c56897_ex99-1.htm -- Converted by SEC Publisher, created by BCL Technologies Inc., for SEC Filing

depreciation expense. We believe adjusted income (loss) from operations provides useful information about the operating performance of our business apart from the costs associated with our capital structure and physical plant. The exclusion of interest and depreciation and amortization expense is useful given fluctuations in interest rates and significant variation in depreciation and amortization expense that can result from the amount and timing of capital expenditures and potential variations in estimated useful lives, all of which can vary widely across different industries or among companies within the same industry. We believe the exclusion of taxes is appropriate for comparability purposes as the tax positions of companies can vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the various jurisdictions in which they operate. We believe the exclusion of restructuring and related costs and impairment of goodwill is useful given the one- time nature of these transactions. We also believe the exclusion of stock-based compensation expense is useful given the significant variation in expense that can result from changes in the fair market value of our common stock. To compensate for the exclusion of taxes, other income (expense), depreciation and stock-based compensation expense, we separately measure and budget for these items.

There are material limitations associated with the use of adjusted income (loss) from operations in evaluating our company compared with net loss, which reflects overall financial performance, including the effects of taxes, other income (expense), depreciation and amortization, restructuring and related costs, impairment of goodwill and stock-based compensation expense. We use adjusted income (loss) from operations to supplement GAAP results to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Investors that wish to compare and evaluate our operating results after giving effect for these costs, should refer to net loss as disclosed in our unaudited consolidated statements of operations. Since adjusted income (loss) from operations is a non-GAAP financial measure, our calculation of adjusted income (loss) from operations may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

The reconciliation of the pro forma unadjusted Net loss to the pro forma Adjusted income (loss) from operations is calculated as follows:


Subscriber Data:
	Pro Forma						Pro Forma
	Three months ended							Twelve months ended
	December 31,						December 31,
	2008			2007			2008				2007
Beginning subscribers		18,920,911			16,234,070			17,348,622				13,653,107
Gross subscriber additions		1,713,210			2,336,640			7,710,306				8,077,674
Deactivated subscribers		(1,630,265	)		(1,222,088	)		(6,055,072	)			(4,382,159	)
Net additions		82,945			1,114,552			1,655,234				3,695,515
Ending subscribers		19,003,856			17,348,622			19,003,856				17,348,622

Retail		8,905,087			9,238,715			8,905,087				9,238,715
OEM		9,995,953			8,033,268			9,995,953				8,033,268
Rental		102,816			76,639			102,816				76,639
Ending subscribers		19,003,856			17,348,622			19,003,856				17,348,622

Retail		(131,333	)		314,908			(333,628	)			791,444
OEM		218,249			791,356			1,962,685				2,860,722
Rental		(3,971	)		8,288			26,177				43,349
Net additions		82,945			1,114,552			1,655,234				3,695,515

	Pro Forma						Pro Forma
	Three months ended						Twelve months ended
	December 31,						December 31,
	2008			2007			2008			2007

Average self-pay monthly churn (1)(7)		1.8	%		1.7	%		1.8	%			1.7	%
Conversion rate (2)(7)		44.2	%		51.4	%		47.5	%			50.9	%
ARPU (3)(7)	$	10.60		$	10.42		$	10.51			$	10.61
SAC, as adjusted, per gross subscriber addition (4)(7)	$	70		$	83		$	74			$	86
Customer service and billing expenses, as adjusted,
per average subscriber (5)(7)	$	1.18		$	1.30		$	1.11			$	1.18
Total revenue	$	644,108		$	557,515		$	2,436,740			$	2,058,608
Free cash flow (6)(7)	$	25,877		$	5,405		$	(551,771	)		$	(504,869	)
Adjusted income (loss) from operations (8)	$	31,797		$	(224,143	)	$	(136,298	)		$	(565,452	)
Net loss	$	(248,468	)	$	(405,041	)	$	(902,335	)		$	(1,247,633	)


	Pro Forma						Pro Forma
	Three months ended						Twelve months ended
	December 31,						December 31,
(in thousands, except per share data)	2008			2007			2008			2007

Total revenue	$	644,108		$	557,515		$	2,436,740		$	2,058,608
Operating expenses:
Satellite and transmission		22,851			23,697			99,185			101,721
Programming and content		105,215			109,076			446,638			401,461
Revenue share and royalties		122,711			163,541			477,962			403,059
Customer service and billing		67,036			65,006			244,195			217,402
Cost of equipment		18,084			37,334			66,104			97,820
Sales and marketing		81,712			123,711			342,296			413,084
Subscriber acquisition costs		132,731			180,767			577,126			654,775
General and administrative		51,591			64,223			267,032			271,831
Engineering, design and development		10,380			14,303			52,500			62,907
Depreciation and amortization		49,519			75,045			245,571			293,976
Share-based payment expense		24,945			52,897			124,619			165,099
Restructuring and related costs		2,9777			-			10,434			-
Total operating expenses		689,752			909,600			2,953,662			3,083,135
Loss from operations		(45,644	)		(352,085	)		(516,922	)		(1,024,527	)
Other expense		(202,649	)		(52,055	)		(381,425	)		(221,610	)
Loss before income taxes		(248,293	)		(404,140	)		(898,347	)		(1,246,137	)
Income tax expense		(175	)		(901	)		(3,988	)		(1,496	)
Net loss	$	(248,468	)	$	(405,041	)	$	(902,335	)	$	(1,247,633	)


		Actual						Actual
		Three months ended						Twelve months ended
		December 31,						December 31,
(in thousands, except per share data)	2008			2007			2008			2007
	(Unaudited)			(Unaudited)
Revenue:
Subscriber revenue, including effects of rebates	$	565,435		$	227,658		$	1,543,951		$	854,933
Advertising revenue, net of agency fees		15,776			9,770			47,190			34,192
Equipment revenue		30,712			12,065			56,001			29,281
Other revenue		10,260			323			16,850			3,660
Total revenue		622,183			249,816			1,663,992			922,066
Operating expenses (depreciation and amortization
shown separately below) (1)
Cost of services:
Satellite and transmission		24,481			5,175			59,279			27,907
Programming and content		89,214			62,735			312,189			236,059
Revenue share and royalties		103,217			56,762			280,852			146,715
Customer service and billing		67,818			29,288			165,036			93,817
Cost of equipment		18,084			15,886			46,091			35,817
Sales and marketing		80,699			56,866			231,937			183,213
Subscriber acquisition costs		113,512			100,062			371,343			407,642
General and administrative		64,586			37,212			213,142			155,863
Engineering, design and development		12,404			7,946			40,496			41,343
Impairment of goodwill		15,331			-			4,766,190			-
Depreciation and amortization		82,958			27,638			203,752			106,780
Restructuring and related costs		2,977			-			10,434			-
Total operating expenses		675,281			399,570			6,700,741			1,435,156
Loss from operations		(53,098	)		(149,754	)		(5,036,749	)		(513,090	)
Other income (expense)
Interest and investment income		(90	)		4,171			9,079			20,570
Interest expense, net of amounts capitalized		(61,196	)		(19,887	)		(144,833	)		(70,328	)
Loss from redemption of debt		(98,203	)		-			(98,203	)		-
Loss on investments		(27,418	)		-			(30,507	)		-
Other (expense) income		(5,664	)		17			(9,599	)		31
Total other expense		(192,571	)		(15,699	)		(274,063	)		(49,727	)
Loss before income taxes		(245,669	)		(165,453	)		(5,310,812	)		(562,817	)
Income tax expense		(175	)		(770	)		(2,476	)		(2,435	)
Net loss	$	(245,844	)	$	(166,223	)	$	(5,313,288	)	$	(565,252	)
Net loss per common share (basic and diluted)	$	(0.08	)	$	(0.11	)	$	(2.45	)	$	(0.39	)
Weighted average common shares outstanding
(basic and diluted)		3,160,223			1,468,210			2,169,489			1,462,967

(1) Amounts related to share-based payment expense included in operating expenses were as follows:
Satellite and transmission	$	1,349		$	364		$	4,236		$	2,198
Programming and content		4,672			2,786			12,148			9,643
Customer service and billing		783			165			1,920			708
Sales and marketing		2,165			539			13,541			15,607
Subscriber acquisition costs		-			156			14			2,843
General and administrative		12,995			10,261			49,354			44,317
Engineering, design and development		2,023			625			6,192			3,584
Total share-based payment expense	$	23,987		$	14,896		$	87,405		$	78,900


		Actual
		As of December 31,
(in thousands, except share and per share data)	2008			2007
ASSETS
Current assets:
Cash and cash equivalents	$	380,446		$	438,820
Accounts receivable, net of allowance for doubtful accounts of $6,746 and $4,608, respectively		102,024			44,068
Receivables from distributors		45,950			60,004
Inventory, net		24,462			29,537
Prepaid expenses		67,203			31,392
Related party current assets		114,177			2,161
Restricted investments		-			35,000
Other current assets		58,744			37,875
Total current assets		793,006			678,857
Property and equipment, net		1,703,476			806,263
FCC licenses		2,083,654			83,654
Restricted investments, net of current portion		141,250			18,000
Deferred financing fees, net		40,156			13,864
Intangible assets, net		688,671			-
Goodwill		1,834,856			-
Related party long-term assets, net of current portion		124,607			3,237
Other long-term assets		81,019			90,274
Total assets	$	7,490,695		$	1,694,149
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses	$	877,594		$	464,943
Accrued interest		76,463			24,772
Deferred revenue		985,180			548,330
Current maturities of long-term debt		399,726			35,801
Related party current liabilities		68,373			1,148
Total current liabilities		2,407,336			1,074,994
Long-term debt, net of current portion		2,851,740			1,278,617
Deferred revenue, net of current portion		247,889			110,525
Deferred credit on executory contracts		1,037,190			-
Deferred tax liability		894,453			12,771
Other long-term liabilities		43,550			9,979
Total liabilities		7,482,158			2,486,886

Commitments and contingencies		-			-
Stockholders’ equity (deficit):
Series A convertible preferred stock, par value $0.001 (liquidation preference of
$51,370 and $0 at December 31, 2008 and 2007, respectively); 50,000,000 authorized at
December 31, 2008 and 2007, 24,808,959 and zero shares issued and outstanding at
December 31, 2008 and 2007, respectively		25			-
Common stock, par value $0.001; 8,000,000,000 and 2,500,000,000 shares
authorized at December 31, 2008 and 2007, respectively; 3,651,765,837 and 1,471,143,570
shares issued and outstanding at December 31, 2008 and 2007, respectively		3,652			1,471
Accumulated other comprehensive loss, net of tax		(7,871	)		-
Additional paid-in capital		9,724,991			3,604,764
Accumulated deficit		(9,712,260	)		(4,398,972	)
Total stockholders’ equity (deficit)		8,537			(792,737	)
Total liabilities and stockholders’ equity (deficit)	$	7,490,695		$	1,694,149


		Actual
		For the Years Ended December 31,
	2008			2007
(in thousands)
Cash flows from operating activities:
Net loss	$	(5,313,288	)	$	(565,252	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		203,752			106,780
Impairment of goodwill		4,766,190			-
Non-cash interest expense, net of amortization of premium		(6,311	)		4,269
Provision for doubtful accounts		21,589			9,002
Non-cash loss from redemption of debt		98,203			-
Amortization of deferred income related to equity method investment		(1,156	)		-
Loss on disposal of assets		4,879			(428	)
Loss on investments, net		28,999			-
Share-based payment expense		87,405			78,900
Deferred income taxes		2,476			2,435
Other non-cash purchase price adjustments		(68,330	)		-
Other		1,643			-
Changes in operating assets and liabilities:
Accounts receivable		(32,121	)		(28,881	)
Inventory		8,291			4,965
Receivables from distributors		14,401			(13,179	)
Related party assets		(22,249	)		-
Prepaid expenses and other current assets		(19,953	)		11,459
Other long-term assets		(5,490	)		12,109
Accounts payable and accrued expenses		(65,481	)		66,169
Accrued interest		23,081			(8,920	)
Deferred revenue		55,778			169,905
Related party liabilities		34,646			-
Other long-term liabilities		30,249			1,901
Net cash used in operating activities		(152,797	)		(148,766	)


Cash flows from investing activities:
Additions to property and equipment		(130,551	)		(65,264	)
Sales of property and equipment		105			641
Purchases of restricted and other investments		(3,000	)		(310	)
Acquisition of acquired entity cash		819,521			-
Merger related costs		(23,519	)		(29,444	)
Purchase of available-for-sale securities		-			-
Sale of restricted and other investments		65,869			40,191
Net cash provided by (used in) investing activities		728,425			(54,186	)


Cash flows from financing activities:
Proceeds from exercise of warrants and stock options		471			4,097
Long term borrowings, net of related costs		531,743			244,879
Payment of premiums on redemption of debt		(18,693	)		-
Payments to minority interest holder		(1,479	)		-
Repayment of long term borrowings		(1,146,044	)		(625	)
Net cash (used in) provided by financing activities		(634,002	)		248,351
Net (decrease) increase in cash and cash equivalents		(58,374	)		45,399
Cash and cash equivalents at beginning of period		438,820			393,421
Cash and cash equivalents at end of period	$	380,446		$	438,820


(1)	Average self-pay monthly churn represents the average of self pay deactivations by the period divided by the average self pay subscriber balance for the period.

(2)	We measure the percentage of subscribers that receive the service and convert to self-paying after the initial promotion period. We refer to this as the “conversion rate.” At the time of sale, vehicle owners generally receive between three and twelve month prepaid trial subscriptions and we receive a subscription fee from the OEM. Promotional periods generally include the period of trial service plus 30 days to handle the receipt and processing of payments. We measure conversion rate three months after the period in which the trial service ends. Based on our experience it may take up to 90 days after the trial service ends for subscribers to respond to our marketing communications and become self-paying subscribers.

(3)	ARPU is derived from total earned subscriber revenue and net advertising revenue divided by the daily weighted average number of subscribers for the period. ARPU is calculated as follows (in thousands, except for per subscriber amounts):


	Unaudited Pro Forma				Unaudited Pro Forma
		Three months ended				Twelve months ended
	December 31,				December 31,
	2008		2007		2008		2007

Subscriber revenue	$	585,534	$	499,109	$	2,247,334	$	1,879,766
Net advertising revenue		15,776		20,571		69,933		73,340
Total subscriber and net advertising revenue	$	601,310	$	519,680	$	2,317,267	$	1,953,106
Daily weighted average number of subscribers		18,910,689	16,629,079			18,373,274		15,342,041
ARPU	$	10.60	$	10.42	$	10.51	$	10.61

(7)	Average monthly self-pay churn; conversion rate; ARPU; SAC, as adjusted, per gross subscriber addition; customer service and billing expenses, as adjusted, per average subscriber; and free cash flow are not measures of financial performance under U.S. generally accepted accounting principles (“GAAP”). We believe these non-GAAP financial measures provide meaningful supplemental information regarding our operating performance and are used by us for budgetary and planning purposes; when publicly providing our business outlook; as a means to evaluate period-to-period comparisons; and to compare our performance to that of our competitors. We also believe that investors also use our current and projected metrics to monitor the performance of our business and to make investment decisions.

	We believe the exclusion of stock-based compensation expense in our calculations of SAC, as adjusted, per gross subscriber addition and customer service and billing expenses, as adjusted, per average subscriber is useful given the significant variation in expense that can result from changes in the fair market value of our common stock, the effect of which is unrelated to the operational conditions that give rise to variations in the components of our subscriber acquisition costs and customer service and billing expenses. Specifically, the exclusion of stock-based compensation expense in our calculation of SAC, as adjusted, per gross subscriber addition is critical in being able to understand the economic impact of the direct costs incurred to acquire a subscriber and the effect over time as economies of scale are reached.

	These non-GAAP financial measures are used in addition to and in conjunction with results presented in accordance with GAAP. These non-GAAP financial measures may be susceptible to varying calculations; may not be comparable to other similarly titled measures of other companies; and should not be considered in isolation, as a substitute for, or superior to measures of financial performance prepared in accordance with GAAP.

(8)	We refer to net income (loss) before taxes; other income (expense)-including interest and investment income, interest expense, depreciation and amortization, restructuring and related costs and impairment of goodwill; and stock-based compensation expense as adjusted income (loss) from operations. Adjusted income (loss) from operations is not a measure of financial performance under GAAP. We believe adjusted income (loss) from operations is a useful measure of our operating performance. We use adjusted income (loss) from operations for budgetary and planning purposes; to assess the relative profitability and on-going performance of our consolidated operations; to compare our performance from period–to-period; and to compare our performance to that of our competitors.

	We also believe adjusted income (loss) from operations is useful to investors to compare our operating performance to the performance of other communications, entertainment and media companies. We believe that investors use current and projected adjusted income (loss) from operations to estimate our current or prospective enterprise value and to make investment decisions.

	Because we fund and build-out our satellite radio system through the periodic raising and expenditure of large amounts of capital, our results of operations reflect significant charges for interest and