | 1,088                                 |   | — |   | — |   | 581 |   | — |   | — |   | — |
| General and administrative                                  |   | —                                |   | — |   | — |   | — |   | — |   | 40 |   | — |
| Broadcast and operations                                    |   | —                                |   | — |   | — |   | — |   | — |   | — |   | 1,071 |
|                                                             |        |                                       |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

***(a)  GM***

 

In1999, the Company established a distribution agreement with GM (see note10(g)).  Under the terms of theagreement, GM distributes the XM Radio Service in various models of itsvehicles.  This agreement was amended inJune 2002 and January 2003 (see note 10(g)).

 

***(b)  Hughes***

 

In1999, the Company entered into a terrestrial repeater manufacturing agreementwith Hughes (see note 10 (e)).

 

***(c)  DIRECTV***

 

In1999, the Company entered into a consulting services agreement withDIRECTV.  The agreement provides forDIRECTV professionals to aid the Company’s efforts in establishing its customercare center and billing operations on a time and materials basis.

 

***(d)  Clear Channel***

 

Pursuantto an operational assistance agreement with Clear Channel Communications, theCompany receives programming service. In addition, in 2000, the Company entered into a sponsorship agreementwith SFX Marketing, now Clear Channel Entertainment, to advertise the Company’sservice at Clear Channel Entertainment events and venues.  Since 2000, Premiere Radio Networks, asubsidiary of Clear Channel Communications has served as one of the Company’sad sales representatives.  Underseparate agreements, the Company also runs advertisements on a spot and networkbasis on radio stations owned by Clear Channel Communications.

 

***(e)  LCCI***

 

In1999, the Company entered into the LCCI Services Contract (see note 10(e)), andLCCI also provides certain ongoing consulting engineering work for the Companyrelating to the terrestrial repeater network on a time and materials basis.  LCCI ceased to be a related party in 2002.

 

***(f)  Motient***

 

In1998, the Company entered into an agreement with Motient, in which Motientwould provide technical and administrative support relating to the Company’soperations.  Payments for servicesprovided under this agreement were made based on negotiated hourly rates.  Motient ceased to be a related party in2002.

 

***(g)  Parent***

 

Duringthe three-month period ended March 31, 2003, the Parent provided funding to theCompany of $73.0 million and also provided non-cash capital contribution of$32.2 million in deferred financing fees and $68.9 million in discountsassociated with the issuance of the Company's 10% senior secured discountconvertible notes.  For the three-monthperiod ended March 31, 2003, the Company incurred costs relating to the rentalof office space with the Parent of $1,072,000.

11

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**(10)  Commitments and Contingencies**

 

***(a)  DARS License***

 

TheCompany’s DARS license is valid for eight years upon successful launch andorbital insertion of the satellites and can be extended by the Company.  The DARS license requires that the Companycomply with a construction and launch schedule specified by the FCC for each ofthe two authorized satellites, which has occurred.  The FCC has the authority to revoke the authorizations and inconnection with such revocation could exercise its authority to rescind theCompany’s license.  The Company believesthat the exercise of such authority to rescind the license is unlikely.  If necessary, the Company could seek FCCauthority to launch additional satellites for use in its system, whichmanagement believes would likely be approved. Additionally, the FCC has not yet issued final rules permitting theCompany to deploy its terrestrial repeaters to fill gaps in satellitecoverage.  The Company is operating itsrepeaters on a non-interference basis pursuant to a grant of special temporaryauthority from the FCC.  This grantoriginally expired March 18, 2002. However, on March 11, 2002, the Company applied for an extension of thisspecial temporary authority and the Company can continue to operate itsterrestrial repeaters pursuant to the special temporary authority pending afinal determination on this extension request. This authority is currently being challenged by operators of terrestrialwireless systems who have asserted that the Company’s repeaters may causeinterference.  The Company believes itis not likely that an FCC order would materially impact the terrestrialrepeater system design currently in operation.

 

***(b)  Application for Review ofDARS License***

 

Oneof the losing bidders for the DARS licenses filed an Application for Review bythe full FCC of the Licensing Order that granted the Company its DARSlicense.  The Application for Reviewalleged that a former investor had effectively taken control of the Companywithout FCC approval.  The FCC deniedthe Application for Review and the losing bidder appealed to the United StatesCourt of Appeals for the District of Columbia Circuit.  On February 21, 2003, the Court of Appealsrejected the losing bidder’s claims and upheld the FCC’s decision to grant theCompany its license.  The losing biddercan request that the D.C. Circuit rehear its case or can request the UnitedStates Supreme Court review the D.C. Circuit’s decision.  The FCC’s order granting the Company’slicense remains in effect pending any further appeal by the losing bidder.

 

***(c)  Technology Licenses***

 

EffectiveJanuary 1, 1998, XMSR entered into a technology licensing agreement withMotient and WorldSpace Management Corporation (“WorldSpace MC”) by which ascompensation for certain licensed technology then under development to be usedin the XM Radio System, XMSR pays certain amounts to WorldSpace MC; $5 millionof such amounts have been deferred and are to be paid, plus interest, over thenext five years.  The actual amounts to beincurred under this agreement are dependent upon further development of thetechnology, which is at XMSR’s option. The agreement includes provisions for sharing certain costs related tothe further development of technology and for royalty payments from XMSR toWorldSpace MC.

 

***(d)  Satellite Contract***

 

Underthe Company’s satellite contract, Boeing Satellite Systems (“BSS”) deliveredtwo satellites in orbit and is to complete construction of a ground sparesatellite.  BSS also provided groundequipment and software used in the XM Radio system and certain launch andoperations support services.  Thecontract also provides for in-orbit incentives to be earned depending on theperformance of the in-orbit satellites over their useful lives.  Future payments under the satellite contractcould total up to an additional $68,285,000 over the useful lives of thesatellites.

 

OnDecember 5, 2001, the Company and BSS amended the satellite contract so as topermit the deferral of $31,350,000 of payments to be made under the agreement,as well as to provide certain additional rights and obligations of the Company,including the launch of the ground spare satellite on the SeaLaunch launchvehicle should the ground spare satellite be launched between specifieddates.  Amounts deferred under thesatellite contract include (i) $15,000,000 of the purchase price for the groundspare satellite and (ii) $16,350,000 of in-orbit incentive payments relating tothe Company’s two existing satellites, XM “Rock” and XM “Roll.”  Interest will accrue on the $15,000,000commencing when the ground spare satellite is available for shipment (it iscurrently being modified to address the solar power anomaly), and the principalof such amount is to be paid on December 5, 2006.  Similarly, the $16,350,000 of incentive payments relating to Rockand Roll has been deferred (with interest payable currently), with theprincipal amount (to the extent earned) payable on December 5, 2006.  After December 5, 2006, BSS must repay theCompany incentive amounts that are not earned on a current basis.  Incentive payment amounts are earned (andexpensed through operations) on a daily basis for each day that a satellitemeets or exceeds its applicable performance specifications.  Under the amendment, the deferred amountsbear interest at the rate of 8%, compounded annually, and are payable quarterlyin arrears.

 

Asof March 31, 2003, the Company had paid approximately $470,803,000 under thesatellite contract and had recognized an additional liability of $2,619,000 forin-orbit incentives and related interest.

 

12

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***(e)  Terrestrial Repeater SystemContracts***

 

Asof March 31, 2003, the Company had incurred aggregate costs of approximately$267,559,000 for its terrestrial repeater system.  These costs covered the capital costs of the design, developmentand installation of a system of terrestrial repeaters to cover approximately 60cities and metropolitan areas.  InAugust 1999, the Company signed a contract with LCCI calling for engineeringand site preparation.  As of March 31,2003, the Company had paid $128,356,000 under this contract.  There are no further payments due under theLCCI contract.  The Company also enteredinto a contract effective October 22, 1999 with Hughes for the design,development and manufacture of the terrestrial repeaters.  As of March 31, 2003, the Company had paid$113,900,000 under this contract and recorded an additional liability of$29,000.

 

***(f)  Accrued Network OptimizationExpenses***

 

AtMarch 31, 2003, the Company had recorded a lease termination accrual of$4,453,000 that represents an estimate of the costs to terminate the remaining98 leases based on management’s judgment, advice of lease consultants, andon-going negotiations with landlords. The liability also includes the estimated costs to deconstruct theexisting sites, which are based upon quotes from contractors.  This amount could vary significantly fromthe actual amount incurred, depending primarily on the Company’s ability tonegotiate lease termination settlements. As a result of the planned reduction of the number of terrestrialrepeater sites, the Company recognized a charge of $3,393,000 during thethree-month period ended March 31, 2003 compared to $0 during the three-monthperiod ended March 31, 2002.

 

***(g)  GM Distribution Agreement***

 

TheCompany has a long-term distribution agreement with OnStar, a subsidiary ofGeneral Motors.  During the term of theagreement, which expires 12 years from the commencement date of the Company’scommercial operations, GM has agreed to distribute the service to the exclusionof other S-band satellite digital radio services**. **The Company willalso have a non-exclusive right to arrange for the installation of XM radiosincluded in OnStar systems in non-GM vehicles that are sold for use in theUnited States.  The agreement wasamended in June 2002 and January 2003 to clarify certain terms in theagreement, including extending the dates when certain initial payments are dueto GM and confirming the date of the Company’s commencement of commercialoperations, and to provide that the Company may make certain payments to GM inthe form of indebtedness or shares of the Parent’s Class A common stock, asdescribed in note 4 above.  TheCompany’s total cash payment obligations were not increased.  The Company has significant annual, fixedpayment obligations to GM.  As a resultof the June 2002 amendment, the Company commenced recognizing these fixedpayment obligations for the period ending through November 2005, whichapproximate $63.6 million, on a straight-line basis.  However, due to the January 2003 amendment to the DistributionAgreement and GM’s current roll out plans which demonstrate a likelihood of GMexceeding minimum installation targets, the Company is now prospectivelyrecognizing these fixed payments due through September 2013, which approximate$397.3 million, on a straight-line basis. The Company issued a 10% Senior Secured Convertible Note due 2009 withan aggregate principal amount of $89,042,387 to OnStar in lieu of making thesefixed payments to OnStar for amounts otherwise due in 2003 through 2006.  The Company has recorded $22.3 million ofcurrent prepaid expense to related party and $61.2 million of non-currentprepaid expense to related party in the condensed consolidated balance sheet atMarch 31, 2003.

 

Inorder to encourage the broad installation of XM radios in GM vehicles, theCompany has agreed to subsidize a portion of the cost of XM radios, and to makeincentive payments to GM when the owners of GM vehicles with installed XMradios become subscribers to the Company’s service.  The Company must also share with GM a percentage of thesubscription revenue attributable to GM vehicles with installed XM radios,which percentage increases until there are more than 8 million GM vehicles withinstalled XM radios.  The Company willalso make available to GM bandwidth on its system.  As part of the agreement, OnStar provides certain call-centerrelated services directly to XM subscribers who are also OnStar customers andthe Company must reimburse OnStar for these XM-related call centerservices.  The agreement is subject torenegotiation at any time based upon the installation of radios that arecompatible with a unified standard or capable of receiving Sirius SatelliteRadio’s service.  The agreement issubject to renegotiation if as of November 2005, and at two-year intervalsthereafter, GM does not achieve and maintain specified installation levels ofGM vehicles capable of receiving the Company’s service, starting with 1,240,000units by November 2005, and thereafter increasing by the lesser of 600,000units per year and amounts proportionate to target market shares in thesatellite digital radio service market. There can be no assurances as to the outcome of any suchrenegotiations.  General Motors’exclusivity obligations will discontinue if, by November 2005 and at two-yearintervals thereafter, the Company fails to achieve and maintain specifiedminimum market share levels in the satellite digital radio service market.  Prior to 2001, the Company had not incurredany costs under the distribution agreement. As of March 31, 2003 and 2002, the Company paid $15.7 million and $1.1million, respectively, and incurred total costs of $49.5 million and $2.4million, respectively, under the distribution agreement.

 

13

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***(h)  Joint Development Agreement***

 

Underthe terms of a joint development agreement with Sirius Radio, the other holderof an FCC satellite radio license, each party is obligated to fund one half ofthe development cost for a unified standard for satellite radios.  During the three-month periods ended March31, 2003 and 2002, the Company incurred costs of $35,000 and $0 respectively,in relation to this agreement. The costs related to the joint developmentagreement are being expensed as incurred in research and development.  The prior arbitration with Sirius has beenresolved, with no payment by either side.

 

***(i)  Sales, Marketing andDistribution Agreements***

 

TheCompany has entered into various joint sales, marketing and distributionagreements.  Under the terms of theseagreements, the Company is obligated to provide incentives, subsidies andcommissions to other entities that may include fixed payments, per-unit radioand subscriber amounts and revenue sharing arrangements.  The amount of these operational,promotional, subscriber acquisition, joint development, and manufacturing costsrelated to these agreements cannot be estimated, but are expected to besubstantial future costs.  During thethree-month period ended March 31, 2003 and 2002, the Company incurred expensesof $7.6 million and $11.4 million respectively, in relation to these agreementsexcluding the GM distribution agreement. The amount of these costs will vary in future years, but is expected toincrease in the next year as the number of subscribers and revenue increase.

 

***(j)  Programming Agreements***

 

TheCompany has entered into various programming agreements.  Under the terms of these agreements, theCompany is obligated to provide payments to other entities that may includefixed payments, advertising commitments and revenue sharing arrangements.  During the three-month periods ended March31, 2003 and 2002, the Company incurred expenses of $3.0 million and $6.1million, respectively, in relation to these agreements.  The amount of these costs will vary infuture years, but is expected to increase in the next year as the number ofsubscribers and advertising revenue increase. The amount of the costs related to these agreements cannot be estimated,but are expected to be substantial future costs.

 

***(k)  Royalty Agreements***

 

TheCompany has entered into fixed and variable revenue share payment agreementswith performance rights organizations that expire as late as 2006.  During the three-month periods ended March31, 2003 and 2002, the Company incurred expenses of $2.3 million and $156,000,respectively, in relation to these agreements.

 

***(l)  Warrants***

 

***Sony Warrant***

 

InFebruary 2000, the Parent issued a warrant to Sony exercisable for shares ofthe Parent’s Class A common stock.  Thewarrant will vest at the time that the Company attains its one-millionthcustomer, and the number of shares underlying the warrant will be determined bythe percentage of XM Radios that have a Sony brand name as of the vestingdate.  If Sony achieves its maximumperformance target, the warrant will be exercisable for 2% of the total numberof shares of the Company’s Class A common stock on a fully-diluted basis.  The exercise price of the Sony warrant willequal 105% of fair market value of the Class A common stock on the vestingdate, determined based upon the 20-day trailing average.  For the three-month periods ended March 31,2003 and 2002, the Company recognized $2.5 million and $156,000, respectively,in non-cash compensation expense related to these warrants.

 

***CNBC Warrant***

 

InMay 2001, the Parent granted a warrant to purchase 90,000 shares of Class Acommon stock consisting of three 30,000 share tranches to purchase shares at$26.50 per share, which expire in 11, 12, and 13 years, respectively.  The warrants began to vest on September 25,2001 when the Company reached its commercial launch and will be vested onSeptember 1, 2002, 2003, and 2004, respectively.  For the three-month periods ended March 31, 2003 and 2002, theCompany recognized $131,000 and $269,000, respectively, in non-cashcompensation expense related to these warrants.

 

14

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

***(m)  Service Providers***

 

TheCompany has entered into agreements with service providers for customer carefunctions to subscribers of its service. Employees of service providers have access to the Company’s customercare systems to establish customer accounts, activate radios, update programand account information and respond to general inquiries from subscribers.  The Company pays its service provider anhourly rate for each customer care representative supporting itssubscribers.  During the three-monthperiods ended March 31, 2003 and 2002, the Company incurred $2.7 million and$1.3 million, respectively, in relation to this agreement.

 

**(10)  Supplemental Cash Flows Disclosures**

 

TheCompany paid $29,249,000 and $22,932,000 for interest (net of amountscapitalized) during the three-month periods ended March 31, 2003 and 2002,respectively.  Additionally, the Companyincurred the following non-cash financing and investing activities (in thousands):

 
|                                     |   | **Three-month periods ending****March 31,** |    |
|------------------------------------------|--------|---------------------------------------------|---------|
|                                     |   | **2003**                                    |    | **2002** |   |
|                                     |   |                                        |    |   |   |
| Accrued system milestone payments        |   | $                                           | 4,943   |   | $ | 21,162 |   |
| Issuance of note for prepaid expenses    |   | 89,042                                      |    | — |   |
| Issuance of notes for accrued expenses   |   | 19,577                                      |    | — |   |
| Proceeds of note issuance held at Parent |   | 203,925                                     |    | — |   |
| Deferred financing fees paid by Parent   |   | 32,144                                      |    | — |   |
| Discount on debt securities              |   | 63,823                                      |    | — |   |
| Conversion of debt to equity in Parent   |   | 13,510                                      |    | — |   |
|                                     |   | $                                           | 426,964 |   | $ | 21,162 |   |

 

The Parentissued warrants and made cash payments on the Company’s behalf for deferred financingfees and as part of the Company’s debt issuance.  These items are treated as capital contributions and aggregated$32.2 million for deferred financing fees and $68.9 million value allocated tothe warrants issued in connection with the Company’s new debt agreements.

 

**(11)  Recent Accounting Pronouncements**

 

TheCompany adopted SFAS No. 143, *Accounting for Asset Retirement Obligations*,effective January 1, 2003, and SFAS 143 does not have a material impact on thefinancial statements.  The Company’s assetretirement obligations are limited to deconstruction of its terrestrialrepeater sites.  SFAS No. 143 requiresentities to record the fair value of a legal liability for an asset retirementobligation in the period in which it is incurred.  When a new liability is recorded, the Company will capitalize thecosts of the liability by increasing the carrying amount of the relatedlong-lived asset.  The liability isaccreted to its present value each period, and the capitalized cost isdepreciated over the useful life of the related asset.  Upon settlement of the liability, an entitysettles the obligation for its recorded amount or incurs a gain or loss uponsettlement.

 

InApril 2002, the FASB issued SFAS No. 145, *Rescissionof FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, andTechnical Corrections*. SFAS No. 145 amends existing guidance onreporting gains and losses on the extinguishment of debt to prohibit theclassification of the gain or loss as extraordinary, as the use of such extinguishmentshave become part of the risk management strategy of many companies.  SFAS No. 145 also amends SFAS No. 13 torequire sale-leaseback accounting for certain lease modifications that haveeconomic effects similar to sale-leaseback transactions.  The Company recorded a loss of $(2.1)million during the three-months ended March 31, 2003 from the early retirementof $17.9 million of principal.  The lossis reported in other income (expense) on the unaudited condensed consolidatedstatement of operations.

 

InJune 2002, the FASB issued SFAS No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities.* SFAS No. 146requires that a liability for a cost associated with an exit or disposalactivity be recognized when incurred at fair value.  SFAS No. 146 is effective for exit or disposal activities that areinitiated after December 31, 2002.  Theadoption of SFAS No. 146 may have an effect on the timing of future restructuringcharges taken, if and when they occur.

 

InDecember 2002, the FASB issued SFAS No. 148, *Accountingfor Stock-Based Compensation – Transition and Disclosure, an amendment of FASBStatement No. 123*.  ThisStatement amends FASB Statement No. 123, *Accountingfor Stock-Based Compensation,* to provide alternative methods of transitionfor a voluntary change to the fair value method of accounting for stock-basedemployee compensation.  In addition,this Statement amends the disclosure requirements of Statement No. 123 torequire prominent disclosures in both annual and interim financialstatements.  The disclosures required bySFAS No. 148 are included in note 3 to these condensed consolidated financialstatements.

 

15

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

TheEmerging Issues Task Force issued EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables* addressingthe allocation of revenue among products and services in bundled salesarrangements. EITF 00-21 is effective for arrangements entered into in fiscalperiods after June 15, 2003.  Based onthe Company’s current sales and marketing programs, the Company does notanticipate the application of the new pronouncement will have a material impacton the Company’s financial statements. However, the Company’s sales and marketing programs may change over timeand the Company will continue to evaluate the applicability of EITF 00-21 as itrelates to sales of service and hardware.

 

**(12)  Condensed Consolidating Financial Information**

 

TheCompany hascertain series of debt securities outstanding that are guaranteed by the Parentand by the Company’s subsidiary, XM Equipment Leasing LLC, which owns certainterrestrial repeaters. Accordingly, the Company provides the followingcondensed consolidating financial information.

 

16

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***XM SATELLITERADIO INC., SUBSIDIARIES AND AFFILIATES***

***UNAUDITEDCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS***

***FOR THETHREE-MONTH PERIOD ENDED MARCH 31, 2003***

 
|                            |   | **XM  Satellite  Radio Inc** |       | **XM  Equipment  Leasing LLC** |       | **XMSR  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  XM Satellite  Radio Inc.** |       | **XM Satellite  Radio  Holdings Inc** |       | **XM Holdings  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  XM Satellite  Radio Holdings Inc** |       |
|---------------------------------|--------|------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
|                            |   |                         | ** ** |                           | ** ** |                                  | ** ** |             | ** ** |                                       | ** ** |                                  | ** ** |                                         | ** ** |             | ** ** |                                               | ** ** |
| *Revenue:*                      |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Subscriber revenue              |   | $                            | 11,885     |                           | $          | —                                |       | $                | —     |                                       | $          | —                                |       | $                                            | 11,885     |             | $          | —                                             |       | $ | — |   | $ | — |   | $ | 11,885 |   |
| Equipment Revenue               |   | 170                          |       | —                         |       | 422                                   |       | —           |       | 592                                        |       | —                                |       | —                                       |       | —           |       | 592                                                |       |
| Net ad sales                    |   | 448                          |       | —                         |       | —                                |       | —           |       | 448                                        |       | —                                |       | —                                       |       | —           |       | 448                                                |       |
| Royalty and other revenue       |   | 127                          |       | —                         |       | —                                |       | —           |       | 127                                        |       | —                                |       | —                                       |       | —           |       | 127                                                |       |
| Intercompany revenue            |   | —                       |       | 2,609                          |       | 1,871                                 |       | (4,480           | )          | —                                     |       | —                                |       | 1,834                                        |       | (1,834           | )          | —                                             |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Total revenue*                 |   | $                            | 12,630     |                           | $          | 2,609                                 |       | $                | 2,293      |                                       | $          | (4,480                                | )          | $                                            | 13,052     |             | $          | —                                             |       | $ | 1,834 |   | $ | (1,834 | ) | $ | 13,052 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Operating expenses:*           |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Cost of revenue:                |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Revenue share & royalties   |   | $                            | 3,883      |                           | $          | —                                |       | $                | —     |                                       | $          | —                                |       | $                                            | 3,883      |             | $          | —                                             |       | $ | — |   | $ | — |   | $ | 3,883 |   |
| Cost of equipment               |   | 375                          |       | —                         |       | 738                                   |       | —           |       | 1,113                                      |       | —                                |       | —                                       |       | —           |       | 1,113                                              |       |
| Ad sales                        |   | 437                          |       | —                         |       | —                                |       | —           |       | 437                                        |       | —                                |       | —                                       |       | —           |       | 437                                                |       |
| Customer care & billing     |   | 4,842                        |       | —                         |       | —                                |       | —           |       | 4,842                                      |       | —                                |       | —                                       |       | —           |       | 4,842                                              |       |
| Satellite & terrestrial     |   | 17,041                       |       | 10                             |       | —                                |       | (4,480           | )          | 12,571                                     |       | —                                |       | —                                       |       | —           |       | 12,571                                             |       |
| Broadcast & operations      |   | 6,504                        |       | —                         |       | —                                |       | —           |       | 6,504                                      |       | —                                |       | —                                       |       | (1,172           | )          | 5,332                                              |       |
| Programming & content       |   | 4,787                        |       | —                         |       | —                                |       | —           |       | 4,787                                      |       | —                                |       | —                                       |       | —           |       | 4,787                                              |       |
| *Cost of revenue*               |   | $                            | 37,869     |                           | $          | 10                                    |       | $                | 738        |                                       | $          | (4,480                                | )          | $                                            | 34,137     |             | $          | —                                             |       | $ | — |   | $ | (1,172 | ) | $ | 32,965 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Research & development      |   | 2,467                        |       | —                         |       | —                                |       | —           |       | 2,467                                      |       | —                                |       | —                                       |       | —           |       | 2,467                                              |       |
| General & administrative    |   | 8,697                        |       | —                         |       | —                                |       | 108              |       | 8,805                                      |       | 28                                    |       | 233                                          |       | (47              | )          | 9,019                                              |       |
| Marketing                       |   | 35,611                       |       | —                         |       | —                                |       | —           |       | 35,611                                     |       | —                                |       | —                                       |       | —           |       | 35,611                                             |       |
| Depreciation & amortization |   | 35,896                       |       | 3,518                          |       | —                                |       | —           |       | 39,414                                     |       | —                                |       | 346                                          |       | —           |       | 39,760                                             |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Total operating expenses*      |   | $                            | 120,540    |                           | $          | 3,528                                 |       | $                | 738        |                                       | $          | (4,372                                | )          | $                                            | 120,434    |             | $          | 28                                                 |       | $ | 579 |   | $ | (1,219 | ) | $ | 119,822 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Operating income (loss)*       |   | $                            | (107,910   | )                              | $          | (919                                  | )          | $                | 1,555      |                                       | $          | (108                                  | )          | $                                            | (107,382   | )                | $          | (28                                                | )          | $ | 1,255 |   | $ | (615 | ) | $ | (106,770 | ) |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Other income (expense):*       |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Interest income                 |   | $                            | 42         |                           | $          | 81                                    |       | $                | 14,487     |                                       | $          | (14,568                               | )          | $                                            | 42         |             | $          | 451                                                |       | $ | 59 |   | $ | — |   | $ | 552 |   |
| Interest expense                |   | (35,827                      | )          | —                         |       | (81                                   | )          | 14,568           |       | (21,340                                    | )          | 5                                     |       | (598                                         | )          | (1,866           | )          | (23,799                                            | )          |
| Other income (expense)          |   | 12,699                       |       | (14                            | )          | (13                                   | )          | (14,988          | )          | (2,316                                     | )          | (126,710                              | )          | (165                                         | )          | 132,926          |       | 3,735                                              |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Net loss*                      |   | $                            | (130,996   | )                              | $          | (852                                  | )          | $                | 15,948     |                                       | $          | (15,096                               | )          | $                                            | (130,996   | )                | $          | (126,282                                           | )          | $ | 551 |   | $ | 130,445 |   | $ | (126,282 | ) |

 

(Certain totals may not add due to the effect of rounding)

 

17

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***XM SATELLITERADIO INC., SUBSIDIARIES AND AFFILIATES***

***UNAUDITEDCONDENSED CONSOLIDATING STATEMENT OF OPERATIONS***

***FOR THETHREE-MONTH PERIOD ENDED MARCH 31, 2002***

 
|                            |   | **XM  Satellite  Radio Inc** |       | **XM  Equipment  Leasing LLC** |       | **XMSR  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  XM Satellite  Radio Inc.** |       | **XM Satellite  Radio  Holdings Inc** |       | **XM Holdings  Non-Guarantor  Subsidiaries** |       | **Eliminations** |       | **Consolidated  XM Satellite  Radio Holdings Inc** |       |
|---------------------------------|--------|------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|------------------|------------|--------------------------------------------|------------|---------------------------------------|------------|----------------------------------------------|------------|------------------|------------|----------------------------------------------------|------------|
|                            |   |                         | ** ** |                           | ** ** |                                  | ** ** |             | ** ** |                                       | ** ** |                                  | ** ** |                                         | ** ** |             | ** ** |                                               | ** ** |
| *Revenue:*                      |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Subscriber revenue              |   | $                            | 1,389      |                           | $          | —                                |       | $                | —     |                                       | $          | —                                |       | $                                            | 1,389      |             | $          | —                                             |       | $ | — |   | $ | — |   | $ | 1,389 |   |
| Equipment Revenue               |   | —                       |       | —                         |       | —                                |       | —           |       | —                                     |       | —                                |       | —                                       |       | —           |       | —                                             |       |
| Net ad sales                    |   | 391                          |       | —                         |       | —                                |       | —           |       | 391                                        |       | —                                |       | —                                       |       | —           |       | 391                                                |       |
| Royalty and other revenue       |   | 5                            |       | —                         |       | —                                |       | —           |       | 5                                          |       | —                                |       | —                                       |       | —           |       | 5                                                  |       |
| Intercompany revenue            |   | —                       |       | 2,265                          |       | 279                                   |       | (2,544           | )          | —                                     |       | —                                |       | 1,834                                        |       | (1,834           | )          | —                                             |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Total revenue*                 |   | $                            | 1,785      |                           | $          | 2,265                                 |       | $                | 279        |                                       | $          | (2,544                                | )          | $                                            | 1,785      |             | $          | —                                             |       | $ | 1,834 |   | $ | (1,834 | ) | $ | 1,785 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Operating expenses:*           |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Cost of revenue:                |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Revenue share & royalties   |   | $                            | 612        |                           | $          | —                                |       | $                | —     |                                       | $          | —                                |       | $                                            | 612        |             | $          | —                                             |       | $ | — |   | $ | — |   | $ | 612 |   |
| Cost of equipment               |   | —                       |       | —                         |       | —                                |       | —           |       | —                                     |       | —                                |       | —                                       |       | —           |       | —                                             |       |
| Ad sales                        |   | 167                          |       | —                         |       | —                                |       | —           |       | 167                                        |       | —                                |       | —                                       |       | —           |       | 167                                                |       |
| Customer care & billing     |   | 2,487                        |       | —                         |       | —                                |       | —           |       | 2,487                                      |       | —                                |       | —                                       |       | —           |       | 2,487                                              |       |
| Satellite & terrestrial     |   | 13,002                       |       | 20                             |       | —                                |       | (2,544           | )          | 10,478                                     |       | —                                |       | —                                       |       | —           |       | 10,478                                             |       |
| Broadcast & operations      |   | 5,409                        |       | —                         |       | —                                |       | —           |       | 5,409                                      |       | —                                |       | 28                                           |       | (1,214           | )          | 4,223                                              |       |
| Programming & content       |   | 6,024                        |       | —                         |       | —                                |       | —           |       | 6,024                                      |       | —                                |       | —                                       |       | —           |       | 6,024                                              |       |
| *Cost of revenue*               |   | $                            | 27,701     |                           | $          | 20                                    |       | $                | —     |                                       | $          | (2,544                                | )          | $                                            | 25,177     |             | $          | —                                             |       | $ | 28 |   | $ | (1,214 | ) | $ | 23,991 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Research & development      |   | 2,324                        |       | —                         |       | —                                |       | —           |       | 2,324                                      |       | —                                |       | —                                       |       | —           |       | 2,324                                              |       |
| General & administrative    |   | 5,316                        |       | —                         |       | 7                                     |       | —           |       | 5,323                                      |       | 38                                    |       | —                                       |       | (346             | )          | 5,015                                              |       |
| Marketing                       |   | 46,330                       |       | —                         |       | —                                |       | —           |       | 46,330                                     |       | —                                |       | —                                       |       | —           |       | 46,330                                             |       |
| Depreciation & amortization |   | 19,996                       |       | 2,144                          |       | —                                |       | —           |       | 22,140                                     |       | —                                |       | 346                                          |       | —           |       | 22,486                                             |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Total operating expenses*      |   | $                            | 101,667    |                           | $          | 2,164                                 |       | $                | 7          |                                       | $          | (2,544                                | )          | $                                            | 101,294    |             | $          | 38                                                 |       | $ | 374 |   | $ | (1,560 | ) | $ | 100,146 |   |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Operating income (loss)*       |   | $                            | (99,882    | )                              | $          | 101                                   |       | $                | 272        |                                       | $          | —                                |       | $                                            | (99,509    | )                | $          | (38                                                | )          | $ | 1,460 |   | $ | (274 | ) | $ | (98,361 | ) |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Other income (expense):*       |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| Interest income                 |   | $                            | 816        |                           | $          | 14                                    |       | $                | 11,090     |                                       | $          | (10,960                               | )          | $                                            | 960        |             | $          | 677                                                |       | $ | 20 |   | $ | — |   | $ | 1,656 |   |
| Interest expense                |   | (23,943                      | )          | —                         |       |                                  |       | 10,960           |       | (12,983                                    | )          | (2,371                                | )          | (644                                         | )          | —           |       | (15,998                                            | )          |
| Other income (expense)          |   | 11,376                       |       | —                         |       | —                                |       | (11,477          | )          | (101                                       | )          | (110,518                              | )          | —                                       |       | 111,071          |       | 452                                                |       |
|                            |   |                         |       |                           |       |                                  |       |             |       |                                       |       |                                  |       |                                         |       |             |       |                                               |       |
| *Net loss*                      |   | $                            | (111,633   | )                              | $          | 115                                   |       | $                | 11,362     |                                       | $          | (11,477                               | )          | $                                            | (111,633   | )                | $          | (112,250                                           | )          | $ | 836 |   | $ | 110,797 |   | $ | (112,250 | ) |

 

(Certain totals may not add due to the effect of rounding)

 

18

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**XM SATELLITE RADIO INC.,SUBSIDIARIES AND AFFILIATES**

**UNAUDITED CONDENSED CONSOLIDATINGBALANCE SHEET**

**AS OF MARCH 31, 2003 (INTHOUSANDS)**

 
|                                                      |   | **XM  Satellite  Radio, Inc.** |      | **XM  Equipment  Leasing LLC** |   | **XMSR  Non-Guarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated  XM Satellite  Radio Inc.** |   | **XM  Satellite  Radio Holdings Inc.** |   | **XM  Holdings  Non-Guarantor  Subsidiaries** |      | **Eliminations** |   | **Consolidated  XM Satellite  Radio Holdings Inc.** |   |
|-----------------------------------------------------------|--------|--------------------------------|-----------|--------------------------------|--------|---------------------------------------|--------|------------------|---------|--------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|-----------|------------------|--------|-----------------------------------------------------|--------|
| Current assets:                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Cash and cash equivalents                                 |   | $                              | 8,380     |                           | $      | 27                                    |   | $                | 218     |                                       | $      | —                                 |   | $                                             | 8,625     |             | $      | 183,227                                             |   | $ | 1,640 |   | $ | — |   | $ | 193,492 |   |
| Short-term investments                                    |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | —                                 |   | —                                        |      | —           |   | —                                              |   |
| Restricted investments                                    |   | 7,278                          |      | —                         |   | —                                |   | —           |    | 7,278                                      |   | —                                 |   | —                                        |      | —           |   | 7,278                                               |   |
| Accounts receivable, net                                  |   | 4,044                          |      | —                         |   | —                                |   | —           |    | 4,044                                      |   | —                                 |   | —                                        |      | —           |   | 4,044                                               |   |
| Due from related parties                                  |   | 1,225                          |      | —                         |   | —                                |   | —           |    | 1,225                                      |   | —                                 |   | —                                        |      | —           |   | 1,225                                               |   |
| Due from subsidiaries / affiliates                        |   | 222,210                        |      | 16,676                         |   | 402,630                               |   | (437,591         | )       | 203,925                                    |   | 277,530                                |   | 4,882                                         |      | (486,333         | )      | —                                              |   |
| Related party prepaid expenses                            |   | 22,261                         |      | —                         |   | —                                |   | —           |    | 22,261                                     |   | —                                 |   | —                                        |      | —           |   | 22,261                                              |   |
| Prepaid and other current assets                          |   | 12,204                         |      | —                         |   | 658                                   |   | —           |    | 12,862                                     |   | 500                                    |   | 130                                           |      | —           |   | 13,492                                              |   |
| *Total current assets*                                    |   | $                              | 277,602   |                           | $      | 16,703                                |   | $                | 403,506 |                                       | $      | (437,591                               | )      | $                                             | 260,220   |             | $      | 461,257                                             |   | $ | 6,653 |   | $ | (486,333 | ) | $ | 241,792 |   |
| Restricted investments, net of current portion            |   | 1,611                          |      | —                         |   | —                                |   | —           |    | 1,611                                      |   | —                                 |   | 3,109                                         |      | —           |   | 4,721                                               |   |
| System under construction                                 |   | 18,558                         |      | —                         |   | —                                |   | —           |    | 18,558                                     |   | 36,458                                 |   | —                                        |      | —           |   | 55,016                                              |   |
| Property and equipment, net                               |   | 701,369                        |      | 81,122                         |   | —                                |   | (5,099           | )       | 777,392                                    |   | —                                 |   | 32,638                                        |      | —           |   | 810,030                                             |   |
| Investment in subsidiary / affiliates                     |   | 890,568                        |      | —                         |   | —                                |   | (890,568         | )       | —                                     |   | 495,262                                |   | —                                        |      | (495,262         | )      | —                                              |   |
| DARS license & intangibles, net                       |   | 9,379                          |      | —                         |   | 141,200                               |   | —           |    | 150,579                                    |   | —                                 |   | —                                        |      | —           |   | 150,579                                             |   |
| Goodwill, net                                             |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | —                                 |   | —                                        |      | —           |   | —                                              |   |
| Related party ppd expenses, net of current portion        |   | 61,216                         |      | —                         |   | —                                |   | —           |    | 61,216                                     |   | —                                 |   | —                                        |      | —           |   | 61,216                                              |   |
| Other assets, net                                         |   | 46,003                         |      | —                         |   | —                                |   | —           |    | 46,003                                     |   | 3,417                                  |   | 1,374                                         |      | (30              | )      | 50,764                                              |   |
| *Total assets*                                            |   | $                              | 2,006,305 |                           | $      | 97,825                                |   | $                | 544,706 |                                       | $      | (1,333,259                             | )      | $                                             | 1,315,579 |             | $      | 996,394                                             |   | $ | 43,775 |   | $ | (981,629 | ) | $ | 1,374,118 |   |
|                                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Current liabilities:                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Accounts payable                                          |   | 29,428                         |      | —                         |   | —                                |   | —           |    | 29,428                                     |   | —                                 |   | 3                                             |      | —           |   | 29,431                                              |   |
| Accrued expenses                                          |   | 41,389                         |      | 119                            |   | 5                                     |   | —           |    | 41,512                                     |   | 22                                     |   | 467                                           |      | (441             | )      | 41,560                                              |   |
| Current portion of related party long-term debt           |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | —                                 |   | —                                        |      | —           |   | —                                              |   |
| Current portion of other long-term debt                   |   | 8,346                          |      | —                         |   | —                                |   | —           |    | 8,346                                      |   | —                                 |   | 437                                           |      | —           |   | 8,783                                               |   |
| Due to subsidiaries / affiliates                          |   | 690,850                        |      | 630                            |   | 14,170                                |   | (705,650         | )       | —                                     |   | 225,840                                |   | 2,469                                         |      | (228,310         | )      | 0                                                   |   |
| Due to related parties                                    |   | 6,664                          |      | —                         |   | —                                |   | —           |    | 6,664                                      |   | —                                 |   | —                                        |      | —           |   | 6,664                                               |   |
| Accrued interest                                          |   | 2,702                          |      | —                         |   | —                                |   | —           |    | 2,702                                      |   | 500                                    |   | 189                                           |      | —           |   | 3,391                                               |   |
| Deferred revenue                                          |   | 12,892                         |      | —                         |   | —                                |   | —           |    | 12,892                                     |   | —                                 |   | —                                        |      | —           |   | 12,892                                              |   |
|                                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total current liabilities*                               |   | $                              | 792,271   |                           | $      | 749                                   |   | $                | 14,176  |                                       | $      | (705,650                               | )      | $                                             | 101,545   |             | $      | 226,362                                             |   | $ | 3,566 |   | $ | (228,751 | ) | $ | 102,721 |   |
|                                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Related party long-term debt, net of current portion      |   | 102,592                        |      | —                         |   | —                                |   | —           |    | 102,592                                    |   | —                                 |   | —                                        |      | —           |   | 102,592                                             |   |
| Long-term debt, net of current portion                    |   | 344,580                        |      | —                         |   | —                                |   | —           |    | 344,580                                    |   | 93,182                                 |   | 28,029                                        |      | —           |   | 465,792                                             |   |
| Due to related parties, net of current portion            |   | 12,670                         |      | —                         |   | —                                |   | —           |    | 12,670                                     |   | —                                 |   | —                                        |      | —           |   | 12,679                                              |   |
| Deferred revenue, net of current portion                  |   | 3,369                          |      | —                         |   | —                                |   | —           |    | 3,369                                      |   | —                                 |   | —                                        |      | —           |   | 3,369                                               |   |
| Other non-current liabilities                             |   | 15,767                         |      | —                         |   | —                                |   | —           |    | 15,767                                     |   | —                                 |   | (1,315                                        | )         | (4,336           | )      | 10,115                                              |   |
| *Total liabilities*                                       |   | 1,271,258                      |      | 749                            |   | 14,176                                |   | (705,650         | )       | 580,532                                    |   | 319,544                                |   | 30,280                                        |      | (233,088         | )      | 697,268                                             |   |
| Stockholders’ (deficit) equity:                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Capital stock                                             |   | —                         |      | —                         |   | —                                |   |             |    | —                                     |   | 1,198                                  |   | —                                        |      | —           |   | 1,198                                               |   |
| Paid in capital                                           |   | 1,741,072                      |      | 97,019                         |   | 433,172                               |   | (530,191         | )       | 1,714,072                                  |   | 1,687,920                              |   | 8,347                                         |      | (1,749,419       | )      | 1,687,920                                           |   |
| Retained earnings                                         |   | (1,006,025                     | )         | 58                             |   | 97,358                                |   | (97,416          | )       | (1,006,025                                 | )      | (1,012,268                             | )      | 5,148                                         |      | 1,000,877        |   | (1,012,268                                          | )      |
|                                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total  stockholder's equity*                             |   | $                              | 735,047   |                           | $      | 97,076                                |   |             | 530,530 |                                       | $      | (627,607                               | )      | $                                             | 735,047   |             | $      | 676,850                                             |   | $ | 13,495 |   | $ | (748,542 | ) | $ | 676,850 |   |
|                                                      |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total liabilities & stockholder's (deficit)  equity* |   | $                              | 2,006,305 |                           | $      | 97,825                                |   | $                | 544,706 |                                       | $      | (1,333,257                             | )      | $                                             | 1,315,578 |             | $      | 996,394                                             |   | $ | 43,775 |   | $ | (981,630 | ) | $ | 1,374,118 |   |

 

(Certain totals may not add due to the effect of rounding)

 

19

----

 

**XMSATELLITE RADIO INC., SUBSIDIARIES AND AFFILIATES**

**UNAUDITEDCONDENSED CONSOLIDATING BALANCE SHEET**

**AS OFDECEMBER 31, 2002 (IN THOUSANDS)**

 
|                                                           |   | **XM  Satellite  Radio, Inc.** |      | **XM  Equipment  Leasing LLC** |   | **XMSR  Non-Guarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated  XM Satellite  Radio Inc.** |   | **XM  Satellite  Radio Holdings Inc.** |   | **XM  Holdings  Non-Guarantor  Subsidiaries** |      | **Eliminations** |   | **Consolidated  XM Satellite  Radio Holdings Inc.** |   |
|----------------------------------------------------------------|--------|--------------------------------|-----------|--------------------------------|--------|---------------------------------------|--------|------------------|---------|--------------------------------------------|--------|----------------------------------------|--------|-----------------------------------------------|-----------|------------------|--------|-----------------------------------------------------|--------|
| Current assets:                                                |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Cash and cash equivalents                                      |   | $                              | 6,348     |                           | $      | 159                                   |   | $                | 219     |                                       | $      | —                                 |   | $                                             | 6,726     |             | $      | 24,370                                              |   | $ | 1,722 |   | $ | — |   | $ | 32,818 |   |
| Short-term investments                                         |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | 9,997                                  |   | —                                        |      | —           |   | 9,997                                               |   |
| Restricted investments                                         |   | 25,014                         |      | —                         |   | —                                |   | —           |    | 25,014                                     |   | —                                 |   | —                                        |      | —           |   | 25,014                                              |   |
| Accounts receivable, net                                       |   | 3,551                          |      | —                         |   | 205                                   |   | —           |    | 3,756                                      |   | —                                 |   | —                                        |      | —           |   | 3,756                                               |   |
| Due from related parties                                       |   | 1,478                          |      | —                         |   | —                                |   | —           |    | 1,478                                      |   | —                                 |   | —                                        |      | —           |   | 1,478                                               |   |
| Due from subsidiaries / affiliates                             |   | 6,863                          |      | 13,879                         |   | 382,722                               |   | (403,464         | )       | —                                     |   | 177,911                                |   | 3,602                                         |      | (181,513         | )      | —                                              |   |
| Prepaid and other current assets                               |   | 9,311                          |      | —                         |   | 1,051                                 |   | —           |    | 10,362                                     |   |                                   |   | —                                        |      | —           |   | 10,362                                              |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total current assets*                                         |   | $                              | 52,565    |                           | $      | 14,038                                |   | $                | 384,197 |                                       | $      | (403,464                               | )      | $                                             | 47,336    |             | $      | 212,278                                             |   | $ | 5,324 |   | $ | (181,513 | ) | $ | 83,425 |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Other assets:                                                  |   | —                         |      | —                         |   | —                                |   | —           |    |                                       |   | —                                 |   | —                                        |      | —           |   |                                                |   |
| Restricted investments, net of current portion                 |   | 1,673                          |      | —                         |   | —                                |   | —           |    | 1,673                                      |   | —                                 |   | 3,055.00                                      |      | —           |   | 4,728                                               |   |
| System under construction                                      |   | 18,558                         |      | —                         |   | —                                |   |             |    | 18,558                                     |   | 36,458                                 |   | —                                        |      | —           |   | 55,016                                              |   |
| Property and equipment, net                                    |   | 735,426                        |      | 84,220                         |   | —                                |   | (4,680           | )       | 814,966                                    |   | —                                 |   | 32,970.00                                     |      | —           |   | 847,936                                             |   |
| Investment in subsidiary / affiliates                          |   | 780,745                        |      | —                         |   | —                                |   | (780,745         | )       | —                                     |   | 468,856                                |   | —                                        |      | (468,856         | )      | —                                              |   |
| DARS license & intangibles, net                            |   | 9,690                          |      | —                         |   | 144,042                               |   | —           |    | 153,732                                    |   | —                                 |   | —                                        |      | —           |   | 153,732                                             |   |
| Goodwill, net                                                  |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | —                                 |   | —                                        |      | —           |   |                                                |   |
| Other assets, net                                              |   | 8,082                          |      | —                         |   | —                                |   | —           |    | 8,082                                      |   | 6,143                                  |   | 1,248.00                                      |      | (30              | )      | 15,443                                              |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total assets*                                                 |   | $                              | 1,606,739 |                           | $      | 98,258                                |   | $                | 528,239 |                                       | $      | (1,188,889                             | )      | $                                             | 1,044,347 |             | $      | 723,735                                             |   | $ | 42,597 |   | $ | (650,399 | ) | $ | 1,160,280 |   |
| Current liabilities:                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Accounts payable                                               |   | $                              | 36,141    |                           | $      | 1                                     |   | $                | —  |                                       | $      | —                                 |   | $                                             | 36,142    |             | $      | 3,820                                               |   | $ | 44 |   | $ | — |   | $ | 40,006 |   |
| Accrued expenses                                               |   | 616,516                        |      | 329                            |   | 13,794                                |   | (576,516         | )       | 54,123                                     |   | 11,366                                 |   | 2,167                                         |      | (18,531          | )      | 49,125                                              |   |
| Current portion of long-term debt                              |   | 3,408                          |      | —                         |   | —                                |   | —           |    | 3,408                                      |   | —                                 |   | 437                                           |      | —           |   | 3,845                                               |   |
| Due to related parties                                         |   | 13,410                         |      | —                         |   | —                                |   | —           |    | 13,410                                     |   | —                                 |   | —                                        |      | —           |   | 13,410                                              |   |
| Accrued interest                                               |   | 14,286                         |      | —                         |   | —                                |   | —           |    | 14,286                                     |   | 2,181                                  |   | 184                                           |      | —           |   | 16,651                                              |   |
| Deferred revenue                                               |   | 9,925                          |      | —                         |   | —                                |   | —           |    | 9,925                                      |   | —                                 |   | —                                        |      | —           |   | 9,925                                               |   |
| *Total current liabilities*                                    |   | $                              | 693,686   |                           | $      | 330                                   |   | $                | 13,794  |                                       | $      | (576,516                               | )      | $                                             | 131,294   |             | $      | 17,367                                              |   | $ | 2,832 |   | $ | (18,531 | ) | $ | 132,962 |   |
| Long term debt, net of current portion                         |   | 270,347                        |      | —                         |   | —                                |   | —           |    | 270,347                                    |   | 114,057                                |   | 28,136                                        |      | —           |   | 412,540                                             |   |
| Due to related parties, net of current portion                 |   | 10,618                         |      | —                         |   | —                                |   | —           |    | 10,618                                     |   | —                                 |   | —                                        |      | —           |   | 10,618                                              |   |
| Deferred revenue, net of current portion                       |   | 2,372                          |      | —                         |   | —                                |   | —           |    | 2,372                                      |   | —                                 |   | —                                        |      | —           |   | 2,372                                               |   |
| Other non-current liabilities                                  |   | 15,190                         |      | —                         |   | —                                |   | —           |    | 15,190                                     |   | —                                 |   | (1,315                                        | )         | (4,398           | )      | 9,477                                               |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total liabilities*                                            |   | $                              | 992,213   |                           | $      | 330                                   |   | $                | 13,794  |                                       | $      | (576,516                               | )      | $                                             | 429,821   |             | $      | 131,424                                             |   | $ | 29,653 |   | $ | (22,929 | ) | $ | 567,969 |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Stockholder’s (deficit) equity:                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| Capital Stock                                                  |   | —                         |      | —                         |   | —                                |   | —           |    | —                                     |   | 1,036                                  |   | —                                        |      | —           |   | 1,036                                               |   |
| Paid In Capital                                                |   | 1,489,555                      |      | 97,019                         |   | 433,036                               |   | (530,055         | )       | 1,489,555                                  |   | 1,477,261                              |   | 8,347                                         |      | (1,497,902       | )      | 1,477,261                                           |   |
| Retained Earnings                                              |   | (875,029                       | )         | 909                            |   | 81,409                                |   | (82,318          | )       | (875,029                                   | )      | (885,986                               | )      | 4,597                                         |      | 870,432          |   | (885,986                                            | )      |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
|                                                           |   | $                              | 614,526   |                           | $      | 97,928                                |   | $                | 514,445 |                                       | $      | (612,373                               | )      | $                                             | 614,526   |             | $      | 592,311                                             |   | $ | 12,944 |   | $ | (627,470 | ) | $ | 592,311 |   |
|                                                           |   |                           |      |                           |   |                                  |   |             |    |                                       |   |                                   |   |                                          |      |             |   |                                                |   |
| *Total liabilities & stockholder’s (deficit)  equity* |   | $                              | 1,606,739 |                           | $      | 98,258                                |   | $                | 528,239 |                                       | $      | (1,188,889                             | )      | $                                             | 1,044,347 |             | $      | 723,735                                             |   | $ | 42,597 |   | $ | (650,399 | ) | $ | 1,160,280 |   |

 

20

----

 

**XM SATELLITE RADIO INC.,SUBSIDIARIES AND AFFILIATES**

**UNAUDITED CONDENSED CONSOLIDATINGSTATEMENTS OF CASH FLOWS**

**FOR THE THREE-MONTH PERIOD ENDEDMARCH 31, 2003**

 
|                                                         |   | **XM  Satellite  Radio Inc** |    | **XM  Equipment  Leasing LLC** |   | **XMSR  Non-Guarantor  Subsidiaries** |   | **Eliminations** |   | **Consolidated  XM Satellite  Radio Inc.** |   | **XM Satellite  Radio  Holdings Inc** |    | **XM Holdings  Non-Guarantor  Subsidiaries** |    | **Eliminations** |   | **Consolidated  XM Satellite  Radio Holdings Inc** |    |
|--------------------------------------------------------------|--------|------------------------------|---------|--------------------------------|--------|---------------------------------------|--------|------------------|--------|--------------------------------------------|--------|---------------------------------------|---------|----------------------------------------------|---------|------------------|--------|----------------------------------------------------|---------|
|                                                         |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| *Net Cash used in  operating activities*                     |   | $                            | (70,721 | )                              | $      | (132                                  | )      | $                | (1     | )                                          | $      | (15,096                               | )       | $                                            | (85,950 | )                | $      | (7,865                                             | )       | $ | 41 |   | $ | 3,694 |   | $ | (90,080 | ) |
|                                                         |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| *Cash flows from  investing activities:*                     |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| Purchase of plant and equipment                              |   | (2,173                       | )       | —                         |   | —                                |   | —           |   | (2,173                                     | )      | —                                |    | (14                                          | )       | —           |   | (2,187                                             | )       |
| Additions to system under construction                       |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | —                                |    | —                                       |    | —           |   | —                                             |    |
| Net purchase/maturity of short-term  investments             |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | —                                |    | —                                       |    | —           |   | —                                             |    |
| Net purchase/maturity of restricted investments              |   | 22,750                       |    | —                         |   | —                                |   | —           |   | 22,750                                     |   | —                                |    | —                                       |    | —           |   | 22,750                                             |    |
| Other investing activities                                   |   | (4,952                       | )       | —                         |   | —                                |   | —           |   | (4,952                                     | )      | 9,942                                 |    | —                                       |    | —           |   | 4,990                                              |    |
| Net cash used in investing activities                        |   | $                            | 15,625  |                           | $      | —                                |   | $                | — |                                       | $      | —                                |    | $                                            | 15,625  |             | $      | 9,942                                              |    | $ | (14 | ) | $ | — |   | $ | 25,553 |   |
|                                                         |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| *Cash flows from  financing activities*                      |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| Proceeds from sale of common stock and  capital contribution |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | 33,890                                |    | —                                       |    | —           |   | 33,890                                             |    |
| Proceeds from issuance of 10% Series A  convertible. Note    |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | 203,925                               |    | —                                       |    | —           |   | 203,925                                            |    |
| Repayment of 7.75% convertible notes                         |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | (6,723                                | )       | —                                       |    | —           |   | (6,723                                             | )       |
| Other financing activities                                   |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | —                                |    | —                                       |    | —           |   | —                                             |    |
| Payments on capital lease obligations and  mortgage          |   | (807                         | )       | —                         |   | —                                |   | —           |   | (807                                       | )      | —                                |    | (107                                         | )       | —           |   | (914                                               | )       |
| Buyback of Series B preferred stock                          |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | (4,977                                | )       | —                                       |    | —           |   | (4,977                                             | )       |
| Payments for deferred financing costs                        |   | —                       |    | —                         |   | —                                |   | —           |   | —                                     |   | —                                |    | —                                       |    | —           |   | —                                             |    |
| Capital contribution from parent                             |   | 57,935                       |    | —                         |   | —                                |   | 15,096           |   | 73,031                                     |   | (69,337                               | )       | —                                       |    | (3,694           | )      | —                                             |    |
| Net cash used in financing activities                        |   | $                            | 57,128  |                           | $      | —                                |   | $                | — |                                       | $      | 15,096                                |    | $                                            | 72,224  |             | $      | 156,778                                            |    | $ | (107 | ) | $ | (3,694 | ) | $ | 225,201 |   |
|                                                         |   |                         |    |                           |   |                                  |   |             |   |                                       |   |                                  |    |                                         |    |             |   |                                               |    |
| Net increase(decrease) in cash and cash  equivalents         |   | $                            | 2,032   |                           | (132   | )                                     | (1     | )                | — |                                       | 1,899  |                                  | 158,855 |                                         | (80     | )                | — |                                               | 160,674 |   |
| Cash and cash equivalents at beginning of  period            |   | 6,348                        |    | 159                            |   | 219                                   |   | —           |   | 6,726                                      |   | 24,369                                |    | 1,723                                        |    | —           |   | 32,818                                             |    |
| Cash and cash equivalents at end of period                   |   | $                            | 8,380   |                           | $      | 29                                    |   | $                | 218    |                                       | $      | —                                |    | $                                            | 8,625   |             | $      | 183,224                                            |    | $ | 1,643 |   | $ | — |   | $ | 193,492 |   |

 

(Certain totalsmay not add due to the effect of rounding)

 

21

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**UNAUDITED CONDENSED CONSOLIDATINGSTATEMENTS OF CASH FLOWS**

**FOR THE THREE-MONTH PERIOD ENDEDMARCH 31, 2002**

 
|                                                              |   | **XM  Satellite  Radio Inc** |    | **XM  Equipment  Leasing LLC** |   | **XMSR  Non-Guarantor  Subsidiaries** |   | **Eliminations** |    | **Consolidated  XM Satellite  Radio Inc.** |   | **XM Satellite  Radio  Holdings Inc** |   | **XM Holdings  Non-Guarantor  Subsidiaries** |     | **Eliminations** |   | **Consolidated  XM Satellite  Radio Holdings Inc** |   |
|-------------------------------------------------------------------|--------|------------------------------|---------|--------------------------------|--------|---------------------------------------|--------|------------------|---------|--------------------------------------------|--------|---------------------------------------|--------|----------------------------------------------|----------|------------------|--------|----------------------------------------------------|--------|
|                                                              |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Net cash used in operating activities                             |   | $                            | (91,567 | )                              | $      | (131                                  | )      | $                | —  |                                       | $      | (11,477                               | )      | $                                            | (103,175 | )                | $      | 51,322                                             |   | $ | 41 |   | $ | (59,547 | ) | $ | (111,359 | ) |
|                                                              |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Cash flows from investing activities:                             |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Purchase of plant and equipment                                   |   | (1,399                       | )       | $                              | — |                                  | $      | —           |    | $                                          | — |                                  | $      | (1,399                                       | )        | 450              |   | 14                                                 |   | — |   | (935 | ) |
| Additions to system under construction                            |   | (7,248                       | )       | —                         |   | —                                |   | —           |    | (7,248                                     | )      | —                                |   | —                                       |     | —           |   | (7,248                                             | )      |
| Net purchase/maturity of restricted  investments                  |   | 22,750                       |    | —                         |   | —                                |   | —           |    | 22,750                                     |   | —                                |   | —                                       |     | —           |   | 22,752                                             |   |
| Other investing activities                                        |   | 488                          |    | 144                            |   | 6,640                                 |   | —           |    | 7,272                                      |   | (40,078                               | )      | —                                       |     | —           |   | (32,806                                            | )      |
| Net cash used in investing activities                             |   | $                            | 14,591  |                           | $      | 144                                   |   | $                | 6,640   |                                       | $      | —                                |   | $                                            | 21,375   |             | $      | (39,628                                            | )      | $ | 14 |   | $ | — |   | $ | (18,239 | ) |
|                                                              |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Cash flows from financing activities                              |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Proceeds from sale of common stock and  capital contribution      |   | —                       |    | —                         |   | —                                |   | —           |    | —                                     |   | 19                                    |   | —                                       |     | —           |   | 19                                                 |   |
| Other financing activities                                        |   | 72,552                       |    | —                         |   | (72,552                               | )      | —           |    | —                                     |   | —                                |   | —                                       |     | —           |   | —                                             |   |
| Payments on capital lease obligations and  mortgage               |   | (567                         | )       | —                         |   | —                                |   | —           |    | (567                                       | )      | —                                |   | (55                                          | )        | —           |   | (622                                               | )      |
| Payments for deferred financing costs                             |   | —                       |    | —                         |   | —                                |   | —           |    | —                                     |   | —                                |   | —                                       |     | —           |   | —                                             |   |
| Capital contribution from parent through  transfer of liabilities |   | 8,522                        |    | —                         |   | —                                |   | 11,477           |    | 19,999                                     |   | (79,546                               | )      | —                                       |     | 59,547           |   | —                                             |   |
| Net cash used in financing activities                             |   | $                            | 91,984  |                           | $      | —                                |   | $                | (72,552 | )                                          | $      | —                                |   | $                                            | 19,432   |             | $      | (79,527                                            | )      | $ | (55 | ) | $ | — |   | $ | (603 | ) |
|                                                              |   |                         |    |                           |   |                                  |   |             |    |                                       |   |                                  |   |                                         |     |             |   |                                               |   |
| Net increase (decrease) in cash and cash  equivalents             |   | $                            | 3,531   |                           | $      | 13                                    |   | $                | (65,912 | )                                          | $      | —                                |   | $                                            | (62,368  | )                | $      | (67,833                                            | )      | $ | — |   | $ | — |   | $ | (130,201 | ) |
| Cash and cash equivalents at beginning of  period                 |   | $                            | (4,019  | )                              | $      | 10                                    |   | $                | 66,377  |                                       | $      | —                                |   | $                                            | 62,368   |             | $      | 119,268                                            |   | $ | 865 |   | $ | — |   | $ | 182,497 |   |
| Cash and cash equivalents at end of period                        |   | $                            | 488     |                           | $      | 23                                    |   | $                | 465     |                                       | $      | —                                |   | $                                            | —   |             | $      | 51,435                                             |   | $ | 865 |   | $ | — |   | $ | 52,296 |   |

 

(certain totals may not add due to the effect ofrounding)

 

22

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Item 2.    *Management’s Discussion and Analysis of FinancialCondition and Results of Operations***

 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

Certain statements contained in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andother sections herein, including statements regarding the development of ourbusiness, the markets for our services, our anticipated capital expenditures,and other similar statements are forward-looking statements (as such term isdefined in the Private Securities Litigation Reform Act of 1995) which can beidentified as any statement that does not relate strictly to historical orcurrent facts.  Forward-looking statementsuse such words as “plans,” “expects,” “will,” “will likely result,” “areexpected to,” “will continue,” “is anticipated,” “estimate,” “project,”“believes,” “anticipates,” “intends,” “may,” “should,” “continue,” “seek,”“could” and other similar reasonable expressions.  Although we believe that our expectations are based on reasonableassumptions, we can give no assurance that our expectations will beachieved.  The important factors thatcould cause actual results to differ materially from those in theforward-looking statements herein (the “Cautionary Statements”) include,without limitation, the key factors that have a direct bearing on our futureresults of operations.  These are oursignificant expenditures and losses, unproven market for our service; health ofour satellites; potential need for additional financing, substantialindebtedness, as well as other risks referenced from time to time in filingswith the SEC, including our Form 10-K, filed April 2, 2003.  All subsequent written and oral forward-lookingstatements attributable to us or persons acting on our behalf are expresslyqualified in their entirety by the Cautionary Statements.  We do not undertake any obligation torelease publicly any revisions to such forward-looking statements to reflectthe occurrence of unanticipated events.

 

The following discussion and analysis should be readin conjunction with our Condensed Consolidated Financial Statements and Notesthereto included herewith, and with our Management’s Discussion and Analysis ofFinancial Condition and Results of Operations and audited consolidatedfinancial statements and notes thereto for the three-year period ended December31, 2002, included in our Annual Report on Form 10-K.

 

This quarterly report on Form 10-Q is filed by XMSatellite Radio Inc. XM Satellite Radio Holdings Inc. is filingseparately.  The principal differencesbetween the financial condition of Holdings and XM, which are not significantin amount, are:

 
| • | the ownership by Holdings of the corporate  headquarters building since August 2001, and the lease of the building from  Holdings by XM; |
|--------|------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                     |
| • | the presence at Holdings of additional indebtedness  not guaranteed by XM; and                                                           |
|   |                                                                                                                                     |
| • | the existence of cash balances at Holdings.                                                                                              |

 

Accordingly, the results of operations for XM and itssubsidiaries are substantially the same as the results for Holdings and itssubsidiaries discussed above except that XM incurs:

 
| • | additional rent, less depreciation and amortization  expense and less other income, in each case principally related to XM's  rental of its corporate headquarters from Holdings, which are intercompany  transactions that have been eliminated in the Holdings financial statements; |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                   |
| • | less interest expense principally related to the  additional indebtedness at Holdings; and                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                   |
| • | less interest income because of the additional cash  balances at Holdings.                                                                                                                                                                                                             |

 

**Introduction**

 

XMwas incorporated in Delaware in 1992 and Holdings became a holding company forXM in early 1997.  We emerged from thedevelopment stage in the fourth quarter of 2001, following the commencement ofour service in two test markets on September 25, 2001 and nationwide launch onNovember 12, 2001.  Accordingly, theresults for the quarter ended March 31, 2002 reflect limited commercialoperations and the direct comparison of the results of operations for thequarters ended March 31, 2003 and 2002 may not be meaningful with respect torevenue and various other line items. At the completion of the quarter ended March 31, 2003, we had 483,075subscribers.

 

Holdingsand we have raised $1.9 billion of equity and debt net proceeds through March31, 2003 from investors and strategic partners to fund our operations.  This includes $225 million of gross fundsraised in the January 2003 financing transactions.  The January 2003 financing transactions also included $250million of payment deferrals and a line of credit.  Following completion of this January 2003 financing, so long aswe meet the revenue, expense and cash flow projections of our refined businessplan, we expect to be fully funded and will not need to raise additionalfinancing to continue operations.  Ourbusiness plan contemplates the use of either insurance proceeds and/or vendorfinancing to launch replacement satellite(s).

 

Wewill continue to incur operating losses until we substantially increase thenumber of our subscribers and develop a stream of cash flow sufficient to coveroperating costs.  We also havesignificant outstanding contracts and commercial commitments that need to bepaid in cash or through credit facilities over the next several years,including to fund subsidies and distribution costs, particularly under ourarrangement with General Motors, programming costs, repayment of long-termdebt, lease payments and service payments, as further described below under theheading “Liquidity and Capital Resources—Contractual Obligations and CommercialCommitments.” Our ability to become profitable also depends upon other factorsidentified below under the heading “Liquidity and Capital Resources—FutureOperating and Capital Resource Requirements.”

 

23

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**XMSATELLITE RADIO INC. AND SUBSIDIARIES**

 

**NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

 

**Results of Operations**

 

To better explain ourperformance during 2003 and on an on-going basis, we have expanded the numberof revenue and expense categories to better reflect the drivers of thebusiness.  Descriptions for expandedrevenue and expense categories are outlined below.

 

*Subscription Revenue*

Subscription includes fees from basic and premiumservice net of subscription-related promotions.

 

*Activation Revenue*

Activation & Equipment includes amortization ofsubscription activation fees over the estimated average life of a subscriber. 

 

*Equipment Revenue*

Equipment includes revenue from XM's direct sales ofradios.

 

*Net Ad Sales Revenue*

Net Ad Sales includes revenue from sales ofadvertisements and programming sponsorships to advertisers on the XM network,net of agency commissions.

 

*Cost of Revenue*

Costs of Revenue are those expenses directly relatedto the generation of subscriber and advertising revenue and have variable andfixed components.  Cost of Equipment,Revenue Share & Royalties, along with Customer Care & Billing tend tofluctuate along with increases and decreases in revenues and/orsubscribers.  Satellite &Terrestrial, Broadcast & Operations and Programming & Content are notexpected to fluctuate directly with changes in revenue and/or subscribers.  Ad Sales, which includes internal andexternal costs directly associated with selling advertisements on the XMnetwork, tends to fluctuate with increases and decreases in advertisingrevenue.

 

*Research & Development*

Research & Development is a discretionary expenseused primarily to drive new product development and radio component and radiounit cost reductions.

 

*General & Administrative*

General & Administrative expenses include legal,human resources, accounting and other overhead costs.

 

*Marketing*

Marketing includes: Retention & Support, which arethose indirect costs that are not associated with gaining a subscriber and arenot expected to fluctuate directly with changes in revenue and/or subscribers;Subsidies & Distribution, which includes commissions to radio manufacturersand distribution partners that are based on the number of radios manufacturedor the number of new subscribers added in the period (these costs havepreviously been referred to as “Subscriber Acquisition Costs” or “SAC”);Marketing, which are those discretionary costs including advertising, media andevents, as well as marketing materials for retail and automotive dealer pointsof presence.  Amortization of the GMLiability includes the straight-line accounting treatment of the fixedobligation to General Motors.  Weconsider subscriber acquisition costs to include radio manufacturer subsidies,certain sales, activation and installation commissions, and subscriber product-and hardware-related incentives. (Subscriber acquisition costs do not include ongoing loyalty payments toretailers and distribution partners, payments under revenue sharingarrangements with radio manufacturers and distributors and certain guaranteedpayments to General Motors.) We consider Cost Per Gross Addition (CPGA) toinclude the amounts in SAC, as well as advertising, media and most marketingexpenses.

 

*EBITDA*

Net loss before interest income, interest expense,income taxes, depreciation and amortization is commonly referred to in ourbusiness as “EBITDA.” EBITDA is not a measure of financial performance undergenerally accepted accounting principles. As a result of regulatory changes, EBITDA now includes Other Income(Expense).  We believe EBITDA is often auseful measure of a company's operating performance and is a significant basisused by our management to measure the operating expenditure of large amounts ofcapital, our results of operations reflect significant charges fordepreciation, amoritization and interest expense.  EBITDA, which excludes this information, provides helpful informationabout the operating performance of our business, apart from the expensesassociated with our physical plant or capital structure.  EBITDA is frequently used as one of thebases for comparing businesses in our industry, although our measure of EBITDA maynot be comparable to similarly titled measures of other companies. EBITDA doesnot purport to represent operating activities, as those terms are defined undergenerally accepted accounting principles, and should not be considered as analternative to those measuresments as an indicator of our performance.

 

24

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|                                                                                 |   | **March 31,**                             |    |
|--------------------------------------------------------------------------------------|--------|-------------------------------------------|---------|
|                                                                                 |   | **2003**                                  |    | **2002** |   |
|                                                                                 |   | **(In  thousands, except share amounts)** |    |
| Revenue:                                                                             |   |                                      |    |   |   |
| Subscriber  revenue:                                                                 |   |                                      |    |   |   |
| Subscription                                                                         |   | $                                         | 11,590  |   | $ | 1,365 |   |
| Activation                                                                           |   | 295                                       |    | 24 |   |
| Total  subscribers                                                                   |   | 11,885                                    |    | 1,389 |   |
| Equipment  revenue                                                                   |   | 592                                       |    | — |   |
| Net ad sales                                                                         |   | 448                                       |    | 391 |   |
| Royalties &  other                                                               |   | 127                                       |    | 5 |   |
| Total revenue                                                                        |   | 13,052                                    |    | 1,785 |   |
|                                                                                 |   |                                      |    |   |   |
| Operating  expenses                                                                  |   |                                      |    |   |   |
| Cost of Revenue  (excludes depreciation and amortization, shown below):              |   |                                      |    |   |   |
| Revenue share  & royalties                                                       |   | 3,883                                     |    | 612 |   |
| Cost of  equipment                                                                   |   | 1,113                                     |    | — |   |
| Ad sales                                                                             |   | 437                                       |    | 167 |   |
| Customer care  & billing                                                         |   | 4,842                                     |    | 2,487 |   |
| Satellite &  terrestrial                                                         |   | 12,571                                    |    | 10,478 |   |
| Broadcast &  operations:                                                         |   |                                      |    |   |   |
| Broadcast                                                                            |   | 2,566                                     |    | 1,741 |   |
| Operations                                                                           |   | 3,938                                     |    | 3,668 |   |
| Total broadcast  & operations                                                    |   | 6,504                                     |    | 5,409 |   |
| Programming  & content                                                           |   | 4,787                                     |    | 6,024 |   |
| Total cost of  revenue                                                               |   | 34,137                                    |    | 25,177 |   |
| Research &  development (excludes depreciation and amortization, shown below):   |   | 2,467                                     |    | 2,324 |   |
| General &  administrative (excludes depreciation and amortization, shown below): |   | 8,805                                     |    | 5,323 |   |
| Marketing  (excludes depreciation and amortization,  shown below):              |   |                                      |    |   |   |
| Retention &  support                                                             |   | 4,914                                     |    | 2,897 |   |
| Subsidies and  distribution                                                          |   | 11,722                                    |    | 9,561 |   |
| Advertising  & marketing                                                         |   | 11,349                                    |    | 33,127 |   |
| Marketing                                                                            |   | 27,985                                    |    | 45,585 |   |
| Amortization of  GM liability                                                        |   | 7,626                                     |    | 745 |   |
| Total marketing                                                                      |   | 35,611                                    |    | 46,330 |   |
| Depreciation  & amortization                                                     |   | 39,414                                    |    | 22,140 |   |
| Total operating  expenses                                                            |   | 120,434                                   |    | 101,294 |   |
| Operating loss                                                                       |   | (107,382                                  | )       | (99,509 | ) |
| Interest income                                                                      |   | 42                                        |    | 960 |   |
| Interest expense                                                                     |   | (21,340                                   | )       | (12,983 | ) |
| Other income  (expense)                                                              |   | (2,316                                    | )       | (102 | ) |
| Net loss                                                                             |   | (130,996                                  | )       | (111,633 | ) |
| EBITDA(1)                                                                            |   | $                                         | (70,284 | ) | $ | (77,470 | ) |

 

----

| (1) |   | Net loss before interest income, interest expense,  income taxes, depreciation and amortization is commonly referred to in our  business as “EBITDA.” EBITDA is not a measure of financial performance under  generally accepted accounting principles.   We believe EBITDA is often a useful measure of a company’s operating  performance and is a significant basis used by our management to measure the  operating performance of our business.   Because we have funded and completed the build-out of our system  through the raising and expenditure of large amounts of capital, our results  of operations reflect significant charges for depreciation, amortization and  interest expense.  EBITDA, which  excludes this information, provides helpful information about the operating  performance of our business, apart from the expenses associated with our  physical plant or capital structure.   EBITDA is frequently used as one of the bases for comparing businesses  in our industry, although our measure of EBITDA may not be comparable to  similarly titled measures of other companies.  EBITDA does not purport to represent operating loss or cash  flow from operating activities, as those terms are defined under generally  accepted accounting principles, and should not be considered as an  alternative to those measurements as an indicator of our performance. |
|-----|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

25

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|                                           |   | **Three Months Ended March 31,** |     |
|------------------------------------------------|--------|----------------------------------|----------|
|                                           |   | **2003**                         |     | **2002** |   |
| Reconciliation of Net Loss to EBITDA           |   |                             |     |   |   |
| Net loss as reported                           |   | $                                | (130,996 | ) | $ | (111,633 | ) |
| Add back non-EBITDA items included in net loss |   |                             |     |   |   |
| Interest income                                |   | (42                              | )        | (960 | ) |
| Interest expense                               |   | 21,340                           |     | 12,983 |   |
| Depreciation & amortization                |   | 39,414                           |     | 22,140 |   |
| EBITDA                                         |   | $                                | (70,284  | ) | $ | (77,470 | ) |

 

***Three months Ended March 31, 2003 Compared With Three MonthsEnded March 31, 2002***

 

**Revenue**

 

*Revenue*.    Ourrevenue consists of subscription fees, activation charges, limited direct salesof radios, advertising sales, and revenue earned from royalties.  During the three-month period ended March31, 2003, we recognized $13.1 million in total revenue, compared to $1.8million during the three-month period ended March 31, 2002, an increase of$11.3 million.  During the three-monthperiod ended March 31, 2003, subscription related revenues comprised over 91%of our total revenues.  As of March 31,2003, we had 483,075 subscribers, compared to 76,242 at March 31, 2002, anincrease of 406,833 subscribers.  Weconsider subscribers to be those who are receiving and have agreed to pay forour service, either by credit card or by invoice, including those who arecurrently in promotional periods.  Weexpect revenue to increase as we continue to add subscribers and to attractadditional advertisers.

 

*SubscriberRevenue*.    Revenue from subscribersconsists of subscription revenue and activation revenue.  Subscriber related revenue was $11.9 millionduring the three-month period ended March 31, 2003, compared to $1.4 millionduring the three-month period ended March 31, 2002.  For the three months ended March 31, 2003, subscription revenueincludes $1.1 million from GM for subscription fees paid under certainpromotional agreements.  Subscriptionrevenue consists primarily of our monthly subscription fees charged toconsumers, commercial establishments and fleets, which are recognized as theservice is provided.  Subscriptionrevenue also includes revenues from premium service.  Our subscriber arrangements are cancelable, without penalty.  Promotions and discounts are treated as areduction to revenue during the period of the promotion.  Sales incentives, consisting of rebates tosubscribers, offset revenue.

 

*SubscriptionRevenue.*    Total subscription revenueduring the three-month period ended March 31, 2003 was $11.6 million, comparedto $1.4 million during the three-month period ended March 31, 2002, an increaseof $10.2 million.  Average monthlysubscription revenue per subscriber (ARPU) was approximately $9.34 during thethree-month period ended March 31, 2003, and $9.27 during the three-month periodended March 31, 2002.  Average monthlysubscription revenue per subscriber is derived from the total of earnedsubscription revenue (net of promotions and rebates) divided by the monthlyweighted average number of subscribers for the period reported.  Average monthly revenue per subscriber is ameasure of operational performance and not a measure of financial performanceunder generally accepted accounting principles.

 

*ActivationRevenue*.    Activation revenue iscomprised of one-time activation charges billed to customers.  Activation fees are non-refundable, and arerecognized on a pro-rata basis over the estimated average term of thesubscriber relationship.  We expect thisestimate to be further refined in the future as additional historical data becomesavailable.  During the three-month periodended March 31, 2003, we recognized $0.3 million in activation revenue comparedto $24,000 during the three-month period ended March 31, 2002.    We expect activation revenue to increaseas we increase subscribers.

 

*EquipmentRevenue*.    Equipment revenue iscomprised of revenues from any direct sales of radios.  Through March 31, 2003, the direct sales ofradios have generally been for promotional purposes.  During the three-month period ended March 31, 2003, we recognized$0.6 million in equipment revenue compared to $0 during the three-month periodended March 31, 2002.  We expect revenuefrom the sale of equipment to increase proportionately with the increase indirect sales of equipment by XM.

 

*Net AdSales Revenue*.    Advertising revenueconsists of sales of advertisements and program sponsorships on theXM network to advertisers that are recognized in the period in which theyare broadcast.  Advertising revenue

 

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includes advertising aired in exchange for goods and services (barter),which is recorded at fair value. Advertising revenue is presented net of national agency fees in theConsolidated Statements of Operations, which is consistent with industrypractice.  During both the three-month periodsended March 31, 2003 and March 31, 2002, we recognized $0.4 million in netadvertising revenue.  These amounts arenet of agency commissions, which were $74,000 during the three-month periodended March 31, 2003, compared to $64,000 during the three-month period endedMarch 31, 2002.

 

*Royalties& Other Revenue*.    Royalty &other revenue earned during the three-month period ended March 31, 2003consisted of royalty revenue from certain tuners manufactured during 2003, andother broadcast revenue.  We recognized$127,000 of royalty and other revenue during the three-month period ended March31, 2003 compared with $5,000 during the three-month period ended March 31,2002.

 

**Operating Expenses**

 

*TotalOperating Expenses*.    Total operatingexpenses were $120.4 million during the three-month period ended March 31, 2003compared to $101.3 million during the three-month period ended March 31, 2002,an increase of $19.1 million or 19%. The increase was due primarily to an increase in cost of revenue of $9.0million attributable to increased sales, an increase in general andadministrative expenses of $3.5 million and an increase in depreciation andamortization of $17.3 million resulting from a reduction in the useful life ofour satellites, offset in part by a decline in marketing expenses of $10.7million due to a decrease in consumer advertising media expenses.

 

*Cost ofRevenue.*    Cost of revenue includescosts of radios associated with radio sales, revenue share & royalties,customer care & billing costs, satellite & terrestrial operating costs,cost of broadcast and operations, programming & content and costs directlyassociated with the sales of advertising. These combined costs were $34.1 million during the three-month periodended March 31, 2003, up from $25.2 million during the three-month period endedMarch 31, 2002, an increase of $8.9 million or 35%.

 

*Cost ofEquipment*.    During the three-monthperiod ended March 31, 2003, we incurred $1.1 million relating to promotionalradios and radio kits that we sold directly to subscribers, compared to $0during the three-month period ended March 31, 2002.  The cost of equipment will increase as we increase the directsales of equipment by XM.

 

*RevenueShare & Royalties.*    Revenue share& royalties includes royalties paid to radio technology providers, revenueshare payments to content providers, and performance rights obligations tocomposers, artists, and copyright owners for public performances of theircreative works broadcast on XM.  Thesecosts were $3.9 million during the three-month period ended March 31, 2003compared to $0.6 million during the three-month period ended March 31,2002.  This increase of $3.3 million wasa result of our growth in subscriber base and increase in revenues of $11.3million along with completion of negotiations for performance rightsroyalties.  These total costs willincrease with subscriber growth.

 

*AdSales*.    Ad sales expense was $0.4million during the three-month period ended March 31, 2003 compared to $0.2million during the three-month period ended March 31, 2002, an increase of $0.2million.  The increase in ad salesexpense is due primarily to an increase in advertising representation fees.

 

*CustomerCare & Billing.*    Customer care& billing operations expense includes expenses from outsourced customercare functions and was $4.8 million during the three-month period ended March31, 2003, compared with $2.5 million during the three-month period ended March31, 2002, an increase of $2.3 million or 92%. This increase resulted from the increase in the number ofsubscribers.  Customer care &billing operations expense will continue to increase as we continue to addsubscribers.

 

*Satellite& Terrestrial.*    Satellite &terrestrial includes telemetry, tracking and control of our two satellites,in-orbit satellite insurance and incentive payments, satellite uplink, and allcosts associated with operating our terrestrial repeater network such as power,maintenance and lease payments.  Theseexpenses were $12.6 million during the three-month period ended March 31, 2003,compared with $10.5 million during the three-month period ended March 31, 2002,an increase of $2.1 million or 20%. This increase primarily

 

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resulted from a charge for the termination anddeconstruction of terrestrial repeater sites no longer required in our existingnetwork.

 

*Broadcast& Operations*

 

*Broadcast.*    Broadcastexpenses include costs associated with the management and maintenance of thesystems, software, hardware, production and performance studios used in thecreation and distribution of XM-original and third party content.  The advertising trafficking (scheduling andinsertion) functions are also included. Broadcast costs were $2.6 million during the three-month period endedMarch 31, 2003, compared to $1.7 million during the three-month period endedMarch 31, 2002, an increase of $0.9 million or 52.9%.  The increase is due primarily to increases in computer licensefees and software maintenance expense.

 

*Operations.*    Operations,which includes facilities and information technology expense, was $3.9 millionduring the three-month period ended March 31, 2003, compared with $3.7 millionduring the three-month period ended March 31, 2002, an increase of $0.2 millionor 5%.  The increase in operationsexpense during the three-month ended March 31, 2003 is due primarily toincreased software maintenance expenses, higher telecom costs and higheroperating lease expenses for IT systems.

 

*Programming& Content*.    Programming &content includes the creative and production costs associated with our 101channels of XM-original and third party content.  This includes costs of programming staff and fixed payments forthird party content.  Programming &content expense was $4.8 million during the three-month period ended March 31,2003, compared with $6.0 million during the three-month period ended March 31,2002, a decrease of $1.2 million or 20%. The decrease is due primarily to decreases in payroll and payrollrelated costs from a reduction in headcount which occurred in November 2002.

 

*Research& Development*.    Research &development includes the costs of new product development, chipset design, andengineering.  These combined expenseswere $2.5 million during the three-month period ended March 31, 2003, comparedwith $2.3 million during the three-month period ended March 31, 2002, anincrease of $0.2 million or 8.7%.  Theincrease in research and development expense is due primarily to increasedactivities in new product development and costs associated with thereallocation of certain personnel to research and development.  Research and development expenses willcontinue to increase as we accelerate the development of future telematicsapplications and new products, including interoperable radios.

 

*General& Administrative*.    General &administrative expense was $8.8 million during the three-month period endedMarch 31, 2003, compared with $5.3 million during the three-month period endedMarch 31, 2002, an increase of $3.5 million or 66%.  The increase in general & administrative expense primarilyresulted from increases in professional service fees and director and officerinsurance premiums

 

*Marketing*.    Marketingincludes the costs of retention & support, subsidies & distribution,advertising & marketing, and amortization of our liability to GM.  These combined costs were $35.6 millionduring the three-month period ended March 31, 2003, compared to $46.3 millionduring the three-month period ended March 31, 2002, a decrease of $10.7million, or 23.1%.  Marketing expensedecreased primarily due to a decrease in consumer advertising media expenses of$21.8 million offset by increases in retention & support of $2.0 million,subsidies & distribution of $2.2 million and amortization of GM liabilityof $6.9 million.

 

*Retention& Support*.    Retention & supportconsists primarily of marketing related overhead expenses.  During the three-month period ended March31, 2003, these costs were $4.9 million compared to $2.9 million during thethree-month period ended March 31, 2002, an increase of $2.0 million.  The increase is due primarily to an increasein amounts due to our distribution partners.

 

*Subsidies& Distribution*.    We currentlyprovide incentives and subsidies for the manufacture, purchase, installationand activation of XM radios to attract and retain our manufacturing anddistribution partners.  Our subsidy anddistribution costs are significant and totaled approximately $11.7 millionduring the three-month period

 

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ended March 31, 2003, compared with $9.6 million during the three-monthperiod ended March 31, 2002, an increase of $2.1 million or 22% due primarilyto the increase in subscriber and new activations.

 

*SubscriberAcquisition Costs.*    We considersubscriber acquisition costs to include radio manufacturer subsidies, certainsales, activation and installation commissions, and subscriber product- andhardware-related incentives.  Thesecosts are represented in Subsidies & Distribution.  Subscriber acquisition costs do not includeongoing loyalty payments to retailers and distribution partners, payments underrevenue sharing arrangements with radio manufacturers and distributors andcertain guaranteed payments to General Motors. During the three-month period ended March 31, 2003 and 2002, we incurredexpenses of $11.2 million, and $9.4 million, respectively, related tosubscriber acquisition costs.  Ouraverage subscriber acquisition cost was $74.36 during the three-month periodended March 31, 2003.

 

*Advertising& Marketing*.    Activities comprisingthese expenses include media, advertising, events and direct marketingprograms.  Advertising & marketingcosts were $11.3 million during the three-month period ended March 31, 2003compared with $33.1 million during the three-month period ended March 31, 2002,a decrease of $21.8 million or 66%.  Thedecrease is due to a decrease in consumer advertising media.

 

*CostPer Gross Addition*.    We consider CPGAto include the amounts in SAC, as well as advertising, media and most marketingexpenses.  In our financial statements,SAC costs are captured in the Subsidies & Distribution, while CPGA costsare captured by the combination of the Subsidies & Distribution,Advertising & Marketing, plus the negative margins from equipmentsales.  CPGA does not include marketingstaff and subscriber communication costs (included in Retention & Support)or the amortization of the GM guaranteed payments (included in Amortization ofGM Liability).  During the three-monthsended March 31, 2003 and 2002, we incurred expenses of $23.8 million and $42.7million, respectively.  CPGA for thethree-month period ended March 31, 2003 and 2002 was $156 and $875,respectively.  The decline in CPGA forthe three-month period ended March 31, 2003 as compared to the three-monthperiod ended March 31, 2002 is due to the combined impacts of the decline inadvertising and marketing expenses as well as the increase in the number of newsubscribers during the quarter.

 

*Amortizationof GM Liability*.    These costs includethe amortization of annual fixed guaranteed payment commitments to GeneralMotors, aggregating to $439 million, under our long-term distribution agreementwith the OnStar division of GM providing for the installation of XM radios inGM vehicles.  Amortization of the GMliability was $7.6 million for the three-month period ended March 31, 2003,compared with $0.7 million for the three-month period ended March 31,2002.   The distribution agreement wasamended in June 2002 and then again in January 2003, as described under thecaptions “Liquidity and Capital Resources—Capital Resources and Financing.” Asa result of the January 2003 amendment and GM’s current roll out plans, commencingin February 2003 we began recognizing the fixed annual payments due throughSeptember 2013, which approximate $397.3 million, on a straight-linebasis.  In January 2003, we expensed thepro rata portion of the fixed payment that was based on the June 2002 amendmentto the agreement.

 

*Depreciation& Amortization*.    Depreciation &amortization expense was $39.4 million during the three-month period endedMarch 31, 2003, compared with $22.1 million during the three-month period endedMarch 31, 2002, an increase of $17.3 million or 78%  The increase in depreciation and amortization expense primarilyresulted from the reduction in the useful lives of our in-orbit satellites from17.5 years to 6.75 years during the third quarter of 2002 due to a solar arrayoutput power anomaly.

 

*InterestIncome*.    Interest income was $42,000during the three-month period ended March 31, 2003, compared with $960,000during the three-month period ended March 31, 2002, a decrease of $918,000 or96%.  The decrease was the result oflower average balances of cash and cash equivalents during the three-monthperiod March 31, 2003 as well as lower yields on our investments due to marketconditions.

 

*InterestExpense*.    We recorded interest expenseof $21.3 million and $13.0 million during the three-month period ended March31, 2003 and 2002, respectively.

 

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*OtherIncome (Expense), net*.     Other income(expense), net was $(2.3) million during the three-month period ended March 31,2003, compared with $(0.1) million the three-month period ended March 31, 2002,an increase of $(2.2) million.  Theincrease resulted primarily from losses of $(2.1) million from the retirementof debt with a face value of $17.9 million. Other income (expense), net for thethree months ended March 31, 2002 consists primarily of income from rental ofoffice space in our corporate headquarters to third parties.

 

*NetLoss*.    Net loss during the three-monthperiod ended March 31, 2003 was $127.3 million, compared with $111.6 millionfor the three-month period ended 2002, an increase of $15.7 million or14%.  The increase primarily reflectsincreases in operating expenses, offset in part by the growth in our revenue.

 

*EBITDA*.    Netloss before interest income, interest expense, income taxes, depreciation andamortization is commonly referred to in our business as “EBITDA.” EBITDA is nota measure of financial performance under generally accepted accountingprinciples.  The decrease is dueprimarily to an increase in operating expense in connection with our ramp-up ofcommercial operations, offset in part by the growth in our revenue.  EBITDA during the three-month period endedMarch 31, 2003 was $(70.3) million, compared with $(77.5) million during thethree- month period ended March 31, 2002. We believe EDITDA is often a useful measure of a company’s operatingperformance and is a significant basis used by our management to measure theoperating performance of our business. Because we have funded and completed the build-out of our system throughthe raising and expenditure of large amounts of capital, our results ofoperations reflect significant charges for depreciation, amortization andinterest expense.  EBITDA, which excludesthis information, provides helpful information about the operating performanceof our business, apart from the expenses associated with our physical plant orcapital structure.  EBITDA is frequentlyused as one of the bases for comparing businesses in our industry, although ourmeasure of EBITDA may not be comparable to similarly titled measures of othercompanies.  EBITDA does not purport torepresent operating activities, as those terms are defined under generallyaccepted accounting principles, and should not be considered as an alternativeto those measurements as an indicator of our performance.  The reconciliation of net loss to EBITDA isas follows.

 
|                                            |   | **Three Months Ended March 31,** |     |
|-------------------------------------------------|--------|----------------------------------|----------|
|                                            |   | **2003**                         |     | **2002** |   |
| Net loss as reported                            |   | $                                | (130,996 | ) | $ | (111,633 | ) |
| Add back non-EBITDA items included in net loss: |   |                             |     |   |   |
| Interest income                                 |   | (42                              | )        | (960 | ) |
| Interest expense                                |   | 21,340                           |     | 12,983 |   |
| Depreciation & amortization                 |   | 39,414                           |     | 22,140 |   |
| EBITDA                                          |   | $                                | (70,284  | ) | $ | (77,470 | ) |

 

**Liquidity and Capital Resources**

 

At March 31, 2003, we had total cash and cashequivalents of $8.6 million, which excludes $8.9 million of restrictedinvestments, and working capital of $158.7 million.  Cash and cash equivalents increased $1.9 million during the threemonths ended March 31, 2003.  Theincrease resulted from $72.2 million provided by financing activities and $15.6million provided by investing activities, offset by $85.9 million used inoperating activities.  The proceeds fromfinancing activities resulted primarily from a private placement in January2003 that resulted in the issuance of the Parent’s 10% Senior Secured DiscountConvertible Notes that yielded gross proceeds of $210 million and the issuanceof 5.5 million shares of the Parent’s Class A common stock that yielded grossproceeds of $15 million.  The financingactivities completed during the quarter are more fully discussed below.  Investing activities consisted primarily ofproceeds provided from the maturity of restricted investments.  Cash flows used in operating activitiesincludes the net loss of $131.0 million and the net cash used by our operatingassets and liabilities, offset in part by non-cash expenses included in the netloss.

 

By comparison, at March 31, 2002 we had cash, cashequivalents and short-term investments of $0 million, which excludes $49.0million of restricted investments, and working capital of $(43.2) million.  This amount reflects $103.2 million cashused in operations, $21.4 million cash provided by investing activities, and$19.4 million cash provided by financing activities during the three-monthperiod ended March 31, 2002.  Cash flowused in operations

 

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during the three-month period ended March 31, 2002 reflected commercialoperations.  Investing activitiesconsisted primarily of capital expenditures for infrastructure and systemcompletion.

 

Holdings and we have raised $1.9 billion of equity anddebt net proceeds from inception through March 31, 2003 from investors andstrategic partners to fund our operations. This includes $225 million of gross funds raised in the January 2003financing transactions.  The January2003 financing transactions also included $250 million of payment deferrals anda line of credit.  Although asignificant portion of the proceeds from the recent financing transactions areheld by Holdings, we have entered into an agreement with Holdings under whichHoldings has agreed to contribute funds to us as needed to fund ouroperations.  So long as our businessgenerates positive cash flow in accordance with our recently refined businessplan, we will not need to raise additional financing to continue operations asfurther described below under the heading “Future Operating and CapitalResource Requirements.”  Our refinedbusiness plan contemplates the use of either insurance proceeds and/or vendorfinancing to launch replacement satellite(s). These funds have been used to acquire our DARS license, make requiredpayments for our system, including the satellites, terrestrial repeater system,and ground networks, and for working capital and operating expenses.

 

***January 2003 Financing Transactions***

 

In January 2003, Holdings and we completed a privateplacement of $279.3 million aggregate principal amount at maturity of our 10%Senior Secured Discount Convertible Notes due December 31, 2009, which yieldedgross proceeds of $210.0 million, and a private placement of 5,555,556 sharesof our Class A common stock, which yielded gross proceeds of $15.0million.  Concurrently with these transactions,we completed an exchange offer in which we exchanged $300.2 million aggregateprincipal amount of XM’s previously outstanding 14% Senior Secured Notes due2010 for $438.0 million aggregate principal amount at maturity ($300.2 millionaccreted value as of March 15, 2003) of 14% Senior Secured Discount Notes due2009, cash and warrants to purchase Holdings’ Class A common stock.

 

In January 2003, General Motors provided us with a$100.0 million Senior Secured Credit Facility, maturing as late as December2009, that enables us to make monthly draws to finance payments that become dueunder our distribution agreement with OnStar Corporation and other GMpayments.  Holdings and XM areco-borrowers under this credit facility. The outstanding principal amount of all draws will be due December 31,2009 and bear interest at the applicable 90-day LIBOR rate plus 10%.  We will be able to make interest payments inshares of Holdings’ Class A common stock having an aggregate fair market valueat the time of payment equal to the amount of interest due.  The fair market value will be based on theaverage daily trading prices of the Holdings’ Class A common stock over the tenbusiness days prior to the day the interest payment is due.  We have the option to prepay all draws inwhole or in part at any time but will not be able to re-borrow any prepaidamounts.  Beginning in 2005, we will berequired to prepay the amount of any outstanding advances in an amount equal tothe lesser of (i) 50% of our excess cash and (ii) the amount necessary toprepay the draws in full.  In order tomake draws under the credit facility, we are required to have a certain minimumnumber of subscribers that are not originated by GM and a minimum pre-marketingcash flow.

 

In January 2003, Holdings and we issued a 10% SeniorSecured Convertible Note due December 31, 2009 in the amount of $89.0 millionto General Motors’ subsidiary, OnStar Corporation.  The note was provided in lieu of our obligation to make $115million in guaranteed payments to OnStar under the distribution agreement from2003 to 2006.  The note becomesconvertible at the holder’s option on a quarterly basis through 2006, at 90% ofthe then fair market value of our Class A common stock but subject to a $5.00per share minimum and escalation maximum (up to $20 per share) for each fiscalyear.  Interest would be payable in cashor shares of Holdings’ Class A common stock, at Holdings’ option, at fairmarket value at the time of payment.

 

In January 2003, General Motors provided Holdings andus with the ability to satisfy up to $35.0 million in future subscriberacquisition payments (“subscriber acquisition payments”) that we may owe toOnStar under the distribution agreement in shares of Holdings’ Class A commonstock, valued at fair market value at the time of payment.

 

***Other Equity Issuances and De-leveragingTransactions***

 

In February and March 2003,Holdings issued 4,527,947 shares of its Class A common stock for gross proceedsof $19.6 million under its Direct Stock Purchase Program (DSPP).

 

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Concurrent with the funds raised by Holdings throughits DSPP in February and March 2003, Holdings and us (i) entered intoagreements with certain holders of our outstanding notes to exchange $38.9million carrying value, or $46.1 million fully accreted face value at maturity,of their notes, for $6.7 million in cash consideration and 4,352,375 shares ofHoldings' Class A common stock; and (ii) entered into agreements with certainholders of Holdings' 8.25% Series B convertible redeemable preferred stock toexchange $12.3 million in shares of Series B preferred stock for $5.0 millionin cash consideration.  Additionally,Holdings entered into agreements with certain holders of its Class A commonstock warrants to exchange 28.145 warrants convertible into 2,392,325 shares ofits Class A common stock for 1,669,400 shares of its common stock.

 

In April 2003, Holdings issued 4,880,847 shares of itsClass A common stock for gross proceeds of $30.4 million under its DSPP.  Concurrent with the funds raised through theDSPP in April 2003 and through May 6, 2003, Holdings and us (i) entered intoagreements with certain holders of outstanding notes to exchange $49.5 millioncarrying value, or $70.9 million fully accreted face value at maturity, oftheir notes for 5,775,000 shares of Class A common stock; and (ii) entered intoagreements with certain holders of Holdings' 8.25% Series B convertibleredeemable preferred stock to exchange $7.4 million in shares of Series Bpreferred stock for $5.2 million in cash consideration.  Additionally, Holdings and us entered intoagreements with certain holders of Holdings' Class A common stock warrants toexchange 15,000 warrants convertible into 1,275,000 shares of Holdings' Class Acommon stock for 978,000 shares of Holding's common stock.

 

As a result of these de-leveraging transactions,Holdings and we have eliminated approximately $108 million of carrying value ofdebt and preferred securities or approximately $137 million of face amount atmaturity.  Holdings and us haveeliminated $2.1 million carrying value ($2.0 million face amount) of our 14%Senior Secured Notes due 2010, $65.5 million carrying value ($94.2 million faceamount) of our 14% Senior Secured Discount Notes due 2009 issued in January 2003,$20.9 million carrying value ($20.9 million face amount) of Holdings' 7.75%Convertible Subordinated Notes due 2006 and $19.7 million of Holdings' Series Bpreferred stock.

 

As a result of our financings and other issuances ofsecurities, the conversion price of the Series C preferred stock issued inAugust 2000 has been adjusted from $26.50 to $9.11, the exercise price of thewarrants sold in March 2000 from $49.50 to $44.69 and the number of warrantshares from 8.024815 to 8.888615. There was no impact on the consolidatedresults of operations as a result of the adjustments to these prices.

 

We expect that our future working capital, capitalexpenditures, and debt service requirements will be satisfied from existingcash, cash equivalents, and short-term investments augmented by the results ofour January 2003 financing activities described below and by cash generatedfrom operations, except for the financing of replacement satellites.  Our business plan contemplates thatfinancing for replacement satellites would be provided by insurance proceedsand/or vendor financing.

 

***Future Operating and Capital Resource Requirements***

 

We have refined our business plan based on what wehave learned during our first full year of commercial service and our availableresources.  We are focusing on the newautomobile market to take advantage of our relationships with automobilemanufacturers, the introduction of lower-priced and more user-friendly radiotechnology in the retail aftermarket and the use of our most productivedistribution channels.  We have alsoreduced spending on advertising and streamlined our workforce.  Provided that we meet the revenue, expenseand cash flow projections of our refined business plan, we expect to be fullyfunded and will not need to raise additional financing to continueoperations.  Our business plancontemplates the use of either insurance proceeds and/or vendor financing tolaunch replacement satellite(s).

 

Our business plan is based on estimates regardingexpected future costs and expected revenue. Our costs may exceed or our revenues may fall short of our estimates,our estimates may change, and future developments may affect ourestimates.  Any of these factors mayincrease our need for funds, which would require us to seek additionalfinancing.  In addition, we may seekadditional financing to undertake initiatives not contemplated by our businessplan or obtain additional cushion against possible shortfalls.  We may pursue a range of different sizes ortypes of financing as opportunities arise, particularly the sale of additionalequity securities.  However, we may notbe able to raise additional funds on favorable terms or at all.  Our ability to obtain additional financingdepends on several factors, including future market conditions; our success orlack of success in developing, implementing and marketing our satellite radioservice; our future creditworthiness; and restrictions contained in agreementswith our

 

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investors or lenders.  Thesefinancings could increase our level of indebtedness or result in furtherdilution to our equity holders.  We haveand may continue to take advantage of opportunities to reduce our level ofindebtedness in exchange for issuing equity securities, if these transactionscan be completed on favorable terms.

 

If we fail to obtain necessary financing on a timelybasis, a number of adverse effects could occur.  We could default on our commitments to creditors or others andmay have to discontinue operations or seek a purchaser for our business orassets.

 

Our need for additional funds may also be affected byfuture developments.  In late August2001, BSS advised us of a progressive degradation problem with the solar arrayoutput power of Boeing 702 class satellites, including XM “Rock” and XM “Roll.”At the present time, the output power of the solar arrays and the broadcastsignal strength are above minimum acceptable levels and are expected to remainthat way at least through 2005, permitting full operation of the XM System(based on patterns projected by BSS). We have launch and in-orbit insurance policies that provide coverage tous for a total, constructive total or partial loss of either of our satellites wheresuch loss arises from an occurrence within the first five years after launch(both satellites were launched during the first half of 2001).  The aggregate sum insured in the event ofthe total or constructive total loss of our satellites is $400 million ($200million per satellite).  In September2001, we advised our insurance carriers that the aforementioned solar arraysituation was likely to result in a claim under our in-orbit insurance policiesand, in the first quarter of 2003, we filed a claim with the insurance carriersfor the aggregate sum insured (less applicable salvage); we believe we willultimately receive insurance payments adequate to launch our spare satelliteand commence work on an additional satellite, although there is no assurancethis will be the case.  Since the issueis common to Boeing 702 class satellites, the manufacturer and we are closelywatching the progression of the problem, including data from a satellite thathas been in orbit longer than either of our two satellites by approximately 15and 17 months, respectively.  With thisadvance visibility of performance levels, insurance arrangements in place andclaim filed, a spare satellite under construction that is being modified toaddress the solar array power anomaly, the ability to provide full service forsome period of time with Rock and Roll collocated in one orbit slot and thespare located in the other slot (which would allow partial use of the existingsatellites through the first quarter of 2008), availability of comparablesatellites from more than one vendor, and various mitigation actions to extendthe full or partial use of the satellites, we believe that we will be able tolaunch additional satellites prior to the time the solar array power problemmight cause the broadcast signal strength to fall below minimum acceptablelevels.  Based on the consistency of thedegradation trends (with no substantial improvement to date) and continuinganalyses by BSS and us, our management adjusted the estimated useful lives ofour in-orbit satellites, with effect from September 2002, to the period runningthrough first quarter 2008 (approximately 6.75 years from launch).  Our management will continue to monitor thissituation carefully and may re-adjust the estimated useful lives of ourin-orbit satellites based on future information.  We are not recording an impairment at this time, due to ourforecasted cash flows (which are sufficient to recover the system assets);however, should we reduce or not meet our forecasted cash flows or reducefurther the estimated useful lives of the satellites, we may be required torecord an impairment (which may be substantial) at that time.  We have not adjusted the estimated usefullives of our spacecraft control facilities, as we believe that these facilitieswill continue to be of use in our system.

 

***Contractual Obligations and Commercial Commitments***

 

We are obligated to make significant payments under avariety of contracts and other commercial arrangements, including thefollowing:

 

*ServiceProviders.    *We have entered into agreementswith service providers for customer care functions to subscribers of ourservice.  Employees of service providershave access to our customer care systems to establish customer accounts,activate radios, update program and account information and respond to generalinquiries from subscribers.  We pay anhourly rate for each customer care representative supporting oursubscribers.  During the three-monthsended March 31, 2003 and 2002, we incurred $2.7 million and $1.3 million,respectively, in relation to this agreement.

 

*ProgrammingAgreements.    *We have also entered intovarious long-term programming agreements. Under the terms of these agreements, we are obligated to providepayments to other entities that may include fixed payments, advertisingcommitments and revenue sharing arrangements. During the three-months ended March 31,

 

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2003 and 2002, we incurred expenses of $3.0 million and $6.1 million,respectively, in relation to these agreements. The amount of these costs will vary in future years, but is expected toincrease in the next year as the number of subscribers and advertising revenueincrease.  The amount of the costsrelated to these agreements cannot be estimated, but are expected to besubstantial future costs.  Of theseamounts, $43,000 and $103,000, respectively, are included in Revenue Share& Royalties, and $1.3 million and $4.1 million, respectively, are includedin Advertising & Marketing.

 

*RoyaltyAgreements*.    We have entered into fixedand variable revenue share payment agreements with performance rightsorganizations that expire as late as 2006. During the three-months ended March 31, 2003 and 2002, we incurredexpenses of $2.3 million and $156,000, respectively, in relation to theseagreements.

 

*Marketing& Distribution Agreements.*

 

We have entered into various joint sales, marketingand distribution agreements.  Under theterms of these agreements, we are obligated to provide incentives, subsidiesand commissions to other entities that may include fixed payments, per-unitradio and subscriber amounts and revenue sharing arrangements.  As previously described, we subsidize themanufacture of certain component parts of XM radios in order to provideattractive pricing to our customers. The subsidies are generally charged to expense when the radios aremanufactured or shipped from the factory. Consequently, the expense is most often recognized in advance of whenrevenue, if any, is realized.  Theamount of these operational, promotional, subscriber acquisition, jointdevelopment, and manufacturing costs related to these agreements cannot beestimated, but are expected to be substantial future costs.  During the three-months ended March 31, 2003and 2002, we incurred expenses of $7.6 million and $11.4 million, respectively,in relation to these agreements, excluding expenses related to GM.

 

*GeneralMotors Distribution Agreement*.     Wehave significant payment obligations under our distribution agreement withGeneral Motors.  During the term of theagreement, which expires 12 years from the commencement date of our commercialoperations, GM has agreed to distribute the service to the exclusion of otherS-band satellite digital radio services. We will also have a non-exclusive right to arrange for the installationof XM radios included in OnStar systems in non-GM vehicles that are sold foruse in the United States.  The agreementwas amended in June 2002 and January 2003 to clarify certain terms in theagreement, including extending the dates when certain initial payments are dueto GM and confirming the date of our commencement of commercial operations, andto provide that we may make certain payments to GM in the form of indebtednessor shares of our Class A common stock. XM’s total cash payment obligations were not increased.  We have significant annual, fixed paymentobligations to GM.  As a result of theJune 2002 amendment, we commenced recognizing these fixed payment obligationsfor the period ending through November 2005, which approximate $63.6 million,on a straight-line basis.  However, dueto the January 2003 amendment to the Distribution Agreement and GM’s currentroll out plans which demonstrate a likelihood that GM will exceed minimuminstallation targets, in 2003 we are now prospectively recognizing these fixedpayments due through September 2013, which approximate $397.3 million, on astraight-line basis.  We have issued a10% Senior Secured Convertible Note due 2009 with an aggregate principal amountof $89.0 million to OnStar in lieu of making these fixed payments to OnStar foramounts otherwise due in 2003 through 2006.

 

In order to encourage the broad installation of XMradios in GM vehicles, we have agreed to subsidize a portion of the cost of XMradios, and to make incentive payments to GM when the owners of GM vehicleswith installed XM radios become subscribers for our service.  We must also share with GM a percentage ofthe subscription revenue attributable to GM vehicles with installed XM radios,which percentage increases until there are more than 8 million GM vehicles withinstalled XM radios (at which point the percentage remains constant).  We will also make available to GM bandwidthon our system.  As part of theagreement, OnStar provides certain call-center related services directly to XMsubscribers who are also OnStar customers and XM must reimburse OnStar forthese XM-related call center services. The agreement is subject to renegotiation at any time based upon theinstallation of radios that are compatible with a unified standard or capableof receiving Sirius Satellite Radio’s service. The agreement is subject to renegotiation if as of November 2005, and attwo-year intervals thereafter, GM does not achieve and maintain specifiedinstallation levels of GM vehicles capable of receiving our service, startingwith 1,240,000 units by November 2005, and thereafter increasing by the lesserof 600,000 units per year and amounts proportionate to target market shares inthe satellite digital radio service market. There can be no

 

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assurances as to the outcome of any such renegotiations.  General Motors’ exclusivity obligations willdiscontinue if, by November 2005 and at two-year intervals thereafter, we failto achieve and maintain specified minimum market share levels in the satellitedigital radio service market (we are currently in excess of the minimum marketshare levels).  Prior to 2001, we hadnot incurred any costs under the distribution agreement.  As of March 31, 2003 and 2002, we had paid$15.7 million and $1.1 million, respectively, and incurred total costs of $49.5million and $2.4 million, respectively, under the distribution agreement.

 

**Non-Cash Stock-Based Expense**

 

We incurred non-cash compensation charges ofapproximately $3.0 million and $0.6 million during the three-months ended March31, 2003 and 2002, respectively.  Thesecharges relate to stock options granted to employees and non-employees andwarrants granted to Sony and CNBC.  Additionalcompensation charges may result depending upon the market value of the Parent’sClass A common stock at each balance sheet date.

 

**Related Party Transactions**

 

We developed strategic relationships with certaincompanies that were instrumental in the construction and development of oursystem.  In connection with our grantingto them of large supply contracts, some of these strategic companies havebecome large investors in us and have been granted rights to designatedirectors or observers to our board of directors.  The negotiation of these supply contracts and investmentsprimarily occurred at or prior to the time these companies became relatedparties.

 

We are a party to a long-term distribution agreementwith the OnStar division of General Motors that provides for the installationof XM radios in General Motors vehicles, as further described above under theheading “Liquidity and Capital Resources—Contractual Obligations and CommercialCommitments.” In connection with the development of our terrestrial repeaternetwork, we are a party to a contract with Hughes Electronics Corporation andwere under a contract with LCC International (LCCI), as further described underthe heading “Liquidity and Capital Resources—Capital Expenditures.”  DIRECTV has provided consulting services inconnection with the development of our customer care center and billingoperations.  We have agreements withOnStar, Clear Channel Communications, DIRECTV and American Honda to make availableuse of our bandwidth.  We have a sponsorshipagreement with Clear Channel Entertainment to advertise our service at ClearChannel Entertainment concerts and venues. Premiere Radio Networks, a subsidiary of Clear Channel Communications,is our advertising sales representative. We also run advertisements on a spot and network basis on radio stationsowned by Clear Channel.

 

During November 2002, we initiated joint promotionalactivities with General Motors, targeted at new GM car buyers who subscribe toXM service.  During the three-months endingMarch 31, 2003, approximately 54,000 subscribers took advantage of the jointpromotion.  In addition, duringDecember  2002, GM purchased XM servicefor approximately 7,000 of their dealers. These subscriptions are included in our total subscriptions.  Subscriber revenues from both theseactivities are recorded as related party revenue.

 

General Motors is one of our largest shareholders andChester A. Huber, Jr., the president of OnStar, is a member of our board ofdirectors.  Hughes Electronics is one ofour largest shareholders and is a subsidiary of General Motors.  Jack Shaw, a member of our board ofdirectors, is Chief Executive Officer of Hughes Electronics Corporation.  Dr. Rajendra Singh, who was a member of ourboard of directors until May 23, 2002, is a member of the board of directors ofLCCI and controls the largest shareholder of LCCI.  LCCI ceased to be a related party of ours during 2002.  DIRECTV, a subsidiary of Hughes Electronics,was a holder of our Series C preferred stock during 2002.  Randall Mays, a member of our board ofdirectors, is executive vice president and chief financial officer of ClearChannel Communications.  Thomas G.Elliott, a member of our board of directors, is Executive Vice President,Automobile Operations of American Honda Motor Company.  Gary Parsons, the chairman of our board ofdirectors, was until May 1, 2002 chairman of the board of directors of Motient,a significant early investor and formerly our controlling stockholder.  Mr. Parsons no longer serves on Motient’sboard of directors and Motient is no longer a significant stockholder of ours.

 

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We earned the following revenue in connection with thesale of XM service to related parties described above (in thousands):

 
|               |   | **Three  Months  Ending  March 31,** |   | **GM** |   |
|--------------------|--------|--------------------------------------|--------|--------|--------|
| Subscriber revenue |   | 2002                                 |   | — |   |
|               |   | 2003                                 |   | 1,050  |   |

 

We have incurred the following costs in transactionswith the related parties described above (in thousands):

 
|                                                        |   | **Three  Months  Ending  March 31,** |   | **GM** |   | **Hughes** |   | **DIRECTV** |   | **Clear  Channel** |   | **LCCI** |   | **Motient** |   | **Parent** |
|-------------------------------------------------------------|--------|--------------------------------------|--------|--------|--------|------------|--------|-------------|--------|--------------------|--------|----------|--------|-------------|--------|------------|
| Terrestrial repeater network engineering and  manufacturing |   | 2002                                 |   | — |   | 10,927     |   | —      |   | —             |   | 4,515    |   | —      |   | —     |
|                                                        |   | 2003                                 |   | — |   | 69         |   | —      |   | —             |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   | —     |
| Terrestrial repeater site leases                            |   | 2002                                 |   | — |   | —     |   | 33          |   | 12                 |   | —   |   | —      |   | —     |
|                                                        |   | 2003                                 |   | — |   | —     |   | —      |   | 15                 |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   | —     |
| Customer care  and billing Operations                       |   | 2002                                 |   | 8      |   | —     |   | —      |   | —             |   | —   |   | —      |   | —     |
|                                                        |   | 2003                                 |   | — |   | —     |   | —      |   | —             |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   | —     |
| Ad sales                                                    |   | 2002                                 |   | — |   | —     |   | —      |   | 1,595              |   | —   |   | —      |   | —     |
|                                                        |   | 2003                                 |   | — |   | —     |   | —      |   | 1,834              |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   | —     |
| Marketing                                                   |   | 2002                                 |   | 1,088  |   | —     |   | —      |   | 581                |   | —   |   | —      |   | —     |
|                                                        |   | 2003                                 |   | 18,146 |   | —     |   | —      |   | 1,072              |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   | —     |
| General and administrative                                  |   | 2002                                 |   | — |   | —     |   | —      |   | —             |   | —   |   | 40          |   | —     |
|                                                        |   | 2003                                 |   | — |   | —     |   | —      |   | —             |   | —   |   | —      |   | —     |
|                                                        |   |                                 |   |   |   |       |   |        |   |               |   |     |   |        |   |       |
| Broadcast and operations                                    |   | 2002                                 |   | — |   | —     |   | —      |   | —             |   | —   |   | —      |   | 1,071      |
|                                                        |   | 2003                                 |   | — |   | —     |   | —      |   | —             |   | —   |   | —      |   | 1,072      |

 

**Capital Expenditures**

 

*SatelliteContract*.    Under our satellitecontract, Boeing Satellite Systems (BSS) delivered two satellites in orbit andis to complete construction of a ground spare satellite.  BSS also provided ground equipment andsoftware used in the XM Radio system and certain launch and operations supportservices.  The contract also provides forin-orbit incentives to be earned depending on the performance of the in-orbitsatellites over their useful lives. Future payments under the satellite contract could total up to anadditional $68.3 million over the useful lives of the satellites.

 

On December 5, 2001, BSS and we amended the satellitecontract so as to permit the deferral of approximately $31.4 million ofpayments to be made under the agreement, as well as to provide certainadditional rights and obligations to us, including the launch of the groundspare satellite on the SeaLaunch launch vehicle should the ground sparesatellite be launched between specified dates. Amounts deferred under the satellite contract include (i) $15.0 millionof the purchase price for the ground spare satellite and (ii) $16.4 million ofin-orbit incentive payments relating to our two existing satellites, XM “Rock”and XM “Roll.”  Interest will accrue onthe $15.0 million commencing when the ground spare satellite is available forshipment (it is currently being modified to address the solar power anomaly),and the principal of such amount is to be paid on December 5, 2006.  Similarly, the $16.4 million of incentivepayments relating to Rock and Roll has been deferred (with interest payablecurrently), with the principal amount (to the extent earned) payable onDecember 5, 2006.  After December 5,2006, BSS must repay us incentive amounts that are not earned on a currentbasis.  Incentive payment amounts areearned (and expensed through operations) on a daily basis for each day that asatellite meets or exceeds its applicable

 

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performance specifications. Under the amendment, the deferred amounts bear interest at the rate of8%, compounded annually, and are payable quarterly in arrears.

 

As of March 31, 2003, we had paid approximately $470.8 million under our satellite contract and had recognized an additionalliability of $2.6 million for deferred in-orbit incentives and relatedinterest.

 

*TerrestrialRepeater System*.    As of March 31, 2003,we incurred aggregate costs of approximately $ 267.6 million for a terrestrialrepeater system.  These costs coveredthe capital cost of the design, development and installation of a system ofterrestrial repeaters to cover approximately 60 cities and metropolitanareas.  In August 1999, we signed acontract with LCC International (LCCI) for engineering and sitepreparation.  As of March 31, 2003, wehad paid $ 128.4 million under this contract. There are no further payments due under the LCCI contract.  We also entered into a contract effectiveOctober 22, 1999, with Hughes Electronics Corporation for the design,development and manufacture of the terrestrial repeaters.  As of March 31, 2003, we had paid $ 113.9million under this contract and recorded an additional liability of $29,000.

 

*GroundSegment*.    As of March 31, 2003, weincurred aggregate ground segment costs of approximately $131.3 million.  These costs were related to the satellitecontrol facilities, programming production studios and various other equipmentand facilities.

 

*JointDevelopment Agreement Funding Requirements*.    Wemay require additional funds to contribute toward the development oftechnologies supporting a unified standard for satellite radios under our jointdevelopment agreement with Sirius Radio. Each party is obligated to fund one half of the development cost forsuch technologies.  The priorarbitration with Sirius has been resolved, with no payment by either side.

 

*Long-termdebt*.    We have raised funds fromissuing long-term debt on several occasions.

 

•              InMarch 2000, XM issued $325.0 million aggregate principal amount of 14% SeniorSecured Notes due 2010.  Following ourJanuary 2003 financing, less than $25 million of these notes remainedoutstanding.  Principal on the 14%Senior Secured Notes due 2010 is payable at maturity, while interest is payablesemi-annually. 

 

•              InMarch 2001, Holdings issued $125.0 million aggregate principal amount of 7.75%convertible subordinated notes due 2006. In July and August 2001, holders of convertible subordinated notesexchanged $45.9 million of notes for 4,194,272 shares of Holdings’ Class Acommon stock.  As a result of thesetransactions, approximately $79.1 million of the notes remained.  Principal on the convertible subordinatednotes is payable at maturity, while interest is payable semi-annually.  During the first quarter of 2003, weexchanged approximately $20.9 million aggregate principal of these notes for acombination of cash and Class A common stock. Therefore, at March 31, 2003, approximately $58.2 million aggregateprincipal of these notes remain outstanding.

 

•              InAugust 2001, Holdings borrowed $29.0 million to finance the purchase of ourheadquarters facility.  This loan is fora term of five years and bears interest at a rate based on the six-month LondonInterbank Offer Rate plus an indicated spread. We make monthly payments of principal and interest on this loan. 

 

•              InDecember 2001, Holdings borrowed $35.0 million from a subsidiary of The BoeingCompany.  This loan is for a term offive years and bears interest at a rate based on the six-month London InterbankOffer Rate plus an indicated spread. Principal is payable at maturity, while interest is payable quarterly. 

 

•              OnJanuary 28, 2003, we completed a three-part financing. 

 

•              We andHoldings issued $279.3 million aggregate principal amount at maturity of 10%Senior Secured Discount Convertible Notes in a private placement.  Principal on the 10% Senior Secured DiscountConvertible Notes is payable at maturity, while interest accretes until January1, 2006 and is thereafter payable semi-annually in cash or, at our option, inadditional

 

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notes.  If all of the interest is paid in additionalnotes, these notes would aggregate $412.6 million when they come due in 2009. 

 

•              We andHoldings issued to OnStar $89.0 million in aggregate principal amount of a 10%Senior Secured Convertible Note due December 31, 2009 in lieu of our obligationto make $115 million in guaranteed payments from 2003 to 2006 under the GeneralMotors distribution agreement. Principal on the OnStar note is payable at maturity, while interest,which is due semi-annually, is payable at our option in shares of Holdings’Class A common stock.

 

•              We andHoldings completed an exchange of $300.2 million aggregate principal amount ofthe 14% Senior Secured Notes due 2010 for $438.0 million aggregate principalamount at maturity ($300.2 million accreted value as of March 15, 2003) of 14%Senior Secured Discount Notes due 2009, cash and warrants to purchase Class Acommon stock.  Principal on the 14%Senior Secured Discount Notes due 2009 is payable at maturity, while interestaccretes until December 31, 2005 and is thereafter payable semi-annually.  Through May 6, 2003, we have extinguished$65.5 million carrying value, or $94.2 million face amount at maturity, ofthese notes. 

 

Based on the various terms of our long-term debt, ourability to redeem any long-term debt is limited.  We have and may continue to take advantage of opportunities toreduce our level of indebtedness in exchange for issuing equity securities, ifthese transactions can be completed on favorable terms.

 

**Recent Accounting Pronouncements**

 

We adopted SFAS No. 143, *Accounting for Asset RetirementObligations*, effective January 1, 2003, and SFAS 143 does not have amaterial impact on the financial statements. Our asset retirement obligations are limited to the deconstruction ofterrestrial repeater sites.  SFAS No.143 requires entities to record the fair value of a legal liability for anasset retirement obligation in the period in which it is incurred.  When a new liability is recorded, we willcapitalize the costs of the liability by increasing the carrying amount of therelated long-lived asset.  The liabilityis accreted to its present value each period, and the capitalized cost isdepreciated over the useful life of the related asset.  Upon settlement of the liability, an entitysettles the obligation for its recorded amount or incurs a gain or loss uponsettlement.

 

In April 2002, the FASB issued SFAS No. 145, *Rescission of FASB Statements No. 4, 44 and 64,Amendment of FASB Statement No. 13, and Technical Corrections*.  SFAS No. 145 amends existing guidance onreporting gains and losses on the extinguishment of debt to prohibit theclassification of the gain or loss as extraordinary, as the use of suchextinguishments have become part of the risk management strategy of manycompanies.  SFAS No. 145 also amendsSFAS No. 13 to require sale-leaseback accounting for certain leasemodifications that have economic effects similar to sale-leasebacktransactions.  We recorded a loss $(2.1)million during the three-months ended March 31, 2003 from the early retirementof $17.9 million of principal.  The lossis reported in other income (expense) on the condensed consolidated statementof operations.

 

In June 2002, the FASB issued SFAS No. 146, *Accounting for Costs Associated with Exit or DisposalActivities*.  SFAS No. 146requires that a liability for a cost associated with an exit or disposalactivity be recognized when incurred at fair value.  The adoption of SFAS No. 146 may have an effect on the timing offuture restructuring charges taken, if and when they occur.

 

In December 2002, the FASB issued SFAS No. 148, *Accounting for Stock-Based Compensation — Transitionand Disclosure, an amendment of FASB Statement No. 123. *This Statement amends FASBStatement No. 123, Accounting for Stock-Based Compensation, to providealternative methods of transition for a voluntary change to the fair valuemethod of accounting for stock-based employee compensation.  In addition, this Statement amends thedisclosure requirements of Statement No. 123 to require prominent disclosures inboth annual and interim financial statements. The disclosures required by SFAS No. 148 are included in note 7 to thesecondensed consolidated financial statements.

 

The Emerging Issues Task Force issued EITF No. 00-21, *Revenue Arrangements with Multiple Deliverables*addressing the allocation of revenue among products and services in bundledsales arrangements.  EITF 00-21 iseffective for arrangements entered into in fiscal periods after June 15, 2003.  Based on our current sales and marketingprograms, we do not anticipate the application of the new pronouncement willhave a material impact on our financial statements.  However, our sales and marketing programs may change over timeand we will continue to evaluate the applicability of EITF 00-21 as it relatesto sales of service and hardware.

 

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**ITEM3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

As of March 31, 2003, we do not have any derivativefinancial instruments and do not intend to use derivatives.  We do not hold or issue any free-standingderivatives.  We invest our cash inshort-term commercial paper, investment-grade corporate and government obligationsand money market funds.  Our long-termdebt includes fixed interest rates and the fair market value of the debt issensitive to changes in interest rates. We run the risk that market rates will decline and the required paymentswill exceed those based on current market rates.  Under our current policies, we do not use interest ratederivative instruments to manage our exposure to interest ratefluctuations.  Included in our relatedparty long-term debt owed to GM is a balance of $13.5 million, of which $3.5million will be converted to shares of Class A common stock under our distributionagreement with OnStar and $10.0 million will be drawn under our Senior SecuredCredit Facility with GM.  This facilityhas a variable interest rate.  A changeof one percentage point in the interest rate applicable to this $10.0 millionof variable rate debt at March 31, 2003 would result in a fluctuation ofapproximately $0.1 million in our annual interest expense.  Additionally, we believe that our exposureto interest rate risk is not material to our results of operations.

 

**ITEM4.    CONTROLS AND PROCEDURES.**

 

Within the 90-day period prior to the filing of thisreport, an evaluation was carried out under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures (as defined in Rule 13a-14(c) under theSecurities Exchange Act of 1934).  Basedupon that evaluation, the Chief Executive Officer and Chief Financial Officerconcluded that the design and operation of these disclosure controls andprocedures were effective.  Nosignificant changes were made in our internal controls or in other factors thatcould significantly affect these controls subsequent to the date of theirevaluation.

 

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**PARTII: OTHER INFORMATION**

** **

**Item2.    Changes in Securities and Use of Proceeds**

 

**January 2003 Financing Transactions**

 

On January 28, 2003, we and our parent, XM SatelliteRadio Holdings Inc. (“Holdings”), completed (1) an exchange of over $300million of the $325 million aggregate principal amount of our outstanding debt,(2) a restructuring of $250 million in payment obligations to General MotorsCorporation through 2006, and (3) a private placement resulting in grossproceeds to us of $225 million.  Thefollowing summary of these transactions is qualified in its entirety byreference to the principal transaction documents, filed as exhibits toHoldings’ Annual Report on Form 10-K for the fiscal year ended December 31,2002, filed with the SEC on March 31, 2003.

 

*TheExchange Offer*

 

We and Holdings accepted for exchange $300.2 millionaggregate principal amount of the previously outstanding $325.0 million of our14% Senior Secured Notes due 2010.  Foreach $1,000 principal amount of notes tendered for exchange, the tenderingholder received:

 

•                  $1,459 principalamount at maturity of 14% Senior Secured Discount Notes due 2009 issued by XMand guaranteed by Holdings;

 

•                  a warrant topurchase 85 shares of Holdings’ Class A common stock at an exercise price of$3.18 per share; and

 

•                  $70 in cash.

 

The exercise price of each warrant may be paid eitherin cash or without the payment of cash by reducing the number of shares ofClass A common stock that would be obtainable upon the exercise of awarrant.  The warrants are fully vestedand expire December 31, 2009.

 

*Transactionswith General Motors*

 

Under certain agreements with General Motors and itssubsidiary, OnStar Corporation, we and Holdings issued to OnStar a 10% SeniorSecured Convertible Note due December 31, 2009 with an aggregate principalamount of $89 million in lieu of our obligation to make $115 million inguaranteed payments from 2003 to 2006 under our distribution agreement withOnStar Corporation and issued a warrant to General Motors to purchase 10million shares of Holdings’ Class A common stock at an exercise price of $3.18per share.  The warrant is fully vestedand expires after five years.  The noteissued to OnStar is convertible and the warrant exercisable only to the extentGeneral Motors would not beneficially own more than 19.9% of Holdings’ Class Acommon stock, unless Holdings and General Motors otherwise agree and certainstockholder approvals are obtained.

 

OnStar will be able to convert the note into shares ofClass A common stock pursuant to a vesting schedule so that on each date priorto and including December 31, 2006 that we would have been obligated to makescheduled guaranteed payments under the distribution agreement, a pro rata portionof the OnStar note corresponding to the scheduled guaranteed payment willbecome convertible at the option of OnStar at a conversion price equal to 90%of the fair market value of a share of Class A common stock (calculated asdescribed above) on the date of conversion; provided that, the conversion pricewill be not less than $5 per share nor greater than $10 per share during 2003,not less than $5 per share nor greater than $15 per share during 2004, and notless than $5 per share nor greater than $20 per share thereafter.

 

*Transactionswith New Investors*

 

We and Holdings sold $210.0 million of 10% SeniorSecured Discount Convertible Notes due December 31, 2009 to certaininstitutional and accredited investors, including some of Holdings’ current investors.  At any time, a

 

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holder of new investor notes may convert all or part of the accretedvalue of its notes at a conversion price of $3.18 per share.

 

We are not able to prepay or redeem the new investornotes.  Beginning four years after theissuance of the new investor notes, we will be able to convert all, but notless than all of the notes at the conversion price if: (i) shares of Holdings’Class A common stock have traded on the Nasdaq National Market or a nationalsecurities exchange for the previous 30 trading days at 200% of the conversionprice, (ii) we have reported earnings before interest income and expense, otherincome, taxes, depreciation (including amounts related to research and development)and amortization greater than $0 for the immediately preceding quarterly periodfor which we report our financial results, (iii) immediately following suchconversion, the aggregate amount of Holdings’ and its subsidiaries’indebtedness is less than $250 million, and (iv) no shares of Holdings’ SeriesC preferred stock remain outstanding.

 

Holdings also sold $15.0 million of its Class A commonstock at a per share purchase price of $2.70 to a private investor and issued awarrant to purchase 900,000 shares of its Class A common stock at an exerciseprice of $3.18 per share to R. Steven Hicks, who joined our board of directorsin connection with these transactions.

 

*Exemptions;Use of Proceeds*

 

We issued the exchange notes in reliance on theexemption from registration afforded by Section 3(a)(9) of the SecuritiesAct.  We have not sold securities of thesame class as the exchange notes and no such sales are planned.  We did not pay or give, and will not pay orgive, directly or indirectly, any commission or remuneration to any broker,dealer, salesman, agent or other person for soliciting tenders in the exchangeoffer.  To the extent solicitations wereundertaken by our officers and employees, such officers and employees did notand will not receive additional compensation for making such solicitations andsuch activities were merely incidental to their normal duties andresponsibilities.

 

We and Holdings issued the OnStar note and the newinvestor notes in reliance on the exemption from registration afforded bySection 4(2) of the Securities Act of 1933, as amended, and Rule 506thereunder.  Proceeds from the sale ofthe new investor notes and the Class A common stock and the exercise of thewarrants will be used for general business and administrative expenses.

 

**Other Issuances**

 

In February and March 2003, Holdings and we issued4,352,375 shares of Holdings' Class A common stock and paid $6.7 millionin cash in exchange for $38.9 million carrying value (or $46.1 million fullyaccreted face value at maturity) of Holdings' 7.75% Convertible SubordinatedNotes due 2006, our 14% Senior Secured notes due 2010, and our 14% seniorsecured discount notes due 2009 in transactions that were exempt fromregistration under Section 3(a)(9) of the Securities Act.  Holdings and we also issued 1,669,400 sharesof Holdings' Class A common stock in exchange for warrants to purchase2,392,325 shares of Holdings' Class A common stock in transactions thatwere exempt from registration under Section 3(a)(9) of the Securities Act.

 

In April 2003 and through May 6, 2003, Holdings and weissued 5,775,000 shares of Holdings' Class A common stock in exchange for$48.9 million carrying value (or $70.9 million fully accreted face value atmaturity) of our 14% Senior Secured Discount Notes due 2009 in transactionsthat were exempt from registration under Section 3(a)(9) of the SecuritiesAct.  Holdings and we also issued978,000 shares of Holdings' Class A common stock for warrants to purchase1,275,000 shares of Holdings' Class A common stock in transactions thatwere exempt from registration under Section 3(a)(9) of the Securities Act.

 

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**Item6.**  **Exhibits andReports on Form 8-K.**

 

(a)             Exhibits:

 
| **Exhibit  No.** | **Description** |
|------------------|-----------------|
|             |            |   |
| 3.1^             |            | Restated Certificate of Incorporation of XM  Satellite Radio Holdings Inc. |
|             |            |   |
| 3.2^             |            | Restated Bylaws of XM Satellite Radio Holdings Inc. |
|             |            |   |
| 3.3              |            | Restated Certificate of Incorporation of XM  Satellite Radio Inc. (incorporated by reference to XM’s Registration  Statement on Form S-4, File No. 333-39178). |
|             |            |   |
| 3.4              |            | Amended and Restated Bylaws of XM Satellite Radio  Inc. (incorporated by reference to XM’s Registration Statement on Form S-4,  File No. 333-39178). |
|             |            |   |
| 3.5              |            | Certificate of Amendment of Restated Certificate of  Incorporation of XM Satellite Radio Holdings Inc. (incorporated by reference  to Amendment No. 1 to Holdings’ Registration Statement on Form S-3, File No.  333-89132). |
|             |            |   |
| 3.6              |            | Certificate of Amendment of Restated Certificate of  Incorporation of XM Satellite Radio Holdings Inc. (incorporated by reference  to Holdings’ Annual Report on Form 10-K, filed with the SEC on March 31,  2003). |
|             |            |   |
| 4.1              |            | Form of Certificate for Holdings’ Class A common  stock (incorporated by reference to Exhibit 3 to Holdings’ Registration  Statement on Form 8-A, filed with the SEC on September 23, 1999). |
|             |            |   |
| 4.2              |            | Form of Certificate for Holdings’ 8.25% Series B  Convertible Redeemable Preferred Stock (incorporated by reference to  Holdings’ Registration Statement on Form S-1, File No. 333-93529). |
|             |            |   |
| 4.3              |            | Certificate of Designation Establishing the Voting  Powers, Designations, Preferences, Limitations, Restrictions and Relative  Rights of 8.25% Series B Convertible Redeemable Preferred Stock due 2012  (incorporated by reference to Holdings’ Annual Report on Form 10-K for the  fiscal year ended December 31, 1999, filed with the SEC on March 16, 2000). |
|             |            |   |
| 4.4              |            | Warrant to purchase shares of Holdings’ Class A  common stock, dated February 9, 2000, issued to Sony Electronics, Inc.  (incorporated by reference to Holdings’ quarterly report on Form 10-Q for the  quarter ended March 31, 2000, filed with the SEC on May 12, 2000). |
|             |            |   |
| 4.5              |            | Warrant Agreement, dated March 15, 2000, between XM  Satellite Radio Holdings Inc. as Issuer and United States Trust Company of  New York as Warrant Agent (incorporated by reference to Holdings’  Registration Statement on Form S-1, File No. 333-39176). |
|             |            |   |
| 4.6              |            | Warrant Registration Rights Agreement, dated March  15, 2000, between XM Satellite Radio Holdings Inc. and Bear, Stearns &  Co., Inc., Donaldson, Lufkin and Jenrette Securities Corporation, Salomon  Smith Barney Inc. and Lehman Brothers Inc. (incorporated by reference to  Holdings’ Registration Statement on Form S-1, File No. 333-39176). |
|                  |                 |  |  |

 

42

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| 4.7    |   | Form of Warrant (incorporated by reference to  Holdings’ Registration Statement on Form S-1, File No. 333-39176).                                                                                                                                                                                                                |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.8    |   | Certificate of Designation Establishing the Powers,  Preferences, Rights, Qualifications, Limitations and Restrictions of the  8.25% Series C Convertible Redeemable Preferred Stock due 2012 (incorporated  by reference to Holdings’ Registration Statement on Form S-1, File No.  333-39176).                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.9    |   | Form of Certificate for Holdings’ 8.25% Series C  Convertible Redeemable Preferred Stock (incorporated by reference to the  Registrant’s Registration Statement on Form S-1, File No. 333-39176).                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.10   |   | Indenture, dated as of March 15, 2000, between XM  Satellite Radio Inc. and United States Trust Company of New York  (incorporated by reference to XM’s Registration Statement on Form S-4, File  No. 333-39178).                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.11   |   | Registration Rights Agreement, dated March 15, 2000,  between XM Satellite Radio Inc. and Bear, Stearns & Co. Inc., Donaldson,  Lufkin and Jenrette Securities Corporation, Salomon Smith Barney Inc. and  Lehman Brothers Inc. (incorporated by reference to XM’s Registration  Statement on Form S-4, File No. 333-39178). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.12   |   | Form of 14% Senior Secured Note of XM Satellite  Radio Inc. (incorporated by reference to XM’s Registration Statement on Form  S-4, File No. 333-39178).                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.13   |   | Security Agreement, dated March 15, 2000, between XM  Satellite Radio Inc. and United States Trust Company of New York  (incorporated by reference to XM’s Registration Statement on Form S-4, File  No. 333-39178).                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.14   |   | Pledge Agreement, dated March 15, 2000, between XM  Satellite Radio Inc. and United States Trust Company of New York  (incorporated by reference to XM’s Registration Statement on Form S-4, File  No. 333-39178).                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.15   |   | Indenture, dated March 6, 2001, between XM Satellite  Radio Holdings Inc. and United States Trust Company of New York (incorporated  by reference to Holdings’ annual report on Form 10-K for the year ended  December 31, 2000, filed with the SEC on March 15, 2001).                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.16   |   | Supplemental Indenture, dated as of November 15,  2001, by and between XM Satellite Radio Inc. and The Bank of New York  (successor to United States Trust Company of New York) (incorporated by  reference to Holdings’ Current Report on Form 8-K, filed with the SEC on  December 6, 2001).                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.17   |   | Form of 7.75% convertible subordinated note  (incorporated by reference to Holdings’ annual report on Form 10-K for the  year ended December 31, 2000, filed with the SEC on March 15, 2001).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.18   |   | Customer Credit Agreement dated as of December 5,  2001 between Holdings and Boeing Capital Services Corporation (incorporated  by reference to Holdings’ Current Report on Form 8-K, filed with the SEC on  December 6, 2001).                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.19   |   | Security Agreement dated as of December 5, 2001,  between Holdings and Boeing Capital Services Corporation (incorporated by  reference to Holdings’ Current Report on Form 8-K, filed with the SEC on  December 6, 2001).                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.20   |   | Rights Agreement, dated as of August 2, 2002, between  Holdings and Equiserve Trust Company as Rights Agent (incorporated by  reference to Holdings’ Current Report on Form 8-K, filed with the SEC on  August 2, 2002).                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
| 4.21   |   | Indenture, dated as of January 28, 2003, among XM  Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment Leasing  LLC and The Bank of New York, as trustee (incorporated by reference to  Holdings’ Current Report on Form 8-K filed with the SEC on January 29, 2003).                                           |

 

43

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| 4.22   |   | Security Agreement, dated as of January 28, 2003,  among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM Equipment  Leasing LLC, and The Bank of New York (incorporated by reference to Holdings’  Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                               |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.23   |   | Amended and Restated Security Agreement, dated as of  January 28, 2003, between XM Satellite Radio Inc. and The Bank of New York  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.24   |   | Intercreditor and Collateral Agency Agreement  (General Security Agreement), dated as of January 28, 2003, by and among the  Noteholders named therein, The Bank of New York, as trustee, General Motors  Corporation, OnStar Corporation and The Bank of New York, as collateral agent  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.25   |   | Intercreditor and Collateral Agency Agreement (FCC  License Subsidiary Pledge Agreement), dated as of January 28, 2003, by and  among the Noteholders named therein, The Bank of New York, as trustee,  General Motors Corporation, OnStar Corporation and The Bank of New York, as  collateral agent (incorporated by reference to Holdings’ Current Report on Form  8-K filed with the SEC on January 29, 2003). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.26   |   | Warrant Agreement, dated as of January 28, 2003,  between XM Satellite Radio Holdings Inc. and The Bank of New York  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.27   |   | Amended and Restated Amendment No. 1 to Rights  Agreement, dated as of January 22, 2003, by and among XM Satellite Radio  Holdings Inc. and Equiserve Trust Company, N.A. (incorporated by reference to  Holdings’ Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.28   |   | Form of 10% Senior Secured Convertible Note due 2009  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.29   |   | Form of 10% Senior Secured Discount Convertible Note  due 2009 (incorporated by reference to Holdings’ Current Report on Form 8-K  filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.30   |   | Global 14% Senior Secured Discount Note due 2009  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.31   |   | Global Common Stock Purchase Warrant (incorporated  by reference to Holdings’ Current Report on Form 8-K filed with the SEC on  January 29, 2003).                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.32   |   | Common Stock Purchase Warrant issued to General  Motors Corporation (incorporated by reference to Holdings’ Current Report on  Form 8-K filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.33   |   | Common Stock Purchase Warrant issued to R. Steven  Hicks (incorporated by reference to Holdings’ Current Report on Form 8-K  filed with the SEC on January 29, 2003).                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.34   |   | Second Supplemental Indenture, dated as of December  23, 2002, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings  Inc., XM Equipment Leasing LLC and The Bank of New York, as trustee  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 15, 2003).                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 4.35   |   | Third Supplemental Indenture, dated January 27,  2003, among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., XM  Equipment Leasing LLC and The Bank of New York, as trustee (incorporated by  reference to Holdings’ Current Report on Form 8-K filed with the SEC on  January 29, 2003).                                                                                                               |

 

44

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| 10.1    |   | Second Amended and Restated Shareholders and  Noteholders Agreement, dated as of January 28, 2003, by and among XM  Satellite Radio Holdings Inc. and certain shareholders and noteholders named  therein (incorporated by reference to Holdings’ Current Report on Form 8-K  filed with the SEC on January 29, 2003).                                                                                                                                                                                                                   |
|---------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.2    |   | Second Amended and Restated Registration Rights  Agreement, dated as of January 28, 2003, by and among XM Satellite Radio  Holdings Inc. and certain shareholders and noteholders named therein  (incorporated by reference to Holdings’ Current Report on Form 8-K filed with  the SEC on January 29, 2003).                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.3^   |   | Note Purchase Agreement, dated June 7, 1999, by and  between XM Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear  Channel Communications, Inc., DIRECTV Enterprises, Inc., General Motors  Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio Partners, LLC,  Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity  III, L.P., and Special Advisors Fund I, LLC (including form of Series A  subordinated convertible note of XM Satellite Radio Holdings Inc. attached as  Exhibit A thereto). |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.4^*  |   | Technology Licensing Agreement by and among XM  Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management  Corporation and American Mobile Satellite Corporation, dated as of January 1,  1998, amended by Amendment No. 1 to Technology Licensing Agreement, dated  June 7, 1999.                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.5    |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.6    |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.7^*  |   | Amended and Restated Agreement by and between XM  Satellite Radio Inc. and ST Microelectronics Srl, dated September 27, 1999.                                                                                                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.8*   |   | Second Amended and Restated Distribution Agreement,  dated as of January 28, 2003, by and among XM Satellite Radio Holdings Inc.,  XM Satellite Radio Inc. and OnStar Corporation, a division of General Motors  Corporation (incorporated by reference to Holdings’ Current Report on Form  8-K filed with the SEC on January 29, 2003).                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.9^*  |   | Operational Assistance Agreement, dated as of June  7, 1999, between XM Satellite Radio Inc. and DIRECTV, INC.                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10^* |   | Operational Assistance Agreement, dated as of June  7, 1999, between XM Satellite Radio Inc. and Clear Channel Communication,  Inc.                                                                                                                                                                                                                                                                                                                                                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11^* |   | Operational Assistance Agreement, dated as of June  7, 1999, between XM Satellite Radio Inc. and TCM, LLC.                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.13   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.16   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.17^  |   | Form of Indemnification Agreement between XM  Satellite Radio Holdings Inc. and each of its directors and executive  officers.                                                                                                                                                                                                                                                                                                                                                                                                                |

 

45

----

 
| 10.18   |   | 1998 Shares Award Plan (incorporated by reference to  Holdings’ Registration Statement on Form S-8, File No. 333-65020).                                                                                                                                                                                                                          |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.19^  |   | Form of Employee Non-Qualified Stock Option  Agreement.                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.20^* |   | Firm Fixed Price Contract #001 between XM Satellite  Radio Inc. and the Fraunhofer Gesellschaft zur Foderung Der angewandten  Forschung e.V., dated July 16, 1999.                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.21^* |   | Contract for Engineering and Construction of  Terrestrial Repeater Network System by and between XM Satellite Radio Inc.  and LCC International, Inc., dated August 18, 1999.                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.22   |   | Employee Stock Purchase Plan (incorporated by  reference to Holdings’ Registration Statement on Form S-8, File No.  333-65020).                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.23^  |   | Non-Qualified Stock Option Agreement between Gary  Parsons and XM Satellite Radio Holdings Inc., dated July 16, 1999.                                                                                                                                                                                                                                  |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.24^  |   | Non-Qualified Stock Option Agreement between Hugh  Panero and XM Satellite Radio Holdings Inc., dated July 1, 1998, as amended.                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.25^  |   | Form of Director Non-Qualified Stock Option  Agreement.                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.26   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.27   |   | Intentionally omitted.                                                                                                                                                                                                                                                                                                                                 |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.28*  |   | Contract for the Design, Development and Purchase of  Terrestrial Repeater Equipment by and between XM Satellite Radio Inc. and  Hughes Electronics Corporation, dated February 14, 2000 (incorporated by  reference to Holdings’ Annual Report on Form 10-K for the fiscal year ended  December 31, 1999, filed with the SEC on March 16, 2000). |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.29*  |   | Joint Development Agreement, dated February 16,  2000, between XM Satellite Radio Inc. and Sirius Satellite Radio Inc.  (incorporated by reference to Holdings’ quarterly report on Form 10-Q for the  quarter ended March 31, 2000, filed with the SEC on May 12, 2000).                                                                         |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.30   |   | XM Satellite Radio Holdings Inc. Talent Option Plan  (incorporated by reference to Holdings’ Registration Statement on Form S-8,  File No. 333-65022).                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.31   |   | Employment Agreement, dated as of June 1, 2001,  between XM Satellite Radio Holdings Inc. and Hugh Panero (incorporated by  reference to Holdings’ quarterly report on Form 10-Q for the quarter ended  June 30, 2001, filed with the SEC on August 13, 2001).                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.32   |   | Form of Employment Agreement, dated as of July 1,  2001, between XM Satellite Radio Holdings Inc. and Gary Parsons (incorporated  by reference to Holdings’ quarterly report on Form 10-Q for the quarter ended  June 30, 2001, filed with the SEC on August 13, 2001).                                                                           |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.33   |   | Loan and Security Agreement, dated as of August 24,  2001, by and between Fremont Investment & Loan and XM 1500 Eckington LLC  (incorporated by reference to Holdings’ quarterly report on Form 10-Q for the  quarter ended September 30, 2001, filed with the SEC on November 13, 2001).                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.34   |   | Limited Recourse Obligations Guaranty, dated as of  August 24, 2001, by XM Satellite Radio Holdings Inc. in favor of Fremont  Investment & Loan (incorporated by reference to Holdings’ quarterly  report on Form 10-Q for the quarter ended September 30, 2001, filed with the  SEC on November 13, 2001).                                   |

 

46

----

 
| 10.35  |   | Assignment and Novation Agreement dated as of  December 5, 2001, between Holdings, XM Satellite Radio Inc. and Boeing  Satellite Systems International Inc. (incorporated by reference to Holdings’  Current Report on Form 8-K filed with the SEC on December 6, 2001).                                       |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.36* |   | Third Amended and Restated Satellite Purchase  Contract for In-Orbit Delivery dated as of May 15, 2001 between XM Satellite  Radio, Inc. and Boeing Satellite Systems International Inc. (incorporated by  reference to Amendment No. 1 to Holdings’ Registration Statement on Form S-3,  File No. 333-89132). |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.37* |   | Amendment to the Satellite Purchase Contract for  In-Orbit Delivery dated as of December 5, 2001 between XM Satellite Radio,  Inc. and Boeing Satellite Systems International Inc. (incorporated by  reference to Holdings’ Current Report on Form 8-K filed with the SEC on  December 6, 2001).               |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.38  |   | Note Purchase Agreement, dated as of December 21,  2002, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc.  and OnStar Corporation (incorporated by reference to Holdings’ Current Report  on Form 8-K filed with the SEC on January 29, 2003).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.39  |   | Amendment No. 1 to Note Purchase Agreement, dated as  of January 16, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio  Holdings Inc. and OnStar Corporation (incorporated by reference to Holdings’  Current Report on Form 8-K filed with the SEC on January 29, 2003).                         |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.40  |   | Note Purchase Agreement, dated as of December 21,  2002, by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc.  and certain investors named therein (incorporated by reference to Holdings’  Current Report on Form 8-K filed with the SEC on January 29, 2003).                              |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.41  |   | Amendment No. 1 to Note Purchase Agreement, dated as  of January 28, 2003, by and among XM Satellite Radio Inc., XM Satellite Radio  Holdings Inc. and certain investors named therein (incorporated by reference  to Holdings’ Current Report on Form 8-K filed with the SEC on January 29,  2003).           |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.42  |   | Director Designation Agreement, dated as of January  28, 2003, by and among XM Satellite Radio Holdings Inc. and the shareholders  and noteholders named therein.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.43  |   | GM/DIRECTV Director Designation Agreement, dated as  of January 28, 2003, among XM Satellite Radio Holdings Inc., General Motors  Corporation and DIRECTV Enterprises LLC (incorporated by reference to  Holdings’ Current Report on Form 8-K filed with the SEC on January 29, 2003).                         |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.44  |   | Clear Channel Director Designation Agreement, dated  as of January 28, 2003, among XM Satellite Radio Holdings Inc. and Clear  Channel Investments, Inc (incorporated by reference to Holdings’ Current  Report on Form 8-K filed with the SEC on January 29, 2003).                                           |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.45  |   | Amended and Restated Assignment and Use Agreement,  dated as of January 28, 2003 between XM Satellite Radio Inc. and XM Radio  Inc. (incorporated by reference to Holdings’ Current Report on Form 8-K filed  with the SEC on January 29, 2003).                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.46  |   | Agreements not to convert, dated as of January 28,  2003, among XM Satellite Radio Holdings Inc. and certain noteholders named  therein (incorporated by reference to Holdings’ Current Report on Form 8-K  filed with the SEC on January 29, 2003).                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.47  |   | Credit Agreement, dated as of January 28, 2003,  among XM Satellite Radio Inc., as a borrower, and XM Satellite Radio Holdings  Inc., as a borrower, and General Motors Corporation, as lender (incorporated  by reference to Holdings’ Current Report on Form 8-K filed with the SEC on  January 29, 2003).   |
|   |   |                                                                                                                                                                                                                                                                                                                |
| 10.48  |   | Voting Agreement, dated as of December 21, 2002,  among the shareholders named therein (incorporated by reference to Holdings’  Current Report on Form 8-K filed with the SEC on January 29, 2003).                                                                                                            |

 

47

----

 
| 10.49  |   | Employment Agreement, dated as of June 21, 2002,  between XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc., and  Joseph J. Euteneuer (incorporated by reference to Holdings’ Quarterly Report  on Form 10-Q, filed with the SEC on August 14, 2002). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 10.50  |   | Form of  Employment Agreement, dated as of March 20, 2003, between XM Satellite Radio  Holdings Inc. and XM Satellite Radio Inc., and Hugh Panero.                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.51  |   | Form of  Employment Agreement, dated as of March 20, 2003, between XM Satellite Radio  Holdings Inc. and XM Satellite Radio Inc., and Gary Parsons.                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                  |
| 10.52  |   | Form of  Executive Stock Option Agreement.                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                  |
| 99.1   |   | Written Statement of Chief Executive Officer and  Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002 (18 U.S.C. Section 1350).                                                                                                        |

 

----

^                                          Incorporatedby reference to Holdings’ Registration Statement on Form S-1, File No.333-83619.

*                                         Pursuantto the Commission’s Orders Granting Confidential Treatment under Rule 406 ofthe Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of1934, certain confidential portions of this Exhibit were omitted by means ofredacting a portion of the text.

 

(b) Reports on Form 8-K.

 

On January 15, 2003, Holdings and XM filed a CurrentReport on Form 8-K that contained certain information in connection with theirexchange offer, $225 million financing package and various transactions withGeneral Motors Corporation.

 

On January 29, 2003, Holdings and XM filed a CurrentReport on Form 8-K that reported the closing of their exchange offer, $225million financing package and various transactions with General MotorsCorporation.

 

On May 8, 2003, Holdings filed a Current Report onForm 8-K to report financial results for the quarter ended March 31, 2003.

 

48

----

 

**SIGNATURES**

 

Pursuant to the requirements of the Securities andExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 
|         |   | XM SATELLITE RADIO INC.                                   |
|--------------|--------|-----------------------------------------------------------|
|         |   | **(Registrant)**                                          |   |
|         |   |                                                      |
| May 15, 2003 |   | By:                                                       | /s/ Hugh Panero |   |
|         |   | **Hugh  Panero,**                                         |
|         |   | **President  and Chief Executive Officer**                |
|         |   | **(principal  executive officer)**                        |
|         |   |                                                      |
|         |   | XM SATELLITE RADIO INC.                                   |
|         |   | **(Registrant)**                                          |   |
|         |   |                                                      |
| May 15, 2003 |   | By:                                                       | /s/ Joseph J. Euteneuer |   |
|         |   | **Joseph J.  Euteneuer**                                  |
|         |   | **Executive  Vice President and Chief Financial Officer** |
|         |   | **(principal  financial and accounting officer)**         |
|              |        |                                                           |  |  |  |  |  |

 

49

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**CERTIFICATIONS**

 

I, Hugh Panero, President and Chief Executive Officerof XM Satellite Radio Inc., certify that:

 

1.  I havereviewed this quarterly report on Form 10-Q of XM Satellite Radio Inc.;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)  Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) Presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)  Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May  15, 2003              |
|----------------------------------------|
|                                   |   |
| By:                                    | /s/ Hugh Panero |   |
| Hugh Panero                            |   |
| President and  Chief Executive Officer |   |
| (principal  executive officer)         |   |
|                                        |  |  |  |

 

50

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**CERTIFICATIONS**

 

I, Joseph J. Euteneuer, Executive Vice President andChief Financial Officer of XM Satellite Radio Inc., certify that:

 

1.  I havereviewed this quarterly report on Form 10-Q of XM Satellite Radio Inc.;

 

2.  Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

3.  Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.  Theregistrant’s other certifying officers and I are responsible for establishingand maintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and we have:

 

a)  Designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

b)  Evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) Presented in this quarterly report our conclusionsabout the effectiveness of the disclosure controls and procedures based on ourevaluation as of the Evaluation Date;

 

5.  Theregistrant’s other certifying officers and I have disclosed, based on our mostrecent evaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunction):

 

a)  Allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b)  Any fraud,whether or not material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.  Theregistrant’s other certifying officers and I have indicated in this quarterlyreport whether or not there were significant changes in internal controls or inother factors that could significantly affect internal controls subsequent tothe date of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weaknesses.

 
| Date:  May  15, 2003                             |
|-------------------------------------------------------|
|                                                  |
| By:                                                   | /s/ Joseph J. Euteneuer |   |
| Joseph J.  Euteneuer                                  |
| Executive Vice  President and Chief Financial Officer |
| (principal  financial officer)                        |

 

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