<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1999.
Registration No. 333-83619
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
---------------
XM SATELLITE RADIO HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 4899 54-1878819
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
1250 23rd Street, N.W., Suite 57
Washington, D.C. 20037-1100
(202) 969-7100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Joseph M. Titlebaum
Senior Vice President, General
Counsel and Secretary
XM Satellite Radio Holdings Inc.
1250 23rd Street, N.W., Suite 57
Washington, D.C. 20037-1100
(202) 969-7100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
With Copies To:
David B.H. Martin, Esq. Gregory A. Ezring, Esq.
Steven M. Kaufman, Esq. LATHAM & WATKINS
HOGAN & HARTSON L.L.P. 885 Third Avenue
555 13th Street, N.W. Suite 1000
Washington, D.C. 20004 New York, New York 10022
(202) 637-5600 --------------- (212) 906-1200
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (as defined below), check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold nor may any offers to buy be +
+accepted prior to the time this prospectus is delivered in final form. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+a solicitation of an offer to buy these securities in any jurisdiction where +
+such offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 27, 1999
PRELIMINARY PROSPECTUS
Shares
XM SATELLITE RADIO HOLDINGS INC.
[LOGO]
Class A Common Stock
This is an initial public offering of our Class A common stock. We are selling
all of the shares offered under this prospectus. We anticipate that the initial
public offering price for the Class A common stock will be between and
per share.
There is currently no public market for the shares. We have applied to have our
Class A common stock approved for listing on the Nasdaq National Market under
the symbol "XMSR."
See "Risk Factors" beginning on page 8 of this prospectus to read about certain
risks that you should consider before buying shares of our common stock.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
----------------------------------------------------------------
Per Share Total
----------------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to XM Radio:
----------------------------------------------------------------
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional shares of our Class A common stock from us at the initial public
offering price less the underwriting discount.
Joint Book-Running Managers
Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette
-----------
Deutsche Banc Alex. Brown Merrill Lynch & Co.
The date of this prospectus is , 1999.
<PAGE>
[COMPANY PHOTOGRAPHY AND ARTWORK]
<PAGE>
PROSPECTUS SUMMARY
This summary contains basic information about us and this offering. This
summary does not contain all the information you should consider before
investing in our common stock. Please read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the related notes. All numbers in this prospectus will be adjusted to reflect a
for 1 stock split which will occur upon completion of this offering. Unless
stated otherwise, all information in this prospectus assumes conversion of our
outstanding convertible notes into common and preferred stock and no exercise
of the underwriters' over-allotment option.
Our Business
We seek to become a premier nationwide provider of audio entertainment and
information programming. We will transmit our service, which we will call "XM
Radio," from our satellites to vehicle, home and portable radios. XM Radio
plans to offer up to 100 channels of music, news, talk, sports and children's
programming developed by us or third parties for a monthly subscription price
of $9.95. We believe XM Radio will appeal to consumers because of our digital
quality sound, variety of programming and nationwide coverage. We will build a
subscriber base for XM Radio through multiple distribution channels, including
an exclusive distribution arrangement with General Motors, other automotive
manufacturers, car audio dealers and national electronics retailers. We are
presently a development stage company with no revenue-generating operations,
and we expect to commence full commercial operation of our service in the
second quarter of 2001.
We hold one of only two licenses issued by the Federal Communications
Commission to provide satellite digital audio radio service in the United
States. We will broadcast XM Radio throughout the continental United States
from two of the most powerful commercial satellites available. These
satellites, and a ground spare, are being built by Hughes Space and
Communications Inc. and Alcatel Space Industries. A network of terrestrial
repeaters, which are ground-based electronics equipment, will receive and re-
transmit the satellite signals to augment our satellite signal coverage.
We have contracts with four leading consumer electronics manufacturers to
develop, manufacture and distribute XM radios. Our radios will be capable of
receiving both XM Radio and traditional AM/FM stations. One of these
manufacturers, Delco Electronics Corporation, a subsidiary of Delphi Automotive
Systems, is an original equipment manufacturer of radios for the automobile
industry, producing radios for installation in new automobiles. Delphi-Delco is
also the leading manufacturer of automobile radios sold in General Motors
vehicles. Two of our other manufacturers, Pioneer Electronics Corporation and
Alpine Electronics, produce radios for installation in automobiles after
purchase, so-called aftermarket radios. SHARP Corporation, a consumer
electronics company, will develop and distribute XM radios for home and
portable use. STMicroelectronics, a leading car audio chipset manufacturer,
will design and produce chipsets for XM radios.
We intend to offer our consumers a unique listening experience by providing
up to 100 channels of programming, coast-to-coast coverage and digital quality
sound. We believe that the quality and diversity of our programming will be key
drivers of consumer interest in our service. To that end, we have developed a
programming strategy that offers consumers
.Original music and talk channels created by XM Originals, our in-house
programming unit
.Channels created by well-known providers of brand name programming
.The availability of commercial-free and limited-advertising channels.
We have hired a team of programming professionals with a proven track record
of introducing new radio formats and building local and national listenership.
1
<PAGE>
We already have signed contracts representing at least 24 channels with
numerous well-known specialty and niche programmers, for many of which we will
be the exclusive satellite radio platform, including
<TABLE>
<CAPTION>
Media Radio
----- -----
<S> <C>
- Bloomberg News Radio - Hispanic Broadcasting Corporation (formerly Heftel)
- USA Today - Clear Channel Communications
- CNNfn - Radio One
- CNN en Espanol - Salem Communications
- CNN Sports Illustrated - AsiaOne
- C-SPAN Radio - One-On-One Sports
- Black Entertainment
Television - BBC World Service
- DIRECTV
- Weather Channel
- Sporting News
</TABLE>
In addition to a $9.95 subscription fee, we expect to generate revenue by
selling limited advertising time on a number of our channels. XM Radio offers a
new national radio platform for advertisers that solves many of the problems
associated with buying radio advertising nationally on a spot or syndicated
basis. By using our national platform to aggregate geographically disparate
groups through affinity and niche programming, we will provide advertisers an
effective way to market products and services to these groups. We believe that
sales of advertising time will be a significant source of revenue as our
subscriber base grows.
We have raised $330.8 million in financing, net of expenses and repayment of
debt, from investors and strategic partners. We expect to receive assistance
launching and operating our business from the following strategic investor
companies.
. General Motors, the automotive market leader, sold approximately 4.5
million automobiles in 1998, representing more than 29% of the United
States market. General Motors will install XM radios in General Motors
vehicles and exclusively market our service to General Motors vehicle
buyers.
. DIRECTV is a subsidiary of Hughes Electronics and the largest provider of
satellite television services in the United States with over 7.4 million
subscribers. We expect to benefit from DIRECTV's experience in marketing
and operating subscription broadcast service around the world.
. Clear Channel Communications is the second largest radio broadcaster in
the United States, operating or affiliated with 625 stations across the
country. We expect Clear Channel to provide us with programming,
technical and advertising sales support.
. American Mobile Satellite Corporation is a leading provider of nationwide
wireless data services in the United States.
We believe that there is a significant market for XM Radio. Market data show
strong demand for radio service. Over 75% of the entire United States
population age 12 and older listens to the radio daily, and over 95% listens to
the radio weekly. In 1997, radio manufacturers shipped approximately 15.7
million factory/dealer original equipment automobile radios, 7.4 million
aftermarket automobile radios and 1.2 million aftermarket automobile CD
changers for consumption in the United States. Original equipment radios are
installed in new cars; aftermarket radios are installed in the automobile after
purchase. We believe our national subscription service will complement
traditional local radio and that XM Radio will be attractive to underserved
radio listeners who want expanded radio choices. Approximately 50% of all
commercial radio stations in the top 268 radio markets in the United States use
one of only three general programming formats.
2
<PAGE>
Consumers in the United States have demonstrated the willingness to pay for
additional programming choices. As of year-end 1998, more than 67% of
households in the United States subscribed to cable or satellite television
services at an average cost of $28 per month. A market study conducted for us
by Critical Mass Media, a leading radio research firm, projects that between 34
million and 43 million customers would be willing to pay between $200 and $400
for a satellite radio and approximately $10.00 per month for satellite radio
service.
Our strategy includes offering diverse programming designed to appeal to a
large audience, including urban and rural listeners of virtually all ages,
ethnicities, economic groups and specialty interests. We intend to tailor our
programming and marketing to appeal to specific groups that our research has
shown are most likely to subscribe to our satellite radio service. We expect to
establish several broad distribution channels for XM Radio including the
following:
. General Motors has agreed to exclusively distribute and market the XM
Radio service and to install XM radios in General Motors vehicles. We are
currently in discussions with other car manufacturers regarding
additional distribution agreements.
. Distribution through radio manufacturers such as Delphi-Delco for new car
radios and Pioneer, Alpine and SHARP, which have strong retail and dealer
distribution networks in the United States.
. Rural market distribution using distribution channels similar to those
used by direct broadcast satellite television and through catalog/direct
marketing, the Internet and marketing through affinity groups.
----------------
Our executive offices are at 1250 23rd Street, N.W., Washington, D.C. 20037-
1100, and our telephone number is (202) 969-7100. We maintain an Internet site
on the World Wide Web at http://www.xmradio.com. Information at our web site is
not, and should not be deemed to be, part of this prospectus.
3
<PAGE>
The Offering
<TABLE>
<S> <C>
Class A common stock offered... shares
Common stock to be outstanding
after the offering:
Class A...................... shares (1)
Class B ..................... shares (2)
--------------
Total...................... shares
==============
</TABLE>
Proposed Nasdaq National
Market symbol..............
XMSR
- --------
(1) The Class A common stock outstanding after this offering is based on the
number of shares outstanding as of , 1999, and includes shares of
Class A common stock issuable upon conversion of notes which convert
automatically into such common stock at the closing of this offering. It
excludes
. shares of Class A common stock issuable upon exercise of outstanding
options exercisable at an exercise price of $ per share;
. shares of Class A common stock issuable upon conversion of Series A
convertible preferred stock which will be issued upon conversion of
notes that convert automatically at the closing of this offering; and
. shares of Class A common stock issuable upon conversion of Class B
common stock, which convert on a one-for-one basis.
(2) The Class B common stock outstanding after this offering is based on the
number of shares outstanding as of , 1999, and includes shares of
Class B common stock issuable upon conversion of notes which convert
automatically into such common stock at the closing of this offering. The
Class B common stock is substantially identical to Class A common stock,
except that it has three votes per share as compared to one vote per share
for Class A common stock.
4
<PAGE>
Summary Consolidated Financial Data
The pro forma information contained within the statements of operations data in
the following table gives effect to
. the amortization of goodwill and other intangibles arising from American
Mobile's acquisition of debt and equity interests in our company from
WorldSpace;
. the amortization of $11.3 million deferred financing fees; and
. interest in excess of amounts that would be capitalized arising from the
issuance of $250.0 million Series A subordinated convertible notes
as if all such transactions had been consummated on January 1, 1998. The pro
forma "as adjusted" information further gives effect to
. the elimination of the amortization of $11.3 million deferred financing
fees and
. interest expense related to the $250.0 million Series A subordinated
convertible notes upon the mandatory conversion of the notes into
196.1896 shares of Series A convertible preferred stock and 294.2844
shares of Class A common stock
as if all such transactions had been consummated on January 1, 1998.
The pro forma information contained within the balance sheet data in the
following table gives effect to
. American Mobile's acquisition of debt and equity interests in our
company from WorldSpace;
. our issuance of $250.0 million Series A subordinated convertible notes,
net of repayment of $75.0 million of debt and related fees and expenses
of $11.3 million;
. payments to vendors of $68.0 million; and
. the exchange of the outstanding options and debt held by American Mobile
for a new convertible note, which is convertible into Class B common
stock at a rate of $462,728 per share
as if each had occurred on June 30, 1999. The pro forma "as adjusted"
information further gives effect to
. the completion of this offering for an estimated $150.0 million less
underwriters discounts and commissions and related fees and expenses of
$11.3 million; and
. the mandatory conversion of $250.0 million Series A subordinated
convertible notes into 196.1896 shares of Series A convertible preferred
stock and 294.2844 shares of Class A common stock and the mandatory
conversion of an aggregate of $103.8 million of American Mobile
convertible notes and the related accrued interest into 202.9848 shares
of Class B common stock concurrently with this offering
as if each had occurred on June 30, 1999.
(table appears on the following page)
5
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30, December 15,
---------------------------------------- --------------------------------------- 1992
1998 1999 (Date of
1998 Pro 1999 Pro Inception)
1997 1998 Pro Forma As 1998 1999 Pro Forma As to June 30,
Actual Actual Forma Adjusted Actual Actual Forma Adjusted 1999 (1)
-------- --------- --------- -------- -------- -------- --------- -------- ------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data:
Revenue................ $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
-------- --------- --------- -------- -------- -------- --------- ------- --------
Operating expenses:
Research and
development........... -- 6,941 6,941 6,941 3,867 1,378 1,378 1,378 8,319
Professional fees...... 1,090 5,242 5,242 5,242 3,723 2,560 2,560 2,560 8,892
General and
administrative........ 20 4,010 6,353 6,353 542 4,503 5,674 5,674 8,533
-------- --------- --------- -------- -------- -------- --------- ------- --------
Total operating
expenses............. 1,110 16,193 18,536 18,536 8,132 8,441 9,612 9,612 25,744
-------- --------- --------- -------- -------- -------- --------- ------- --------
Operating loss......... (1,110) (16,193) (18,536) (18,536) (8,132) (8,441) (9,612) (9,612) (25,744)
Other expense--interest
income (expense),
net................... (549) 26 (18,218) 26 -- 76 (8,017) 76 (447)
-------- --------- --------- -------- -------- -------- --------- ------- --------
Net loss............... $ (1,659) $ (16,167) $ (36,754) $(18,510) $ (8,132) $ (8,365) $ (17,629) $(9,536) $(26,191)
======== ========= ========= ======== ======== ======== ========= ======= ========
Net loss per share--
basic and diluted..... $(13,941) $(129,336) $(294,032) $(65,056) $(66,920) $(141,032)
======== ========= ========= ======== ======== =========
Weighted average shares
used in computing net
loss per share--basic
and diluted........... 119 125 125 125 125 125
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------------
Pro
Forma
December 31, Pro As
1998 Actual Forma Adjusted
------------ -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash
equivalents........... $ 310 $ 163 $ 96,763 $235,513
System under
construction.......... 169,029 261,653 261,653 261,653
Total assets........... 170,485 263,901 406,044 533,544
Total debt............. 140,298 179,134 354,134 348
Total liabilities...... 177,668 279,449 386,449 32,663
Stockholders' equity
(deficit)............. (7,183) (15,548) 19,595 500,881
</TABLE>
- --------
(1) Business activity for the period from December 15, 1992 (date of inception)
through December 31, 1996 was insignificant.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision.
We are a development stage company and have not generated revenues to date.
We are a development stage company and still need to develop the planned XM
Radio service significantly before we can offer it to consumers. We have not
yet generated any revenues and will not do so until the commencement of
commercial operation of our service. Unless we generate significant revenues,
we will not become profitable. Our ability to generate revenues and ultimately
to become profitable will depend upon several factors, including
. whether we create and implement the XM Radio system in a timely fashion;
. whether consumer electronics manufacturers successfully develop and
manufacture XM radios;
. whether we can attract and retain enough subscribers and advertisers to
XM Radio;
. whether we compete successfully; and
. whether the FCC grants us all additional necessary authorizations in a
timely manner.
Our expenditures and losses have been significant and are expected to grow.
As of June 30, 1999, we had incurred significant costs, aggregating
approximately $261.7 million, in connection with the development of the XM
Radio system. We incurred net aggregate losses approximating $1.7 million from
our inception through December 31, 1997, and an additional $24.5 million in the
18-month period ended June 30, 1999. We expect our net losses and negative cash
flow to grow as we build the XM Radio system, make payments under our various
contracts and begin to incur marketing costs.
We need substantial further financing but such financing might not be
available.
We estimate that we will need approximately $610.6 million, after giving
effect to the proceeds from this offering, in order to meet our needs until we
begin commercial operation of our services. The funds raised in this offering
are expected to be sufficient in the absence of additional financing to cover
our funding needs into the first quarter of 2000. Even after we commence
commercial service, we will require significant additional funds before we
generate positive cash flow. In addition, we have substantial payment
obligations under a distribution agreement with General Motors, as described
under the caption "Certain Relationships and Related Party Transactions--
Distribution Agreement with GM and OnStar." Our actual funding requirements
could vary materially from our projections, due to a variety of factors, some
of which are outside of our control. If one or more of these events occurs, we
may have to raise more funds than expected to remain in business and to
continue to develop and market the XM Radio system.
We plan to raise future funds by selling debt or equity securities, or both,
publicly and/or privately and by obtaining loans or other credit lines from
banks or other financial institutions. We may not be able to raise sufficient
funds on favorable terms or at all. If we are successful in raising additional
financing, we anticipate that a significant portion of the financing will
consist of debt securities. As a result, we may be highly leveraged. If we fail
to obtain any necessary financing on a timely basis, then
. our satellite construction, launch, or other events necessary to our
business could be materially delayed, or their costs could materially
increase;
. we could default on our commitments to our satellite construction or
launch contractors, creditors or others, leading to termination of
construction or inability to launch our satellites; and
7
<PAGE>
. we may not be able to launch our satellite radio service as planned and
may have to discontinue operations or seek a purchaser for our business
or assets.
Our satellites could be damaged or destroyed during launch.
Launches of our satellites will involve risks of launch failure, satellite
destruction or damage during launch, and improper orbital placement. Launch
failure rates vary depending on the particular launch vehicle and contractor,
and there is virtually no track record for the specific rocket that will be
used for the launch of our satellites. If one or more of our launches fail, we
will suffer significant delay that will be very damaging to our business, and
we will incur significant additional costs associated with the delay in revenue
generating activities.
Premature failure of our satellites would damage our business.
If one of our satellites were to fail prematurely, it likely would affect
the quality of our service, substantially delay the commencement or interrupt
the continuation of our service and harm our business. This harm to our
business would continue until we either launched our ground spare satellite or
had additional satellites built or launched. A number of factors may decrease
the useful lives of our satellites to less than the expected approximately 15
years, including
. defects in construction;
. faster than expected degradation of solar panels;
. loss of fuel on board;
. random failure of satellite components that are not protected by back-up
units;
. electrostatic storms; and
. collisions with other objects in space.
In addition, our network of terrestrial repeaters will communicate principally
with one satellite. If the satellite communicating with the repeater network
fails, we would have to repoint all of the repeaters to communicate with the
other satellite. This would result in an interruption of service that could
last from a few hours to several days and could harm our business.
Our system depends on development and integration of complex technologies in a
novel configuration that might not work.
Our system will involve new applications of existing technology and the
complex integration of different technologies, which may not work as planned.
In addition, we may not be able to successfully develop the new technologies
required for our planned XM Radio system.
The use of terrestrial repeaters with a satellite system is untested and may
not provide the expected transmission quality. Our system will rely on a
network of terrestrial repeaters to retransmit satellite signals in areas where
blockages occur from high concentrations of tall buildings and other
obstructions. Satellites and terrestrial repeater networks have not been
integrated and used together on the scale we contemplate. We cannot be certain
that what we plan will work. Failure to integrate these technologies may result
in areas with impediments to satellite line of sight experiencing dead zones
where our signals cannot be received clearly or are of low quality.
Our business plan relies on the timely development of XM radios. Our service
is to be received by specially designed receivers that have not yet been
developed. They will require a unique integration of existing technologies,
which may take longer than expected.
Integration of components of our system may encounter technical
difficulties. We will have to integrate a number of sophisticated satellite and
other wireless technologies never integrated in the past before we can
8
<PAGE>
begin offering our service. If the technological integration of the XM Radio
system is not completed in a timely and effective manner, our business will be
harmed. We cannot ultimately confirm the ability of the system to function
until we have actually deployed and tested a substantial portion of the system.
Hardware or software errors in space or on the ground may limit or delay the XM
Radio service and therefore reduce anticipated revenues.
Our planned launch of service may be delayed, which could harm our business and
chances of success.
Any significant delay in the start of commercial operations would harm our
business and decrease our chances of competing successfully. Potential causes
of serious delay include
. our inability to obtain necessary financing in a timely manner;
. delays in, or modifications to, the design, development, construction,
launch or testing of satellites, terrestrial repeaters or other aspects
of the XM Radio system;
. satellite launch failure;
. delays in manufacture or commercial availability of XM radios;
. obtaining additional authorizations from the FCC, if required; and
. coordinating spectrum use with Mexico.
Performance failures by our satellite and launch contractors would damage our
business, and we may not have adequate remedies.
We will rely on Hughes, our satellite manufacturer, to build and deliver our
satellites in a timely manner. If Hughes fails to deliver functioning
satellites in a timely manner, the introduction of our service would likely be
delayed. If Hughes were to deliver a satellite late or otherwise default, the
remedies we have will not adequately compensate us for any damage caused to our
business. Hughes will not be liable for indirect or consequential damages, or
lost revenues or profits, from late delivery or other defaults. Also, our
satellite contract entitles Hughes to certain excusable delays for which we
have no remedy. If Hughes breaches its performance warranty, our only remedy is
not to pay Hughes in-orbit performance incentive payments of up to a total of
$12.5 million for each satellite. This remedy likely will not adequately
compensate us for the damage such breach would cause to our business.
We are depending on Sea Launch, the satellite launch services provider, to
build our launch vehicles and to launch the satellites. If the satellite launch
services provider fails to launch the satellites in a timely manner, we may be
unable to meet our business plan timetable. Neither Hughes nor the satellite
launch services provider will be liable to us for any delay in delivery of the
satellites up to 180 days caused by our scheduled launch services provider. A
delay of more than six months beyond the launch period for either satellite may
allow us to select an alternative launch system. This remedy, however, likely
would not adequately compensate us for the damage such delay would cause to our
business. Although we may be able to use another satellite launch services
provider, switching to another provider could involve significant delay and a
significant increase in cost.
Failure of third party vendors to supply radios to customers in a timely manner
would delay our revenues.
We will rely on third party manufacturers and their distributors to
manufacture and distribute XM radios. If one or more manufacturers fails to
develop XM radios for timely commercial sale, at an affordable price and with
mass market nationwide distribution, the launch of our service would be
delayed, our revenues would be less than expected and our business would
suffer. We will rely on Pioneer, Alpine and Delphi-Delco to develop,
manufacture and market XM radios for use in the car, and on SHARP to develop,
manufacture and market XM
9
<PAGE>
radios for use in the home. XM radios are not yet available, and our agreements
with third party vendors may not result in the timely production of enough
affordable XM radios to permit the widespread introduction of our service.
We will be subject to competition from CD Radio and traditional and emerging
audio entertainment providers.
In seeking market acceptance, we will encounter competition for both
listeners and advertising revenues from many sources, including
. CD Radio, the other satellite radio licensee;
. traditional and, when available, digital AM/FM radio;
. Internet based audio providers;
. direct broadcast satellite television audio service; and
. cable systems that carry audio service.
CD Radio has announced that it has arrangements for the construction,
implementation and distribution of its service and that it expects to begin
receiving revenue from commercial operations in the first quarter of 2001,
which is slightly ahead of our timetable. If CD Radio begins commercial
operations significantly before we do, it may gain a competitive advantage over
us.
Unlike XM Radio, traditional AM/FM radio already has a well established
market for its services and generally offers free broadcast reception supported
by commercial advertising rather than by a subscription fee. Also, many radio
stations offer information programming of a local nature, such as traffic and
weather reports, which XM Radio is not expected to offer as effectively as
local radio, or at all. To the extent that consumers place a high value on
these features of traditional AM/FM radio, we will be at a competitive
disadvantage.
Our business will depend on market acceptance, and the market for our service
is new and unproven.
There is currently no mobile satellite digital audio radio service in
commercial operation in the United States. As a result, we cannot estimate with
any certainty the potential consumer demand for such a service or the degree to
which we will meet that demand. Among other things, consumer acceptance of XM
Radio will depend upon
. whether we obtain, produce and market high quality programming
consistent with consumers' tastes;
. the willingness of consumers to pay subscription fees to obtain
satellite radio service;
. the cost and availability of XM radios; and
. XM Radio's and our competitors' marketing and pricing strategy.
Although we have commissioned market studies which attempt to measure market
demand, these studies are based upon statistical sampling methods and reflect
responses to hypothetical questions. Consequently, the data may not be
accurate. We caution you not to place undue reliance on this data.
Because we expect to derive a significant part of our revenues from
advertisers as well as subscription revenues, advertiser acceptance also will
be critical to the success of our business. Our ability to generate revenues
from advertisers will depend on several factors, including the level and type
of market penetration of our service, competition for advertising dollars from
other media, and changes in the advertising industry. FCC regulations limit our
ability to offer our radio service to non-subscribers. These factors may reduce
our potential revenue from advertising.
10
<PAGE>
Our distribution agreement with General Motors involves significant financial
and other risks.
We have significant payment obligations under our long-term agreement with
General Motors for the installation of XM radios in General Motors vehicles and
the distribution of our service to the exclusion of other satellite radio
services. If installation of XM radios in General Motors vehicles is not
consistent with our market acceptance, we may not be able to meet our
obligations to General Motors. In addition, certain of the payments to be made
by us under this agreement will not be directly related to the number of XM
radios installed in General Motors vehicles. For the first four years following
commencement of commercial service, we have annual, fixed payment obligations
aggregating approximately $35 million. Annual fixed payment obligations beyond
the initial four years of the contract term range from less than $35 million
per year to approximately $130 million through 2009, aggregating approximately
$400 million. In order to encourage the broad installation of XM radios in
General Motors vehicles, we have agreed to subsidize a portion of the cost of
XM radios and to make incentive payments to General Motors when the owners of
General Motors vehicles with installed XM radios become subscribers for the XM
Radio service. We must also share with General Motors a percentage of the
subscription revenue attributable to General Motors vehicles with installed XM
radios, which percentage increases until there are more than eight million
General Motors vehicles with installed XM radios. This agreement is subject to
renegotiation if General Motors does not achieve and maintain specified
installation levels of General Motors vehicles capable of receiving our
service, starting with 1.24 million units after four years, and the lesser of
600,000 units per year and amounts proportionate to target market shares in the
satellite digital radio service market thereafter. We cannot predict the
outcome of any such renegotiation.
CD Radio's patent infringement suit against us could impair our business.
On January, 12, 1999, CD Radio, the only other owner of an FCC license for
satellite radio service, sued us, claiming that we are infringing or will
infringe three CD Radio patents. The CD Radio patents involved in this
litigation relate to certain aspects of signal and reception methodologies that
may be employed by a satellite radio system. In its complaint, CD Radio seeks
money damages to the extent we have manufactured, used or sold any product or
method claimed in CD Radio's patents, and an injunction. Based on the planned
design of our system, our knowledge of the differences between the XM Radio
system and the claims of the CD Radio patents and on advice we have received
from our patent counsel, we believe that we have not infringed and will not
infringe any CD Radio patents. However, the litigation could harm us, even if
we prevail. It may divert management's attention and may make it more difficult
for us to raise financing or enter other agreements with third parties. It may
also impede our ability to move forward with the development of our system in a
timely manner. If we do not prevail in this litigation, we could become liable
to CD Radio for substantial money damages or be subject to an injunction
preventing us from using certain technology in our satellite radio system, or
both. Any such injunction could force us to develop new technology which would
not be subject to the injunction. Alternatively, we could be required to
license alternative technology from a third party, or seek a license from, and
pay royalties to, CD Radio to use its technology. Any of the foregoing could
delay or increase the costs of deploying the XM Radio system.
Our business may be impaired by third party intellectual property rights.
Development of the XM Radio system will depend largely upon the intellectual
property that we will develop and license from third parties. If the
intellectual property that we may develop or use is not adequately protected,
others will be permitted to duplicate the XM Radio system or service without
liability. There is no guarantee that others will not develop such information,
technology and know-how. In addition, others may challenge, invalidate or
circumvent our intellectual property rights, patents or existing sublicenses.
Some of the know-how and technology we have developed and plan to develop will
not be covered by United States patents. Trade secret protection and
contractual agreements may not provide adequate protection if there is any
unauthorized use or disclosure. The loss of necessary technologies could
require us to obtain substitute technology of lower quality performance
standards, at greater cost or on a delayed basis, which could harm our
business.
Other parties may have patents or pending patent applications which will
later mature into patents or inventions which may block our ability to operate
our system or license our technology. We may have to resort
11
<PAGE>
to litigation to enforce our rights under license agreements or to determine
the scope and validity of other parties' proprietary rights in the subject
matter of those licenses. Such litigation could result in substantial cost,
and there can be no guarantee that we will succeed in any such litigation.
Finally, we cannot assure you that third parties will not bring suit
against us for patent or other infringement of intellectual property rights.
Any such litigation could result in substantial cost to, and diversion of
effort by, our company, and adverse findings in any proceeding could
. subject us to significant liabilities to third parties;
. require us to seek licenses from third parties;
. block our ability to operate the XM Radio system or license its
technology; or
. otherwise adversely affect our ability to successfully develop and
market the XM Radio system.
Oversight by the FCC and other regulatory bodies involves costs and risks.
As an owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we will continue to be subject to
regulatory oversight by the FCC. FCC rules and regulations, and the terms of
our license, require us to meet certain conditions such as
. milestone dates, including the requirement that we begin full operation
of our system by October 2003;
. interoperability of our system with the other licensed satellite radio
system;
. coordination of XM Radio's satellite radio service with radio systems
operating in the same range of frequencies in neighboring countries; and
. coordination of our communications links to our satellites with other
systems that operate in the same frequency band.
Non-compliance by us with these conditions could result in fines, additional
license conditions, license revocation or other detrimental FCC actions. We
are also subject to interference risks from adjacent radio frequency users if
the FCC does not adequately protect against such risks in its rule making
process. In addition, the FCC has not yet issued rules permitting XM Radio to
deploy terrestrial repeaters to fill gaps in satellite coverage. XM Radio's
plans to deploy terrestrial repeaters may be impacted by the FCC's rules, when
issued.
The award of our FCC license was challenged by one of the losing bidders in
the initial FCC licensing procedure, but the challenge was denied by the FCC.
Subsequent to the award of our license, the losing bidder filed with the FCC
for reconsideration of the license award. Although we believe that the award
of license to us will continue to be upheld, we cannot predict the ultimate
outcome of this challenge. If this challenge is successful, the FCC could take
a range of actions, any of which could harm our ability to proceed with our
planned satellite radio service.
Sea Launch, Alcatel and other venders are subject to United States export
regulations and will need approval from the State Department under technology
export statutes and regulations for the launch of our satellites. Failure to
receive such approval or any change in applicable law or policy may result in
delay of our satellite launch.
Our service may be interrupted or impaired by catastrophic events affecting
our network or other facilities.
A catastrophic event affecting our network, such as an earthquake or power
outage, could interrupt our service and harm our business. We will not have
replacement or redundant facilities that can be used to assume the functions
of our repeater network or our planned central production and broadcast
facility in the event of a catastrophic event. Any damage to our repeater
network would likely result in degradation of our service for some subscribers
and could result in complete loss of service in affected areas. Damage to our
production and
12
<PAGE>
broadcast facility would restrict our production of programming and require us
to obtain programming from third parties to continue our service.
Consumers could steal our service.
Like all radio transmissions, the XM Radio signal will be subject to
interception. Pirates may be able to obtain or rebroadcast XM Radio without
paying the subscription fee. Although we plan to use encryption technology to
mitigate the risk of signal theft, such technology may not be adequate to
prevent theft of the XM Radio signal. If widespread, signal theft could harm
our business.
We need to obtain rights to programming, which could be more costly than
anticipated.
We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc., and SESAC, Inc. We expect to negotiate
or establish by arbitration royalty arrangements with these organizations, but
such royalty arrangements may be more costly than anticipated or unavailable.
We also have to negotiate royalty arrangements with the owners of the sound
recordings. Cable audio services currently pay a royalty rate of 6.5% of gross
subscriber revenue set by the Librarian of Congress. Although we believe we can
distinguish XM Radio sufficiently from the cable audio services in order to
negotiate a lower statutory rate, we may not be able to do so.
Our launch and in-orbit insurance will not adequately protect us against
catastrophic loss.
We intend to purchase standard launch and in-orbit insurance policies from
global space insurance underwriters, which would provide coverage against total
or partial loss of either satellite during its expected life from the time of
launch. Any adverse change in insurance market conditions may substantially
increase the premiums we would have to pay for such insurance. If the launch of
either satellite is a total or partial failure, our insurance may not fully
cover our losses. We do not expect to buy insurance to cover and would not have
protection against business interruption, loss of business or similar losses.
Also, any insurance we obtain will likely contain certain customary exclusions
and material change conditions which would limit our coverage.
Rapid technological and industry changes could make our service obsolete.
The satellite industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations, and evolving industry
standards. If we are unable to keep pace with these changes, our business may
be unsuccessful. Products using new technologies, or emerging industry
standards, could render XM Radio's technologies obsolete. In addition, we may
face unforeseen problems when developing the XM Radio system which could harm
our business. Because we will depend on third parties to develop technologies
used in key elements of the XM Radio system, more advanced technologies which
we may wish to use may not be available to us on reasonable terms or in a
timely manner. Further, our competitors may have access to technologies not
available to us, which may enable them to produce entertainment products of
greater interest to consumers, or at a more competitive cost.
Our common stock may have limited liquidity.
We cannot predict the extent to which investor interest in our company will
lead to the development of an active, liquid trading market for our common
stock. Failure to develope an active trading market may result in higher price
volatility in our stock and less efficient execution of buy and sell orders for
investors. The initial public offering price may bear no relationship to the
price at which the common stock will trade upon completion of this offering.
See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price.
13
<PAGE>
Our stock will likely be subject to substantial price and volume fluctuations.
Historically, stock prices and trading volumes for emerging companies
fluctuate widely for a number of reasons, including some reasons which may be
unrelated to their businesses or results of operations. This market volatility
could materially adversely affect the price of our common stock without regard
to our operating performance. In addition, our operating results may be below
the expectations of public market analysts and investors. If this were to
occur, the market price of our common stock would likely significantly
decrease.
Problems related to the Year 2000 issue could disrupt our operations and harm
our business.
Year 2000 could require us to incur delays and unanticipated expenses. Many
currently installed computer systems and software products are not able to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software that fail to recognize the proper date at the end of this
year may suffer major system failures or miscalculations. We believe that we
will achieve Year 2000 compliance in a timely manner without materially
affecting our company's finances. In addition, to date, based on initial
communications with significant third parties with whom we do business, we have
not identified any system within our business, which may be affected in any
material way by the failure of any such third parties to remediate their own
Year 2000 issues. However, to the extent we are unable to identify and resolve
a problem related to the Year 2000 in time to avoid any adverse consequences,
such problem could result in an interruption in, or a failure of, certain of
our normal business activities and operations, harming our business and
financial results.
A small number of principal stockholders own over % of our stock and
effectively control us.
Their interests may conflict with yours as a stockholder.
After this offering our principal stockholders will hold in aggregate
approximately % of our common stock on a fully diluted basis with total voting
power of %. We have entered into material contracts and transactions with our
principal stockholders and their affiliates, and we may enter into additional
contracts in the future. The composition of our board of directors is governed
by a shareholders' agreement among our principal stockholders, which grants
them effective management control of the company. These stockholders could use
their position as principal stockholders and their management control to cause
us to take actions that might not be in our interests or your interests as a
stockholder.
We must retain and attract key personnel to operate our business.
We depend on the continued efforts of our executive officers and key
employees who have specialized technical knowledge regarding our systems and
business knowledge regarding the radio industry and subscription services. If
we lose the services of one or more of these employees, or fail to attract
qualified replacement personnel, it could harm our business and our future
prospects.
It may be hard for a third party to acquire us, and this could depress our
stock price.
We are a Delaware company with unissued preferred stock, the terms of which
can be set by our board of directors. Antitakeover provisions in Delaware law
and our ability to adopt a shareholder rights plan using our preferred stock
could make it difficult for a third party to acquire us, even if doing so would
benefit our stockholders. This could depress our stock price.
We do not plan to pay dividends.
We have never declared or paid any dividends on our common stock. We intend
to retain any earnings to support the growth and development of our business,
and we do not plan to pay cash dividends any time soon.
14
<PAGE>
Shares eligible for future sale in the open market could depress our stock
price.
Sales of substantial amounts of our common stock in the public market
following this offering could depress its market price. Even the appearance
that a large number of shares is available for sale could have this effect. The
number of shares available for sale in the public market will be limited by
agreements under which we and our executive officers, directors and the holders
of substantially all of our outstanding shares of common stock and options and
warrants to purchase common stock have agreed not to sell or otherwise dispose
of any portion of their shares for a period of days after the date of this
prospectus. Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation may release all or any portion of the shares subject to
such agreements. In addition to the adverse effect a price decline could have
on holders of our common stock, that decline would likely impede our ability to
raise capital through the issuance of additional shares of common stock or
other securities. In addition, approximately restricted shares of our stock
are entitled to certain registration rights for sale in the public market. If
the holders of these shares sell in the public market, such sales could harm
the market price of our common stock.
You will pay more for your stock than prior investors.
The initial public offering price per share will significantly exceed the
price paid by prior investors and the net tangible book value of your shares.
As calculated under "Dilution," the average price per share paid by our
existing stockholders is $ . Therefore, the average realized gain per share
to our existing stockholders is $ , while the dilution per share to new
investors is $ . If we issue debt securities with warrants to purchase our
common stock as part of future financings, such warrants might be exercisable
for less than the initial public offering price. The amount of stock subject to
such warrants would depend on market conditions at the time. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources".
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements which are based on our current expectations, and which involve
substantial risks and uncertainties. These statements are inherently predictive
and speculative, and you must not assume that they will prove to be correct.
You can often identify these statements by forward-looking words such as
. ""may'';
. ""will," "intend," "plan to";
. ""expect," "anticipate," "project," "believe," "estimate";
. ""continue'' or similar words.
You should read such statements very carefully because they
. discuss our future plans or expectations;
. contain projections of our future financial condition or results of
operations; or
. state other forward-looking information.
When you consider such forward-looking statements, you should keep in mind
the risk factors above and the other cautionary statements in this prospectus
because they provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in
our forward-looking statements.
15
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering, at the initial public offering price of
$ per share, are estimated to be $138.7 million, after deducting estimated
underwriting discounts and commissions and offering expenses payable by us of
$11.3 million. The net proceeds are estimated to be $159.9 million if the
underwriters' over-allotment option is exercised in full, after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us of $12.6 million. The net proceeds from this offering will be used as set
forth below.
<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C>
Payments under satellite contract........................... $ 91,500
Payments under terrestrial repeater contracts............... 33,400
Working capital, operating losses and general corporate
expenses................................................... 13,800
--------
Total Uses................................................ $138,700
========
</TABLE>
We may re-allocate the proceeds among these categories depending upon the
timing of our funding requirements. In addition, these uses assume that the net
proceeds are the first funds used. To the extent we use cash on hand or from
other financings to meet these funding needs, we may reallocate the proceeds to
other matters. Pending these uses, the net proceeds from this offering may be
temporarily invested in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We have not declared or paid any dividends since our date of inception.
Currently, our Series A subordinated convertible notes restrict us from paying
dividends. These restrictions will terminate upon conversion of these notes
which will occur concurrently with this offering. We do not intend to pay cash
dividends on our capital stock in the foreseeable future. We anticipate we will
retain any earnings, if any, for use in our operations and the expansion of our
business.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1999 our capitalization on
. an actual basis;
. on a pro forma basis, which reflects the July 1999 transactions in which
we raised $250.0 million through the sale of Series A subordinated
convertible notes, repaid $75.0 million of debt, exchanged the options
and debt held by American Mobile for a new convertible note, paid $68.0
million under the Hughes contract, and amended our authorized capital
structure; and
. on a pro forma as adjusted basis which additionally reflects the sale of
million shares of Class A common stock at an assumed public offering
price of $ per share after deducting the underwriting discount and
estimated offering expenses and the application of the net proceeds from
the offering and the mandatory conversion of the $250.0 million Series A
subordinated convertible notes and the $103.8 million of American Mobile
convertible notes.
These adjustments are described more fully in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Pro Forma
Information."
<TABLE>
<CAPTION>
June 30, 1999
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ 163 $ 96,763 $235,513
======== ======== ========
Notes payable due to related party............. 98,038 -- --
Convertible notes payable due to related par-
ty............................................ 58,352 -- --
Series A subordinated convertible notes........ -- 250,000 --
American Mobile convertible note............... 22,396 22,396 --
American Mobile convertible note--new.......... -- 81,390 --
Capital lease.................................. 309 309 309
Term loan...................................... 39 39 39
-------- -------- --------
Total debt................................... $179,134 $354,134 $ 348
======== ======== ========
Stockholders' equity (deficit)
Preferred stock, par value $1.00; 1,000 shares
authorized, 500 shares designated for Series
A convertible preferred stock, no shares
issued and outstanding actual and pro forma;
and 196.1896 issued pro forma as adjusted.... -- -- --
Common stock--old, par value $0.10; 3,000
shares authorized, 125 shares issued and
outstanding actual; no shares issued and
outstanding, pro forma and pro forma as
adjusted..................................... -- -- --
Class A common stock, par value $0.01; 2,500
shares authorized, no shares issued and
outstanding actual and pro forma; and
294.2844 shares issued and outstanding pro
forma as adjusted............................ -- -- --
Class B common stock, par value $0.01; 1,000
shares authorized; issued and outstanding
actual and pro forma; and 327.9848 issued pro
forma as adjusted ........................... -- -- --
Class C non-voting common stock, par value
$0.01; 500 shares authorized, no shares
issued and outstanding actual pro forma and
pro forma as adjusted........................ -- -- --
Additional paid-in capital..................... 10,643 55,705 536,991
Accumulated deficit............................ (26,191) (26,191) (26,191)
-------- -------- --------
Total stockholders' equity (deficit)......... (15,548) 29,514 510,800
-------- -------- --------
Total capitalization........................... $163,586 $383,648 $511,148
======== ======== ========
</TABLE>
17
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was $ , or $
per share. Pro forma net tangible book value per share represents the amount of
total tangible assets less total actual liabilities, divided by the number of
shares of our common stock outstanding as of June 30, 1999 after giving effect
to the mandatory conversion of the $250.0 million Series A subordinated
convertible notes and the $103.8 million in American Mobile convertible notes
into various classes of common stock. After giving effect to the sale of the
shares of Class A common stock we are offering at a public offering price
of $ per share, without regard to the underwriting discount and estimated
offering expenses, our adjusted net tangible book value as of June 30, 1999
would have been $ , or $ per share. This represents an immediate increase
in as adjusted net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C>
Public offering price per share....................................... $
Pro forma net tangible book value per share as of June 30, 1999....... ( )
-----
Increase per share attributable to new investors......................
-----
Pro forma net tangible book value per share after the offering........
-----
Dilution per share to new investors................................... $
=====
</TABLE>
The following table sets forth, as of June 30, 1999, the difference between
existing stockholders and the new investors (before deducting the underwriting
discount and estimated offering expenses) with respect to the number of shares
purchased from us, the total consideration paid and the average price per share
paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------- ----------------------
Average Price
Number Percent Amount Percent Per Share
-------- -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders... % $ % $
New investors........... % %
-------- ---------
Total................... 100% 100%
======== =========
</TABLE>
18
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below should be read in
conjunction with the consolidated financial statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this prospectus. The consolidated statements
of operations data for the years ended December 31, 1997 and 1998, and the
consolidated balance sheets data as of December 31, 1997 and 1998, are derived
from the consolidated financial statements of XM Satellite Radio Holdings Inc.
and subsidiary, which have been audited by KPMG LLP, independent certified
public accountants. The independent auditors' report contains a paragraph
stating that we have not begun operations, have negative working capital and
are dependent upon additional debt and equity financings, and these factors
raise substantial doubt about our ability to continue as a going concern. The
selected consolidated financial data do not include any adjustments that might
result from the outcome of that uncertainty. The consolidated statements of
operations data for the six months ended June 30, 1998 and 1999, and for the
period from December 15, 1992, which is the date of inception, through June 30,
1999, and the consolidated balance sheet data as of June 30, 1999, are derived
from our unaudited consolidated financial statements included elsewhere in this
prospectus. The unaudited consolidated financial statements have been prepared
on the same basis as the audited consolidated financial statements and, in the
opinion of management, include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information set
forth therein. The results of operations for the six months ended June 30, 1998
and 1999 are not necessarily indicative of the results that may be expected for
the full year.
The pro forma information contained within the consolidated statements of
operations data in the following table gives effect to
. the amortization of goodwill and other intangibles arising from American
Mobile's acquisition of debt and equity interests in our company from
WorldSpace;
. the amortization of $11.3 million deferred financing fees; and
. interest in excess of amounts that would be capitalized arising from the
issuance of $250.0 million Series A subordinated convertible notes
as if all such transactions had been consummated on January 1, 1998. The pro
forma "as adjusted" information further gives effect to
. the elimination of the amortization of $11.3 million deferred financing
fees and
. interest expense related to the $250.0 million Series A subordinated
convertible notes upon the mandatory conversion of the notes into
196.1896 shares of Series A convertible preferred stock and 294.2844
shares of Class A common stock
as if all such transactions had been consummated on January 1, 1998.
The pro forma information contained within the consolidated balance sheet
data in the following table gives effect to
. American Mobile's acquisition of debt and equity interests in our company
from WorldSpace;
. our issuance of $250.0 million Series A subordinated convertible notes,
net of repayment of $75.0 million of debt in July 1999 and related fees
and expenses of $11.3 million;
. payments to vendors of $68.0 million; and
. the exchange of the outstanding options and debt held by American Mobile
for a new convertible note, which is convertible into Class B common
stock at a rate of $462,728 per share
as if each had occurred on June 30, 1999. The pro forma "as adjusted"
information further gives effect to
. the completion of this offering for an estimated $150.0 million less
underwriting discounts and commissions and related fees and expenses of
$11.3 million; and
. the mandatory conversion of $250.0 million Series A subordinated
convertible notes into 196.1896 shares of Series A convertible preferred
stock and 294.2844 shares of Class A common stock and the mandatory
19
<PAGE>
conversion of an aggregate of $103.8 million of American Mobile
convertible notes and the related accrued interest into 202.9848 shares of
Class B common stock concurrently with this offering as if each had
occurred at June 30, 1999.
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30, December 15,
----------------------------------------- --------------------------------------- 1992
1998 1999 (Date of
Pro 1999 Pro Inception)
1997 1998 1998 Forma As 1998 1999 Pro Forma As to June 30,
Actual Actual Pro Forma Adjusted) Actual Actual Forma Adjusted 1999 (1)
-------- --------- --------- --------- -------- -------- --------- -------- -------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of
Operations Data :
Revenue............... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
-------- --------- --------- -------- -------- -------- --------- -------- --------
Operating expenses:
Research and
development......... -- 6,941 6,941 6,941 3,867 1,378 1,378 1,378 8,319
Professional fees.... 1,090 5,242 5,242 5,242 3,723 2,560 2,560 2,560 8,892
General and
administrative...... 20 4,010 6,353 6,353 542 4,503 5,674 5,674 8,533
-------- --------- --------- -------- -------- -------- --------- -------- --------
Total operating
expenses............ 1,110 16,193 18,536 18,536 8,132 8,441 9,612 9,612 25,744
-------- --------- --------- -------- -------- -------- --------- -------- --------
Operating loss........ (1,110) (16,193) (18,536) (18,536) (8,132) (8,441) (9,612) (9,612) (25,744)
Other expense-interest
income (expense),
net.................. (549) 26 (18,218) 26 -- 76 (8,017) 76 (447)
-------- --------- --------- -------- -------- -------- --------- -------- --------
Net loss.............. $ (1,659) $ (16,167) $ (36,754) $(18,536) $ (8,132) $ (8,365) $ (17,629) $ (9,536) $(26,191)
======== ========= ========= ======== ======== ======== ========= ======== ========
Net loss per share--
basic and diluted.... $(13,941) $(129,336) $(294,032) $(65,056) $(66,920) $(141,032)
======== ========= ========= ======== ======== =========
Weighted average
shares used in
computing net loss
per share--basic and
diluted.............. 119 125 125 125 125 125
<CAPTION>
As of December
31, As of June 30, 1999
------------------ ----------------------------------
Pro Pro Forma As
1997 1998 Actual Forma Adjusted
-------- -------- --------- -------- -------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash equivalents..................................... $ 1 $ 310 $ 163 $ 96,763 $235,513
System under construction..................................... 91,932 169,029 261,653 261,653 261,653
Total assets.................................................. 91,933 170,485 263,901 406,044 533,544
Total debt.................................................... 82,504 140,298 179,134 354,134 348
Total liabilities............................................. 82,949 177,668 279,449 386,449 32,663
Stockholders' equity (deficit)................................ 8,984 (7,183) (15,548) 19,595 500,881
</TABLE>
(1) Business activity for the period from December 15, 1992 (date of
inception) through December 31, 1996 was insignificant.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which we believe
is relevant to an assessment and understanding of our financial condition and
consolidated results of operations. This discussion should be read together
with our consolidated financial statements, pro forma financial information and
related notes beginning on page F-1 of this prospectus.
Introduction
XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-
owned subsidiary of American Mobile. XM Satellite Radio Holdings Inc. became a
holding company for XM Satellite Radio Inc. in connection with a strategic
investment by WorldSpace in early 1997. In July 1999, following our repayment
of $75.0 million in debt owed to WorldSpace, WorldSpace conveyed all of its
interest in our company to a trust. American Mobile then acquired all of that
interest from the trust, making American Mobile our only current stockholder.
Also, in July, we issued $250.0 million of Series A subordinated convertible
notes.
We are in the development stage. Since our inception in December 1992, we
have devoted our efforts to establishing and commercializing the XM Radio
system. Our activities were fairly limited until 1997, when we pursued and
obtained regulatory approval from the FCC to provide satellite radio service.
Our principal activities to date have included
. designing and developing the XM Radio system;
. negotiating contracts with satellite and launch vehicle operators,
specialty programmers, radio manufacturers and car manufacturers;
. developing technical standards and specifications;
. conducting market research; and
. securing financing for working capital and capital expenditures.
We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement
of commercial operations.
We intend to capitalize all costs related to our satellite contract and our
FCC license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground
control stations. Depreciation of our satellites will commence upon in-orbit
delivery. Depreciation of our satellite control facilities and terrestrial
repeaters and the amortization of our FCC license will commence upon commercial
operations.
After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.
Results of Operations
Six Months Ended June 30, 1999 Compared with Six Months Ended June 30, 1998
Research and Development. Research and development expenses declined to
approximately $1.4 million for the six months ended June 30, 1999, compared
with approximately $3.9 million for the six months ended June 30, 1998. The
reduction in the research and development expenses primarily resulted from the
development of the system waveform technology which was completed during the
second half of 1998.
21
<PAGE>
Professional Fees. Professional fees declined to approximately $2.6 million
for the six months ended June 30, 1999, compared with $3.7 million for the six
months ended June 30, 1998. Professional fees for the six months ended June 30,
1999 primarily reflect legal, regulatory and marketing expenses. Professional
fees for the six months ended June 30, 1998 reflect regulatory and consulting
activities. The professional fees decreased as we replaced consultants with
permanent employees. We expect the professional fees to trend upward as we
continue to develop the system and our market position.
General and Administrative. General and administrative expenses increased to
$4.5 million for the six months ended June 30, 1999, compared with $0.5 million
for the six months ended June 30, 1998. The increase primarily reflects
increased headcount and facility expenses which are anticipated to continue to
increase through commercial operations.
Interest Expense. As of June 30, 1999 and 1998, we owed $178.8 million and
$93.5 million, respectively, under various debt agreements which we entered
into for the purpose of financing the XM Radio system. We capitalized interest
costs of $8.2 million and $4.6 million associated with our FCC license and the
XM Radio system during the six months ended June 30, 1999 and 1998,
respectively. No interest costs were expensed during this period.
Depreciation Expense. Depreciation expense of computers and related
facilities amounted to $0.1 million during the six months ended June 30, 1999.
We had no significant fixed assets in service during the six months ended June
30, 1998.
Net Loss. The net loss for the six-month periods ended June 30, 1999 and
1998 was $8.4 million and $8.1 million, respectively. The increase in net
losses for June 30, 1999, compared with June 30, 1998, reflects additional
general and administration expenses, primarily increased headcount and facility
expenses, in preparation for commercial operations.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Research and Development. Research and development expenses amounted to
approximately $6.9 million for the year ended December 31, 1998. Research and
development expenses for the year ended December 31, 1997 were insignificant.
The increase in research and development expenses resulted from the development
of the system waveform technology which was completed during 1998.
Professional Fees. Professional fees increased to approximately $5.2 million
for the year ended December 31, 1998, compared with $1.1 million for the year
ended December 31, 1997. The increase primarily reflects legal, regulatory and
marketing expenses.
General and Administrative. General and administrative expenses increased to
$4.0 million for the year ended December 31, 1998, compared with $20,000 for
the year ended December 31, 1997. The increase primarily reflects increased
headcount and facility expenses to begin program management and operations.
Interest Expense. As of December 31, 1998 and 1997, we owed $140.2 million
and $82.5 million, respectively, under various debt agreements which we entered
into for the purpose of financing the XM Radio system. We capitalized interest
costs of $11.8 million and $1.9 million associated with our FCC license and the
XM Radio system during the year ended December 31, 1998 and 1997, respectively.
We expensed interest costs of $0.5 million during the year ended December 31,
1997.
Depreciation Expense. Depreciation expense of computers and related
facilities amounted to $57,000 during the year ended December 31, 1998. We had
no significant fixed assets in service during the year ended December 31, 1997.
22
<PAGE>
Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.7 million, respectively, primarily reflecting research
and development activities, professional fees and general and administrative
expenses.
Liquidity and Capital Resources
Funds Required for XM Radio Through Commencement of Commercial Operations
We estimate that we will require approximately $1.1 billion to develop and
implement the XM Radio system from our inception through the commencement of
commercial operations, which we are targeting for the second quarter of 2001.
After we receive the estimated proceeds from this offering, we will have
raised an aggregate of $469.5 million since our inception net of expense and
repayment of debt. We will require substantial additional funding,
approximately $610.6 million, to finish building the XM Radio system and to
provide working capital until we commence commercial operations. The funds
raised in this offering are expected to be sufficient in the absence of
additional financing to cover our funding needs into the first quarter of
2000.
We currently expect to satisfy our funding requirements by selling debt or
equity securities and by obtaining loans or other credit lines from banks or
other financial institutions. In addition, we plan to raise funds through
vendor financing arrangements associated with our terrestrial repeater
project. If we are successful in raising additional financing, we anticipate
that a significant portion of the financing will consist of debt securities.
We may offer debt securities in a private placement at the time of or
shortly after this offering, or at other times in the near future. Often, high
yield debt securities are issued as part of units with warrants to purchase
common stock. If warrants were issued in any debt placement by us, the amount
of common stock that may be purchased and the price at which stock would be
purchased under the warrants would depend upon market conditions at that time.
We may not be able to raise any funds or obtain loans on favorable terms or
at all. Our ability to obtain the required financing depends on several
factors, including future market conditions; our success or lack of success in
developing, implementing and marketing our satellite radio service; our future
creditworthiness; and restrictions contained in agreements with our investors
or lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or
their costs could materially increase. We could default on our commitments to
our satellite construction or launch contractors, creditors or others, leading
to termination of construction or inability to launch our satellites. Finally,
we may not be able to launch our satellite radio service as planned and may
have to discontinue operations or seek a purchaser for our business or assets.
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
<TABLE>
<CAPTION>
Sources of Funds
- ----------------
<S> <C>
Total funds raised to
date.................... $ 330.8
Net proceeds from this
offering................ 138.7
--------
Total capital raised... 469.5
Future capital
requirements............ 610.6
--------
Total sources.......... $1,080.1
========
</TABLE>
<TABLE>
<CAPTION>
Uses of Funds
- -------------
<S> <C>
Satellites and launch.... $ 472.6
Launch insurance......... 50.0
Terrestrial repeater
system.................. 263.3
Ground segment........... 65.9
--------
Total system........... 851.8
FCC license.............. 90.0
Operating expenses and
working capital
requirements............ 138.3
--------
Total uses............. $1,080.1
========
</TABLE>
23
<PAGE>
The sources and uses chart for inception through commercial launch assumes
that we will commence full commercial operations in the second quarter of 2001
and does not include net interest income or expense of any future offerings or
other financings. We anticipate that we will need further funding after
commencement of operations to cover our cash requirements before we generate
positive cash flow from operations. Many factors, including our ability to
generate significant revenues, could affect this estimate. See "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Total funds raised to date in the chart above include proceeds of
. $1.7 million from an equity contribution from American Mobile;
. $7.5 million from common stock we issued to WorldSpace;
. $81.9 million from loans made by WorldSpace;
. $54.5 million from the WorldSpace convertible note;
. $21.4 million from the American Mobile subordinated convertible notes;
and
. $250.0 million from the subordinated convertible notes sold to General
Motors, Clear Channel, DIRECTV, Telcom Ventures, Columbia Capital and
Madison Dearborn Partners, less $11.3 million in fees and expenses in
connection with financing transactions and $75.0 million debt repayment
to WorldSpace.
Net proceeds from the offering in the chart above reflects the expected
gross proceeds of this offering of $150.0 million less $11.3 million in
underwriting discounts and commissions and offering expenses payable by us.
The use of funds for satellites and launch in the chart above includes
$472.6 million for satellites, launch and long-lead items, including certain
financing costs associated with the satellites, and for an option to complete
the ground spare satellite under our satellite contract with Hughes. As of June
30, 1999, $58.3 million has been paid under the satellite contract.
The anticipated $65.9 million in costs for ground segment are intended to
cover the satellite control facilities, programming production studios and
various other equipment and facilities. As of June 30, 1999, we had not
incurred any costs in deploying the ground segment.
Other operating expenses and working capital requirements in the chart above
include cumulative historical operating losses through June 30, 1999 of $26.2
million.
Sources of Funds. To date, we have raised approximately $330.8 million of
capital, net of expenses and repayment of debt. These funds have been used to
acquire our FCC license, make required payments under our satellite contract
with Hughes, and for working capital and operating expenses. Of the $330.8
million raised to date, approximately $167.0 million has been raised through
the issuance of equity to, and receipt of loans from, our current stockholder,
American Mobile, and former stockholder, WorldSpace. Of this amount,
approximately $90.7 million and $46.0 million was raised in 1997 and 1998,
respectively, and $30.3 million was raised in January 1999.
In July 1999, we issued $250.0 million of Series A subordinated convertible
notes to six strategic and financial investors--General Motors, $50.0 million;
Clear Channel Communications, $75.0 million; DIRECTV, $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million in the aggregate. Using part of the proceeds from the issuance of the
Series A subordinated convertible notes, we paid WorldSpace $75.0 million in
July 1999 to redeem an outstanding loan owed to WorldSpace. We incurred fees
and expenses totalling $11.3 million in connection with these transactions.
Assuming completion of the offering on September 15, 1999, the notes would
automatically convert into 300.3506 shares of our Class A common stock and
200.2338 shares of our Series A preferred stock. If not converted, the notes
will mature on December 31, 2004, or, if we issue at least $50.0 million
aggregate
24
<PAGE>
principal amount of high yield debt securities, we will be entitled to extend
the maturity date of the subordinated convertible notes to a date no later than
the six-month anniversary of the stated maturity date of the high yield debt
securities. The notes are senior to all of our existing indebtedness, including
the debt securities issued by us to American Mobile that are convertible into
our Class B common stock. However, the notes are subordinate to any future high
yield debt securities issued by us.
As part of the July 1999 transactions, WorldSpace transferred all of its
rights, title and interests in XM Radio to a trust. These interests included 25
shares of our common stock; a $54.5 million note issued to WorldSpace in April
1998 convertible into 62.3270 shares of our common stock, together with
interest accrued and capitalized thereon; an aggregate of $81.9 million of
additional indebtedness incurred to WorldSpace in May 1997, together with
interest accrued and capitalized thereon, other than $75.0 million aggregate
principal amount thereof, which was retained by WorldSpace and repaid and
retired by us; and options issued to WorldSpace in May 1997 to purchase up to
229.6209 shares of our common stock. The stock, notes, and indebtedness were
then acquired from the trust by American Mobile, and the notes and indebtedness
were converted into or exchanged for additional shares of our common stock. As
a result of these transactions, WorldSpace ceased to have any direct equity or
debt interest in our company, and American Mobile holds 125 shares of Class B
common stock and notes, including associated accrued interest convertible into
203.4316 shares of Class B common stock as of July 15, 1999.
Uses of Funds. Of the approximately $1.1 billion of funds to be used through
commencement of commercial operations, an estimated $569.4 million are expected
to be incurred under contracts presently in place and for our FCC license,
which has already been paid for in full. Total capital expenditures from our
inception to June 30, 1999 totaled $152.6 million.
Satellite Contract. Under our satellite contract, Hughes will deliver two
satellites in orbit and if we exercise our option, complete construction of a
ground spare satellite. Hughes will also provide ground equipment and software
to be used in the XM Radio system and certain launch and operations support
services. We expect that by commencement of commercial operations in the second
quarter of 2001, we will have had to pay an aggregate amount of approximately
$472.6 million for these items and for Hughes to complete the optional ground
spare satellite. This amount does not include incentive payments, which will
depend in part on projected satellite performance at the acceptance date. Such
payments could total up to an additional $68.7 million over the useful lives of
the satellites. As of June 30, 1999, we had paid approximately $58.3 million
under our satellite contract, and have recognized an additional $88.0 million
in accrued milestone payments. On July 7, 1999 we paid $68.0 million to Hughes,
and on July 23, 1999 we paid $20.0 million to Hughes.
Launch Insurance. Based on current market research, we expect that launch
insurance will cost approximately $50.0 million. As of June 30, 1999, we had
not incurred any costs with respect to launch insurance.
Terrestrial Repeater System. Based on the current design of the XM Radio
system and preliminary bids, we estimate that through our expected commencement
of operations in the second quarter of 2001 we will incur aggregate costs of
approximately $263.3 million for a terrestrial repeater system. We expect these
costs to cover the capital cost of the design, development and installation of
a system of terrestrial repeaters to cover approximately 70 cities and
metropolitan areas. As of June 30, 1999, we had incurred costs with respect to
the terrestrial repeater buildout of $1.7 million, and in August 1999 we signed
a contract calling for payments of approximately $115 million for engineering
and site preparation.
Ground Segment. Based on the design of the XM Radio system, available
research, preliminary bids and actual contract costs, we expect to incur
aggregate ground segment costs through the expected commencement of operations
in the second quarter of 2001 of approximately $65.9 million. We expect these
costs will cover the satellite control facilities, programming production
studios and various other equipment and facilities. As of June 30, 1999, we had
not incurred any costs with respect to the ground segment.
25
<PAGE>
FCC License. In October 1997, we received one of two satellite radio
licenses issued by the FCC. We have paid approximately $90.0 million for this
license, including the initial bid right. No additional payments have been made
relating to the license.
Operating Expenses and Working Capital Requirements. In addition to the
above capital needs, we will require funds for working capital, operating
expenses and royalty payments currently estimated to be approximately $138.3
million through our targeted commercial launch in the second quarter of 2001.
From our inception through June 30, 1999, we have incurred total operating
expenses of $26.2 million. Total cash used in operating activities was $6.0
million. The difference between the loss incurred to date and cash used in
operations is principally due to $5.8 million in accounts payable and accrued
interest and $13.8 million in amounts due to related parties.
Funds Required for XM Radio Following Commencement of Commercial Operations
We anticipate that even after commencement of commercial operations we will
need significant additional funds to cover our cash requirements before we
generate sufficient cash flow from operations to cover our expenses. We cannot
accurately estimate the amount of additional funds needed, since it will depend
on business decisions to be made in the future and revenues received from
operations, but we expect the amount to be substantial. Funds will be needed to
cover operating expenses, marketing and promotional expenses including an
extensive marketing campaign in connection with the launch of our service,
distribution expenses, programming costs and any further development of the XM
Radio system that we may undertake after operations commence.
We will have significant payment obligations after commencement of
operations under our long-term distribution agreement with the OnStar division
of General Motors. We have significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35 million during this period. Additional annual
fixed payment obligations beyond the initial four years of the contract term
range from less than $35 million to approximately $130 million through 2009,
aggregating approximately $400 million. In order to encourage the broad
installation of XM radios in General Motors vehicles, we have agreed to
subsidize a portion of the cost of XM radios and to make incentive payments to
General Motors when the owners of General Motors vehicles with installed XM
radios become subscribers for the XM Radio service. We must also share with
General Motors a percentage of the subscription revenue attributable to General
Motors vehicles with installed XM radios, which percentage increases until
there are more than eight million General Motors vehicles with installed XM
radios. This agreement is subject to renegotiation if General Motors does not
achieve and maintain specified installation levels of General Motors vehicles
capable of receiving our service, starting with 1.24 million units after four
years, and the lesser of 600,000 units per year or amounts proportionate to
target market shares in the satellite digital radio service market. The
distribution agreement is described in more detail under the caption "Certain
Relationships and Related Party Transactions--Distribution Agreement with
General Motors and OnStar."
We currently expect to satisfy our funding requirements for the period
following commencement of commercial operations in substantially the same
manner as our requirements prior to commencement of commercial operations,
discussed above.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Many such systems will
need to accept four-digit entries in order to distinguish 20th century dates
from 21st century dates. As a result, before the end of this year, computer
systems and software used by many companies need to be upgraded to comply with
these Year 2000 requirements. Otherwise these systems may cause miscalculations
that will interfere with business activities or simply fail to work. When we
use the terms "Year 2000 Ready" or "Year 2000 Readiness," we mean that
customers will not experience any material difference in performance and
functionality of our networks as a result of the date being prior to, during or
after the Year 2000.
26
<PAGE>
We began to assess our Year 2000 Readiness in mid-1998. We have
substantially completed the identification, modification (as necessary) and
testing of all our current systems, which we believe are Year 2000 compliant.
This required no significant expense. Because we are a development stage
company and do not expect to commence commercial operations until the second
quarter of 2001, we do not expect that Year 2000 issues will pose significant
operational or financial problems for our company. Our existing technology
development contracts require Year 2000 Readiness, and we will require Year
2000 Readiness in all new contracts that we enter.
In addition to our internal review process, we have had initial
communications with certain significant third parties with which we do business
to
. evaluate their Year 2000 Readiness and state of compliance; and
. determine the extent to which our systems may be affected if they fail
to remediate their own Year 2000 issues.
To date, we have not identified any system which presents a material risk of
not being Year 2000 Ready in a timely fashion or for which a suitable
alternative cannot be implemented. However, as we progress with our Year 2000
Readiness review, we may identify systems that present a material risk of Year
2000 disruption. If we determine that our business or a segment thereof is at
material risk of disruption due to Year 2000 issues or anticipate that our Year
2000 Readiness will not be completed in a timely fashion, we will work to
enhance our contingency plan.
Qualitative and Quantitative Discussion of Market Risk
As of December 31, 1998, we had various loans payable to related parties of
$91.5 million. These loans matured in April and May 1999 and were converted
into demand notes. Interest on the loans payable to related parties accrues at
variable rates based upon the six-month LIBOR rate plus 5% per annum and is
payable semi-annually or may be capitalized into the loan balance if renewed.
Additionally, we have a $45.6 million convertible note payable to a related
party. This note bears interest at a variable interest rate based upon the six-
month LIBOR rate plus 5% per annum. This note matures September 30, 2006.
We do not have any derivative financial instruments as of December 31, 1998,
and we believe that the interest rate risk associated with our indebtedness is
not material to the results of operations. On July 7, 1999 all of the amounts
outstanding under the loans payable to related parties and the convertible note
due to related party, with the exception of $75.0 million which was repaid in
cash, were converted into a new convertible note with a face value of $81.7
million which matures on December 31, 2004, unless extended in certain
circumstances if we issue high yield debt securities and bears interest at the
six-month LIBOR plus 5% per annum.
Substantially all of our indebtedness will automatically convert into equity
upon the completion of this offering.
27
<PAGE>
BUSINESS
Overview
We seek to become a premier nationwide provider of audio entertainment and
information programming with digital quality sound. We will transmit our XM
Radio service by satellites to vehicle, home and portable radios. We own one of
two FCC licenses to provide a satellite digital radio service in the United
States. We will offer a wide variety of music, news, talk, sports and other
specialty programming on up to 100 distinct channels. We believe that customers
will be attracted to our service because of its wide variety of formats,
digital quality sound and coast-to-coast coverage.
We are constructing our satellite system and have contracts with third party
programmers, vendors and other partners. Key milestones achieved include the
following:
. $330.8 million of capital raised to date, net of expenses and repayment
of debt, including an offering of subordinated convertible notes to
several strategic and financial investors, including General Motors,
Clear Channel Communications, DIRECTV, Telcom Ventures, Columbia Capital
and Madison Dearborn Partners;
. Contract with Hughes for construction and in-orbit delivery of two high-
powered satellites and long lead items for a ground spare;
. Long-term agreement with the OnStar division of General Motors covering
the installation and exclusive marketing and distribution of XM Radio
service in General Motors vehicles;
. Contracts with Alpine, Pioneer, SHARP and Delphi-Delco Electronics to
manufacture and distribute XM radios;
. Agreement with STMicroelectronics, a leading digital audio chipset
manufacturer, for the design and production of chipsets for XM radios;
and
. Agreements with leading specialty programmers, for many of which we will
be the exclusive satellite radio platform, covering at least 24
channels, including AsiaOne, Black Entertainment Television (BET), BBC
World Service, Bloomberg News Radio, Clear Channel, CNN en Espanol, CNN
fn, CNN Sports Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting
Corporation (formerly Heftel), One-on-One Sports, Radio One, Salem
Communications and USA Today.
Market Opportunity
We believe that there is a significant market for our satellite radio
service. Market studies show strong demand for radio service, as evidenced by
radio listening trends, data relating to sales and distribution of radios and
the general growth in radio advertising. In addition, we note that in many
markets audio programming choices are limited to mass appeal formats. We
believe our national subscription service will complement traditional local
radio. Moreover, the success of subscription entertainment services in other
media such as cable television and market research further indicate potential
for significant consumer demand for satellite radio services.
Radio Listening
On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that
over 75% of the entire United States population age 12 and older listen to the
radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and
Factbook, Radio Advertising Bureau, 1998).
In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting
28
<PAGE>
our service initially. An estimated 69% of consumers chose radio as their most
listened to format in the car as compared to 15% for cassettes and 9% for CDs
(Radio Listening Habits, CEMA 1998).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis.
In 1997, radio manufacturers shipped 15.7 million factory/dealer original
equipment automobile radios, 7.4 million aftermarket automobile radios and 1.2
million aftermarket automobile CD changers for consumption in the United
States. Original equipment radios are installed in new cars; aftermarket radios
are installed in the automobile after purchase. Based on these statistics, each
additional one million subscribers would represent less than 5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.
Radio Advertising
The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1998 climbed to $15.4 billion, an increase of 12% over 1997 (Press
Release, February 8, 1999). Veronis, Suhler & Associates projects a compound
annual increase of 9.3% through 2002. This growth rate exceeds the projected
increase in advertising spending for television, newspapers, consumer
magazines, and outdoor advertising. (Communications Industry Forecast, 1998)
Current Limitations on Programming Choice
Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.
Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the up to 100
channels we expect to offer on a nationwide basis. In 1998, there were only 49
AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Summer 1998 Ratings Report, Duncan's American Radio, 1998).
We estimate that our coast-to-coast service will reach approximately 98
million listeners age 12 and over who are beyond the range of the largest 50
markets as measured by Arbitron. Of these listeners, over 36 million live
beyond the largest 268 markets (Statistical Abstract of the United States 1998
and Fall 1998 Market Rankings, The Arbitron Company). In addition, there are 22
million people age 12 and above who receive five or fewer stations (The
Satellite Report 1999, C. E. Unterberg, Towbin).
Limited Programming Formats. We believe that there is significant demand for
a satellite radio service that expands the current programming choices
available to these potential listeners. Over 50% of all commercial radio
stations use one of only three general programming formats--country,
news/talk/sports, and adult contemporary (M Street Radio Directory, 1998). Over
70% of all commercial radio stations use one of only five general formats--the
same three, plus oldies and religion. The small number of available programming
choices means that artists representing niche music formats likely receive
little or no airtime in many markets. Radio stations prefer featuring artists
they believe appeal to the broadest market. However, according to the Recording
Industry Association of America, record sales of niche music formats such as
classical, jazz, movie and Broadway soundtracks, new age, children's
programming and others comprised up to 21% of total recorded music sales in
1998 (1998 Consumer Profile).
29
<PAGE>
Demand for Subscription Services and Products
Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1998, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $28, and nearly 9% of TV households subscribe to satellite television at an
average monthly cost of $52 (National Cable Television Association website and
DBSdish.com website). Also in 1998, according to Paul Kagan Associates,
subscribers of cable and satellite services purchased more than 68 million
premium channel units (e.g., HBO, Showtime, Cinemax) for which they paid an
extra monthly charge on top of the monthly fee for basic cable or satellite
services.
Demand for Satellite Radio Services
Several studies have been conducted demonstrating the demand for satellite
radio service. In December 1998, we commissioned SMART--Strategic Marketing And
Research Techniques, a leading market research company, to conduct a Discrete
Choice Model Study based on one-on-one interviews with over 1,000 licensed
drivers ages 16 to 64 in ten geographically dispersed markets. The study
concluded that approximately 50% of aftermarket radio purchases would be for
AM/FM/satellite radio units with a single-disc CD player assuming a radio price
point of $399, a $75 installation fee and a $10 monthly subscription fee for
the service. The same study also found that consumers are more likely to buy
satellite radio units that offer at least 80 channels.
In November 1998, we commissioned Yankelovich Partners to gauge consumer
interest in satellite radio by surveying 1,000 people via telephone and
correlating the results with the Yankelovich MONITOR study, the longest
standing tracking study of consumer values and attitudes in the United States.
The study indicated that 18% of people age 16 and older were "definitely" or
"probably" willing to pay $9.99 per month and an additional $150 for a
satellite radio when buying a new car.
In July 1997, Critical Mass Media, a leading radio research firm, conducted
a demand and segmentation study for us involving telephone surveys of 6,000
people. The study measured demand for satellite radio, and estimated it to be
between 34 and 43 million customers based at different equipment price points,
a $10.00 subscription fee, and 50 channels. According to the study, 34 million
consumers would be willing to subscribe to satellite radio with a $400
equipment price point and a $10.00 per month subscription fee, growing to 43
million consumers with a $200 equipment price point and a $10.00 per month
subscription fee. XM Radio presently plans to offer up to 100 channels.
The XM Radio Service
We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout
the continental United States, will position us to become the leading provider
of the next generation in radio.
We Will Differentiate XM Radio from Traditional AM/FM Radio
Local radio stations, even those which are part of national networks, focus
on maximizing listener share within local markets. This limits the types of
programming they can profitably provide to mass appeal formats. In contrast,
our nationwide reach and ability to provide up to 100 channels in each radio
market will allow us to aggregate listeners from markets across the country,
expanding the types of programming we can provide. The following chart
indicates differences between XM Radio and traditional AM/FM radio.
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<TABLE>
<CAPTION>
XM Radio Traditional AM/FM Radio
<S> <C> <C>
Convenience: go anywhere Virtually seamless signal Local area coverage
capability coverage in the United
States
Choice: wide Up to 100 channels with a Limited formats in many markets
variety/number of wide variety of programming
stations
Improved audio quality Digital quality sound Analog AM/FM quality sound
Fewer commercials Average 6-7 minutes per Average 13-17 minutes per hour
hour; some channels
commercial free
More information about Text display with title/name No visual display
music of song/artist
</TABLE>
We plan to further differentiate XM Radio from traditional AM/FM radio in
the following ways.
Provide music formats unavailable in many markets. XM Radio will offer many
music formats that are popular but currently unavailable in many markets.
Approximately 50% of all commercial radio stations in markets surveyed by
Arbitron use one of only three programming formats: country; news/talk/sports;
or adult contemporary. There are many types of music with significant
popularity, as measured by recorded music sales and concert revenues, that are
unavailable in many traditional AM/FM radio markets. Such music could include
classical recordings or popular blues and rap music that have retail appeal but
are not commonly played on traditional AM/FM radio. This music also includes
special recordings such as the Irish dance soundtrack "Riverdance" and the
"Three Tenors" concerts which generate millions of CD sales, yet are not
typically played on today's AM/FM stations. Additionally, heavy metal and dance
are two of the more popular musical styles not currently broadcast in many
small and medium sized markets. Even major markets do not always offer a full
complement of formats.
Superserve popular music formats. We will be able to offer more specific
programming choices than traditional AM/FM radio generally offers for even the
most popular listening formats. For example, on traditional AM/FM radio oldies
music is often generalized on a single format. We will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.
Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on specific
formats, we have the ability to provide more variety to attract listeners
dissatisfied with repetitive and/or limited playlist selection offered by
traditional radio.
Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using
our national platform to aggregate geographically disparate groups through
affinity programming, we will provide advertisers a valuable way to market
products and services to these groups by advertising on our affinity channels.
Develop promotional opportunities with record companies, recording artists
and radio personalities. Because of our nationwide coverage and resulting
economies of scale, we will be able to deliver a variety of national promotions
and events that would not be cost effective or efficient on a market-by-market
basis through traditional AM/FM radio distribution. Also, we will seek to hire
and develop high profile talk and disc jockey talent capable of becoming the
next generation of national radio stars with an influence on radio similar to
the impact that the new breed of cable TV talk hosts have had on the television
industry.
Respond quickly when major music and cultural events occur. XM Radio
programmers will respond quickly to changing musical tastes, seasonal music and
emerging popular cultural events (e.g., Bruce
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Springsteen, Ricky Martin tours) by providing listeners with extensive coverage
utilizing our large channel capacity.
Take advantage of digital's higher quality signal. There are several music
formats that have strong demand but have been relegated to AM stations with
weaker signals due to lack of available FM frequencies. Such AM formats include
traditional country music, big band/nostalgia and gospel formats that we will
be able to deliver with superior sound quality.
Focus on special demands of mobile listeners. A significant percentage of
radio listeners, such as truckers, routinely travel through two or more radio
markets on a frequent basis. According to the U.S. Department of
Transportation, there were over three million truckers in the United States in
1997. We believe these listeners will be attracted to a radio service with
national coast-to-coast coverage. We are seeking to specifically identify and
target the listening demands of this audience.
Availability of commercial-free and limited-advertising channels. We believe
that a significant portion of the listening market would pay to subscribe to a
radio service that provided commercial-free channels and channels with reduced
advertising, as demonstrated by the appeal of limited periods of non-stop music
used by some traditional AM/FM stations. Therefore, we plan to target this
audience with a number of commercial-free music channels covering popular music
formats. In addition, we expect that our limited-advertising channels will
carry less than half the advertising spots of typical AM/FM stations.
Use cross-promotion capability to market XM Radio. We will dedicate a
percentage of our advertising inventory across our channels to promote specific
programming and brand loyalty. AM/FM radio stations traditionally promote on a
single channel basis to build awareness.
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Representative XM Radio Channel List
The following table is a list of representative channels we may offer.
Channels in italics represent contractual commitments with content providers.
Representative Channels of XM Radio
ROCK MUSIC INFORMATION HISPANIC
Classic Rock All News (USA Today)
Classic Hard Rock All News (Bloomberg) Tejano (Hispanic
New Hard Rock Public Affairs (C-SPAN) Broadcasting Corp.)
New Alternative Financial News (CNN fn)
Classic Alternative News/Information (BBC Caribbean (Hispanic
Soft Rock World Service) Broadcasting Corp.)
ECLECTIC MUSIC Home & Garden
Contemporary Christian Love/Relationship Line Regional Mexican
(Salem) Farm/Rural (Hispanic Broadcasting
Traditional Christian Health/Fitness Corp.)
(Salem)
Comedy
Blues Audio Books Rock en Espanol
Traditional Jazz Consumer Classified (Hispanic Broadcasting
Reggae/Island Soap Operas Corp.)
World Music For Truckers Only
American Folk Movie Soundtrack Channel Hispanic Ballads
Pop Classical Relationship Classified (Hispanic Broadcasting
Traditional Classical (-18) Corp.)
Modern Jazz Relationship Classified Hispanic News (CNN en
Progressive/Fusion (19-30) Espanol)
POP MUSIC Relationship Classified OLDIES MUSIC
Top 20 Contemporary Hits (31-50) 40's Oldies
Disco/Dance Relationship Classified 50's Oldies
Broadway Show Tunes (51+) 60's Oldies
Modern Adult Lifestyles 70's Oldies
Contemporary Celebrity Gossip 80's Oldies
Classic Vocalists Entertainment News 90's Oldies
All Request Contemporary Game Show/Contest Love Songs
Hits URBAN MUSIC TALK
SPORTS Hip Hop/Rap (BET/Radio African American Talk
Sports Headlines One) Asian/Indian Talk
(CNN/Sports) Urban Dance Mix (Radio (AsiaOne)
Sports Talk (One-On-One One) Christian/Family Talk
Sports) Classic Soul (BET/Radio (Salem)
Sportsman Channel One) Mandarin Talk (AsiaOne)
Automotive Gospel (BET/Radio One) Conservative Talk
COUNTRY MUSIC Adult Urban (BET/Radio Liberal Talk
Mainstream Country One) Senior Citizen Talk
Classic Country Top 20 Urban Rock Talk (18-34)
Bluegrass/Traditional ENVIRONMENTAL MUSIC Hispanic Talk
Country Soft Jazz Teen Talk
All Request Country New Age CHILDREN'S MUSIC
Electronic Pre-School
Environmental (Earth Grade School/pre-teen
Sounds) SPECIAL/EVENTS
Beautiful Instrumentals Reserved Channels
Key Elements of Our Business
We have developed a business strategy to become a premier nationwide
provider of digital quality audio entertainment and information programming in
the vehicle, home and portable markets. Our strategy includes the following
elements.
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Programming
We believe that the quality and diversity of our programming will be a key
driver of consumer interest in our service. To that end, we have developed a
unique programming strategy that offers consumers
. Original music and information channels created by XM Originals, our in-
house programming unit;
. Channels created by well-known providers of brand name programming; and
. The availability of commercial-free and advertiser-supported channels.
XM Originals. Through a programming unit in the company called "XM
Originals", we will create a significant number of original channel formats
with content focusing on popular music such as oldies, rock and country, and on
new and innovative formats, including jazz, blues, reggae and pop classical.
These formats will include artists with strong music sales and concert revenue
who do not get significant airplay on traditional AM/FM radio stations. We also
intend to brand individual channels creating a specific station personality and
image using compelling on-air talent and other techniques to attract listeners
in our target market segments. We have hired a team of programming
professionals with a proven track record of introducing new radio formats and
building local and national listenership.
Brand Name Programming Partners. We intend to complement our original
programming with a variety of unique and diverse content provided to us by
brand name programming providers. We have signed contracts representing at
least 24 channels with numerous well-known specialty and niche programmers that
will provide brand name content for XM Radio. These companies include:
<TABLE>
<CAPTION>
Media Radio
----- -----
<S> <C>
-- Bloomberg News Radio -- Hispanic Broadcasting Corporation (formerly Heftel)
-- USA Today -- Clear Channel Communications
-- CNNfn -- Radio One
-- CNN en Espanol -- Salem Communications
-- CNN Sports Illustrated -- AsiaOne
-- C-SPAN Radio -- One-On-One Sports
-- Black Entertainment Television -- BBC World Service
-- DIRECTV
-- Weather Channel
-- Sporting News
</TABLE>
Availability of Commercial-Free and Limited-Advertising Channels. We will
provide a number of commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels will carry less than
half the advertising of a typical AM/FM radio station. We expect the diversity
of our programming line-up will appeal to a large audience, including urban and
rural listeners of all ages, ethnicities, economic groups and specialty
interests. We expect to tailor our programming and marketing to appeal to
specific groups within those audiences that research has shown are most likely
to subscribe to our satellite radio service. Initially, we plan to concentrate
our programming efforts on listeners who are most receptive to innovative
entertainment services, so-called early adopters, and new car buyers. According
to our research, young adults (16-34 years old) will compose a high percentage
of our early adopters; we will therefore focus a significant portion of our
programming and marketing efforts to appeal to them. In addition, we will
develop programming and marketing specifically to appeal to other market
segments such as baby boomers (35-53 years old), seniors (54 years and older),
African-Americans, Asian-Americans and Hispanics.
Marketing and Distribution
Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.
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Establish Broad Distribution Channels for XM Radios
We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.
Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold approximately 4.5 million automobiles in 1998, which represented more than
29% of the United States automobile market. Under the agreement, we have
substantial payment obligations to General Motors, including among others,
certain guaranteed, annual, fixed payment obligations. While we have discussed
with General Motors certain installation projections, General Motors is not
required to meet any minimum targets for installing XM radios in General Motors
vehicles. In addition, certain of the payments to be made by us under this
agreement will not be directly related to the number of XM radios installed in
General Motors vehicles. Our contract with General Motors is described in more
detail under the caption "Certain Relationships and Related Party
Transactions--Distribution Agreement with GM and OnStar." We are currently in
discussions with other car manufacturers regarding additional distribution
agreements.
Distribution through Radio Manufacturers. We have signed contracts with
Delphi-Delco, Pioneer and Alpine for the development, manufacture and
distribution of XM radios for use in cars. One of these manufacturers, Delco
Electronics Corporation, a subsidiary of Delphi Automotive Systems, is the
leading original equipment manufacturer of radios for the automobile industry,
producing approximately 33% of car radios manufactured for installation in new
automobiles in the United States in 1997. Delphi-Delco is also the leading
manufacturer of car radios sold in General Motors vehicles. Two of our other
manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together
produced over 31% of aftermarket car radios sold in the United States in 1997.
We have also signed a contract with SHARP to manufacture and distribute XM
radios for home use. We are pursuing additional agreements for the manufacture
and distribution of XM radios, subject to contract limitations on the number of
manufacturer distributors during the early years of service. We also plan to
meet with automobile dealers to educate them about XM Radio and develop sales
and promotional campaigns to promote XM radios to new car buyers.
These leading radio manufacturers have strong retail and dealer distribution
networks in the United States. We expect to have access to the distribution
channels and direct sales relationships of these distributors, including
national electronics retailers, car audio dealers and mass retailers.
We do not intend to manufacture or hold inventory of XM radios. Radio
distribution likely would be handled by fulfillment centers, which hold
inventory for the radio manufacturers and ship products directly to listeners
at the manufacturers' request.
Rural Market Distribution/Alternative Distribution. We intend to market our
satellite radio service in rural counties, using distribution channels similar
to satellite television, to penetrate rural households not served by
traditional electronic retailers. In addition, we plan to pursue alternative
distribution opportunities such as catalog/direct marketing, the Internet and
marketing through affinity groups.
Maximize Revenue Through Dual Sources
As with other subscription-based entertainment media such as cable
television, we expect to generate revenue by charging a monthly subscription
fee and selling limited advertising time. We will earn all of the revenue from
advertising on our own programming and a portion of the revenues from
advertising on third party programming. XM Radio offers a new national radio
platform for advertisers that solves many of the problems associated with
buying radio advertising nationally on a spot or syndicated basis. We believe
the
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attractiveness of one-stop national radio advertising buys will provide a
significant source of income as our subscriber base grows.
Subscriber Development and Expansion
We expect to promote XM Radio as a national brand name with an exciting
image. Several months prior to service commencement, we will launch an
advertising campaign in several United States markets to test and generate
early feedback on the product offerings and stimulate early demand. Promotional
activities currently under consideration include distributing sample
programming at retail outlets, concert venues and on the Internet to generate
initial interest.
Although XM Radio will be available nationwide upon commencement of
operations, we will initially concentrate promotional activities in several key
markets and rapidly expand to other large markets. This phased roll-out
strategy, similar to that employed by consumer electronics manufacturers and
special services such as DIRECTV and Web TV, will enable us to refine our
launch implementation throughout the roll-out period. The advertising will
consist of both branding and promotion efforts for XM Radio, as well as
separate campaigns to promote and brand individual channels. Initially, we will
focus marketing efforts on the various channels targeting young adults, who we
believe are more likely to drive early penetration. We also expect to benefit
from free local media coverage as XM Radio is first offered in each new market.
XM Radio will promote subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This might include
. promotional campaigns directed towards automobile manufacturers and
dealers;
. promotional campaigns for free months of service with purchase of an XM
radio or free installations for aftermarket car radios;
. incentive programs for retailer sales forces;
. in-store promotional campaigns, including displays located in
electronics, music and other retail stores, rental car agencies and
automobile dealerships; and
. jointly funded local advertising campaigns with retailers.
Advertiser Development and Acquisition
Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups.
We will also work with ratings agencies in our advertising-supported business.
Statistical Research, Inc., which produces Radar reports, has agreed to work
with us to develop other ratings methodologies for satellite radio.
During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.
Charter Advertising Agreements. We have contracts with several advertisers,
advertising agencies and media buying companies offering charter advertising
packages at reduced rates for a limited time. Each charter advertiser will
purchase a minimum amount of advertising from us during the period that the
reduced rates are in effect. We intend to sign additional contracts on similar
terms.
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Foreign Language Advertising. We and our programmers plan to offer foreign
language advertising on specific foreign language-based channels. Several major
national advertisers have expressed strong interest in the ability to advertise
to these hard-to-reach customer segments.
The XM Radio System
We are designing our system to provide satellite radio to the continental
United States and coastal waters using radio frequencies allocated by the FCC
for satellite radio. These radio frequencies are within a range of frequencies
called the S-Band. The XM Radio system will be capable of providing high
quality satellite services to XM radios in automobiles, trucks, recreation
vehicles and pleasure craft, as well as to fixed or portable XM radios in the
home, office or other fixed locations. The XM Radio system design uses a
network consisting of an uplink facility, two high-power satellites and, where
necessary, ground-based repeaters to provide digital audio service to XM
radios.
[PICTURE OF RADIO WAVES REFLECTED OFF SATELLITES TO CAR APPEARS HERE]
Space Segment
Satellite Construction. Under our satellite contract with Hughes, Hughes is
building and will launch two HS 702 high-power satellites for the XM Radio
system. Hughes has also agreed to provide, at our option, one ground spare
satellite, to be available in the event of a failed launch of any satellite or
to accommodate our satellite system growth.
We believe that the HS 702 model will provide higher quality performance
than other satellite options. The first HS 702 satellite is expected to be
ready for launch in the third or fourth quarter of 1999 and a total of three HS
702 satellites are currently scheduled for launch before the launch of our
satellites.
Hughes has also contracted to provide us with launch and operations support
services, equipment and software. Under our contract, Hughes must deliver the
first satellite no later than December 31, 2000 and the second satellite no
later than April 11, 2001.
Hughes has engaged Alcatel to provide the communications payload electronics
for our satellites. The communications payload electronics are designed to make
best use of technologies that have already been developed or used in previous
satellite programs. The design includes significant redundancy and protective
measures to prevent loss of service.
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Satellite Transmission. We anticipate that our two satellites will be
deployed at 85 West Longitude and 115 West Longitude. After reaching their
designated orbital location, the satellites will receive audio signals from our
programming center and retransmit the signals across the continental United
States. The satellites will be 30(degrees) apart in longitude in order to
enhance the probability of clear line-of-sight communication between the
satellites and XM mobile radios.
The transmission coverage areas, or footprints, of our satellites encompass
the 48 contiguous states and nearby coastal waters. We have tailored these
footprints to provide nearly uniform availability over the United States and to
minimize transmission spillage across the United States borders into Canada and
Mexico. However, because coverage does extend to the Gulf of Mexico, the
California coast and the Atlantic coast, we also expect to be able to provide
XM Radio to the cruise ships, cargo vessels and leisure boats which frequent
these waters.
Our satellites will transmit audio programming within a 12.5 MHz range of S
Band radio frequencies that have been allocated by the FCC for our exclusive
use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth
will be subdivided to carry the transmission of six signals, two signals to be
transmitted from each of our two satellites and two signals to be transmitted
by the terrestrial repeater network. The audio programming for XM Radio will be
carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals will repeat the audio programming to enhance
overall signal reception. The transmission of higher quality sound requires the
use of more kilobits per second than the transmission of lesser quality sound.
In order to provide high-quality digital sound, we expect that music channels
will require approximately 56 to 64 kilobits per second (depending on the type
of compression technology used), whereas talk channels will require
significantly less band width. We expect to use our allocated bandwidth in such
a way as to provide up to 100 channels of programming, with our music channels
having a high bandwidth allocation so as to provide high-quality digital sound.
Launch Services. Hughes has signed an agreement with Sea Launch Limited
Partnership, a joint venture in which Boeing Commercial Space Company has a
controlling 40% interest, to provide the launch services for our satellites.
The launch vehicle uses a new rocket called the Zenit-3SL, which is based on a
flight-proven two-stage rocket called the Zenit-2, plus a stage which is the
flight-proven upper stage of a rocket called the Proton rocket. The Zenit-2
vehicle has been successfully launched 27 times and has had five launch
failures for a 84% success rate. The upper stage has successfully flown in 106
launches out of 111 attempts for a 96% success rate.
Sea Launch has developed a new launch system to launch rockets from an
ocean-based platform. Sea Launch will perform all rocket and satellite
processing at the Sea Launch home port in Long Beach, California. Sea Launch
will move the platform to its launch position in the South Pacific Ocean near
the equator, where the satellites can be launched more efficiently by avoiding
the requirement to conduct an orbital plane change. In March 1999, Sea Launch
successfully launched a rocket carrying an inert payload into geo-stationary
orbit. Sea Launch has contracts for 16 launches and expects its first
commercial launch using this system in the third quarter of 1999. Our
satellites are currently the fifth and sixth on the launch manifest.
Insurance. We bear the risk of loss for each of the satellites from the time
of launch, subject to exceptions set forth in our agreement with Hughes, and we
intend to obtain insurance to cover that risk. We intend to purchase launch and
in-orbit insurance policies from global space insurance underwriters. The
insurance premiums are expected to cost us approximately $50 million. We cannot
predict the status of the insurance market near the time of launch, which is
the customary time for purchasing satellite insurance. We expect that the
policies we obtain will indemnify us for a total, constructive total or partial
loss of either of the satellites that occurs from the time of launch through
each satellite's expected lifetime. We intend to obtain coverage which will
exceed all hardware, insurance and launch service costs related to the in-orbit
replacement of a lost satellite. However, any insurance we may obtain will not
protect us from the adverse effect on our business operations due to the loss
of a satellite. We expect that these policies will contain standard commercial
satellite insurance provisions, including standard coverage exclusions.
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Ground Segment
Satellite Control. Each of our satellites will be monitored by a telemetry,
tracking and control station, and both satellites will be controlled by a
satellite control station. Each of the stations will have a backup station.
Hughes, our satellite manufacturer is constructing primary and backup antennas
and electronics. We are evaluating proposals from experienced satellite
operators to perform the telemetry, tracking and control functions.
Programming and Business Center. Programming from both our studios and
external sources will be sent to our programming center, which will package and
retransmit signals to our satellites through the uplink station. Financial
services and certain administrative support will be carried on at our business
center. Communications traffic between the various XM Radio facilities will be
controlled by the network monitoring center. The network monitoring center will
monitor satellite signals and the terrestrial repeater network to ensure that
the XM Radio system is operating properly. We plan to design and install fault
detection systems to detect various system failures before they cause
significant damage.
Terrestrial Repeaters. We intend to install a terrestrial repeater system to
supplement the coverage of our satellites. Terrestrial repeaters are ground-
based electronics equipment which receive and re-transmit the satellite
signals. We have signed a contract with LCC International, a wireless service
site planner, for the design and deployment of our terrestrial repeater
network. LCC International has completed initial site planning for 70 markets.
The contract with LCC International is described in more detail under the
caption "Certain Relationships and Related Party Transactions--Engineering
Contract with LCC International."
In some areas, satellite signals may be subject to blockages from tall
buildings and other obstructions. Due to the satellites' longitudinal
separation, in most circumstances where reception is obscured from one
satellite, XM Radio will still be available from the other satellite. In some
urban areas with a high concentration of tall buildings, however, line-of-sight
obstructions to both satellites may be more frequent. In such areas, we will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do
not expect this to present a serious problem to our construction of a
terrestrial repeater network.
The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.
We plan to install approximately 1,700 terrestrial repeaters to cover urban
areas in approximately 70 markets. We expect that this system will be
operational by the second quarter of 2001. We estimate that the largest urban
markets may require in excess of 100 repeaters, while smaller cities with fewer
tall buildings may require as few as one to three repeaters. We also intend to
use additional small repeaters in areas such as tunnels, where reception would
otherwise be severely restricted. Our placement of terrestrial repeaters will
be guided by a newly developed radio frequency analysis technique which,
employing technology similar to that used in certain cellular telephone
systems, analyzes the satellite footprint to discover areas likely to have
impaired reception of XM Radio.
We expect to benefit from the expertise gained by American Mobile with its
ARDIS terrestrial two-way data network consisting of approximately 1,700 base
stations sites serving cities throughout the United States. We may use a
portion of these sites in our system.
XM Radios. We will transmit XM Radio throughout the continental United
States to vehicle, portable, home and plug and play radios. Our radios will be
capable of receiving both XM Radio and traditional AM/FM
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stations. We believe prototypes will be available and limited production will
begin by December 2000, and radios will be commercially available by
commencement of commercial operation.
We have signed a contract with STMicroelectronics to design and produce
chips which will decode the XM Radio signal. Additionally, some of the design
elements in the chipsets currently being made for the WorldSpace International
system, which operates in a different frequency band, will be integrated into
our chipsets.
Delphi-Delco, Pioneer and Alpine have signed contracts to develop,
manufacture and distribute XM radios which can be used in the car. We have
signed a contract with SHARP to manufacture XM radios for the home.
Competition
We expect to face competition for both listeners and advertising dollars.
CD Radio
Our direct competitor in satellite radio service is likely to be CD Radio,
the only other FCC licensee for satellite radio service in the United States.
Since October 1997, CD Radio's common stock has traded on the Nasdaq National
Market. CD Radio plans to deploy three satellites in a North American
elliptical orbit and a network of terrestrial repeaters. CD Radio has announced
in recent SEC filings that it has arrangements for the construction,
implementation and distribution of its service and that it expects to begin
receiving revenue from operations in early 2001, which is slightly ahead of our
planned commencement of commercial operations in the second quarter of 2001.
Traditional AM/FM Radio
Our competition will also include traditional AM/FM radio. Unlike XM Radio,
traditional AM/FM radio already has a well established market for its services
and generally offers free broadcast reception paid for by commercial
advertising rather than by a subscription fee. Also, many radio stations offer
information programming of a local nature, such as traffic and weather reports,
which XM Radio initially will be unable to offer as effectively as local radio,
or at all. The AM/FM radio broadcasting industry is highly competitive. Radio
stations compete for listeners and advertising revenues directly with other
radio stations within their markets on the basis of a variety of factors,
including
. Program content;
. On-air talent;
. Transmitter power;
. Source frequency;
. Audience characteristics;
. Local program acceptance; and
. The number and characteristics of other radio stations in the market.
Currently, traditional AM/FM radio stations broadcast by means of analog
signals, not digital transmission. We believe, however, that in the future
traditional AM/FM radio broadcasters may be able to transmit digitally into the
bandwidth occupied by current AM/FM stations.
Internet Radio
There are a growing number of Internet radio broadcasts which provide
listeners with radio programming from around the country and the world.
Internet radio can be heard through a personal computer equipped with
40
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a modem, sound card and speakers. One of the largest Internet radio providers,
Broadcast.com Inc., currently provides a large number of stations on the
Internet and has recently completed an initial public offering of stock,
indicating growth in the industry. Although we believe that the current sound
quality of Internet radio is below standard and may vary depending on factors
such as network traffic, which can distort or interrupt the broadcast, we
expect that improvements from higher bandwidths, faster modems and wider
programming selection may make Internet radio a more significant competitor in
the future.
There are a number of Internet-based audio formats in existence or in
development which could compete directly with XM Radio. For example, Internet
users with the appropriate hardware and software can download sound files for
free or for a nominal charge in an internet format known as MP3 and play them
from their personal computers or from specialized portable players. In
addition, prominent members of the music and computer industry have supported
an initiative known as the Secure Digital Music Initiative to become a standard
for fee-based electronic distribution of copyrighted sound recordings. Although
presently available formats have drawbacks such as hardware requirements and
download bandwidth constraints, which we believe would make XM Radio a more
attractive option to consumers, Internet-based audio formats may become
increasingly competitive as quality improves and costs are reduced.
Direct Broadcast Satellite and Cable Audio
A number of companies provide specialized audio service through either
direct broadcast satellite and cable audio systems. These services are targeted
to fixed locations, mostly in-home. The radio service offered by direct
broadcast satellite and cable audio is generally an add-on service to the
higher priced video service.
Regulatory Matters
XM Radio and CD Radio received licenses from the FCC in October 1997 to
construct and operate satellite radio service. The FCC has allocated 25 MHz for
the new service in a range of radio frequencies known as the S-Band.
As an owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we will continue to be subject to
regulatory oversight by the FCC. Our development, implementation and eventual
operation of our system will be subject to significant regulation by the FCC
under authority granted under the Communications Act and related to federal
law. Non-compliance by us with FCC rules and regulations could result in fines,
additional license conditions, license revocation or other detrimental FCC
actions. Any of these FCC actions may harm our business. There is no guarantee
that the rules and regulations of the FCC will continue to support our business
plan.
One of the two losing bidders in the satellite radio license auction filed
an application for review of the order granting our FCC license, but the
challenge was denied. The losing bidder is seeking review by the FCC. The
losing bidder has argued that WorldSpace had effectively taken control of XM
Radio without FCC approval and that WorldSpace has circumvented the FCC's
application cut-off procedures. WorldSpace is no longer a stockholder in XM
Radio. We have opposed this appeal and have denied the allegations contained in
the challenge. The FCC's order granting our license remains in effect during
the pendency of the application for review. Although we believe that the award
of the license to us will continue to be upheld, we cannot predict the ultimate
outcome of this challenge. If this challenge is successful, the FCC could take
a range of actions, any of which could harm our ability to proceed with our
planned satellite radio service.
The term of our license is for eight years from the commencement of actual
commercial operations and may be renewed. The FCC requires the satellite radio
licensees, including XM Radio, to adhere to certain milestones in the
development of their systems, including a requirement that the licensees begin
full operation by October 2003.
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Our FCC license requires us to meet the following milestones:
<TABLE>
<CAPTION>
Deadline Milestone Status
- -------- --------- ------
<S> <C> <C>
October 1998 Complete contracting for first satellite Completed March 1998
October 1999 Complete contracting for second satellite Completed March 1998
October 2001 Begin in-orbit operation of at least one satellite Expected Fourth Quarter 2000
October 2003 Begin full operation of the XM Radio system Expected Second Quarter 2001
</TABLE>
While we have already fulfilled the first two milestones, we may not meet
the remaining two milestones, in part because we depend on third parties to
build and launch our satellites. If we fail to meet these milestones, the FCC
could take a range of actions, any of which may harm our business.
For business and technical reasons, we have decided to modify certain
aspects of the satellite radio system described in our May 1997 amended
application to the FCC. Specifically, we intend to
. Increase the satellites' transmission power;
. Eliminate coverage of Alaska and Hawaii; and
. Change the total number of signals carried by the satellites and
terrestrial repeaters.
We will subdivide our 12.5 MHz of allocated bandwidth to carry six signals
instead of five as previously stated in our FCC application. Two signals will
be transmitted by each of the two satellites, and two signals will be
transmitted by our terrestrial repeaters. We plan to request that the FCC allow
us to modify the XM Radio system to incorporate these changes. While the FCC
regularly approves modifications to commercial licenses, it may not approve our
request.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees.
The FCC's rules require interoperability with all licensed satellite radio
systems that are operational or under construction. The FCC conditioned our
license on certification by us that our final receiver design is interoperable
with the final receiver design of the other licensee, CD Radio, which plans to
use a different transmission technology than we plan to use. Because of
uncertainty regarding the design of CD Radio's systems, we may not be able
initially to meet this interoperability requirement. We may not be able
initially to design a commercially viable interoperable receiver, and CD Radio
may not cooperate with us on the issue of interoperability. Accordingly, we may
not be able to meet the FCC's interoperability requirements, and may need to
obtain an extension of time or modification of this requirement from the FCC.
Complying with the interoperability requirement could make the radios more
difficult and costly to manufacture. Accordingly, this requirement could delay
the commercial introduction of our service.
The FCC is currently conducting a rulemaking proceeding to establish rules
for terrestrial repeater transmitters, which we plan to deploy to fill in gaps
in satellite coverage. The FCC has proposed to permit us to deploy these
facilities. Specifically, the FCC has proposed a form of blanket licensing for
terrestrial repeaters and service rules which would prohibit satellite radio
licensees from using terrestrial repeating transmitters to originate local
programming or transmit signals other than those received from the satellite
radio satellites. Various parties, including the National Association of
Broadcasters, have asked the FCC to
. Delay consideration of terrestrial repeater rules until XM Radio and CD
Radio provide additional information regarding planned terrestrial
repeaters;
. Require individual licensing of each terrestrial repeater;
. Limit the number of repeaters that may be deployed; and
. Impose a waiting period on the use of repeaters in order to determine if
signal reception problems can be resolved through other means.
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Our plans to deploy terrestrial repeaters in our system may be impacted,
possibly materially, by whatever rules the FCC issues in this regard.
The FCC also may adopt limits on emissions of terrestrial repeaters to
protect other services using nearby frequencies. While we believe that we will
meet any reasonable non-interference standard for terrestrial repeaters, the
FCC has no specific standard at this time, and the application of such limits
might increase our cost of using repeaters. Although we are optimistic that we
will be able to construct and use terrestrial repeaters as needed, the
development and implementation of the FCC's ultimate rules might delay this
process or restrict our ability to do so.
We will need to coordinate the XM Radio system with telemetry systems
operating in the same frequency bands in adjacent countries. Canada and Mexico
are the countries whose radio systems are most likely to be affected by
satellite radio. The United States government, which conducts the coordination
process, has resolved the issue with Canada and has begun discussions with the
Mexican government. However, the negotiations with Mexico could be complicated
by that country's interest in developing a similar digital satellite radio
service that might operate on the same frequencies as XM Radio will use in the
United States. Although we are optimistic that the FCC will coordinate
satellite radio frequency use with Mexico without compromising our ability to
operate as planned, it may not be able to do so, which could materially affect
XM Radio.
We will operate the communication uplinks between our own earth station and
our satellites in a band of radio frequencies known as the X-Band. The X-Band
radio frequencies are used for several other services, known under FCC rules as
fixed services, broadcast auxiliary services, electronic news gathering
services, and mobile satellite services for uplink station networks. Although
we are optimistic that we will succeed in coordinating domestic uplink station
networks, we may not be able to coordinate use of this spectrum in a timely
manner, or at all.
We also need to protect our system from out-of-band emissions from licensees
operating in adjacent frequency bands. Wireless Communication Service licensees
operating in frequency bands adjacent to the satellite radio's S-Band
allocation must comply with certain out-of-band emission limits imposed by the
FCC to protect satellite radio systems. These limits, however, are less
stringent than those we proposed. In addition, in April 1998, the FCC proposed
to amend its rules to allow for new radio frequency lighting devices that would
operate in an adjacent radio frequency band. We opposed the proposal on the
grounds that the proliferation of this new kind of lighting and its proposed
emission limits, particularly if used for street lighting, may interfere with
XM Radio. However, the FCC may not rule in our favor, which decision could
adversely affect our signal quality.
The FCC order granting our license determined that because we are a private
satellite system providing a subscription service on a non-common carrier
basis, we would not be subject to the FCC's foreign ownership restrictions.
However, such restrictions would apply to us if we were to offer non
subscription services, which may appear more lucrative to potential advertisers
than subscription services. The FCC also stated in its order that it may
reconsider its decision not to subject satellite radio licensees to its foreign
ownership restrictions.
Sea Launch, Alcatel and other vendors are subject to United States export
regulations. Our vendors will need approval from the State Department under
technology export statutes and regulations for the launch of our satellites.
Although these are not new requirements, the export of technology has received
considerable attention recently in response to concerns about the export of
technology to China by the United States defense contractors. The recent
negative publicity may lead the United States Congress to alter the relevant
laws or regulations, or may change the State Department's policy in enforcing
the regulations. Any change in applicable law or policy may result in delay of
our satellite launch.
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Intellectual Property
System Technology
We have contracted with several technology companies to implement portions
of the XM Radio system. These technology companies include Hughes and Alcatel
(satellites); Delphi-Delco, Alpine, Pioneer and SHARP (car and home radios);
STMicroelectronics (chipsets); and LCC International (design of repeater
network). We will not acquire any intellectual property rights in the
satellites. We will have joint ownership of or a license to use the technology
developed by the radio and chipset manufacturers. We will own the design of our
system, including aspects of the technology used in communicating from the
satellites and the design of the repeater network.
Our system design, our repeater system design and the specifications we
supplied to our radio and chipset manufacturers incorporates or may in the
future incorporate some intellectual property licensed to us on a non-exclusive
basis by WorldSpace Management. WorldSpace Management has used this technology
in its own non-United States satellite radio system. We also have the right to
sublicense the licensed technology to any third party, including chipset
manufacturers, terrestrial repeater manufacturers and receiver manufacturers in
connection with the XM Radio system. Under our agreement with WorldSpace
Management we must pay one time, annual or percentage royalty fees or reimburse
WorldSpace Management for various costs for various elements of the licensed
technology that we decide to use in the XM Radio system. We have incurred costs
of $6.7 million to WorldSpace Management under this agreement through June 30,
1999. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system.
American Mobile has granted us a royalty-free license with respect to
certain ground segment communications technology and antenna technology.
American Mobile and WorldSpace Management have also granted us royalty-free,
non-exclusive and irrevocable licenses to use and sublicense all improvements
to their technology. The technology licenses from American Mobile and
WorldSpace Management renew automatically on an annual basis unless terminated
for a breach which has not been or cannot be remedied.
We believe that the intellectual property rights we have licensed under our
technology license were independently developed or duly licensed by American
Mobile or WorldSpace International, as the case may be. We cannot assure you,
however, that third parties will not bring suit against us for patent or other
infringement of intellectual property rights.
Litigation with CD Radio
On January 12, 1999, CD Radio, the other holder of an FCC satellite radio
license, commenced an action against us in the United States District Court for
the Southern District of New York, alleging that we are infringing or may
infringe three patents assigned to CD Radio. In its complaint, CD Radio seeks
money damages to the extent we have manufactured, used or sold any product or
method claimed in their patents and injunctive relief.
We responded to the complaint on February 26, 1999, denying that
. CD Radio's patents have been or will be infringed;
. the claims of CD Radio's patents are valid;
. CD Radio has any right to either damages or injunctive relief against
our proposed satellite radio system by reason of statements made by CD
Radio to the FCC and by reason of the conditions of CD Radio's
authorization from the FCC to provide satellite radio; and
. CD Radio has any right to either damages or injunctive relief against
our proposed satellite radio system because CD Radio is required to
license the CD Radio patents to us by reason of statements made by CD
Radio to the FCC and by reason of the conditions of CD Radio's
authorization from the FCC to provide satellite radio.
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<PAGE>
Based on the planned design of our system, our knowledge of the differences
between our system and the claims of the CD Radio patents and on advice we have
previously received from our patent counsel, we believe that we have not and
will not infringe any CD Radio patents. However, the litigation could harm our
company, even if we are successful. It will divert our management's attention
and may make it more difficult for us to raise financing or enter into other
agreements with third parties. In addition, even if we prevail, the CD Radio
litigation could prevent us from moving forward with the development of the XM
Radio system in a timely manner. The CD Radio patents involved in the CD Radio
litigation relate to certain aspects of signal and reception methodologies that
may be employed by a satellite radio system. If, despite our efforts, we lose
all or part of this litigation, we could become liable to CD Radio for money
damages and subject to an injunction preventing us from using certain
technology in the XM Radio system. Any such injunction could force us to
engineer technology which would not be subject to the injunction, license or
develop alternative technology, or seek a license from, and pay royalties to,
CD Radio. If any of these strategies becomes necessary, it could be costly and
time-consuming and would likely delay any implementation of our system. If we
could not accomplish any strategy, or could not do so in a timely manner at an
acceptable cost, our business would be harmed.
Copyrights to Programming
We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc., and SESAC, Inc. These organizations
collect royalties and distribute them to songwriters and music publishers and
negotiate fees with copyright users based on a percentage of revenues. Radio
broadcasters currently pay a combined total of approximately 3-4% of their
revenues to these performing rights societies. We expect to negotiate or
establish by arbitration royalty arrangements with these organizations, but
such royalty arrangements may be more costly than anticipated or unavailable.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the
Digital Millennium Copyright Act of 1998, we also have to negotiate royalty
arrangements with the owners of the sound recordings. The Recording Industry
Association of America will negotiate licenses and collect royalties on behalf
of copyright owners for this performance right in sound recordings. Cable audio
services currently pay a royalty rate of 6.5% of gross subscriber revenue. This
rate was set by the Librarian of Congress, which has statutory authority to
decide rates through arbitration, and was affirmed on May 21, 1999 by the
United States Court of Appeals for the District of Columbia. Although we
believe we can distinguish XM Radio sufficiently from the cable audio services
in order to negotiate a lower statutory rate, we may not be able to do so.
The XM(TM) Trademark
We believe that XM Radio will be seen as the complement to AM and FM radio.
We have an application pending in the United States Patent and Trademark Office
for the registration of the trademark "XM" in connection with the transmission
services offered by our company and expect that our brand name and logo will be
prominently displayed on the surface of XM radios together with the radio
manufacturer's brand name. This will identify the equipment as being XM Radio-
compatible and build awareness of XM Radio. We intend to maintain our trademark
and the anticipated registration. We are not aware of any material claims of
infringement or other challenges to our right to use the "XM" trademark in the
United States.
Personnel
As of June 30, 1999, we had 43 employees. In addition, we rely upon a number
of consultants and other advisors. The extent and timing of any increase in
staffing will depend on the availability of qualified personnel and other
developments in our business. None of our employees is represented by a labor
union, and we believe that our relationship with our employees is good.
45
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Property
Our executive offices are located at 1250 23rd Street, N.W., Suite 57,
Washington, D.C. 20037-1100, and are leased pursuant to a lease agreement that
will expire on December 31, 1999. We are in the process of negotiating for
additional space to be used as our headquarters office, as well as for our
studio and production facilities.
Legal Proceedings
Except for the CD Radio litigation and the FCC proceeding described under
the caption "Business--Regulatory Matters," we are not a party to any material
litigation or other proceedings.
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MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table sets forth information concerning our directors,
executive officers and key employees. All directors hold office until the next
annual meeting of stockholders and the election and qualification of their
successors. Officers are elected by and serve at the discretion of our board of
directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gary M. Parsons......... 49 Chairman of the Board of Directors
Hugh Panero............. 43 President, Chief Executive Officer and Member, Board of Directors
Randall T. Mays (1)(2).. 34 Member, Board of Directors
Randy S. Segal (1)...... 43 Member, Board of Directors
Jack Shaw (2)........... 60 Member, Board of Directors
Dr. Rajendra Singh
(1)(2)................. 44 Member, Board of Directors
Ronald L. Zarrella...... 49 Member, Board of Directors
Nathanial A. Davis...... 45 Member, Board of Directors
Thomas J. Donohue....... 61 Member, Board of Directors
Lee Abrams.............. 47 Senior Vice President, Content and Programming
Stephen Cook............ 44 Senior Vice President, Sales and Marketing
Dr. Stelios Patsiokas... 46 Senior Vice President, Technology
Heinz Stubblefield...... 42 Senior Vice President, Chief Financial Officer
Joseph M. Titlebaum..... 36 Senior Vice President, General Counsel and Secretary
John R. Wormington...... 54 Senior Vice President, Engineering and Operations
</TABLE>
- --------
(1) Member of the audit committee.
(2) Member of the compensation committee.
Set forth below are descriptions of the backgrounds and principal
occupations of each of our directors and executive officers.
Gary M. Parsons has served as Chairman of the board of directors since May
1997. Mr. Parsons is Chairman of the board of directors of American Mobile, a
position he has held since March 1998. Mr. Parsons joined American Mobile in
July 1996 and has also served as its Chief Executive Officer and President.
Previously, Mr. Parsons was with MCI Communications Corporation where he served
in a variety of roles from 1990 to 1996, including most recently as Executive
Vice President of MCI Communications, and as Chief Executive Officer of MCI's
subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsons was one of the
principals of Telecom*USA, which was acquired by MCI. Prior to the recruitment
of Hugh Panero, Mr. Parsons served as our Chief Executive Officer.
Hugh Panero has served as a member of the board of directors and as
President and Chief Executive Officer since June 1998. Mr. Panero has over 16
years experience building and managing entertainment distribution services.
Most recently, from 1993 to 1998, Mr. Panero served as President and Chief
Executive Officer of Request TV, a national pay-per-view network owned by
Liberty Media and Twentieth Century Fox. Prior to his employment with Request
TV, Mr. Panero spent ten years with Time Warner Cable where he was part of the
team which built the cable systems serving parts of Queens and Brooklyn, New
York. Mr. Panero held various positions with Time Warner Cable, including Vice
President, Marketing.
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Randall T. Mays has served as a member of the board of directors since July
1999. Mr. Mays is the Executive Vice President and Chief Financial Officer of
Clear Channel Communications. Mr. Mays has been associated with Clear Channel
since 1993 when he was elected Vice President and Treasurer. Mr. Mays also
serves on the board of directors of American Tower Corporation.
Randy S. Segal has served as a board member since July 1999. Ms. Segal has
served as American Mobile's Senior Vice President, General Counsel and
Secretary since October 1992. From October 1983 to October 1992, Ms. Segal was
associated with the law firm of Debevoise & Plimpton in New York, New York.
Prior to joining Debevoise, Ms. Segal clerked for the Honorable Jerre S.
Williams of the United States Court of Appeals for the Fifth Circuit, and for
the Honorable Edmund L. Palmieri for the United States District Court for the
Southern District of New York.
Jack Shaw has served as a member of the board of directors since May 1997.
Mr. Shaw is Chairman and Chief Executive Officer of Hughes Network Systems,
Inc. and Executive Vice President of Hughes Electronics Corporation. Mr. Shaw
is a member of the Hughes Electronics Corporation Executive Committee. Mr. Shaw
has been a director of American Mobile since July 1996 and has previously
served as Chairman of American Mobile's Board. Previously, Mr. Shaw held senior
management positions with companies including ITT Space Communications, Inc.,
Digital Communications Corporation and M/A-Com Telecommunications, Inc., which
was acquired by Hughes Electronics Corporation in 1987.
Rajendra Singh has served as a board member since July 1999. Dr. Singh is a
member of the board of directors and a co-founder of LCC. Dr. Singh was
President of LCC from its formation in 1983 until September 1994, was Chief
Executive Officer from January 1994 until January 1995, and was Interim
President from September 1998 to May 1999. Dr. Singh is Chairman of the Members
Committee of Telcom Ventures L.L.C. and a director of Teligent, Inc., a
wireless local access provider.
Ronald L. Zarrella has served as a member of the board of directors since
July 1999. Mr. Zarrella is an Executive Vice President of General Motors and
President of GM North America, a position he has held since October 1998. Mr.
Zarrella has been associated with General Motors since 1994 when he was elected
Vice President and Group Executive in charge of the North American Vehicle
Sales Service and Marketing Group.
Nathanial A. Davis will serve as a member of the board of directors
effective upon the offering. Mr. Davis is Executive Vice President of Nextel
Communications where he has responsibility for the technical and engineering
operations of Nextel's nationwide switching and wireless communications
network, billing and IT systems. From August 1986 through November 1998, Mr.
Davis served in a variety of senior engineering and finance roles at MCI, most
recently as Senior Vice President and CFO of MCI Telecommunications. Mr. Davis
serves on the board of directors and audit committee of Capital Management
Corporation.
Thomas J. Donohue will serve as a member of the board of directors effective
upon the offering. Mr. Donohue is President and Chief Executive Officer of the
U.S. Chamber of Commerce, the world's largest business federation, and has been
active in national policy and non-profit operations for 30 years. From July
1984 through September 1997, Mr. Donohue served as President and Chief
Executive Officer of the American Trucking Association (ATA). He serves on the
board of directors of Union Pacific Corporation, Sunrise Assisted Living
Corporation, Marymount University and the Hudson Institute.
Lee Abrams has served as Senior Vice President, Content and Programming
since June 1998. Mr. Abrams is a prominent radio programmer/consultant with
more than 30 years of experience in radio, and since 1970 has been a consultant
to a variety of radio stations, networks and record companies. He is credited
with many innovations in radio programming, including transforming FM radio,
pioneering the album rock format in the 1970s, adult contemporary radio and
urban, classic and smooth jazz radio in the 1980s and active rock radio in the
1990s. He most recently has served as a consultant for ABC Radio Networks,
Capstar, Thorn-EMI and Sony, among others.
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<PAGE>
Stephen Cook has served as Senior Vice President, Sales and Marketing since
February 1999. Previously, Mr. Cook was Chief Operating Officer for Conxus
Communications, where he successfully launched its portable voice messaging
product, Pocketalk, in the top 12 United States markets. From 1990 to 1997, Mr.
Cook held key management positions with GTE's cellular operations, including VP
of Marketing and President of the Southeast region. Prior to that time, Mr.
Cook also spent five years in brand management with Proctor & Gamble and has
more than 15 years of experience with launching and marketing new consumer
products.
Stelios Patsiokas has served as Senior Vice President, Technology since
October 1998. Previously, Dr. Patsiokas was with Motorola, Inc., where he
served in a variety of consumer electronics design and development roles since
1979. Since 1996, Dr. Patsiokas was Director of Product Development, for
Motorola's Messaging Systems Product Group, where he was involved with
developing the PageWriter(TM) 2000 two-way messaging device. Dr. Patsiokas
holds 24 United States patents.
Heinz Stubblefield has served as Senior Vice President, Chief Financial
Officer since June 1998. Previously, from March 1996 to May 1998, Mr.
Stubblefield was Chief Financial Officer for WorldSpace International. Before
joining WorldSpace, from February 1993 to February 1996, Mr. Stubblefield was
Corporate Controller for Next Software Corporation and, prior to that time,
spent several years as divisional CFO for Raychem Corporation's German offices.
Joseph M. Titlebaum has served as Senior Vice President, General Counsel and
Secretary since September 1998. From 1990 to 1998, Mr. Titlebaum was an
attorney with the law firm of Cleary, Gottlieb, Steen & Hamilton. With a
specialty in telecommunications ventures, Mr. Titlebaum has expertise in
structuring, negotiating and implementing corporate finance and mergers and
acquisitions transactions.
John R. Wormington has served as Senior Vice President, Engineering and
Operations since September 1998. Mr. Wormington has leadership experience in
commercial and governmental development, design and operational deployment of a
variety of high technology projects. Mr. Wormington came to our company from
Hughes, where since September 1995 he was a senior executive and led the
project management team responsible for that company's HS 702 satellite
program. During his distinguished military career (retiring as an Air Force
Brigadier General in 1995), Mr. Wormington was responsible for a wide range of
large government projects requiring technical management and operational
leadership skills necessary to meet strict implementation deadlines, including
responsibility for conducting all launch and range operations at Cape
Canaveral.
Provisions Governing the Board of Directors
Until completion of this offering, our board of directors will consist of
seven members, three of whom will be selected by General Motors, Clear Channel
and the other investors in our subordinated convertible notes and four of whom
will be selected by American Mobile, including our Chairman and our President
and Chief Executive Officer. Following completion of this offering, our board
of directors will consist of nine members, including the same seven directors
plus two independent directors. One of the independent directors must be
approved by American Mobile, and one must be approved by a majority of the
investors in our subordinated convertible notes. Following completion of this
offering and receipt of approval of the FCC to transfer control of the company
to a diffuse group of stockholders, our board of directors will consist of nine
members, three of whom will be selected by the investors in our subordinated
convertible notes, three of whom will be selected by American Mobile, two of
whom will be independent directors of recognized industry experience and
stature whose nominations must be approved by American Mobile and a majority of
the holders of our subordinated convertible notes and one of whom will be our
President and Chief Executive Officer. The foregoing board rights are subject
to the parties to a shareholders' agreement maintaining certain minimum share
percentages in us, as described in "Certain Relationships and Related Party
Transactions--Shareholders' Agreement."
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<PAGE>
Terms of Directors
All members of the board of directors hold office until the next annual
meeting of stockholders and the election and qualification of their successors.
Board Committees
The board of directors has established compensation and audit committees.
Each committee reports to the board of directors. The compensation committee,
currently consisting of Messrs. Mays and Shaw and Dr. Singh, is responsible for
determining and paying compensation, salaries, annual bonuses, stock option
grants and benefits to officers, directors and employees. The audit committee,
currently consisting of Mr. Mays, Dr. Singh and Ms. Segal, reviews, acts on and
reports to the board of directors with respect to various auditing and
accounting matters. These matters include the selection of our auditors and
review of our accounting books, records and policies.
Compensation of Directors
Following completion of this offering, independent directors (as determined
under our shareholders' agreement) will receive retainer fees of $2,500 per
quarter. In addition, these independent directors will receive $2,000 for every
meeting attended in person and $500 for every meeting attended telephonically.
Independent directors will also receive $3,000 per year for each board
committee on which they serve. In July 1999, we also granted each non-employee
director an option to purchase 0.5 shares of our Class A common stock at
$509,711 per share. These options are immediately exercisable and have ten-year
terms.
Chairman of the Board. We have agreed to issue to Mr. Parsons .2750 shares
of Class A common stock in compensation for his service to us. We will have a
right to repurchase these shares for $509,711 per share if Mr. Parsons' service
with us ends prior to the first anniversary of the agreement. In addition, we
will grant Mr. Parsons a ten-year option to purchase five shares of our Class A
common stock at an exercise price of $509,711 per share. Three of these shares
will vest after one year, and one share will vest in each of the two years
thereafter. The vesting of one of the three shares that vests in the first year
and the shares that vest at the end of the second and third years will be
subject to the fulfillment of performance criteria.
Executive Compensation
The following table sets forth the compensation earned by our named
executive officers which include our Chief Executive Officer and all other
executive officers whose salary and bonus for the year ended December 31, 1998
exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
------------------------- -------------------
Class A Shares
Name and Principal Position(s) Salary Bonus Other Underlying Options
- ------------------------------ -------- ------- -------- ------------------- ---
<S> <C> <C> <C> <C> <C>
Hugh Panero............... $163,333 $65,333 $267,309(1) 5
President and Chief
Executive Officer
Lee Abrams................ 125,417 27,413 30,989(2) 1
Senior Vice President,
Content & Programming
Stelios Patsiokas......... 43,077 16,710 59,966(3) 1
Senior Vice President,
Technology
Heinz Stubblefield........ 116,667 60,000 -- 1
Senior Vice President,
Chief Financial Officer
</TABLE>
- --------
(1) Includes a signing bonus of $200,000.
(2) Includes a signing bonus of $28,000.
(3) A signing bonus.
50
<PAGE>
Employment Agreements
Hugh Panero is employed as our President, Chief Executive Officer and member
of the board of directors for a term of three years under an employment
agreement effective June 1, 1998. His employment agreement provides for an
annual base salary of $280,000, subject to increase from time to time by the
board of directors. Mr. Panero is also eligible for a pro-rata annual bonus to
be determined by the board of directors according to Mr. Panero's personal job
performance and mutually agreed upon corporate goals and objectives. The bonus
target guideline is 40% of Mr. Panero's annual base salary. Under Mr. Panero's
employment agreement and pursuant to our shares award plan, we granted to Mr.
Panero a 10-year option to purchase five shares of our Class A common stock at
an exercise price of $509,711 per share. This option vests at the rate of
. two shares in three equal annual installments beginning on the first
anniversary of the grant; and
. three shares (conditioned on the meeting of additional performance
objectives to be agreed upon with the board of directors) in three
equal annual installments beginning on the first anniversary of the
grant.
All options vest in the event of death or involuntary termination within one
year of a change of control of our company; otherwise, all non-vested options
would be forfeited upon termination of employment. Following termination of
employment, vested stock options would cease to be exercisable
. immediately, if Mr. Panero is terminated for cause;
. three months after termination, in the event of a voluntary
termination;
. six months, following an involuntary termination; or
. one year following death, disability, retirement, or in the event of
voluntary or involuntary termination within one year following a change
of control.
His employment agreement restricts Mr. Panero from engaging in any business in
the United States which resembles or competes with our company for a period of
one year following termination of his employment.
We also have agreements with the following named executive officers:
<TABLE>
<CAPTION>
Salary Rate
Name Title Effective Date Annual Base
- ---- ----- ---------------- -----------
<S> <C> <C> <C>
Lee Abrams................ Senior Vice President, June 8, 1998 $215,000
Content and Programming
Stelios Patsiokas......... Senior Vice President, October 19, 1998 $210,000
Technology
Heinz Stubblefield........ Senior Vice President, June 1, 1998 $200,000
Chief Financial Officer
</TABLE>
Mr. Stubblefield's agreement is for a term of three years, which will
automatically renews for a period of an additional two years unless either
party gives 60 days notice to the other; Mr. Patsiokas' agreement is for a term
of three years; and Mr. Abrams' agreement has no specified term. Each agreement
provides that the executive is eligible for an annual bonus to be determined by
the board of directors based upon agreed upon performance measures. These
amounts are up to 40% of annual base salary for Mr. Patsiokas and up to 30% of
annual base salary for Messrs. Stubblefield and Abrams. The agreement for Mr.
Patsiokas provides for severance payment of one year's salary payable in a lump
sum upon termination of employment by us other than for cause. The agreement
for Mr. Stubblefield provides for severance payment of one year's salary and
bonus, plus the pro-rated portion of earned bonus and options scheduled to vest
for the current year, payable in a lump sum upon termination of employment by
us other than for cause. Under these agreements and the terms of our shares
award plan, we have granted to each of Messrs. Abrams, Patsiokas and
Stubblefield a 10-year option to purchase one share of Class A common stock at
an exercise price of $509,711 per share. Each of these options vests in three
equal annual installments beginning on the first anniversary of the grant.
51
<PAGE>
Shares Award Plan
General
In 1998, our board of directors adopted a 1998 Shares Award Plan. This plan
is intended to attract and retain selected employees, consultants and directors
and to motivate them to exercise their best efforts on our behalf by awarding
them shares of our Class A common stock. Either our board of directors or any
committee of two or more non-employee directors designated by our board of
directors has the exclusive authority to interpret the shares award plan and to
make all determinations necessary to administer the shares award plan.
The following are eligible participants in the shares award plan:
. employees of our company or of any affiliate of our company;
. consultants to our company or to any parent or subsidiary of our
company; and
. non-employee directors.
The aggregate number of shares of our Class A common stock with respect to
which awards may be granted under the shares award plan is 50 shares. We may
not grant awards of more than five shares of our common stock to any
participant in any calendar year.
Options
Options granted under the shares award plan may be either incentive or non-
incentive stock options within the meaning of the Internal Revenue Code. Each
option will be exercisable in whole or in installments, as determined at the
time of grant. The term of any option granted may not be more than 10 years
from the date of grant.
Stock Appreciation Rights
Stock appreciation rights may be granted in tandem with another award, in
addition to another award or unrelated to any other award. No stock
appreciation right may be exercisable until six months after the day of grant.
A stock appreciation right entitles the participant to receive the excess of
the fair market value of our common stock on the date of the exercise of the
stock appreciation right over its grant price.
Restricted Stock
We may grant stock that is not freely tradable, or restricted stock, to
participants under the shares award plan. Shares of restricted stock may not be
sold, assigned, transferred, pledged or otherwise encumbered, except as
provided in the shares award plan or other applicable agreements. Certificates
issued in respect of shares of restricted stock will be registered in the name
of the participant and deposited with our company. Dividends and other
distributions paid on or in any shares of restricted stock may be paid directly
to the participant, or may be reinvested in additional shares of restricted
stock.
Phantom Shares
We may grant hypothetical, or phantom, shares of our common stock which may
be canceled by delivery of actual shares or, at our discretion, by the payment
of cash equal to the fair market value of our common stock on the date of
surrender. The written agreement granting phantom shares will specify the date
on which the phantom share will be surrendered and canceled by delivery of
shares of our common stock with respect thereto.
Termination
If a participant ceases to be an employee, consultant or non-employee
director, then, unless we otherwise determined at the time of grant, such
participant's rights under the shares award plan shall be as follows.
52
<PAGE>
Stock Options and Stock Appreciation Rights. The participant's right to
exercise non-incentive stock options and stock appreciation rights will expire.
The participant will have the right to exercise any incentive stock options and
any related stock appreciation rights during the 90 days after such
termination, but not later than the date the option would have expired if not
for the termination. Nevertheless, if the employee or consultant is terminated
for good cause (as defined in the shares award plan), the participant
immediately forfeits any incentive stock options and associated stock
appreciation rights.
Restricted Stock. All shares of restricted stock still subject to
restriction will be forfeited and reacquired by our company at the price (if
any) paid by the participant for such restricted stock.
Phantom Shares and Other Stock-Based Awards. Phantom shares and stock-based
awards will be canceled or paid based on terms of the original grant.
Merger, Consolidation, Dissolution, Liquidation, Sale of Assets
If we engage in a corporate transaction, which consists of a merger, a
consolidation, a dissolution, a liquidation, or a sale of all or substantially
all of the assets of our company, then the holder of any award still
outstanding will have the right immediately prior to the effective date of the
transaction to exercise such awards in whole or part without regard to any
installment provision regarding exercisabilty. All such awards which are not so
exercised will be forfeited as of the effective time of the transaction.
Change of Control
If there is a change of control of the company, each participant will be
entitled to receive an equivalent award. An equivalent award is defined as a
continuation of the awards, an agreement by the person acquiring our company to
honor or assume the award, or the substitution of a new award with an inherent
value at least equivalent to the original award, and on terms at least as
beneficial to the participant as is the original award. If it is not possible
to grant such an equivalent award, we may grant a cash equivalent, calculated
as described in the shares award plan. If the participant's employment with us
is terminated by reason of involuntary termination within one year following
the change of control, the equivalent award may be exercised in full beginning
on the date of such termination.
Stock Option Grants
The following table sets forth information concerning the stock options
granted to our named executive officers under the 1998 Shares Award Plan in
1998.
<TABLE>
<CAPTION>
Individual Grants
-----------------------------------------------
Number of
Common Percent of Potential Realizable Value
Shares Total Exercise at Assumed Annual Rates
Underlying Options Price of Stock Price
Options Granted to Per Appreciation for Stock
Name Granted Employees Share(1) Expiration Date Term
- ---- ---------- ---------- -------- ---------------- ---------------------------
5% 10%
------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Hugh Panero............. 5 33.9% $875,000 June 1, 2008 $ 2,751,414 $ 6,972,623
Lee Abrams.............. 1 6.8 875,000 June 8, 2008 550,283 1,394,525
Stelios Patsiokas....... 1 6.8 875,000 October 19, 2008 550,283 1,394,525
Heinz Stubblefield...... 1 6.8 875,000 June 1, 2008 550,283 1,394,525
</TABLE>
- --------
(1) On July 8, 1999, the per share exercise price for these options was
adjusted to $509,711.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Satellite Contract with Hughes Space and Communications
Our Satellite Purchase Contract for In-Orbit Delivery, dated March 20, 1998,
as amended thereafter, with Hughes calls for Hughes to deliver
. in-orbit, two high-power satellites;
. an optional ground spare satellite upon exercise of XM Radio's option;
and
. satellite launch services.
We expect to incur total payment obligations under this contract of
approximately $541.3 million, which includes amounts we expect to pay pursuant
to the exercise of the option to build the ground spare satellite and certain
financing costs and in-orbit incentive payments. Payments are to be made to
Hughes upon certain calendar dates and completion of discrete milestones and
other events. As of July 7, 1999, we have paid $126.3 million under this
contract.
We have granted Hughes a first priority security interest in any rights we
may have in Hughes' work product under the satellite contract to secure our
payment obligations to Hughes under the contract. This security interest will
be released once we have made substantial pre-arranged payments to Hughes under
our satellite contract or, if earlier, upon the launch of the satellites.
We may, subject to certain conditions, terminate the satellite contract at
our convenience, in which case Hughes will be entitled to certain payments. We
may also terminate the satellite contract for certain events of default by
Hughes or in case it becomes reasonably certain that the total amount of
excusable delay in Hughes' performance under the satellite contract caused by
events beyond Hughes' control, excluding delays we caused, will exceed 485
calendar days.
The first satellite is to be delivered to us in orbit by December 31, 2000,
the second by April 11, 2001. The scheduled launch period for the first
satellite is the period from November 1, 2000 through February 1, 2001. The
scheduled launch period for the second satellite is the period from February
15, 2001 through May 15, 2001. If there is a delay of more than six months in
the launch of either the first or second satellite, we would be able to select
an alternative launch system from within or outside of Hughes' inventory of
launch vehicles, subject to certain payment conditions set forth in the
satellite contract.
For each satellite, title will transfer to us after Hughes successfully
completes certain tests and analyses on each satellite upon arrival at its
specified orbital location. If Hughes fails to deliver either satellite on or
before the fiftieth day following its delivery date, then Hughes must pay us
liquidated damages which accrue on a daily basis. The total aggregate amount of
liquidated damages for failure to meet the delivery dates of both satellites is
limited to $16 million. These liquidated damages are in addition to other
limited liquidated damages for delay in the launch of the satellites. We would
have no other damages or remedies for late delivery of a satellite. If, on the
other hand, Hughes launches both satellites on or before December 31, 2000, we
will pay Hughes $6 million in addition to the contract price.
American Mobile, whose single largest stockholder on a fully diluted basis
is Hughes Communications, an affiliate of Hughes, owns 37% of the outstanding
shares of our common stock, or 52.7% assuming no conversion of preferred stock.
General Motors, which owns Hughes and with whom we have a distribution
agreement as described below, owns 12% of the outstanding shares of our common
stock and an additional 12% of the outstanding shares is held by DIRECTV, an
affiliate of Hughes and an indirect subsidiary of General Motors.
54
<PAGE>
Distribution Agreement with GM and OnStar
We have signed a long-term distribution agreement with the OnStar division
of General Motors providing for the installation of XM radios in General Motors
vehicles. During the term of the agreement, which expires 12 years from the
commencement date of our commercial operations, General Motors has agreed to
distribute our service to the exclusion of other satellite digital radio
services that broadcast in the S-Band. General Motors will factory-install XM
radios, purchased exclusively from our authorized manufacturers, in certain new
General Motors vehicles and not install any radios which receive CD Radio as
the only satellite radio service. We will have a non-exclusive right to arrange
for the installation of XM radios included in OnStar systems in non-General
Motors vehicles that are sold for use in the United States.
We have agreed, for a nine-month period beginning on July 1, 2001, that
General Motors shall be the exclusive vehicle manufacturer in whose new
vehicles we will activate the XM Radio service. If, however, we cannot install
XM radios prior to January 1, 2002, then this exclusivity arrangement will
apply for a six-month period beginning on the later of July 1, 2002 or the date
we commence full commercial operations. In addition, we have significant
annual, fixed payment obligations to General Motors for four years following
commencement of commercial operation. These payments approximate $35 million in
the aggregate during this period. Additional annual fixed payment obligations
beyond the initial four years of the contract term range from less than $35
million to approximately $130 million through 2009, aggregating approximately
$400 million. In order to encourage the broad installation of XM radios in
General Motors vehicles, we have agreed to subsidize a portion of the cost of
XM radios, and to make incentive payments to General Motors when the owners of
General Motors vehicles with installed XM radios become subscribers for the XM
Radio service within 12 months of purchasing a General Motors vehicle equipped
with an XM radio. We must also share with General Motors a percentage of the
subscription revenue attributable to General Motors vehicles with installed XM
radios. We will also make available to General Motors a limited amount of
bandwidth for audio and/or data transmission by General Motors to owners of
General Motors vehicles equipped with XM radios.
This agreement is subject to renegotiation if four years after the
commencement of commercial operations and at two-year intervals thereafter
General Motors does not achieve and maintain specified installation levels of
General Motors vehicles capable of receiving our service, starting with 1.24
million units after four years, and the lesser of 600,000 units per year
thereafter and amounts proportionate to target market shares in the satellite
digital radio service market. There can be no assurance as to the outcome of
any such renegotiations. General Motors' exclusivity obligations will
discontinue if, four years after we commence commercial operations and at two-
year intervals thereafter, our mobile aftermarket share falls below 40% if
there are two satellite radio providers in the United States, or below 33% if
there are three satellite radio providers in the United States.
Furthermore, if General Motors elects to install radios which are
interoperable radios with other satellite radio providers, in the absence of
any regulatory requirements to do so, we may seek to renegotiate the
distribution agreement. If the FCC requires the installation of interoperable
radios, we will renegotiate the distribution agreement on mutually acceptable
terms.
Engineering Contract with LCC International
We have signed a contract with LCC International for the engineering of and
site preparation of our terrestrial repeater network. The repeater network will
supplement our high-powered satellite signals. Payments by XM Radio under this
contract are expected to approximate $115 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor.
The contract designates LCC International as the prime contractor for the
implementation of our terrestrial repeater sites. Under this contract, LCC
International will perform various services, including radio frequency
engineering design, network deployment management, site acquisition,
architectural and engineering, zoning, site preparation, regulatory services,
network management testing, network coverage testing and interim system
55
<PAGE>
maintenance. The initial site planning is now complete for 70 cities and
metropolitan areas and implementation work is continuing.
The design of our terrestrial repeater system will be guided by a radio
frequency analysis technique newly developed by LCC International. This
technique uses analysis of the satellite footprint to discover areas likely to
have impaired reception of XM Radio through technology similar to that used in
certain cellular telephone systems.
Dr. Rajendra Singh, a member of our board of directors and a member of the
board of directors of LCC International, controls the largest shareholder of
both LCC International and one of the holders of our convertible notes, Telcom-
XM Investors L.L.C., which will hold approximately % of our Class A Common
Stock upon completion of this offering.
Technology License Agreement with American Mobile
American Mobile has granted us a royalty-free license with respect to
certain technology to be used in connection with the implementation of the XM
Radio system, including, among other things, certain ground segment
communications technology and antenna technology. We also have the right to
sublicense this technology to any third party, including chipset manufacturers,
terrestrial repeater manufacturers and receiver manufacturers in connection
with the XM Radio system.
Under cross-license provisions in the license, if we obtain from any third
party the right to use any technology which could be used to develop, implement
and commercialize a satellite radio system for transmission in the United
States, we will make all reasonable efforts to obtain for American Mobile the
right to use such technology. We have granted to American Mobile a royalty-
free, non-exclusive and irrevocable license to any and all technology and
improvements we develop relating to the XM Radio system. This cross-license is
for use and sublicensing worldwide outside the United States and its
territories, or inside the United States and its territories only in connection
with American Mobile's mobile satellite business in the United States and other
than in connection with any satellite radio system.
The technology license renews automatically on an annual basis unless
terminated for a breach which has not been or cannot be remedied.
Technical Services Agreements
We have a technical services agreement with American Mobile under which
American Mobile provides us with certain technical, engineering, marketing and
strategic planning services. We pay American Mobile at specified hourly rates,
which we believe approximate rates available from unrelated parties. On or
after our commencement of commercial operations, American Mobile or we may
terminate the technical services agreement at any time. We incurred costs of
$0.1 million to American Mobile under this agreement from January 1, 1998
through June 30, 1999.
We expect shortly to enter into a technical services agreement with DIRECTV
with respect to customer service, billing and conditional access capabilities.
Other Transactions with American Mobile
In 1997, American Mobile contributed $143,000 for us to establish our
original application for the FCC license. Also in 1997, we received $1,500,000
as a capital contribution from American Mobile. During 1998, American Mobile
incurred general and administrative costs and professional fees for us and
established an intercompany balance of $458,000. During June 1999, American
Mobile provided us a line of credit under which we drew $250,000. This was
repaid, and the line of credit terminated, in July 1999.
56
<PAGE>
American Mobile Convertible Notes
We have issued a convertible note to American Mobile, pursuant to which we
have borrowed the principal amount of $21.4 million. In July 1999, we issued a
second convertible note to American Mobile in the aggregate principal amount of
$81.7 million. The American Mobile convertible notes bear interest at a rate
equal to the LIBOR plus 5% per annum, and the notes matures on December 31,
2004, unless extended in certain circumstances if we issue high yield debt
securities. The principal amount of the notes and all interest accrued thereon
are repayable in a single installment on the maturity date. The $21.4 million
note provides that American Mobile may convert all or a portion of the
aggregate principal amount thereof into shares of our Class B common stock at a
conversion of price of $875,000 per share, subject to adjustment, and the $81.7
million note has a conversion price of $462,728 per share, subject to
adjustment. In each case, accrued interest is convertible into shares of our
Class B common stock at a conversion price of $509,711. These notes convert
automatically into shares of our Class B common stock upon completion of this
offering.
$250 Million Subordinated Convertible Notes
We have issued Series A subordinated convertible notes to General Motors,
Clear Channel, DIRECTV, Telcom Ventures, Columbia Capital and Madison Dearborn
Partners, pursuant to which we have borrowed the principal amount of $250.0
million. The notes bear interest at a rate equal to six-month LIBOR plus 5% per
annum, and the notes mature on December 31, 2004, unless extended in certain
circumstances if we issue high yield debt securities. The principal amount of
the notes and all interest accrued thereon are repayable in a single
installment on the maturity date or the date of conversion. The notes and
accrued interest will be converted automatically into Series A convertible
preferred stock, in the case of notes held by General Motors and DIRECTV, and
Class A common stock, in the case of notes held by the others, at a price of
$509,711 per share upon completion of this offering.
Registration Rights Agreement
We have a registration rights agreement with the holders of our Series A
subordinated convertible notes, Baron Asset Fund and American Mobile.
Commencing July 7, 2000, each of these parties is entitled to demand
registration with respect to its Class A common stock, including shares
issuable upon conversion of other securities. American Mobile is entitled to
make two demands. These rights are subject to our right to defer the timing of
a demand registration and an underwriters' right to cut back shares in an
underwritten offering. In certain instances if a demand registration is cut
back by more than 75% of the number of shares originally requested to be
registered, then the party requesting registration shall be entitled to one
additional demand registration request.
In addition to these demand rights, following our commencement of commercial
operation, parties to the registration rights agreement may request
registration of at least $25.0 million of Class A common stock.
Parties to the registration rights agreement also have rights to include
their Class A common stock in registered offerings initiated by us, other than
the registration statement for this offering and an offering for high yield
debt.
Shareholders' Agreement
We have entered into a shareholders' agreement with American Mobile, Baron
Asset Fund and the holders of our subordinated convertible notes, containing,
among others, the provisions described below.
Conversion of Shares of Class B Common Stock to Class A Common Stock
Our Class B common stock owned by American Mobile is convertible into our
Class A common stock, on a one for one basis, following this offering at any
time at American Mobile's discretion. In addition, under the
57
<PAGE>
shareholders' agreement, following this offering, the holders of a majority of
our outstanding Class A common stock, which must include at least 20% of the
public holders of the Class A common stock, may require conversion by American
Mobile. This conversion will not be effected, however, if the FCC does not
approve the transfer of control of XM Radio from American Mobile to a diffuse
group of stockholders.
Restrictions on Transfer of Shares of Our Securities
Except for affiliated transactions, American Mobile will not be permitted to
transfer any of our securities until the earlier of the date on which we begin
commercial operations or one year after the closing of this offering. Shares of
Class B common stock are transferable only upon conversion into shares of Class
A common stock and, in certain circumstances, to Baron Asset Fund, which can
transfer its shares only upon conversion into shares of Class A common stock.
Non-Competition
American Mobile has agreed not to compete with our company in the satellite
radio business in the United States for so long as American Mobile holds 5% of
our common stock and for a period of three years following any transfer which
results in American Mobile owning less than 5% of our common stock.
Investor Operational Agreements
We have agreements with Clear Channel, DIRECTV and the TCM Group, which is
owned by Columbia Capital, Telcom Ventures and Madison Dearborn Partners, under
which we will make available to them up to 406.6 kilobits per second, 204.8
kilobits per second, and 64.0 kilobits per second each, respectively, of our
bandwidth, for them to supply programming to us with content reasonably
acceptable to us, on terms (including revenue sharing) no less favorable than
those offered to similar commercial programmers who provide similar
programming. Until these options are exercised and this bandwidth is actually
used by them, we can use the bandwidth. Any use of our bandwidth by these
companies must be in compliance with applicable laws, must not interfere with
our business or our obligations to other content providers, and must meet our
quality standards.
The agreements call for us to have a technology advisory committee on which
Clear Channel, DIRECTV and the TCM Group have representatives. The committee
will direct the selection of appropriate billing, customer service and
conditional access systems for us, as well as our overall system integration
effort. We have granted to Clear Channel, DIRECTV, and TCM Group under these
agreements a royalty-free, non-transferable, non-exclusive license to use,
sell, manufacture and have manufactured any and all technology we develop
relating to the XM Radio system worldwide for any purpose other than one
related to digital audio radio service.
We are to enter into a technical services agreement with DIRECTV with
respect to customer service, billing and conditional access capabilities, and
we will use DIRECTV's customer service, billing and conditional access
capabilities if made available to us on competitive terms and conditions.
DIRECTV is to make good faith efforts to represent us in obtaining distribution
of XM Radio service through DIRECTV's existing retail distribution network. We
will provide Clear Channel and DIRECTV with access to our advertising at the
lowest available commercial rates. Clear Channel must make good faith efforts
to give us access to its advertising at the lowest available commercial rates.
The agreements provide for further good faith negotiations with respect to
other arrangements, including advertising barter arrangements, marketing of XM
Radio service by Clear Channel and DIRECTV, and technology cooperation.
These agreements remain in effect so long as Clear Channel, DIRECTV, and
Columbia Capital, Telcom Ventures and Madison Dearborn Partners hold at least
5% of our fully diluted ownership or the full amount of their original
investments in us.
58
<PAGE>
July 1999 Transactions
We engaged in a series of transactions in July 1999 in which WorldSpace
ceased to be an owner of our company, American Mobile became the owner of the
securities previously held by WorldSpace, and several of the transactions and
agreements described above were entered into. These transactions are described
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Sources of Funds"
and in the notes to our Unaudited Condensed Consolidated Financial Statements.
59
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table and the accompanying notes set forth certain information
concerning the beneficial ownership of our Class A common stock after giving
effect to this offering based on stock ownership at August 20, 1999 but
assuming automatic conversion of outstanding convertible notes as of September
15, 1999, by each person who is known by us to own beneficially more than five
percent of such stock, each director and each named executive officer, and all
directors and executive officers as a group. Except as otherwise indicated,
each person listed in the table has informed us that such person has sole
voting and investment power with respect to such person's shares of common
stock and record and beneficial ownership with respect to such person's shares
of common stock.
As of August 20, 1999, there were no shares of Class A common stock
outstanding and 125 shares of Class B common stock outstanding, all of which
were owned by American Mobile. Class B common stock is convertible into Class A
common stock on a one-for-one basis. Class B common stock is entitled to three
votes for each share. The numbers of shares of Class A common stock
beneficially owned after the offering in the first table below include shares
issuable upon conversion of notes that convert automatically upon completion of
this offering. Share ownership in both tables below includes shares we may
issue if certain stockholders exercise outstanding options within 60 days after
August 20, 1999.
<TABLE>
<CAPTION>
Percentage
of Total
Number of Class A
Class A Shares Shares
Beneficially Owned after
Name and Address of Beneficial Owner after Offering Offering
------------------------------------ ------------------ ----------
<S> <C> <C> <C> <C>
Beneficial Owners of More Than 5%:
American Mobile Satellite Corporation... 332.1541(1)
10802 Parkridge Boulevard
Reston, VA 20191-5416
General Motors Corporation.............. 200.2338(2)
100 Renaissance Center
3031 West Grand Boulevard
PO Box 100
Detroit, MI 48265-1000
DIRECTV Enterprises, Inc. .............. 100.1169(3)
2230 E. Imperial Highway
El Segundo, CA 90245
Clear Channel Investments, Inc. ........ 150.1753
200 Concord Plaza, Suite 600
San Antonio, TX 78216
Columbia XM Radio Partners, L.L.C. ..... 50.0584
201 N. Union Street, Suite 300
Alexandria, VA 22314
Telcom-XM Investors, L.L.C. ............ 50.0584(4)
211 North Union Street, Suite 300
Alexandria, VA 22314
Madison Dearborn Capital Partners III,
L.P. .................................. 48.6772
Madison Dearborn Special Equity III,
L.P.................................... 1.0808
Special Advisors Fund I, LLC............ 0.3004
3 First National Plaza, Suite 3800
Chicago, IL 60602
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
Percentage
of Total
Number of Class A
Class A Shares Shares
Beneficially Owned after
Name after Offering Offering
---- ------------------ ----------
<S> <C> <C> <C> <C>
Directors and Named Executive Officers
Gary M. Parsons ........................ 0.2750(5)
Hugh Panero ............................ 1.6666(6)
Randall T. Mays ........................ 0.5000
Randy S. Segal ......................... 0.5000
Jack Shaw .............................. 0.5000
Rajendra Singh ......................... 0.5000(4)
Ronald L. Zarrella ..................... 0.5000
Nathanial Davis......................... --(7)
Thomas R. Donohue....................... --(7)
Lee Abrams ............................. 0.3333(8)
Stelios Patsiokas ...................... 0.3333(9)
Heinz Stubblefield ..................... 0.3333(8)
All directors and executive officers as
a group (15 persons)................... 5.7748(10)
</TABLE>
- --------
* Less than 1%.
(1) Includes 332.1541 shares issuable upon conversion of Class B common stock.
(2) Includes 200.2338 shares issuable upon conversion of Series A convertible
preferred stock, 100.1169 of which are owned by DIRECTV.
(3) Includes 100.1169 shares issuable upon conversion of Series A convertible
preferred stock.
(4) Rajendra Singh, a member of our board of directors, indirectly owns a
controlling interest in Telcom-XM Investors, L.L.C. Mr. Singh disclaims
beneficial ownership of the shares of Class A common stock beneficially
owned by Telcom-XM Investors, L.L.C.
(5) Reflects an agreement to issue shares reached as of July 16, 1999. Does not
include 5.0000 shares issuable upon exercise of options which are not
exercisable within 60 days. Mr. Parsons has acquired a minority membership
interest in each of Columbia XM Radio Partners, L.L.C. and Telcom-XM
Investors, L.L.C. and has also acquired a minority participatory interest
in each of Madison Dearborn Capital Partners III, L.P. and Madison Dearborn
Special Equity III, L.P.
(6) Does not include 3.3334 shares issuable upon exercise of options which are
not exercisable within 60 days. Mr. Panero has acquired a minority
membership interest in Telcom-XM Investors, L.L.C.
(7) It is anticipated that each of Messrs. Davis and Donohue will receive
options to purchase 0.5000 shares in the near future.
(8) Does not include 0.6667 share issuable upon exercise of options which are
not exercisable within 60 days.
(9) Does not include 0.6667 share issuable upon exercise of options which are
not exercisable within 60 days.
(10) Does not include 13.0002 shares issuable upon exercise of options which
are not exercisable within 60 days.
61
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, our authorized capital stock will consist
of 2,500 shares of Class A common stock, $.01 par value per share, 1,000 shares
of Class B common stock, $.01 par value per share, 500 shares of Class C common
stock, $.01 par value per share and 1,000 shares of Series A convertible
preferred stock, $1.00 par value per share. The following summary description
of our capital stock is subject to our Restated Certificate of Incorporation
and Amended and Restated Bylaws and the Delaware General Corporation Law.
Common Stock
As of the date of this prospectus, there were no shares of Class A common
stock outstanding. After giving effect to the issuance of shares of Class
A common stock by us in this offering and the conversion of the outstanding
convertible subordinated notes (other than the notes to be converted into
Series A preferred stock), there will be shares of Class A common stock
outstanding upon completion of this offering.
Class A Common Stock
Holders of Class A common stock are entitled
. to one vote for each share held on any matter submitted for stockholder
approval;
. to receive on a pro rata basis, dividends and distributions, if any, as
the board of directors may declare out of legally available funds; and
. upon the liquidation, dissolution, winding up or insolvency of our
company, to share ratably in the net assets of our company available
after we pay our liabilities and any preferential amounts to which
holders of the Series A preferred stock may be entitled.
Holders of Class A common stock have no preemptive, redemption or sinking
fund rights.
Class B Common Stock
Class B common stock has the same rights as Class A common stock except that
Class B common stock is entitled to three votes for each share. Shares of Class
B common stock are convertible into shares of Class A common stock on a one-
for-one basis, subject to antidilution protection if we effect a
recapitalization.
Class C Common Stock
Holders of Class C common stock are entitled to the same rights as holders
of Class A common stock except that the holders of Class C common stock are not
entitled to vote on any matter submitted for stockholder approval.
Preferred Stock
The board of directors may issue preferred stock in one or more series and
may fix the designations, powers, preferences and relative, participating,
optional and other special rights, qualifications, limitations and restrictions
on the preferred stock, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and may fix the number of
shares to be included in any such series. Any preferred stock may rank senior
to the common stock for the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any shares of preferred stock
may have class or series voting rights. Issuances of preferred stock, while
providing us with flexibility in connection with general corporate purposes,
may, among other things, have an adverse effect on the rights of holders of
common stock. The board of directors, without stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of common stock. Preferred stock
62
<PAGE>
could thus be issued quickly with terms calculated to delay or prevent a change
of control of the company or to make the removal of management more difficult.
In certain circumstances, this could have the effect of decreasing the market
price of the common stock.
Series A Convertible Preferred Stock
We have reserved 500 shares of Series A convertible preferred stock, with
the Series A convertible preferred stock having the following characteristics:
. a right to receive dividends and distributions ratably with the holders
of common stock;
. a $1 per share payment preference over our common stock in the event of
our liquidation, dissolution, winding up or insolvency;
. a right to convert, at the election of the holder, one share of the
Series A convertible preferred stock into one share of Class A common
stock; and
. shares of our Series A convertible preferred stock do not have
-- voting rights;
-- any preference with respect to dividends and distributions;
-- preemptive rights;
-- sinking fund rights; or
-- redemption rights.
Following the occurrence of a recapitalization, as described under the
caption "Class B Common Stock", each share of Series A convertible preferred
stock will be convertible into the kind and number of shares of company
securities or other property to which the holders of such share of Series A
convertible preferred stock would have been entitled to receive if the holder
had converted such share of Series A convertible preferred stock into Class A
common stock immediately prior to the recapitalization.
As of the date of this prospectus, there are no shares of Series A
convertible preferred stock outstanding. After giving effect to the conversion
of convertible subordinated notes, there will be shares of Series A
convertible preferred stock outstanding upon completion of this offering.
Certain Provisions of Our Certificate of Incorporation and Bylaws
Certificate of Incorporation
Our certificate of incorporation permits the board of directors without
stockholder approval to issue shares of preferred stock up to the number of
shares authorized for issuance in our certificate of incorporation, except as
limited by Nasdaq rules. The company could use these additional shares for a
variety of corporate purposes. These purposes include future public offerings
to raise additional capital, corporate acquisitions and employee benefit plans.
Our ability to issue these shares of preferred stock could make it more
difficult or discourage an attempt to obtain control of our company by means of
a proxy contest, tender offer, merger or otherwise.
Bylaws
As currently in effect, our bylaws require that the number of directors be
as provided in the shareholders' agreement. See "Management--Provisions
Governing the Board of Directors." The bylaws provide that special meetings of
the stockholders may be called by the board of directors, by stockholders
holding at least 15% of the outstanding common stock or by the chief executive
officer or the president. The bylaws may be amended or repealed, or new bylaws
may be adopted, by the stockholders or the board of directors, subject to the
Shareholders' Agreement.
63
<PAGE>
Stockholder Actions
Except as otherwise expressly provided in our certificate of incorporation
or our bylaws, resolutions may be adopted at stockholders' meetings by the
affirmative vote of a simple majority of the aggregate number of votes
represented by all shares entitled to vote thereon and represented, in person
or by proxy, at the meeting. In addition, stockholders may act by written
consent without a meeting if approved by the holders of a majority of the
aggregate number of votes represented by all shares entitled to vote thereon,
provided that notice of any such action must be subsequently furnished to all
stockholders if such approval was not unanimous. Directors may be elected by a
plurality of votes cast by stockholders at a meeting or by written consent,
assuming a quorum is present, in person or by proxy, or acting by written
consent. The quorum required for a meeting or action by written consent of
stockholders consists of stockholders holding a majority of the issued and
outstanding shares present in person or by proxy and entitled to vote.
Stockholders' meetings are convened upon advance notice of at least 10 days and
not more than 60 days. Among other powers, stockholders have the power to elect
directors, appoint auditors and make changes in the amount of our authorized
share capital.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that directors of the company
shall not be personally liable to the company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to the company or its
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under a provision of Delaware General Corporation Law relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
. for any transaction from which such director derived an improper personal
benefit.
As a result of this provision, the company and its stockholders may be unable
to obtain monetary damages from a director for breach of his or her duty of
care.
In addition, our certificate of incorporation and bylaws provide for the
indemnification of directors and officers and any director or officer who is or
was serving at our request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise to the full
extent authorized or permitted by the laws of Delaware against expenses,
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any threatened, pending or completed action, suit
or proceeding to which such person was or is made a party or is threatened to
be made a party by reason of serving in any of the foregoing capacities. The
indemnification includes, to the full extent authorized or permitted by the
Delaware General Corporation Law, payment by us of the expenses in advance of
any proceeding. In addition, we have entered or will enter into indemnification
agreements with our directors and executive officers that provide
indemnification in addition to the indemnification provided in our bylaws.
Under the bylaws, we may, but are not obligated to, maintain insurance, at our
expense, for the benefit of the company and of any person to be indemnified by
us.
Listing
We will apply to have our Class A common stock approved for quotation on the
Nasdaq National Market under the symbol "XMSR".
Transfer Agent and Registrar
We will designate a transfer agent and registrar for the Class A common
stock prior to the consummation of this offering.
64
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Based upon the number of shares outstanding as of June 30, 1999, after this
offering we will have outstanding shares of Class A common stock (as
adjusted for the recapitalization). Of the outstanding shares,
approximately shares, including the shares of Class A common stock sold
in this offering, will be immediately eligible for resale in the public market
without restriction under the Securities Act of 1933, except that any shares
purchased in this offering by our affiliates (as that term is defined in
Rule 144), may generally only be resold in compliance with the applicable
provisions of Rule 144.
Our company, the executive officers and directors of our company and certain
security and option holders have agreed, pursuant to lock-up agreements with
our underwriters, not to offer for sale, contract to sell, pledge, hypothecate,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase or otherwise transfer or
dispose of, directly or indirectly, any shares of our Class A common stock or
any securities convertible into or exercisable or exchangeable for shares of
our Class A common stock, without the prior written consent of Bear, Stearns &
Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation on behalf of
our underwriters, for a period of days after the effective date of the
registration statement of which this prospectus is a part. At the end of such
-day period, approximately shares of our Class A common stock, including
approximately shares issuable upon exercise of vested options, will be
eligible for immediate resale, subject to compliance with Rules 144 and 701.
The remainder of the approximately shares of our Class A common stock
outstanding or issuable upon exercise of options held by existing stockholders
or option holders will become eligible for sale at various times over a period
of less than two years and could be sold earlier if the holders exercise any
available registration rights.
In general, under Rule 144, beginning approximately 90 days after the
effective date of the Registration Statement of which this prospectus is a
part, a stockholder, including an affiliate, who has beneficially owned his or
her restricted securities (as that term is defined in Rule 144) for at least
one year from the later of the date such securities were acquired from us or
(if applicable) the date they were acquired from an affiliate, is entitled to
sell, within any three-month period, a number of such shares that does not
exceed the greater of 1% of the then outstanding shares of our Class A common
stock or the average weekly trading volume of our Class A common stock during
the four calendar weeks preceding the date on which notice of such sale was
filed under Rule 144, provided certain requirements concerning availability of
public information, manner of sale and notice of sale are satisfied.
Approximately shares of Class A common stock are expected to be outstanding
immediately after this offering. In addition, under Rule 144(k), if a period of
at least two years has elapsed between the later of the date restricted
securities were acquired from us or (if applicable) the date they were acquired
from an affiliate of our company, a stockholder who is not an affiliate of our
company at the time of sale and has not been an affiliate of our company for at
least three months prior to the sale is entitled to sell the shares immediately
without compliance with the foregoing requirements under Rule 144.
Securities issued in reliance on Rule 701, such as shares of Class A common
stock that may be acquired pursuant to the exercise of certain options granted
prior to this offering, are also restricted securities and, beginning 90 days
after the date of this prospectus, may be sold by stockholders other than an
affiliate of our company subject only to the manner of sale provisions of Rule
144 and by an affiliate under Rule 144 without compliance with its one-year
holding period requirement.
We and our directors, executive officers and principal security holders have
agreed that, subject to certain limited exceptions, for a period of days
after the date of this prospectus, without the prior written consent of Bear,
Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation, we
will not, directly or indirectly, issue, sell, offer or agree to sell or
otherwise dispose of any shares of Class A common stock or securities
convertible into, exchangeable for or evidencing the right to purchase shares
of such common stock. Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette
Securities Corporation, may in their sole discretion and at any time without
notice, release all or any portion of the shares subject to such agreements.
65
<PAGE>
Prior to this offering, there has been no public market for our common
stock. No prediction can be made as to the effect, if any, that market sales of
shares or the availability of shares for sale will have on the number of shares
that may be sold in the public market pursuant to Rule 144, since this will
depend on the market price of our Class A common stock, the personal
circumstances of the sellers and other factors. Nevertheless, sales of
significant amounts of our Class A common stock in the public market could
adversely affect the market price of our Class A common stock and could impair
our ability to raise capital through an offering of its equity securities.
66
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Deutsche Bank Securities Inc., and Merrill Lynch, Pierce, Fenner & Smith
Incorporated, the underwriters have severally agreed to purchase from us the
following respective numbers of shares of Class A common stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Deutsche Bank Securities Inc................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................................
Total......................................................
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a comfort letter from our accountants, the listing of the Class A
common stock on the Nasdaq National Market and no occurrence of an event that
would have a material adverse effect on our business. The underwriters are
obligated to purchase and accept delivery of all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the Class A common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
-------- --------
<S> <C> <C>
Per share.................................................. $ $
Total...................................................... $ $
</TABLE>
At our request, the underwriters have reserved for sale at the initial
public offering price up to shares of our Class A common stock to be
sold in this offering for sale to certain persons designated by us. The number
of shares available for sale to the general public will be reduced to the
extent that any reserved shares are purchased. Any reserved shares not so
purchased will be offered by the underwriters on the same basis as the other
shares offered hereby.
67
<PAGE>
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A common stock. Specifically, the
underwriters may over-allot shares of the Class A common stock in connection
with this offering, thereby creating a short position in the Class A common
stock for their own account. Additionally, to cover such over-allotments or to
stabilize the market price of the Class A common stock, the underwriters may
bid for, and purchase, shares of the Class A common stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our Class A common stock at
a level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
We have applied to list our Class A Common Stock on the NASDAQ National
Market under the symbol "XMSR".
Prior to this offering, there has been no public market for our Class A
common stock. Consequently, the initial public offering price for our Class A
Common Stock will be determined by negotiation among us and the
representatives of the underwriters. Among the factors to be considered in
determining the public offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparable companies; and
. estimates of our business potential.
Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation acted as our financial advisor in connection with our issuance of
$250.0 million of subordinated convertible notes, for which they received
customary compensation. Bear, Stearns & Co. Inc. or its affiliates have also
provided and may in the future provide investment banking or other financial
services to us and American Mobile and its affiliates in the ordinary course
of business, for which it has received and is expected to receive customary
fees and expenses. To date, Bear, Stearns & Co. Inc. has served American
Mobile as an initial purchaser for its issuance of units in March 1998, as an
underwriter in its sale of common stock in July 1999, and as financial advisor
in several of its acquisition and financing transactions. Deutsche Bank
Securities Inc. also served as an underwriter in American Mobile's sale of
common stock in July 1999.
LEGAL MATTERS
Certain legal matters with respect to the shares of Class A common stock
offered by this prospectus will be passed upon for XM Radio by Hogan & Hartson
L.L.P., Washington, D.C. Certain legal matters with respect to communications
regulatory issues will be passed upon for XM Radio by Fisher Wayland Cooper
Leader & Zaragoza L.L.P., Washington, D.C. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Latham &
Watkins, New York, New York.
68
<PAGE>
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for the years ended December 31, 1997 and 1998 and for the period from December
15, 1992 (date of inception) through December 31, 1998, have been included
herein and in the registration statement, in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG LLP contains an explanatory paragraph that states that we have
not commenced operations, have negative working capital and are dependent upon
additional debt and equity financings, which raise substantial doubt about our
ability to continue as a going concern. Our consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
CERTAIN INFORMATION ABOUT THIS PROSPECTUS
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933 covering the Class A common stock being offered by this
prospectus. As permitted by SEC rules, this prospectus omits certain
information that is included in the registration statement. For further
information about us and our Class A common stock, you should refer to the
registration statement and its exhibits. Since the prospectus may not contain
all the information that you may find important, you should review the full
text of these documents. If we have filed a contract, agreement or other
document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Each statement in this prospectus, including statements incorporated by
reference as discussed below, regarding a contract, agreement or other document
is qualified in its entirety by reference to the actual document. You may read
and copy any document we file with the SEC at the SEC's public reference rooms
located at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, at 7 World
Trade Center, 13th Floor, New York, NY 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. You can also obtain copies of
filed documents by mail from the Public Reference Section of the SEC at Room
1024, 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our SEC filings
are also available to the public at the SEC's web site at http://www.sec.gov.
Upon approval of our Class A common stock for quotation on the Nasdaq National
Market, you can also inspect such reports, proxy and information statements and
other information at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, DC. 20006.
69
<PAGE>
Index to Pro Forma Financial Information
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of Pro Forma Financial Information........................... P-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of June 30,
1999.................................................................... P-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the six months ended June 30, 1999...................................... P-4
Unaudited Pro Forma Condensed Consolidated Statement of Operations for
the year ended December 31, 1998........................................ P-5
Notes to Pro Forma Financial Information................................. P-6
</TABLE>
P-1
<PAGE>
Description of Pro Forma Financial Information
The accompanying pro forma financial information gives effect to (i) the
July 1999 transactions, including (a) American Mobile's acquisition of the debt
and equity interests in our company from WorldSpace; (b) the completion of the
issuance of Series A subordinated convertible notes in a private placement net
of related financing costs; (c) the repayment of certain related party notes
and certain amounts due to vendors with the proceeds received from the issuance
of the Series A subordinated convertible notes above; and (d) the exchange of
the outstanding options and debt held by American Mobile for a new subordinated
convertible note; and (ii) the offering and related transactions, including (a)
the issuance of shares in this offering net of underwriters' discounts and
commissions and related fees and expenses; and (b) the mandatory conversion of
the Series A subordinated convertible notes, the existing American Mobile
convertible note and the new American Mobile convertible note as if such
transactions had been consummated on June 30, 1999 in the case of the Unaudited
Pro Forma Condensed Consolidated Balance Sheet of XM Satellite Radio and on
January 1, 1998 in the case of the Unaudited Pro Forma Condensed Consolidated
Statements of Operations of XM Satellite Radio.
The pro forma condensed consolidated financial information is presented for
illustrative purposes only and is not necessarily indicative of what the
Company's actual financial position and results of operations would have been
had the above referenced transactions been consummated as of the above
referenced dates or of the financial position or results of operations that may
be reported by the Company in the future.
The following data should be read in conjunction with XM Satellite Radio
Holdings Inc. and Subsidiary Consolidated Financial Statements and related
notes included elsewhere herein.
P-2
<PAGE>
XM Satellite Radio Holdings Inc. and Subsidiary
(A Development Stage Company)
Unaudited Pro Forma Condensed Consolidated Balance Sheet
<TABLE>
<CAPTION>
As of June 30, 1999
--------------------------------------------------------------
July 1999
Transactions Offering Pro Forma
Actual Adjustments Pro Forma Adjustments As Adjusted
-------- ------------ --------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash................... $ 163 $250,000 (1) $ 96,763 $ 150,000 (6) $235,513
(75,000)(2) (11,250)(6)
(68,000)(3)
(10,400)(1)
Prepaid and other
current assets........ 92 92 92
-------- -------- --------
Total current assets... 255 96,855 235,605
-------- -------- --------
OTHER ASSETS:
Property and equipment,
net of accumulated
depreciation.......... 1,033 1,033 1,033
System under
construction.......... 261,653 261,653 261,653
Goodwill and
intangibles........... -- 35,143 (4) 35,143 35,143
Other assets........... 960 10,400 (1) 11,360 (11,250)(7) 110
-------- -------- --------
Total assets........... $263,901 $406,044 $533,544
======== ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable and
accrued expenses...... $ 93,892 $(68,000)(3) $ 25,892 $ 25,892
Due to related
parties............... 6,389 6,389 6,389
Accrued interest on
loans payable......... 1,891 (1,891)(5) -- --
Notes payable due to
related parties....... 96,147 (75,000)(2) -- --
(21,147)(5)
Term loan.............. 34 34 34
-------- -------- --------
Total current
liabilities........... 198,353 32,315 32,315
NONCURRENT LIABILITIES:
Accrued interest on
notes payable......... 4,793 (3,816)(5) 977 (977)(7) --
Convertible notes
payable due related
party................. 54,536 (54,536)(5) -- --
Amercian Mobile
convertible note...... 21,419 21,419 (21,419)(7) --
American Mobile
convertible note--
new................... -- 81,390 (5) 81,390 (81,390)(7) --
Series A subordinated
convertible notes..... -- 250,000 (1) 250,000 (250,000)(7) --
Capital lease, net of
current portion....... 309 309 309
Term loan, net of
current portion....... 39 39 39
-------- -------- --------
Total liabilities...... 279,449 386,449 32,663
-------- -------- --------
STOCKHOLDERS' EQUITY
(DEFICIT):
Series A convertible
preferred stock....... -- -- -- (7) --
Class A common stock... -- -- -- (7) --
Class B common stock... -- -- -- (7) --
Class C common stock... -- -- --
Additional paid-in-
capital............... 10,643 35,143 (4) 45,786 150,000 (6) 527,072
(11,250)(6)
353,786 (7)
(11,250)(7)
Deficit accumulated
during development
stage................. (26,191) (26,191) (26,191)
-------- -------- --------
Total stockholders'
equity (deficit)...... (15,548) 19,595 500,881
-------- -------- --------
Commitments and
contingencies
Total liabilities and
stockholders' equity
(deficit)............. $263,901 $406,044 $533,544
======== ======== ========
</TABLE>
See accompanying notes to the pro forma financial information.
P-3
<PAGE>
XM Satellite Radio Holdings Inc. and Subsidiary
(A Development Stage Company)
Unaudited Pro Forma Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
--------------------------------------------------------------
July 1999
Transactions Offering Pro Forma
Actual Adjustments Pro Forma Adjustments As Adjusted
-------- ------------ --------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ --
-------- --------- -------
Operating expenses:
Research and
development........... 1,378 1,378 1,378
Professional fees...... 2,560 2,560 2,560
General and
administrative........ 4,503 1,171 (8) 5,674 5,674
-------- --------- -------
Total operating
expenses............... 8,441 9,612 9,612
-------- --------- -------
Operating loss.......... (8,441) (9,612) (9,612)
Other expense-interest
income (expense), net.. 76 (938) (9) (8,017) 1,125 (9) 76
(7,155) (10) 7,155 (10)
-------- --------- -------
Net loss................ $ (8,365) $ (17,629) $(9,536)
======== ========= =======
Net loss per share--
basic and diluted...... $(66,920) $(141,032)
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 125 125
</TABLE>
See accompanying notes to the pro forma financial information.
P-4
<PAGE>
XM Satellite Radio Holdings Inc. and Subsidiary
(A Development Stage Company)
Unaudited Pro Forma Condensed Consolidated Statement of Operations
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
----------------------------------------------------------------
July 1999
Transactions Offering Pro Forma
Actual Adjustments Pro Forma Adjustments As Adjusted
--------- ------------ --------- ----------- -----------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ --
--------- --------- --------
Operating expenses:
Research and
development........... 6,941 6,941 6,941
Professional fees...... 5,242 5,242 5,242
General and
administrative........ 4,010 2,343 (8) 6,353 6,353
--------- --------- --------
Total operating
expenses............... 16,193 18,536 18,536
--------- --------- --------
Operating loss.......... (16,193) (18,536) (18,536)
Other expense-interest
income (expense), net.. 26 (1,875)(9) (18,218) 1,875 (9) 26
(16,369)(10) 16,369 (10)
--------- --------- --------
Net loss................ $ (16,167) $ (36,754) $(18,510)
========= ========= ========
Net loss per share--
basic and diluted...... $(129,336) $(294,032)
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 125 125
</TABLE>
See accompanying notes to the pro forma financial information.
P-5
<PAGE>
Notes to Pro Forma Financial Information
The pro forma financial information is based on the following assumptions
and adjustments:
(1) Reflects the issuance of $250.0 million of Series A subordinated
convertible notes to General Motors, Clear Channel, DIRECTV, Columbia
Capital, Telcom Ventures and Madison Dearborn Partners net of related
financing costs of approximately $11.3 million (of which, approximately
$850,000 was accrued as of June 30, 1999).
(2) Reflects the repayment of $75.0 million of certain outstanding notes
payable to WorldSpace with a portion of the proceeds from the issuance of
the $250.0 million Series A subordinated convertible notes.
(3) Reflects the payment of $68.0 million under the Hughes satellite contract
with portion of the proceeds from the issuance of the $250.0 million
Series A subordinated convertible notes.
(4) Reflects American Mobile's acquisition of debt and equity interests from
WorldSpace.
Total purchase consideration and transaction costs are anticipated to be as
follows:
<TABLE>
<CAPTION>
Amount
--------------
(in thousands)
<S> <C> <C>
8,614,244 shares of American Mobile at $15.00 per share
(the closing price of American Mobile's common stock at
the date of signing of the letter of intent and
announcement of the recapitalization)................... $129,214
Estimated transaction costs.............................. 1,000
--------
$130,214
========
The purchase consideration and transaction costs have been allocated for
pro forma purposes as follows:
<CAPTION>
Amount
--------------
(in thousands)
<S> <C> <C>
Cash..................................................... $ 163
Other current and long-term assets....................... 1,052
Property and equipment................................... 262,686
Goodwill and intangibles................................. 35,143
Accounts payable and accrued expenses.................... (99,928)
Notes payable............................................ (75,382)
--------
$123,734
Less: American Mobile's carrying value: including equity
interest in the Company, the Convertible note payable to
American Mobile and miscellaneous payables to American
Mobile.................................................. 6,480
--------
$130,214
========
</TABLE>
The above purchase price allocation is preliminary and may change upon
final determination of the fair value of assets acquired by American
Mobile. The Company has not specifically identified amounts to assign to
systems under construction and the license; changes in the amounts
allocated to such assets could result in changes to the amount of goodwill
recorded. A preliminary amortization period of fifteen years has been used
for purposes of the pro forma financial information for goodwill, which is
expected to be representative, in all material respects, of the
amortization expense that will result from the ultimate allocation to the
specific assets.
(5) Reflects the July 1999 exchange of the outstanding options and debt
acquired by American Mobile from WorldSpace for the American Mobile
convertible note-new due December 2004, which is convertible into Class B
common stock including the related accrued interest at a rate of $462,728
per share.
P-6
<PAGE>
(6) Reflects the issuance of shares of common stock for estimated proceeds of
$150.0 million as a result of this offering, less underwriters discounts
and commissions and related fees and expenses of $11.3 million in
connection with this transaction.
(7) Reflects the mandatory conversion of the $250.0 million of Series A
subordinated convertible notes into 196.1896 shares of Series A convertible
preferred stock and 294.2844 shares of Class A common stock, and the
mandatory conversion of the American Mobile convertible note--new and the
$21.4 million American Mobile note, including the related accrued interest,
into 202.9848 shares of Class B common stock concurrently with the offering
noted in (6) above.
(8) Reflects the amortization, over a 15-year life, of the acquired intangibles
including goodwill arising from American Mobile's acquisition of debt and
equity interests in our company from WorldSpace.
(9) Reflects the amortization of $11.3 million deferred financing fees over the
term of the notes.
(10) Reflects interest in excess of amounts that would be capitalized arising
from the issuance of $250.0 million Series A subordinated convertible
notes.
P-7
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Unaudited Condensed Consolidated Balance Sheet............................. F-18
Unaudited Condensed Consolidated Statements of Operations.................. F-19
Unaudited Condensed Consolidated Statements of Cash Flows.................. F-20
Notes to Unaudited Condensed Consolidated Financial Statements............. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiary (a development stage company) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM
Satellite Radio Holdings Inc. and subsidiary (a development stage company) as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for the years then ended and for the period from December 15, 1992
(date of inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, the Company has not commenced
operations, has negative working capital of $130,341,000, and is dependent upon
additional debt and equity financings, which raises substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is also described in note 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
McLean, VA
February 12, 1999
F-2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- -----------
(in thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1 $ 310
Prepaid and other current assets...................... -- 172
---------- -----------
Total current assets................................ 1 482
Other assets:
System under construction............................. 91,932 169,029
Property and equipment, net of accumulated
depreciation and amortization of $0 and $57.......... -- 449
Other assets.......................................... -- 525
---------- -----------
Total assets........................................ $ 91,933 $ 170,485
========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ -- $ 23,125
Due to related parties.................................... 445 13,767
Accrued interest on loans payable......................... 1,886 1,907
Loans payable due to related parties...................... 80,618 91,546
Term loan................................................. -- 34
Accrued expenses.......................................... -- 444
------- --------
Total current liabilities............................... 82,949 130,823
Term loan, net of current portion......................... -- 53
Subordinated convertible notes payable due to related
party.................................................... -- 45,583
Accrued interest on subordinated convertible notes payable
due to related party..................................... -- 1,209
------- --------
Total liabilities....................................... 82,949 177,668
------- --------
Common stock--$0.10 par value; authorized 3,000 shares;
125 shares issued and outstanding at December 31, 1997
and 1998................................................. -- --
Additional paid-in capital................................ 10,643 10,643
Deficit accumulated during development stage.............. (1,659) (17,826)
------- --------
Total stockholders' equity (deficit).................... 8,984 (7,183)
------- --------
Commitments and contingencies (notes 4, 7, 8, 11, 12, and
13)
Total liabilities and stockholders' equity (deficit).... $91,933 $170,485
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 to December 31, 1998
-------- --------- --------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue............................. $ -- $ -- $ --
-------- --------- --------
Operating expenses:
Research and development.......... -- 6,941 6,941
Professional fees................. 1,090 5,242 6,332
General and administrative........ 20 4,010 4,030
-------- --------- --------
Total operating expenses........ 1,110 16,193 17,303
-------- --------- --------
Operating loss.................. (1,110) (16,193) (17,303)
Other expense--interest income
(expense), net..................... (549) 26 (523)
-------- --------- --------
Net loss........................ $ (1,659) $ (16,167) $(17,826)
======== ========= ========
Net loss per share:
Basic and diluted................. $(13,941) $(129,336)
======== =========
Weighted average shares used in
computing net loss per share-basic
and diluted 119 125
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity (Deficit)
------ ------ ---------- ----------- ----------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Issuance of common stock
(December 15, 1992).... 100 $-- $ -- $ -- $ --
--- --- ------- -------- --------
Balance at December 31,
1992................... 100 -- -- -- --
Net loss................ -- -- -- -- --
--- --- ------- -------- --------
Balance at December 31,
1993................... 100 -- -- -- --
Net loss................ -- -- -- -- --
--- --- ------- -------- --------
Balance at December 31,
1994................... 100 -- -- -- --
Net loss................ -- -- -- -- --
--- --- ------- -------- --------
Balance at December 31,
1995................... 100 -- -- -- --
Net loss................ -- -- -- -- --
--- --- ------- -------- --------
Balance at December 31,
1996................... 100 -- -- -- --
Contributions to paid-in
capital................ -- -- 143 -- 143
Issuance of common stock
and capital
contributions.......... 25 -- 9,000 -- 9,000
Issuance of options..... -- -- 1,500 -- 1,500
Net loss................ -- -- -- (1,659) (1,659)
--- --- ------- -------- --------
Balance at December 31,
1997................... 125 -- 10,643 (1,659) 8,984
Net loss................ -- -- -- (16,167) (16,167)
--- --- ------- -------- --------
Balance at December 31,
1998................... 125 $-- $10,643 $(17,826) $ (7,183)
=== === ======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 December 31, 1998
------- -------- -----------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(1,659) $(16,167) $(17,826)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ -- 57 57
Note discount amortization.............. 33 -- 33
Changes in operating assets and
liabilities:
Increase in prepaid and other current
assets................................ -- (212) (212)
Increase in accounts payable and
accrued expenses...................... -- 1,701 1,701
Increase in amounts due to related
parties............................... 445 13,322 13,767
Increase (decrease) in accrued
interest.............................. 517 (2) 515
------- -------- --------
Net cash provided by (used in)
operating activities................. (664) (1,301) (1,965)
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment....... -- (506) (506)
Additions to system under construction... (90,031) (43,406) (133,437)
------- -------- --------
Net cash used in investing
activities........................... (90,031) (43,912) (133,943)
------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and
capital contribution.................... 9,143 -- 9,143
Proceeds from issuance of loan payable to
related party........................... 80,053 337 80,390
Proceeds from issuance of options........ 1,500 -- 1,500
Proceeds from issuance of subordinated
convertible notes to related party...... -- 45,583 45,583
Payment to establish collateral for term
loan.................................... -- (92) (92)
Proceeds from term loan.................. -- 92 92
Repayments of term loan.................. -- (5) (5)
Payments for deferred financing costs.... -- (393) (393)
------- -------- --------
Net cash provided by financing
activities........................... 90,696 45,522 136,218
------- -------- --------
Net increase in cash and cash
equivalents.......................... 1 309 310
------- -------- --------
Cash and cash equivalents at beginning of
year..................................... -- 1 --
Cash and cash equivalents at end of year.. $ 1 $ 310 $ 310
======= ======== ========
Supplemental cash flow disclosure:
Interest capitalized..................... $ 1,901 $ 11,824 $ 13,725
Interest converted into principal note
balance................................. $ 501 $ 9,157 $ 9,658
Accrued system milestone payments........ $ -- $ 21,867 $ 21,867
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1998
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC") for
the purpose of procuring a digital audio radio service ("DARS") license.
Business activity for the period December 15, 1992 through December 31, 1996
was insignificant. Pursuant to various financing agreements entered into in
1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiary, XM Satellite Radio Inc. All significant
intercompany transactions and accounts have been eliminated. The Company's
management has devoted substantially all of its time to the planning and
organization of the Company and to the process of addressing regulatory
matters, initiating research and development programs, conducting market
research, initiating construction of the satellite system, securing content
providers, and securing adequate debt and equity capital for anticipated
operations and growth. Accordingly, the Company's financial statements are
presented as those of a development stage enterprise, as prescribed by
Statement of Financial Accounting Standards No. 7, Accounting and Reporting by
Development Stage Enterprises.
(c) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents.
(d) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and computer equipment........... 3 years
Machinery and equipment.............................. 7 years
Leasehold improvements............................... Remaining lease term
</TABLE>
(e) System Under Construction
The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1998, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC license
will be amortized using the straight line method over an estimated useful life
of fifteen years. Amortization of the license will begin on commercial launch.
F-7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. The FCC has the authority to revoke the
authorizations and in connection with such revocation could exercise its
authority to rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
The license asset value consists of the total payments made to the FCC for
the license of $90,031,000. Associated with this license is capitalized
interest of $1,901,000 and $10,991,000 as of December 31, 1997 and 1998,
respectively. Costs incurred for system development were $65,273,000.
Associated with the system development costs is capitalized interest of
$2,734,000 at December 31, 1998.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), during fiscal year
1997. SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. Adoption of SFAS 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity during 1997 or 1998.
(f) Stock-Based Compensation
During fiscal year 1997, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-based Compensation (SFAS 123), which
encourages, but does not require, the recognition of stock-based employee
compensation at fair value. SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and to provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made during the
year of adoption and in future years as if the fair-value-based method defined
in SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123. Accordingly, compensation cost for options to purchase
common stock granted to employees is measured as the excess, if any, of the
fair value of common stock at the date of the grant over the exercise price an
employee must pay to acquire the common stock.
Warrants to purchase common stock granted to other than employees as
consideration for goods or services rendered are recognized at fair market
value.
(g) Research and Development
Research and development costs are expensed as incurred.
(h) Net Loss Per Share
In December 1997, the Company adopted the provisions of SFAS No. 128,
Earnings per Share, (SFAS 128). SFAS 128 supersedes APB Opinion No. 15,
Earnings per Share and its related interpretations, and
F-8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
promulgates new accounting standards for the computation and manner of
presentation of the Company's loss per share. SFAS 128 requires the
presentation of basic and diluted loss per share. Basic earnings per share is
calculated by dividing net income by the weighted-average number of common
shares outstanding during the period. The computation of diluted earnings per
share includes all common stock options and warrants and other common stock, to
the extent dilutive, that potentially may be issued as a result of conversion
privileges, including the subordinated convertible notes payable due to related
party. Due to losses incurred during 1997 and 1998, the impact of other
potentially dilutive securities is anti-dilutive and is not included in the
diluted loss per share calculation.
(i) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and the financial
reporting amounts at each year-end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the sum of tax payable for the period and the change during the period in
deferred tax assets and liabilities.
(j) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997 and 1998 that would be classified as other
comprehensive income.
(k) Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses
during the reporting period. The estimates involve judgments with respect to,
among other things, various future factors which are difficult to predict and
are beyond the control of the Company. Significant estimates include valuation
of the Company's investment in the DARS license and the benefit for income
taxes and related valuation allowances. Accordingly, actual amounts could
differ from these estimates.
(l) Reclassifications
Certain fiscal year 1997 amounts have been reclassified to conform to the
fiscal 1998 consolidated financial statement presentation.
(2) Related Party Transactions
The Company had related party transactions with the following shareholders:
(a) AMSC
In 1997, AMSC contributed $143,000 for the Company to establish the original
application for the FCC license. On March 28, 1997, the Company received
$1,500,000 as a capital contribution from AMSC. During
F-9
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1998, AMSC incurred general and administrative costs and professional fees for
the Company and established an intercompany balance of $458,000 (see note 3).
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital contribution
from WSI. The Company issued WSI 25 shares of common stock for this
consideration.
On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as
a six-month bridge loan (see note 4).
On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 4).
On October 16, 1997, the Company received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 4).
On April 1, 1998, the Company entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998, the Company drew
down $45,583,000 under the agreement (see note 4).
In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and has established a due to WSI for the balance (see note 3).
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Professional fees......................... $ 960 130 1,090
General and administrative................ -- 20 20
----------- ------- ----------
Total................................... $ 960 150 1,110
=========== ======= ==========
<CAPTION>
Year Ended December 31, 1998
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Research and development.................. $ 6,624 -- 6,624
Professional fees......................... 2,529 353 2,882
General and administrative................ 903 60 963
----------- ------- ----------
Total................................... $ 10,056 413 10,469
=========== ======= ==========
</TABLE>
Additionally, during 1998 the Company incurred $925,000 of WSI project
management costs that were capitalized to the satellite system.
F-10
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Due to Related Parties
Due to related parties included the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Advances from WSI........................................... $ -- 7,405
Due to WSI.................................................. 390 5,904
Due to AMSC................................................. 55 458
----- -------
$ 445 13,767
===== =======
</TABLE>
Advances represent funding provided by WSI for 30 days. If amounts are not
repaid within this time period, additional subordinated convertible notes will
be issued.
(4) Debt
(a) Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements (the "Participation
Agreement") with AMSC and WSI in which both companies provided various equity
and debt funding commitments to XMSR for the purpose of financing the
activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997 certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement").
The Company has loans payable with a face amount of $82,053,000 and
$91,546,000 with a carrying amount of $80,618,000 and $91,546,000 at December
31, 1997 and 1998, respectively, outstanding with WSI as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Bridge loan............................................. $23,001 25,556
Additional amounts loan................................. 58,389 64,875
Working capital loan.................................... 663 1,115
------- ------
82,053 91,546
Discount arising from concurrent issuance of options
(note 7), net.......................................... (1,435) --
------- ------
$80,618 91,546
======= ======
</TABLE>
Bridge Loan
The Company executed the bridge loan with WSI in two tranches. On April 16,
1997, the Company received proceeds of $8,479,000 for a loan with a face amount
of $9,000,000. On October 16, 1997, the Company received proceeds of
$12,771,000 for a loan with a face amount of $13,522,000. The first tranche was
a six-month loan at LIBOR plus five percent per annum, equaling 11.03 percent.
The first tranche was rolled over with the establishment of the second tranche,
which is a six-month loan at LIBOR plus five percent per annum, equaling 9.94
percent at December 31, 1998 and due in April 1999. The accrued interest under
the bridge loan is compounded to the loan balance each April and October.
F-11
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional Amounts Loan
On October 16, 1997, the Company executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. This loan is a six-month loan at LIBOR plus five percent per
annum, equaling 9.94 percent at December 31, 1998 and due in April 1999. The
accrued interest under the additional amounts loan is compounded to the loan
balance each April and October.
Working Capital Loan
On May 16, 1997, the Company executed the working capital loan with WSI
whereby the Company would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Company drew down $663,000 against the line of credit
through December 31, 1997. This loan is a six-month loan at LIBOR plus five
percent per annum, with an interest rate of 10.19 percent at December 31, 1998
and due in May 1999. The accrued interest on the loan is compounded to the
balance in May and November.
Restrictive Covenants
The financing agreements contain restrictive covenants which include a
prohibition of the Company or its subsidiary to merge or consolidate, or sell,
transfer, or otherwise dispose of substantially all of its assets. The Company
or the subsidiary may not incur additional indebtedness in excess of $1,000,000
without prior written consent of WSI. Additionally, the financing agreements
provide for other restrictive covenants including a restriction on the payment
of dividends.
The Company has pledged 64.7511 percent of its share of the issued and
outstanding common stock of the subsidiary to WSI as collateral for the
financings.
(b) Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible note
agreement with WSI that provides for a maximum of $54,536,000 through the
issuance of subordinated convertible notes. The notes mature on September 30,
2006 and carry an interest rate of LIBOR plus five percent per annum, which was
10.15 percent as of December 31, 1998. Under the terms of the note agreement,
WSI shall have the right to convert all or a portion of the aggregate principal
amount of the notes into shares of common stock at a conversion price of
$875,000 per share. As of December 31, 1998, $45,583,000 had been drawn through
the issuance of subordinated convertible notes. Interest is payable upon
maturity.
(c) Term Loan
On November 1, 1998, the Company reached an agreement with a commercial bank
for a $92,000 installment loan with a 36 month term at 7 percent interest per
annum. The Company pledged $92,000 as collateral for the loan and placed this
balance on deposit at the commercial bank. At December 31, 1998, the Company's
outstanding balance was $87,000.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, accrued expenses, and the term loan approximate their fair market
value because of the relatively short duration of these instruments as of
December 31, 1997 and 1998, in accordance with SFAS No. 107, Disclosures about
Fair Value of Financial Instruments.
F-12
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the loans and subordinated convertible notes due to
related party could not be estimated as such amounts are due to the Company's
stockholders.
(6) Common Stock
(a) 1998 Shares Award Plan
On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan")
under which employees, consultants, and non-employee directors may be granted
options to purchase shares of common stock of the Company. The Company has
authorized 25 shares of common stock under the Plan. The options are
exercisable in installments determined by the compensation committee of the
Company's board of directors. The options expire as determined by the
committee, but no later than ten years from the date of grant. Transactions and
other information relating to the Plan for the year ended December 31, 1998 are
summarized below:
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, January 1, 1998......................... -- --
Options granted................................ 14.712 $875,000
Options canceled or expired.................... -- --
Options exercised.............................. -- --
------ --------
Balance, December 31, 1998....................... 14.712 $875,000
====== ========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1998 Life Price December 31, 1998 Price
- -------- ----------------- ----------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$875,000 14.712 9.5 years $875,000 -- $875,000
======== ====== ========= ======== === ========
</TABLE>
There were no stock options exercisable at December 31, 1998. There were
10.288 shares available under the plan for future grants at December 31, 1998.
At December 31, 1998, all options have been issued to employees.
The per share weighted-average fair value of employee options granted during
the year ended December 31, 1998 was $564,000 on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Expected dividend yield.... 0%
Volatility................. 56.23%
Risk-free interest rate
range..................... 4.53% to 5.67%
Expected life.............. 7.5 years
=============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined
F-13
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Net loss:
As reported............................................ $16,167
Pro forma.............................................. 17,508
As reported--net loss per share--basic and diluted..... 129
Pro forma--net loss per share--basic and diluted....... 140
=======
</TABLE>
(b) Restrictive Covenants
Certain actions require the unanimous affirmative vote of the board of
directors of the Company. Such actions include the entry into, or the
amendment, modification, extension or termination of any agreements for amounts
in excess of $40,000,000 or with AMSC or WSI; the entry into any agreements
outside of the ordinary course of business; merger or consolidation; issuance
of additional shares of capital stock; and the declaration and payment of
dividends. If WSI holds more than 50 percent of the shares of common stock,
this provision requiring the unanimous affirmative vote of the board of
directors will be of no further force and effect. Additionally, an affirmative
vote of 81 percent of all the issued and outstanding shares of common stock
shall be required to approve any voluntary filing of a bankruptcy petition by
the Company or its subsidiary.
(7) WSI Options
The Company issued WSI three options. Under the first option, WSI may
purchase 97.2222 shares of common stock at $241,714 per share to acquire common
stock. The option may be exercised in whole or in incremental amounts between
April 16, 1998 and October 16, 2002. Under certain circumstances, AMSC may
require WSI to exercise the option in whole. The Company allocated $1,250,000
to the option. Under the second option, WSI may purchase 128.8876 shares at
$477,005 per share. The option may be exercised between October 16, 1997 and
October 16, 2003. The Company allocated $170,000 to the option. Under the third
option, WSI may purchase 3.5111 shares of common stock at $284,811 per share.
The option may be exercised between October 16, 1997 and October 17, 2002. The
Company allocated $80,000 to the option.
The exercise of these options is subject to prior approval of the FCC to the
extent that such exercise would constitute transfer of control. The allocation
was based upon independent valuation.
(8) Employee Benefit Plan
On July 1, 1998, the Company has adopted a profit sharing and employee
savings plan under Section 401(k) of the Internal Revenue Code. This plan
allows eligible employees to defer up to 15 percent of their compensation on a
pre-tax basis through contributions to the savings plan. The Company
contributed $0.50 in 1998 for every dollar the employees contributed up to 6
percent of compensation, which amounted to $14,000.
(9) Interest Cost
The Company capitalizes a portion of interest cost as a component of the
cost of the FCC license and satellite system under construction. The following
is a summary of interest cost incurred during December 31,
F-14
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 15, 1992
(date of inception) to
1997 1998 December 31, 1998
------ ------ ----------------------
<S> <C> <C> <C>
Interest cost capitalized........... $1,901 11,824 13,725
Interest cost charged to expense.... 549 -- 549
------ ------ ------
Total interest cost incurred...... $2,450 11,824 14,274
====== ====== ======
</TABLE>
Interest costs incurred prior to the award of the license were expensed in
1997.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to December 31,
1998, the Company filed consolidated federal and state tax returns with its
majority stockholder AMSC. The Company generated net operating losses and other
deferred tax benefits which were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the net
operating losses. Had the Company filed on a stand-alone basis, it would have
had no tax provision as the deferred tax benefit of approximately $650,000 and
$7,164,000 for 1997 and 1998, respectively, would have been fully offset by a
valuation allowance.
(11) Accumulated Deficit
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and future
operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the DARS
system, develop and launch radio communications satellites, retire debt
incurred in connection with the acquisition of the DARS license and to sustain
operations until it generates positive cash flow. At December 31, 1998, the
Company has negative working capital of $130,341,000.
At the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required
long-term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and
equity securities through public and private sources. There are no assurances,
however, that such financing will be obtained.
(12) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
F-15
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WorldSpace has effectively
taken control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge, no prediction of the
outcome of this challenge can be made with any certainty.
(c) Satellite Purchase Contract
On March 20, 1998, as amended on June 5, 1998, the Company entered into an
agreement for the construction of two satellites, two launch vehicles, and
related equipment, services and spare parts, including launch services. The
total commitment under the amended agreement, excluding financing fees, is
approximately $438,013,000 as of December 31, 1998. These amounts are due upon
the completion of certain milestones. The Company has incurred costs of
$64,348,000 as of December 31, 1998. One of the members of the board of
directors is an executive of an affiliate of the Contractor.
Under the terms of this agreement, the Contractor shall invest $15,000,000
in a private or public equity offering of the Company, should it be consummated
prior to March 20, 1999.
(d) Technical Services and Technology Licenses
Effective January 1, 1998, the Company entered into an agreement with AMSC
and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI,
in which WorldSpace MC provides technical support in areas related to the
development of a DARS system. Payments for services provided under this
agreement are made based on negotiated hourly rates. This agreement may be
terminated by either party on or after the date of the commencement of
commercial operation following the launch of the Company's first satellite.
There is no minimum services purchase requirement. The Company incurred costs
of $4,770,000 under the agreement during 1998.
Effective January 1, 1998, XMSR entered into a technology licensing
agreement with AMSC and WorldSpace MC by which as compensation for certain
licensed technology currently under development to be used in the XM Radio
system, XMSR will pay up to $14,300,000 over a ten-year period. XMSR incurred
costs of $6,624,000 under the agreement during 1998. Any additional amounts to
be incurred under this agreement are dependent upon further development of the
technology, which is at XMSR's option. No liability exists to AMSC or
WorldSpace MC should such developments prove unsuccessful. In addition, XMSR
agreed to pay 1.2 percent of quarterly net revenues to WorldSpace MC and a
royalty of $0.30 per chipset for equipment manufactured using certain source
encoding and decoding signals technology.
(e) FCC Occurrences
On October 30, 1998, AMSC and WSI submitted an application for Consent and
Transfer Control with the FCC. These entities have requested the FCC's consent
to WSI's exercise of certain options that would increase its shareholding
interest in the Company. There have been challenges filed against the
application.
F-16
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Leases
The Company has two noncancelable operating leases for office space that
expire over the next four years. The future minimum lease payments under
noncancelable leases as of December 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999.................................... $ 42
2000.................................... 44
2001.................................... 46
2002.................................... 48
2003.................................... --
----
$180
====
</TABLE>
Rent expense for 1997 and 1998 was $0 and $231,000, respectively.
(13) Subsequent Events
On January 12, 1999, a competitor of the Company commenced action against
the Company for patent infringement and for a declaratory judgment of future
patent infringement by the Company. There have been no damages specified in the
action and the Company is in the process of responding to the complaint. Should
it be unsuccessful in its defense, the Company could be liable for monetary
damages, and could be forced to engineer alternative technologies related to
signal reception or seek a license from, or pay royalties to, the competitor.
The Company intends to vigorously defend against the suit; however, the outcome
is uncertain at this time.
Effective January 15, 1999, the Company issued a convertible note to AMSC
for $21,419,000. This note matures on September 30, 2006 and carries an
interest rate of LIBOR plus five percent per annum. Under the terms of this
note, AMSC shall have the right to convert all or a portion of the aggregate
principal amount of the note into shares of common stock at a conversion price
of $875,000 per share. Interest is payable upon maturity.
(14) Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................. $-- -- -- --
Operating loss........................... -- 51 185 874
Loss before income taxes................. -- 270 459 930
Net loss................................. -- 270 459 930
==== === === ===
Net loss per share--basic and diluted.... $-- 2 4 7
==== === === ===
</TABLE>
<TABLE>
<CAPTION>
1998
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................. $ -- -- -- --
Operating loss........................... 3,100 5,032 3,849 4,204
Loss before income taxes................. 3,100 5,032 3,857 4,178
Net loss................................. 3,100 5,032 3,857 4,178
====== ===== ===== =====
Net loss per share--basic and diluted.... $ 25 40 31 33
====== ===== ===== =====
</TABLE>
The sum of quarterly per share net losses for 1997 do not necessarily agree
to the net loss per share for the year due to the timing of stock issuances.
F-17
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
June 30, 1999
------------------
(in thousands,
except share data)
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 163
Prepaid and other current assets.......................... 92
--------
Total current assets.................................... 255
Other assets:
Property and equipment, net of accumulated depreciation... 1,033
System under construction................................. 261,653
Other assets.............................................. 960
--------
Total assets............................................ $263,901
========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 93,892
Due to related parties.................................... 6,389
Accrued interest on loans payable......................... 1,891
Notes payable due to related parties...................... 96,147
Term loan................................................. 34
--------
Total current liabilities............................... 198,353
Noncurrent liabilities:
Accrued interest on notes payable......................... 4,793
Notes payable due to related parties...................... 75,955
Capital lease, net of current portion..................... 309
Term loan, net of current portion......................... 39
--------
Total liabilities....................................... 279,449
--------
Stockholders' deficit:
Common stock--$0.10 par value; authorized 3,000 shares;
issued and outstanding 125 shares........................ --
Additional paid-in capital................................ 10,643
Deficit accumulated during development stage.............. (26,191)
--------
Total stockholders' deficit............................. (15,548)
--------
Commitments and contingencies
Total liabilities and stockholders' deficit............. $263,901
========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-18
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended June 30, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) to June 30, 1999
<TABLE>
<CAPTION>
Six Months Ended December 15, 1992
June 30, (date of inception)
------------------ to June 30,
1998 1999 1999
-------- -------- -------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue............................... $ -- $ -- $ --
-------- -------- --------
Operating expenses:
Research and development............ 3,867 1,378 8,319
Professional fees................... 3,723 2,560 8,892
General and administrative.......... 542 4,503 8,533
-------- -------- --------
Total operating expenses.......... 8,132 8,441 25,744
-------- -------- --------
Operating loss........................ (8,132) (8,441) (25,744)
Other expense--interest income
(expense), net....................... -- 76 (447)
-------- -------- --------
Net loss.............................. $ (8,132) $ (8,365) $(26,191)
======== ======== ========
Net loss per share:
Basic and diluted................... $(65,056) $(66,920)
======== ========
Weighted average shares used in
computing net loss per share:
Basic and diluted................... 125 125
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) to June 30, 1999
<TABLE>
<CAPTION>
Six Months December 15,
Ended June 30, 1992 (date of
------------------ inception) to
1998 1999 June 30, 1999
-------- -------- -------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $ (8,132) $ (8,365) $ (26,191)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................. -- 127 184
Note discount amortization............... -- -- 33
Changes in operating assets and
liabilities:
(Increase) decrease in prepaid and
other current assets.................. (79) 80 (132)
Decrease in other assets............... -- 21 21
Increase in accounts payable and
accrued expenses...................... 14 4,114 5,815
Increase in amounts due to related
parties............................... 20,692 12 13,779
Increase in accrued interest........... -- -- 515
-------- -------- ---------
Net cash used in operating activities........ 12,495 (4,011) (5,976)
-------- -------- ---------
Cash flows used in investing activities:
Purchase of property and equipment......... -- (280) (786)
Additions to system under construction..... (18,348) (18,356) (151,793)
-------- -------- ---------
Net cash used in investing activities........ (18,348) (18,636) (152,579)
Cash flows from financing activities:
Proceeds from sale of common stock and
capital contribution...................... -- -- 9,143
Proceeds from issuance of loan payable to
related party............................. 336 1,548 81,938
Proceeds from issuance of convertible note
to related party.......................... 6,035 21,419 67,002
Proceeds from issuance of options.......... -- -- 1,500
Payment to establish collateral for term
loan...................................... -- -- (92)
Proceeds from term loan.................... -- -- 92
Repayments of term loan.................... -- (12) (17)
Payment for deferred financing costs....... -- (455) (848)
-------- -------- ---------
Net cash provided by financing activities.... 6,371 22,500 158,718
-------- -------- ---------
Net cash increase in cash and cash
equivalents................................. 518 (147) 163
Cash and cash equivalents--beginning ........ 1 310 --
-------- -------- ---------
Cash and cash equivalents--ending ........... $ 519 $ 163 $ 163
======== ======== =========
Supplemental cash flow disclosure:
Interest capitalized....................... $ 4,648 $ 8,211 $ 21,936
Interest converted into principal note
balance................................... $ 4,582 $ 4,601 $ 14,259
Accrued system milestone payments.......... $ -- $ 66,133 $ 88,000
Accrued expenses transferred to loan
balance................................... $ -- $ 7,405 $ 7,405
Property acquired through capital lease.... $ -- $ 431 $ 431
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the consolidated financial
position of XM Satellite Radio Holdings Inc. and subsidiary, a development
stage entity, (the "Company") as of June 30, 1999, and the results of
operations and cash flows for the six months ended June 30, 1998 and 1999, and
the period from December 15, 1992 (date of inception) through June 30, 1999.
The results of operations for the six months ended June 30, 1998 and 1999 are
not necessarily indicative of the results that may be expected for the full
year. These condensed financial statements are unaudited, and do not include
all related footnote disclosures.
The interim unaudited condensed financial statements should be read in
conjunction with the audited financial statements of the Company.
(2) Loans Payable to Related Party
The Company's loan facility with WorldSpace, Inc., including the $26,840,000
outstanding on the bridge loan, the $68,136,000 outstanding on the additional
amounts loan and the $1,171,000 outstanding under the working capital loan
expired in April 1999 for the bridge loan and additional amounts loan and May
1999 for the working capital loan. Upon maturity, the notes were converted to
demand notes. These demand notes are expected to be settled in connection with
AMSC's acquisition of the WSI debt and equity interest (see note 5). These
demand notes bear interest at LIBOR plus five percent per annum, approximately
10.0 percent.
(3) Subordinated Convertible Notes Payable Due to Related Party
During the period from January 1, 1999 through June 30, 1999 the Company
issued an additional $8,953,000 in subordinated convertible notes to
WorldSpace, Inc. ("WSI") under its agreement for an aggregate of $54,536,000 in
subordinated convertible notes with WSI. The notes mature on September 30, 2006
and carry an interest rate of LIBOR plus five percent per annum, which was 9.97
percent as of March 31, 1999. As of June 30, 1999, the full $54,536,000 had
been drawn through the issuance of subordinated convertible notes.
On January 15, 1999, the Company issued a convertible note to American
Mobile Satellite Corporation ("AMSC") for $21,419,000. This note matures on
September 30, 2006 and carries an interest rate of LIBOR plus five percent per
annum. Interest is payable upon maturity. AMSC shall have a right to convert
all or a portion of the aggregate principal amount of the note into shares of
common stock at a conversion price of $875,000 per share.
(4) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to implement a
revised work time table, payment schedule to reflect the timing of the receipt
of additional funding, and technical modifications. We expect to incur total
payment obligations under this contract of approximately $541.3 million, which
includes amounts the Company expects to pay pursuant to the exercise of the
option to build the ground spare satellite and certain financing costs and in-
orbit incentive payments. As of June 30, 1999, we have paid $58.3 million under
this contract.
F-21
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(5) 1998 Shares Award Plan
Transactions relating to the 1998 Shares Award Plan for the six months ended
June 30, 1999 are summarized below:
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, January 1, 1999......................... 14.712 $875,000
Options granted................................ 2.265 $875,000
Options canceled or expired.................... (0.260) --
Options exercised.............................. -- --
------ --------
Balance, June 30, 1999........................... 16.717 $875,000
====== ========
</TABLE>
On June 6, 1999, the Company's board of directors defined shares under the
1998 Shares Award Plan as referring to the Company's Class A common stock. On
July 8, 1999, the Company's board of directors voted to reduce the exercise
price of the options outstanding under the Shares Award Plan from $875,000 to
$509,711 per share, which represented the par value of the stock on the date of
the repricing. Additionally, the total number of shares reserved for the Plan
was increased from 25 to 50.
(6) Subsequent Events
Exchange of WorldSpace's Interest in XM Radio (WorldSpace Transaction)
On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Company in exchange for approximately 8.6 million shares of AMSC's common
stock, the issuance of approximately 2.1 million of which is subject to AMSC
stockholder approval. Additionally, the Company issued an aggregate $250.0
million of Series A subordinated convertible notes to several new investors and
used $75.0 million of the proceeds it received from the issuance of these notes
to redeem certain outstanding loan obligations owed to WSI. As a result of
these transactions, AMSC owns all of the issued and outstanding stock of the
Company. Assuming subsequent conversion of all outstanding subordinated
convertible notes of the Company, and assuming AMSC obtains stockholder
approval to issue the remaining 2.1 million shares discussed above, AMSC would
own approximately 37% of the equity of the Company, and would have
approximately 62% of the voting power in the Company.
Recapitalization
Concurrently with the transaction discussed above, the Company's capital
structure was reorganized. As a result, AMSC holds 125 shares of Class B common
stock, which are the only shares of the Company's capital stock outstanding.
The Class B common stock has three votes per share. The Company also has Class
A common stock, which is entitled to one vote per share and non-voting Class C
common stock. The Class B common stock is convertible into Class A common stock
on a one for one basis, as follows: (1) at any time at the discretion of AMSC,
(2) following the Company's initial public offering, at the direction of the
holders of a majority of the then outstanding shares of Class A common stock
(which majority must include at least 20% of the public holders of Class A
common stock), and (3) on or after January 1, 2002, at the direction of the
holders of a majority of the then outstanding shares of the Company's Class A
common stock. Such conversion will be effected only upon receipt of FCC
approval of AMSC's transfer of control of the Company to a diffuse group of
shareholders.
F-22
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company also authorized 1,000 shares of preferred stock, of which 500
shares are designated Series A convertible preferred stock, par value $1.00 per
share. The Series A convertible preferred stock is convertible into Class A
common stock at the option of the holder. The Series A preferred stock is non-
voting and receives dividends, if declared, ratably with the common stock. No
such shares have been issued.
Issuance of Series A Subordinated Convertible Notes of XM Radio to New
Investors
At the closing of the transaction described above, the Company issued an
aggregate $250.0 million of Series A subordinated convertible notes to six new
investors--General Motors Corporation, $50.0 million; Clear Channel
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. The Series A subordinated convertible notes issued by the Company are
convertible into shares of the Company's Class A common stock or Series A
convertible preferred stock at the election of the holders or upon the
occurrence of certain events, including an initial public offering of a
prescribed size. The conversion price is $509,711 aggregate principal amount of
notes for each share of the Company's stock. The notes mature on December 31,
2004, or, if the Company issues at least $50.0 million aggregate principal
amount of high yield debt securities, the Company will be entitled to extend
the maturity date of the subordinated convertible notes to a date no later than
the six month anniversary of the stated maturity date of such high yield debt
securities. The notes are senior to all existing Company indebtedness,
including certain notes held by AMSC that are convertible into the Company's
stock, but will be subordinate to any future high yield debt securities issued
by the Company.
Repayment and Conversion of Notes
Using part of the proceeds from the issuance of its Series A subordinated
convertible notes, the Company paid WSI $75.0 million to repay an outstanding
portion of notes payable to WSI. The Company then exchanged $54.5 million of
the subordinated convertible notes payable, $6.9 million in demand notes, $20.3
million in accrued interest and all of the outstanding options to acquire the
Company's common stock for an $81.7 million note to AMSC, which is convertible
at the option of the holder at $462,728 per Class B common share. This note
bears interest at LIBOR plus five percent per annum and is due December 31,
2004, unless extended in certain circumstances if the Company issues high yield
debt securities.
Satellite Purchase Contract
On July 7, 1999, the Company paid Hughes $68.0 million in satisfaction of
all previously completed milestones in accordance with the revised payment
schedule.
Technology Licenses Agreement
During the six months ended June 30, 1999, XM incurred additional costs of
$700,000 under the technology licenses agreement with AMSC and Worldspace
Management Corporation (WMC), giving a cumulative total from inception of
$7,324,000. XM does not currently anticipate incurring any further costs under
this agreement.
In addition, the Company does not currently expect to use the source
encoding and decoding of transmission signals technology, or to manufacture
equipment using this technology, and accordingly, does not anticipate incurring
any costs in this respect.
Amendment to AMSC Note Agreement
On July 7, 1999 the Company amended the convertible note agreement with AMSC
to change the maturity date to December 31, 2004, unless extended in certain
circumstances if the Company issues high yield debt securities, modify the
conversion provisions to Class B common stock and to provide for the payment of
the accrued interest in Class B common stock at a price of $509,711 per share.
F-23
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock Split
The Company expects to effect a stock split prior to an initial public
offering. Upon the split, the financial statements will be restated to give
retroactive application to the split.
(7) Contingencies
Patent Infringement Action
In January, 1999, a competitor of the Company commenced an action against
the Company for patent infringement. In February, 1999, the Company filed an
answer to the action. The Company does not believe that it has infringed and
will not infringe any of the competitor's patents and intends to vigorously
defend against the suit; however, the outcome is uncertain at this time.
FCC Occurrences
AMSC and WSI had previously submitted an application for Consent and
Transfer of Control with the FCC. Challenges have been filed against the
application. The application was withdrawn on July 7, 1999 based upon the
WorldSpace Transaction.
General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors has agreed to distribute the service to the exclusion of other
S-band satellite digital radio services. The Company will also have a non-
exclusive right to arrange for the installation of XM radios included in OnStar
systems in non-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35 million in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35 million to approximately $130
million through 2009, aggregating approximately $400 million. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors vehicles
with installed XM radios become subscribers for the Company's service. The
Company must also share with General Motors a percentage of the subscription
revenue attributable to General Motors vehicles with installed XM radios, which
percentage increases until there are more than 8 million General Motors
vehicles with installed XM radios. The Company will also make available to
General Motors bandwidth on the Company's system. The agreement is subject to
renegotiation at any time based upon the installation of radios that are
interoperable or capable of receiving CD Radio's service. The agreement is
subject to renegotiation if, four years after the commencement of XM Radio's
commercial operations and at two-year intervals thereafter GM does not achieve
and maintain specified installation levels of General Motors vehicles capable
of receiving the Company's service, starting with 1.24 million units after four
years, and the lesser of 600,000 units per year thereafter and amounts
proportionate to target market shares in the satellite digital radio service
market. There can be no assurances as to the outcome of any such
renegotiations. General Motors' exclusivity obligations will discontinue if,
four years after the Company commences commercial operations and at two-year
intervals thereafter, the Company fails to achieve and maintain specified
minimum market share levels in the satellite digital radio service market.
F-24
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicition of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the
Company have not changed since the date hereof.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Consolidated Financial Data..................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 28
Management............................................................... 47
Certain Relationships and Related Party Transactions..................... 54
Principal Stockholders................................................... 60
Description of Capital Stock............................................. 62
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 69
Certain Information About This Prospectus................................ 69
Index to Pro Forma Financial Information................................. P-1
Index to Financial Statements............................................ F-1
</TABLE>
Until , 1999 (25 days after the date of this prospectus), all dealers
that effect transactions in these securities may be required to deliver a
prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter in this offering and when selling
previously unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Shares
[LOGO]
XM Satellite Radio
Holdings Inc.
Class A
Common Stock
------------------------------
PRELIMINARY PROSPECTUS
------------------------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Merrill Lynch & Co.
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following are the estimated expenses to be incurred in connection with
the issuance and distribution of the securities being registered.
<TABLE>
<S> <C>
SEC registration fee................................................ $47,955
Printing and engraving expenses.....................................
Legal fees and expenses.............................................
Blue Sky fees and expenses.......................................... 7,500
NASD filing fees.................................................... 17,750
Accounting fees and expenses........................................
Transfer agent fees.................................................
Listing fees........................................................ 95,000
Miscellaneous.......................................................
-------
Total............................................................. $
=======
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of Delaware General Corporation Law permits indemnification of
officers and directors of our company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against
such person and incurred by him or her in such capacity, or arising out of his
or her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of Section 145
of the Delaware General Corporation law.
Article Ninth of our Restated Certificate of Incorporation and Article VI,
Section 1 of our Bylaws provides that we shall indemnify our directors and
officers and any such directors and officers serving at our request as a
director, officer, employee or agent of another entity to the fullest extent
not prohibited by the Delaware General Corporation Law. The Bylaws also provide
that we may, but shall not be obligated to, maintain insurance, at our expense,
for the benefit of our company and of any person to be indemnified. In
addition, we have entered or will enter into indemnification agreements with
our directors and officers that provide for indemnification in addition to the
indemnification provided in our Bylaws. The indemnification agreements contain
provisions that may require our company, among other things, to indemnify our
directors and executive officers against certain liabilities (other than
liabilities arising from intentional or knowing and culpable violations of law)
that may arise by reason of their status or service as directors or executive
officers of our company or other entities to which they provide service at the
request of our company and to advance expenses they may incur as a result of
any proceeding against them as to which they could be indemnified. We believe
that these provisions and agreements are necessary to attract and retain
qualified directors and officers. We have obtained an insurance policy covering
directors and officers for claims that such directors and officers may
otherwise be required to pay or for which we are required to indemnify them,
subject to certain exclusions.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article Eighth of our Restated Certificate of Incorporation provides that a
director shall not be personally liable for monetary damages or breach of
fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to our company or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
II-1
<PAGE>
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived any improper
personal benefit.
The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which
the underwriters have agreed to indemnify our company, each person, if any, who
controls our company within the meaning of Section 15 of the Securities Act,
each director of our company, and each officer of our company who signs this
Registration Statement, with respect to information furnished in writing by or
on behalf of the underwriters specifically for use in the Registration
Statement.
Item 15. Recent Sales of Unregistered Securities.
In the last three years we have sold the following unregistered securities:
(1) In April 1997, XM Satellite Radio Inc. (formerly American Mobile Radio
Corporation) issued 25 shares of common stock to WorldSpace, Inc. for
cash consideration of $7.5 million. (American Mobile held the remaining
100 shares of common stock.)
(2) As of May 16, 1997, we formed as a parent company for XM Satellite
Radio. We issued 100 shares of common stock to American Mobile and 25
shares of common stock to WorldSpace in exchange for the 100 shares and
25 shares of common stock of XM Satellite Radio from American Mobile
and WorldSpace, respectively.
(3) In May 1997, concurrent with a loan transaction, we issued options to
WorldSpace to purchase 97.2222, 128.8876 and 3.5111 shares of our
common stock.
(4) In April 1998, we issued a convertible note in the aggregate principal
amount of $54,536,112 to WorldSpace.
(5) In January 1999, we issued convertible notes for cash in the aggregate
principal amount of $21,418,553 to American Mobile.
(6) In June 1999, we issued a $1.0 million promissory note for cash to
American Mobile.
(7) In July 1999, we issued $250.0 million aggregate principal amount of
our Series A subordinated convertible notes for cash to institutional
investors.
(8) In July 1999, we issued $81.7 million aggregate principal amount of
convertible notes for existing debt, accrued interest and options to
American Mobile, convertible into our Class B common stock.
The above transactions were exempt from registration under Section 4(2) of
the Securities Act and Regulation D thereunder.
In July 1999, we issued 125 shares of our Class B common stock to American
Mobile in exchange for the cancellation of 125 shares of our common stock held
by American Mobile. This transaction was exempt from registration under Section
3(a)(9) of the Securities Act.
From June 1998 through July 16, 1999, we have granted options to purchase
16.7121 shares of Class A common stock to directors, officers and employees
under our Shares Award Plan. The offering of shares underlying these options is
exempt under Rule 701 under the Securities Act. No options have been exercised.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
1.1+ Underwriting Agreement.
3.1+ Restated Certificate of Incorporation of XM Satellite Radio Holdings
Inc.
3.2+ Amended and Restated Bylaws of XM Satellite Radio Holdings Inc.
4.1+ Form of Certificate for our Class A common stock.
5.1+ Opinion of Hogan & Hartson L.L.P. with respect to the common stock
being registered.
10.1++ Shareholders' Agreement, dated as of July 7, 1999, by and among XM
Satellite Radio Holdings Inc., American Mobile Satellite
Corporation, Baron Asset Fund, Clear Channel Investments, Inc.,
Columbia XM Radio Partners, LLC, DIRECTV Enterprises, Inc., General
Motors Corporation, Madison Dearborn Capital Partners III, L.P.,
Special Advisors Fund I, LLC, Madison Dearborn Special Equity III,
L.P., and Telcom-XM Investors, L.L.C.
10.2++ Registration Rights Agreement, dated July 7, 1999, by and among XM
Satellite Radio Holdings Inc., American Mobile Satellite
Corporation, the Baron Asset Fund series of Baron Asset Fund, and
the holders of Series A subordinated convertible notes of XM
Satellite Radio Holdings Inc.
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++* Technical Services Agreement between XM Satellite Radio Holdings Inc.
and American Mobile Satellite Corporation, dated as of January 1,
1998, as amended by Amendment No. 1 to Technical Services Agreement,
dated June 7, 1998.
10.6++* Satellite Purchase Contract for In-Orbit Delivery, by and between XM
Satellite Radio Inc. and Hughes Space and Communications
International, Inc., dated , 1999.
10.7+ Agreement by and between XM Satellite Radio, Inc. and
STMicroelectronics Srl, dated November 2, 1998.
10.8++* Distribution Agreement, dated June 7, 1999, between OnStar, a
division of General Motors Corporation, and XM Satellite Radio Inc.
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 Communications, Inc.
10.11++* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and TCM, LLC.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<S> <C>
10.12+ Agreement, dated as of , 1999 between XM Satellite Radio Holdings
Inc. and Gary Parsons.
10.13+ Employment Agreement, dated as of June 1, 1998, between XM Satellite
Radio Holdings Inc. and Hugh Panero.
10.14+ Letter Agreement with Lee Abrams date May 22, 1998.
10.15+ Letter Agreement with Stelios Patsiokas dated September 14, 1998.
10.16+ Letter Agreement with Heinz Stubblefield dated May 22, 1998.
10.17++ Form of Indemnification Agreement between XM Satellite Radio Holdings
Inc. and each of its directors and executive officers.
10.18++ 1998 Shares Award Plan.
10.19++ Form of Non-Qualified Stock Option Agreement.
21.1+ Subsidiaries of XM Satellite Radio Holdings Inc.
23.1+ Consent of Hogan & Hartson L.L.P. (contained in their opinion filed as
Exhibit 5.1).
23.2 Consent of KPMG LLP.
23.3 Consent of Nathaniel A. Davis as future director.
23.4 Consent of Thomas J. Donohue as future director.
24.1++ Powers of Attorney.
27.1++ Financial Data Schedule.
</TABLE>
- --------
++ Previously filed.
+ To be filed by amendment.
* Certain confidential portions of this Exhibit were omitted by means of
redacting a portion of the text. This Exhibit has been filed separately with
the Secretary of the Commission without such text pursuant to our
Application Requesting Confidential Treatment under Rule 406 under the
Securities Act.
(b) Financial Statement Schedules included separately in the Registration
Statement.
Item 17. Undertakings.
The undersigned registrant hereby undertakes that
(1) It will provide to the underwriters at the closing specified in the
underwriting agreement, certificates in such denominations and
registered in such names as required by the underwriter to permit
prompt delivery to each purchaser.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the General Corporation Law of the State of Delaware,
the Restated Certificate of Incorporation, or the Amended and Restated Bylaws
of registrant, indemnification agreements entered into between registrant and
its officers and directors, or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer, or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the District of Columbia, on the 27th day of August, 1999.
XM Satellite Radio Holdings Inc.
By: *
Name: Hugh Panero
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amended
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive August 27, 1999
______________________________________ Officer, and Director
Hugh Panero (Principal Executive
Officer)
* Senior Vice President and August 27, 1999
______________________________________ Chief Financial Officer
Heinz Stubblefield (Principal Financial and
Accounting Officer)
* Chairman of the Board of August 27, 1999
______________________________________ Directors
Gary M. Parsons
* Director August 27, 1999
______________________________________
Randall T. Mays
* Director August 27, 1999
______________________________________
Randy S. Segal
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director August 27, 1999
______________________________________
Jack Shaw
* Director August 27, 1999
______________________________________
Dr. Rajendra Singh
* Director August 27, 1999
______________________________________
Ronald L. Zarrella
*By: Joseph M. Titlebaum
______________________________________
Joseph M. Titlebaum
Attorney-in-Fact
</TABLE>
II-7
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
XM Satellite Radio Holdings Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Our report, dated February 12, 1999, contains an explanatory paragraph that
states that the Company has not commenced operations, has negative working
capital and is dependent upon additional debt and equity financings, which raise
substantial doubt about its ability to continue as a going concern. The
consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
/s/ KPMG LLP
McLean, Virginia
August 27, 1999
<PAGE>
Exhibit 23.3
Consent of Future Director
I, Nathaniel A. Davis, resident at 2609 Geneva Hill Ct., Oakton, VA,
do hereby consent to being named a future director of XM Satellite Radio
Holdings, Inc. (the "Company"), effective immediately after the closing of the
Company's initial public offering, in the Company's registration statement
initially filed with the United States Securities and Exchange Commission on
Form S-1 (registration number 333-83619).
Date: August 27, 1999 /s/ NATHANIEL A. DAVIS
-----------------------
Nathaniel A. Davis
<PAGE>
Exhibit 23.4
Consent of Future Director
I, Thomas J. Donohue, resident at 8008 Coach Street, Potomac, MD
20854, do hereby consent to being named a future director of XM Satellite Radio
Holdings, Inc. (the "Company"), effective immediately after the closing of the
Company's initial public offering, in the Company's registration statement
initially filed with the United States Securities and Exchange Commission on
Form S-1 (registration number 333-83619).
Date: August 27, 1999 /s/ THOMAS J. DONOHUE
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Thomas J. Donohue
