<PAGE>
As filed with the Securities and Exchange Commission on June 13, 2000
Registration No. 333-__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________
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 of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
__________________________
1250 23rd Street, NW, Suite 57
Washington, DC 20037
(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, NW Suite 57
Washington, DC 20037
(202) 969-7100
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service)
________________________
Copies to:
Steven M. Kaufman, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
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. [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 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 of 1933, check the following box and list the Securities Act
of 1933 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 of 1933, check the following box and list the Securities Act
of 1933 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, check
the following box.[_]
Calculation of Registration Fee
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------------------
Title Of Each Class Of Amount To Be Registered Proposed Maximum Offering Proposed Maximum Aggregate Amount Of
Securities To Be Registered Price Per Unit(1) Offering Price(1) Registration Fee
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warrants to purchase shares 325,000 $136.33 $44,412,996.61 $11,726.00
of Class A Common Stock
----------------------------------------------------------------------------------------------------------------------------------
Class A Common Stock, par 2,608,065
value $.01 per share(2)
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(i) of the Securities Act. Since the Warrants are
not currently exercisable and are significantly out of the money, the fee
is based on the book value of the Warrants registered hereunder.
(2) The shares of Class A Common Stock are issuable upon exercise of the
Warrants registered hereunder. This Registration Statement also covers such
shares as may be issuable pursuant to anti-dilution adjustments.
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 of 1933 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.
<PAGE>
Subject to Completion
Preliminary Prospectus dated June __, 2000
PROSPECTUS
XM SATELLITE RADIO HOLDINGS INC.
325,000 Warrants
2,608,065 underlying shares of Class A common stock
of
XM Satellite Radio Holdings Inc.
. The warrants were originally issued and sold on March 15, 2000 to Bear,
Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation,
Salomon Smith Barney Inc. and Lehman Brothers Inc. pursuant to a private
placement by XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. of
325,000 units, each unit consisting of one 14% Senior Secured Note due 2010
of XM Satellite Radio Inc. with a principal amount of $1,000 and one warrant
to purchase 8.024815 shares of Class A Common Stock, par value $.01 per
share, of XM Satellite Radio Holdings Inc. at an exercise price of $49.50 per
share. Bear, Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Salomon Smith Barney Inc. and Lehman Brothers Inc. placed the
units with qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933. In connection with the sale of the units, we entered
into a Warrant Agreement with the United States Trust Company of New York, as
Warrant Agent, and a Warrant Registration Rights Agreement with Bear, Stearns
& Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Salomon
Smith Barney Inc. and Lehman Brothers Inc. Pursuant to the Warrant
Registration Rights Agreement, we agreed, among other things, to register the
resale of the warrants under the Securities Act and the issuance of shares of
Class A Common Stock upon exercise of the Warrants.
. Each warrant, when exercised, will entitle the holder thereof to purchase
8.042815 shares of Class A Common Stock from us at a price of $49.50 per
share. The exercise price and number of shares of Class A Common Stock
issuable upon exercise of the warrants are both subject to adjustment in
certain cases. The warrants will initially entitle the holders thereof to
acquire, in the aggregate, 2,608,065 shares of Class A Common Stock.
. Our Class A Common Stock is traded on the Nasdaq National Market under the
symbol "XMSR." The last reported bid price for our Class A Common Stock on
June 1, 2000, was $30.375 per share.
. The warrants are exercisable on or after September 16, 2000, and will expire
on March 15, 2010.
. The holders of unexercised warrants are not entitled, by virtue of being such
holders, to receive dividends, to vote, to consent, to exercise any
preemptive rights or to receive notice as our stockholders in respect of any
stockholders meetings for the election of our directors or any other purpose,
or to exercise any rights whatsoever as our stockholders. See "Description of
the Warrants" for a fuller description of the warrants.
. See "Risk Factors" beginning on page 6 for a discussion of risks that should
be considered by holders of the warrants and the Class A Common Stock
issuable upon exercise of the warrants.
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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Summary.......................................................... 1
Risk Factors..................................................... 6
Use of Proceeds.................................................. 16
Price Range of Common Stock...................................... 16
Dividend Policy.................................................. 16
Capitalization................................................... 17
Selected Consolidated Financial Data............................. 18
Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 19
Business......................................................... 27
Management....................................................... 47
Certain Relationships and Related Transactions................... 54
Principal Stockholders........................................... 59
Description of Capital Stock..................................... 61
Description of the Warrants...................................... 66
Certain United States Federal Income Tax Considerations.......... 70
Selling Holders.................................................. 74
Plan of Distribution............................................. 77
Legal Matters.................................................... 78
Experts.......................................................... 78
Index to Consolidated Financial Statements....................... F-1
</TABLE>
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the "Exchange Act"). You may read and copy any of the
information we file with the SEC at the SEC's public reference rooms at Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at 7 World Trade Center,
13th Floor, New York, New York 10048 and at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 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, N.W., Washington, D.C. 20549 at prescribed rates. You may call the
SEC at 1-800-SEC-0330 for further information on the operation of the public
reference rooms. We file information electronically with the SEC. Our SEC
filings also are available from the SEC's Internet site at http://www.sec.gov,
which contains reports, proxy and information statements, and other information
regarding issuers that file electronically. Our common stock is quoted on the
Nasdaq National Market under the symbol "XMSR," and reports, proxy statements
and other information concerning XM Satellite Radio Holdings Inc. can also be
inspected at the offices of Nasdaq Operations, 1735 K Street, N.W., Washington,
D.C. 20006.
<PAGE>
SUMMARY
This summary does not contain all the information that may be important to
you. You should read this entire prospectus carefully, including the section
entitled "Risk Factors." Unless the context otherwise requires, the terms "we,"
"our," and "us" refer to XM Satellite Radio Holdings Inc. and its subsidiaries
("Holdings"), including XM Satellite Radio Inc. and subsidiary ("XM").
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 clear sound
quality from digital signal radios, 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, constructed by Hughes,
and will have a ground spare in reserve. A terrestrial repeater network,
designed and installed by LCC International, will receive and re-transmit the
satellite signals to augment our satellite signal coverage. The terrestrial
repeaters, which are ground-based electronics equipment, will be manufactured by
Hughes Network Systems.
We have contracts to develop, manufacture and distribute XM automobile
radios with Delco Electronics Corporation, Sony Electronics, Motorola Inc.,
Pioneer Electronics Corporation, Alpine Electronics, Mitsubishi Electric
Automotive America, Inc., Audiovox and Clarion Co. Ltd.; XM home and portable
radios with Sony Electronics and SHARP Corporation; and chipsets for XM radios
with STMicroelectronics. General Motors has signed a contract with Delphi
Automotive Systems Corp., the parent company of Delco Electronics, to
manufacture our radios for GM. Our radios will be capable of receiving both XM
Radio and traditional AM/FM stations.
We will offer our consumers a unique listening experience by providing up
to 100 channels of programming, coast-to-coast coverage and clear sound with our
digital signals. We will have original music and talk channels created by XM
Originals, our in-house programming unit, and channels created by well-known
providers of brand name programming. We have a team of programming professionals
with a proven record of introducing new radio formats and building local and
national listenership. Our programming providers will include the following:
<TABLE>
<CAPTION>
Media Radio
----- -----
<S> <C>
- Bloomberg News Radio - Hispanic Broadcasting Corporation (formerly Heftel)
- USA Today - Clear Channel Communications
- CNNfn, CNN en Espanol, CNN Sports Illustrated - Radio One
- C-SPAN Radio - Salem Communications
- Black Entertainment Television - AsiaOne
- DIRECTV - One-On-One Sports
- Weather Channel - BBC World Service
- Sporting News - NASCAR
</TABLE>
In addition to our subscription fee, we expect revenues from sales of
limited advertising time on a number of 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. Through
affinity and niche programming, we will give advertisers an effective way to
market products and services to geographically disparate groups.
1
<PAGE>
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. A market study conducted for us projects that as many as 49
million people may subscribe to satellite radio by 2012.
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 will tailor our
programming and marketing to appeal to specific groups that our research has
shown are most likely to subscribe to our service. We have several planned
distribution channels, including through major car and radio manufacturers.
Our strategic investor companies include General Motors, DIRECTV, Clear
Channel Communications, and our parent company, Motient Corporation.
Recent Developments
. In the first quarter of 2000, we completed a follow-on offering of
4,370,000 shares of our Class A common stock, which resulted in net
proceeds of $132.1 million. Concurrently with this offering, we completed
an offering of 2,000,000 shares of our Series B convertible redeemable
preferred stock, which resulted in net proceeds of $96.5 million. In March
2000, we completed a private placement of 325,000 units, each unit
consisting of $1,000 principal amount of XM's 14% Senior Secured Notes due
2010 and one warrant to purchase 8.024815 shares of our Class A common
stock, which yielded net proceeds of $191.3 million after excluding $123.0
million for an interest reserve. All net proceeds from these offerings
received by us were contributed to XM as a contribution to capital. As of
March 31, 2000, we have raised $865.7 million in debt and equity proceeds,
net of expenses and repayment of debt, from investors and strategic
partners.
. We have entered into a contract with Hughes Electronics Corporation for the
design, development and manufacture of the terrestrial repeaters.
. We have entered into a contract with Sony Electronics for the development,
manufacture, distribution and marketing of XM automobile, home and portable
radios.
. We have engaged Premiere Radio Networks to be our advertising sales
representative.
. We have entered into marketing arrangements with SFX Entertainment and
NASCAR.
. We have signed a letter of intent with Freightliner Corporation to install
XM radios in Freightliner trucks.
. We have signed an agreement with Sirius Radio to develop a unified standard
for satellite radios, which will facilitate the ability of consumers to
purchase an interoperable radio capable of receiving both our and Sirius
Radio's services.
2
<PAGE>
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
Sources of Funds
----------------
Total equity and debt proceeds
raised to date..................... $ 865.7
Future capital requirements......... 234.3
--------
Total sources.................... $1,100.0
========
Uses of Funds
-------------
Satellites and launch................ $ 472.6
Launch insurance..................... 50.0
Terrestrial repeater system.......... 263.3
Ground segment....................... 65.9
--------
851.8
FCC license.......................... 90.0
Operating expenses and working
capital requirements (1)............ 158.2
--------
$1,100.0
========
(1) Includes costs associated with our agreement with Sirius Satellite Radio to
develop a unified standard for satellite radio.
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 www.xmradio.com. Information at our web site is not,
and should not be deemed to be, part of this prospectus.
3
<PAGE>
Resale of Warrants and Underlying Common Stock
On March 15, 2000, we issued and sold 325,000 units, each unit consisting
of $1,000 principal amount of 14% Senior Secured Notes of XM, which we refer to
as the senior secured notes, and one Warrant to purchase 8.024815 shares of our
Class A Common Stock. In connection with that sale, we entered into a Warrant
Agreement with the United States Trust Company of New York, as Warrant Agent,
and a Warrant Registration Rights Agreement with Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Salomon Smith Barney Inc.
and Lehman Brothers Inc. Pursuant to the Warrant Registration Rights Agreement,
we agreed, among other things, to register the resale of the warrants under the
Securities Act and the issuance of the Class A Common Stock upon exercise of the
warrants.
Warrants:
Issuer ............................. XM Satellite Radio Holdings Inc.
Warrants Offered ................... 325,000 warrants which, when exercised,
will entitle the holders to acquire an
aggregate of 2,608,065 shares of Class A
Common Stock.
Exercise Price...................... $49.50 per share of Class A Common Stock.
Exercise ........................... The warrants are exercisable beginning on
September 16, 2000 and ending on March
15, 2010.
Expiration ......................... March 15, 2010.
Voting Rights....................... Warrant holders have no voting rights.
Anti-dilution ...................... The exercise price and number of shares
of Class A Common Stock issued upon
exercise of the warrants are subject to
adjustment in certain cases, as described
in "Description of Warrants--
Adjustments."
Warrant Shares...................... The warrants entitle the holders to
acquire 8.024815 shares of Class A Common
Stock of XM Satellite Radio Holdings Inc.
The shares of Class A Common Stock for
which the warrants are exercisable or
which are issued upon exercise of the
warrants are collectively referred to as
"Warrant Shares."
Warrant Agent....................... The warrant agent is United States Trust
Company of New York.
Use of Proceeds..................... The net proceeds from the unit offering
have been and will be used to further
develop the satellite and terrestrial
repeater systems and for general
corporate purposes. We will not receive
any proceeds from resales of warrants.
Upon exercise of the warrants, we will
receive the exercise price of $49.50 per
share. See "Use of Proceeds."
United States Federal Income
Tax Consequences ................... Upon the exercise of a warrant, a U.S.
holder will not recognize gain or loss,
except to the extent of cash, if any,
received in lieu of the issuance of
fractional shares of common stock. See
"United States Federal Income Tax
Consequences."
4
<PAGE>
Summary Consolidated Financial Data
<TABLE>
<CAPTION>
December 15,
1992
(Date of
Three Months Ended Inception)
Years Ended December 31, March 31, to March 31,
-------------------------------------- ------------------------- -------------
1997 1998 1999 1999 2000 2000
---------- ---------- ----------- ---------- ----------- --------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Revenue........................................... $ -- $ -- $ -- $ -- $ -- $ --
---------- ---------- ---------- ---------- ----------- --------
Operating expenses:
Research and development......................... -- 6,941 4,274 748 4,519 15,735
Professional fees................................ 1,090 5,242 9,969 1,297 5,594 21,894
General and administrative....................... 20 4,010 16,448 2,376 6,775 27,253
---------- ---------- ----------- ---------- ----------- --------
Total operating expenses......................... 1,110 16,193 30,691 4,421 16,888 64,882
---------- ---------- ----------- ---------- ----------- --------
Operating loss.................................... (1,110) (16,193) (30,691) (4,421) (16,888) (64,882)
Other income--interest income (expense), net...... (549) 26 (6,205) 54 4,148 (2,580)
---------- ---------- ----------- ---------- ----------- --------
Net loss.......................................... $ (1,659) $ (16,167) $ (36,896) $ (4,367) $ (12,740) $(67,462)
========== ========== =========== ========== =========== ========
Preferred stock dividend accrued.................. -- -- -- -- (1,472)
Net loss attributable to common stockholders...... (1,659) (16,167) (36,896) (4,367) (14,212)
---------- ---------- ----------- ---------- -----------
Net loss per share--basic and diluted............. $ (0.26) $ (2.42) $ (2.40) $ (0.65) $ (0.30)
========== ========== =========== ========== ===========
Weighted average shares used in computing net
loss per share--basic and diluted................ 6,368,166 6,689,250 15,334,102 6,689,250 47,195,963
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31,
1997 1998 1999 2000
----- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments................ $ 1 $ 310 $120,170 $ 448,037
Pledged securities(2)............................................ -- -- -- 138,416
System under construction........................................ 91,932 169,029 362,358 437,274
Total assets..................................................... 91,933 170,485 515,189 1,072,146
Total debt(3).................................................... 82,504 140,332 212 259,730
Total liabilities................................................ 82,949 177,668 30,172 304,472
Stockholders' equity (deficit)(3)................................ 8,984 (7,183) 485,017 767,674
</TABLE>
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
(3) The value of the warrants, $65.7 million, is reflected as both a debt
discount and an element of additional paid-in capital. The value of the
warrants was contributed by Holdings to XM as additional paid-in capital.
5
<PAGE>
RISK FACTORS
You should consider carefully these risk factors together with all of the
other information included in this prospectus before making an investment
decision.
Some of the information in this prospectus may contain forward looking
statements. Such statements can be identified by the use of forward looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future
expectations, contain projections of results of operations or of financial
condition or state other "forward looking" information. When considering such
forward looking statements, you should keep in mind the risk factors and other
cautionary statements in this prospectus. The risk factors noted in this section
and other factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward looking statement.
You could lose money on your investment because we have not started operations
or generated any revenues.
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 we can start commercial
operation of our service. Unless we generate significant revenues, we will not
become profitable, and you could lose money on your investment. 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 March 31, 2000, we had incurred significant costs, aggregating
approximately $437.3 million, in connection with the development of the XM Radio
system. We incurred net aggregate losses approximating $67.5 million from our
inception through March 31, 2000. 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
and the terms of our FCC license may restrict our ability to raise funding.
We estimate that we will need approximately $234.3 million in order to meet
our needs until we begin commercial operation of our services. The funds we have
raised as of March 31, 2000 are expected to be sufficient in the absence of
additional financing to cover our funding needs into the fourth 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 General Motors and OnStar." Our
actual funding requirements could vary materially from our current estimates. 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
6
<PAGE>
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 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;
. 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; and
. XM may not be able to meet its obligations under the senior secured
notes.
Motient Corporation is our controlling stockholder and controls us under
applicable FCC rules. Motient has certain rights regarding the election of
persons to serve on our board of directors and holds 61.0% of the voting power,
or 50.5% giving effect to the conversion of all of our outstanding common stock
equivalents. Motient cannot relinquish its controlling position without
obtaining the prior approval of the FCC. Accordingly, prior to our obtaining FCC
approval of the transfer of control from Motient, we will only be able to issue
a limited amount of voting securities or securities convertible into voting
securities unless certain of our stockholders holding nonvoting convertible
securities agree not to convert them into voting securities or we take other
steps to permit voting securities on a basis consistent with FCC rules. Certain
holders of our nonvoting securities have agreed not to convert their securities
if it would cause Motient not to hold at least 40% of our voting stock, until we
obtain approval by the FCC of a change in control. In return, we have agreed not
to issue new voting securities, other than the units and other than up to
2,000,000 shares of Class A common stock (except upon conversion or exercise of
existing securities or under our employee stock plans), if it would make these
holders unable to convert any of their nonvoting securities. We intend to seek
appropriate FCC approvals in the near future. We may not be able to obtain FCC
approval or it may take a long period of time to obtain such approval and there
may be conditions imposed in connection with such approval that may be
unfavorable to us. The inability to raise capital opportunistically, or at all,
could adversely affect our business plan.
Our substantial indebtedness could adversely affect our financial health which
could reduce the value of the warrants and our Class A Common Stock.
As of March 31, 2000, we had total indebtedness of $259.7 million and
stockholders' equity of $767.7 million.
Our substantial indebtedness could have important consequences to you. For
example, it could:
. increase our vulnerability to general adverse economic and industry
conditions;
. limit our ability to fund future working capital, capital
expenditures, research and development costs and other general
corporate requirements;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on XM's indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors
that have less debt; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. And, failing to comply with those covenants could result in an
event of
7
<PAGE>
default which, if not cured or waived, could have a material adverse
effect on us.
Our satellites could be damaged or destroyed during launch.
A significant percentage of satellites never become operational because 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. There is a limited track record for the specific launch
vehicle that will be used for the launch of our satellites, and even launch
vehicles with good track records experience some launch failures. In March
2000, an unsuccessful satellite launch from the Sea Launch platform, our
intended means of launch, resulted in the loss of the communications payload.
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.
Damage to our satellites will not be fully covered by insurance.
We intend to purchase standard launch and in-orbit insurance policies from
global space insurance underwriters. 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.
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
8
<PAGE>
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 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.
Performance failures by our satellite and launch contractors would damage our
business, and we may not have adequate remedies.
We will rely on Hughes Space Communications International, Inc., 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 our 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 Delphi-Delco, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and
Clarion to develop, manufacture and market XM radios for use in the car, and on
Sony and SHARP to develop, manufacture and market XM radios for home and
portable use. 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.
Competition from Sirius Satellite Radio and traditional and emerging audio
entertainment providers could adversely affect our revenues.
In seeking market acceptance, we will encounter competition for both
listeners and advertising revenues from many sources, including
9
<PAGE>
. Sirius Satellite 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.
Sirius Satellite Radio (formerly named 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 Sirius Satellite 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.
Demand for our service may be insufficient for us to become profitable.
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.
If demand for our service does not develop as expected, we may not be able
to generate enough revenues to become profitable. 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 other than to subscribers on a pay-for-
service basis. These factors may reduce our potential revenue from advertising.
Large payment obligations under our distribution agreement with General Motors
may prevent us from becoming profitable.
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
10
<PAGE>
satellite radio services. These payment obligations, which could total several
hundred million dollars over the life of the contract, may prevent us from
becoming profitable. A significant portion of these payments are fixed in
amount, and we must pay these amounts even if General Motors does not meet
performance targets in the contract. Although this agreement is subject to
renegotiation if General Motors does not achieve and maintain specified
installation levels we cannot predict the outcome of any such renegotiation.
This agreement is described more fully under the caption "Certain Relationships
and Related Party Transactions--Distribution Agreement with General Motors and
OnStar."
Joint development agreement funding requirements could be significant.
Under our agreement with Sirius Radio, each party is obligated to fund one
half of the development cost of the technologies used to develop a unified
standard for satellite radios. Each party will be entitled to license fees or a
credit towards its one half of the cost based upon the validity, value, use,
importance and available alternatives of the technology it contributes. The
applicability or validity of Sirius Radio's claims in their former patent suit
against us could affect the determination of the amount of license fees or
credits relating to contributed or licensed technology under the agreement. The
amounts of these fees or credits will be determined over time by agreement of
the parties or by arbitration. We cannot predict at this time the amount of
license fees or contribution payable by XM or Sirius Radio or the size of the
credits to XM and Sirius Radio from the use of their technology. This may
require significant additional capital.
If we default under our joint development agreement, Sirius Satellite Radio's
patent infringement lawsuit against us could be refiled.
Under our agreement with Sirius Radio for the development of a unified
standard for satellite radios, the lawsuit Sirius Radio brought against us in
January 1999 alleging our infringement of three Sirius Radio patents was
withdrawn. We and Sirius Radio have agreed to cross-license our respective
intellectual property. However, if this agreement is terminated before the value
of the licenses has been determined due to our failure to perform a material
covenant or obligation, then this suit could be refiled.
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 and may duplicate the XM Radio system or service
without liability. 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 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. This
may be expensive. Also, we may not succeed in any such litigation.
Third parties may 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;
11
<PAGE>
. 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.
Failure to comply with FCC requirements could damage our business.
As an owner of one of two FCC licenses to operate a commercial satellite radio
service in the United States, we are subject to FCC rules and regulations, and
the terms of our license, which 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 our 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 may
also be subject to interference from adjacent radio frequency users if the FCC
does not adequately protect us against such interference in its rulemaking
process. In addition, the FCC has not yet issued rules permitting us to deploy
terrestrial repeaters to fill gaps in satellite coverage. Our plans to deploy
terrestrial repeaters may be impacted by the FCC's rules, when issued.
Some of our vendors 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 delay our satellite launch.
If the challenge to our FCC license is successful, our business could be harmed.
The award of our FCC license was challenged by one of the losing bidders in
the initial FCC licensing procedure. The challenge was denied by the FCC, but
the losing bidder filed with the FCC for reconsideration of the license award.
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.
Our service network or other ground facilities could be damaged by natural
catastrophes.
Since our ground-based network will be attached to buildings, towers, and
other structures around the country, an earthquake, tornado, flood or other
catastrophic event anywhere in the United States could damage our network,
interrupt our service and harm our business in the affected area. We will not
have replacement or redundant facilities that can be used to assume the
functions of our repeater network or of 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 central production and 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
12
<PAGE>
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. 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. We must also enter into 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.
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 make our 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.
The market price of our stock could be hurt by 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 depress 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.
A small number of stockholders own approximately 68% of our stock on a fully
diluted basis and effectively control us. Their interests may conflict with our
interests and yours.
As of June 1, 2000, our principal stockholders own approximately 68.4% of our
common stock on a fully diluted basis with total voting power of approximately
83.2%. 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 over us. 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 yours.
We need people with special skills to develop, launch and maintain our new
service. If we cannot find and keep these people, our business and stock price
could suffer.
We depend on the continued efforts of our executive officers and key employees
who have specialized technical knowledge regarding our satellite and radio
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
13
<PAGE>
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.
Future sales of our Class A common stock in the public market could lower its
stock price and impair our ability to raise funds in new stock offerings.
As of March 31, 2000, we had 32,179,581 shares of Class A common stock
outstanding, or 62,023,347 shares assuming conversion of all 16,557,262 shares
of our Class B common stock, 10,786,504 shares of our Series A convertible
preferred stock and 2,000,000 shares of our Series B convertible redeemable
preferred stock outstanding. Sales of a large number of shares could adversely
affect the market price of our Class A common stock, which could impair our
ability to raise funds in additional stock offerings.
Motient, which owns 200,000 shares of our Class A common stock and all
16,557,262 shares of our Class B common stock, is prohibited from selling any of
these shares, other than to affiliates, until October 8, 2000 or when we
commence commercial operations, whichever comes first. At that time, these
shares will be freely tradable, subject to the provisions of Rule 144 or Rule
701 under the Securities Act. Motient has experienced substantial appreciation
in the value of its shares relative to the price paid for them. In the event
Motient elects to sell its shares, the price of our stock could materially
decline, irrespective of our performance.
On December 3, 1999, we filed a registration statement under the Securities
Act covering all 2,975,700 shares of its Class A common stock subject to
outstanding stock options or reserved for issuance under its stock plans. The
registration statement became effective upon filing. Accordingly, shares
registered under the registration statement are, subject to vesting provisions
and Rule 144 volume limitations applicable to our affiliates, available for sale
in the open market, and in the case of our officers, directors and stockholders
who have entered into lock-up agreements, available for sale after lock-up
agreements expire. As of March 31, 2000, options to purchase 2,368,524 shares
of our Class A common stock were outstanding.
The holders of approximately 16 million shares of our Class A common stock,
all of our Series A convertible preferred stock and all of our Class B common
stock have the right to request registration of their shares in future public
offerings of our equity securities. Sony Electronics owns a warrant that may in
the future be exercisable for up to 2% of our Class A common stock on a fully-
diluted basis depending on Sony's success in achieving certain sales targets.
Sony will have the right to request registration of these shares in future
public offerings.
There is no established trading market for the warrants, which could make it
more difficult for you to sell warrants and could adversely affect their price.
We expect that the warrants will be eligible for trading in the PORTAL
market. We do not intend to apply for a listing or quotation of the warrants on
any securities exchange. The initial purchasers of the warrants have advised us
that they intend to make a market in the warrants. However, they are not
obligated to do so. Any market-making may be discontinued at any time and we
cannot assure you of the development or liquidity of any trading market for the
warrants, or if a trading market develops, that it will continue. The liquidity
of the trading market for the warrants also may be adversely affected by any
changes in our financial performance or prospects or in the prospects for the
companies in our industry.
There may be limitations on the ability of the holders of warrants to exercise
their warrants and receive the underlying common stock.
We have agreed to use our reasonable best efforts to make effective within
180 days of the consummation of the unit offering and use our reasonable efforts
to maintain effective until the expiration or exercise of all warrants, a shelf
registration statement on an appropriate form under the Securities Act covering
the warrants and issuance of
14
<PAGE>
Warrant Shares. Until the shelf registration statement becomes effective and
during any period when the shelf registration statement is not effective, U.S.
holders of the warrants will not be able to exercise their warrants unless they
are an "accredited investor" or a "qualified institutional buyer," within the
meaning of the Securities Act, and make certain representations to us in
connection with their exercise. We cannot assure you that we will be able to
cause to be declared effective or keep the shelf registration statement
continuously effective until all of the warrants have been exercised or expired.
Shares of common stock issued upon exercise of the warrants at a time when the
shelf registration statement is not effective will be "restricted securities"
for purposes of Rule 144 under the Securities Act and will be subject to
restrictions on transfer.
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements based on our current expectations. 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 registration of the warrants and the common stock underlying the warrants
is to satisfy certain of our obligations under the registration rights agreement
covering the warrants sold in the unit offering in March 2000. Any proceeds we
receive from the exercise of such warrants into shares of our common stock will
be used for working capital, operating losses and general corporate expenses.
The net proceeds to us from the sale of the warrants, together with the senior
secured notes as part of the unit offering in March 2000, were approximately
$191.3 million, after excluding $123.0 million for an interest reserve and
approximately $10.7 million for underwriting fees and expenses. The net proceeds
from the unit offering have been and will be used as set forth below.
<TABLE>
<CAPTION>
Amount
-------------
(In thousands)
<S> <C>
Payments under satellite contract.................................. $ 98.7
Payments under terrestrial repeater contracts...................... 68.0
Payments under ground segment contracts............................ 11.2
Working capital, operating losses and general corporate expenses... 13.4
------
Total uses...................................................... $191.3
======
</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 the unit offering may
be temporarily invested in short-term, interest-bearing, investment grade
securities.
PRICE RANGE OF COMMON STOCK
Our Class A common stock has been quoted on the Nasdaq National Market under
the symbol "XMSR" since its initial public offering on October 5, 1999. The
following table presents, for the period indicated, the high and low sales
prices per share of the Class A common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
1999: High Low
--------- ----------
<S> <C> <C>
Fourth Quarter (beginning October 5, 1999)..... $44.750 $11.625
2000:
First Quarter.................................. $47.375 $27.000
Second Quarter (through June 1, 2000).......... $36.875 $18.125
</TABLE>
On June 1, 2000, the last reported sale price of our Class A common stock on
the Nasdaq National Market was $30.375. As of June 1, 2000, there were 78
holders of record of our Class A common stock.
DIVIDEND POLICY
We have not declared or paid any dividends since our date of inception.
Currently, our Series B Convertible Redeemable preferred stock restricts us from
paying dividends on our common stock unless full cumulative dividends have been
paid or set aside for payment on all shares of our Series B Convertible
Redeemable preferred stock. The indenture governing XM's senior secured notes
restricts XM from paying dividends to Holdings which, in turn, will
significantly limit the ability of Holdings to pay dividends. We do not intend
to pay cash dividends on our common stock in the foreseeable future. We
anticipate that we will retain any earnings for use in our operations and the
expansion of our business.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 2000 our capitalization on an
actual basis.
<TABLE>
<CAPTION>
March 31, 2000
---------------
Actual
------------
<S> <C>
Cash and cash equivalents............................................................ $ 448,037
Restricted investments (1)........................................................... 138,416
----------
Total cash, cash equivalents and restricted investments............................ $ 586,453
==========
Senior Secured Notes (2)............................................................. 259,528
Capital lease........................................................................ 202
----------
Total debt......................................................................... $ 259,730
==========
Stockholders' equity
Series A convertible preferred stock, par value $0.01; 15,000,000 shares
authorized, 10,761,677 shares issued and outstanding actual........................ 108
Series B convertible redeemable preferred stock, par value $0.01 (liquidation
preference of $100,000,000 pro forma as adjusted); 3,000,000 shares authorized,
2,000,000 shares issued and outstanding actual..................................... 20
Class A common stock, par value $0.01; 180,000,000 shares authorized, 32,179,581
shares issued and outstanding actual............................................... 322
Class B common stock, par value $0.01; 30,000,000 shares authorized; 16,557,262
shares issued and outstanding actual............................................... 166
Class C non-voting common stock, par value $0.01; 30,000,000 shares authorized,
no shares issued and outstanding actual............................................ --
Additional paid-in capital (2)....................................................... 834,520
Accumulated deficit.................................................................. (67,462)
----------
Total stockholders' equity......................................................... 767,674
----------
Total capitalization................................................................. $1,027,404
==========
</TABLE>
----------------
(1) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
(2) The value of the warrants, $65.7 million, is reflected as both a debt
discount and an element of additional paid-in capital. The value of the
warrants was contributed by us to XM as additional paid-in capital.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In considering the following selected consolidated financial data, you should
also read our consolidated financial statements and notes and the section
captioned "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The consolidated statements of operations data for the
three-year period ended December 31, 1999, and for the period from December 15,
1992 (date of inception) to December 31, 1999, and the consolidated balance
sheets data as of December 31, 1997, 1998 and 1999, are derived from our
consolidated financial statements. These statements have been audited by KPMG
LLP, independent certified public accountants. KPMG's report contains a
paragraph stating that we have not begun operations and are dependent upon
additional debt or equity financings, and that 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 unaudited consolidated financial
statements have been prepared on the same basis as the audited consolidated
financial statements and, in the opinion of our management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information. You should not assume that our results of
operations for the three months ended March 31, 1999 and 2000 indicate what our
results will be for the full year.
<TABLE>
<CAPTION>
December 15,
1992
(Date of
Three Months Ended Inception)
Years Ended December 31, March 31, to March 31,
-------------------------------------- ------------------------- -------------
1997 1998 1999 1999 2000 2000
---------- ---------- ----------- ---------- ----------- ------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................................ $ -- $ -- $ -- $ -- $ -- $ --
---------- ---------- ----------- ---------- ----------- ------------
Operating expenses:
Research and development.............. -- 6,941 4,274 748 4,519 15,735
Professional fees..................... 1,090 5,242 9,969 1,297 5,594 21,894
General and administrative............ 20 4,010 16,448 2,376 6,775 27,253
---------- ---------- ----------- ---------- ----------- ------------
Total operating expenses.............. 1,110 16,193 30,691 4,421 16,888 64,882
---------- ---------- ----------- ---------- ----------- ------------
Operating loss......................... (1,110) (16,193) (30,691) (4,421) (16,888) (64,882)
Other income--interest
income (expense), net.................. (549) 26 (6,205) 54 4,148 (2,580)
---------- ---------- ----------- ---------- ----------- ------------
Net loss............................... $ (1,659) $ (16,167) $ (36,896) $ (4,367) $ (12,740) $(67,462)
========== ========== =========== ========== =========== ============
Preferred stock dividend accrued....... -- -- -- -- (1,472)
Net loss attributable
to common stockholders................. (1,659) (16,167) (36,896) (4,367) (14,212)
========== ========== =========== ========== ===========
Net loss per share--basic and diluted.. $ (0.26) $ (2.42) $ (2.40) $ (0.65) $ (0.30)
========== ========== =========== ========== ===========
Weighted average shares
used in computing net loss per
share--basic and diluted.............. 6,368,166 6,689,250 15,334,102 6,689,250 47,195,963
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------- March 31,
1997 1998 1999 2000
------- ------ ------ ----------
(In thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments.......... $ 1 $ 310 $120,170 $ 448,037
Pledged securities(2)...................................... -- -- -- 138,416
System under construction.................................. 91,932 169,029 362,358 437,274
Total assets............................................... 91,933 170,485 515,189 1,072,146
Total debt(3).............................................. 82,504 140,332 212 259,730
Total liabilities.......................................... 82,949 177,668 30,172 304,472
Stockholders' equity (deficit)(3).......................... 8,984 (7,183) 485,017 767,674
</TABLE>
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
(3) The value of the warrants, $65.7 million, is reflected as both a debt
discount and an element of additional paid-in capital. The value of the
warrants was contributed by Holdings to XM as additional paid-in capital.
18
<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.
Overview
XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-
owned subsidiary of Motient Corporation ("Motient"), formerly American Mobile
Satellite Corporation. XM Satellite Radio Holdings Inc. became a holding company
for XM Satellite Radio Inc. in early 1997.
In October 1999, we completed an initial public offering which yielded net
proceeds of $114.1 million. Concurrent with the closing of our initial public
offering, $250.0 million of our Series A subordinated convertible notes,
together with associated accrued interest, converted into shares of Series A
convertible preferred stock and shares of Class A common stock. Additionally,
$103.1 million of convertible notes issued to Motient, together with associated
accrued interest, converted into shares of our Class B common stock.
In the first quarter of 2000, we completed:
. a follow-on offering of 4,370,000 shares of Class A common stock, which
yielded net proceeds of $132.1 million;
. a concurrent offering of 2,000,000 shares of Series B convertible
redeemable preferred stock, which yielded net proceeds of $96.5 million;
and
. a private placement of 325,000 units, each consisting of $1,000 principal
amount of 14% senior secured notes due 2010 and one warrant to purchase
8.024815 shares of Class A common stock at $49.50 per share which yielded
net proceeds of $191.3 million excluding $123.0 million for an interest
reserve.
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
19
<PAGE>
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
Three Months Ended March 31, 2000 Compared With Three Months Ended March 31,
1999
Research and Development. Research and development expenses increased to
approximately $4.5 million for the three months ended March 31, 2000, compared
with approximately $0.7 million for the three months ended March 31, 1999. The
increase in the research and development expenses primarily resulted from the
accelerated development of some of our system technology during the first
quarter of 2000.
Professional Fees. Professional fees increased to approximately $5.6 million
for the three months ended March 31, 2000, compared with $1.3 million for the
three months ended March 31, 1999. The increase primarily reflects additional
legal, regulatory and marketing expenses as we engaged more consultants,
including incurring $2.4 million for enterprise information technology
consultants. We expect the professional fees to trend upward as we continue to
evaluate the system alternatives and develop market strategies.
General and Administrative. General and administrative expenses increased to
$6.8 million for the three months ended March 31, 2000, compared with $2.3
million for the three months ended March 31, 1999. The increase reflects
increased headcount and facilities expenses. We have granted certain key
executives stock options and incurred a non-cash compensation charge of
approximately $0.7 million in the first quarter of 2000 primarily for
performance-based stock options. We will continue to incur quarterly non-cash
compensation charges over the vesting period depending on the market value of
our Class A common stock at the end of the quarter. We also continued the
amortization of goodwill and other intangibles during the first quarter of 2000.
We anticipate general and administrative expenses to continue to increase
through commercial operations.
Interest Income. Interest income increased to $4.2 million for the three
months ended March 31, 2000, compared with $0.1 million for the three months
ended March 31, 1999, which was insignificant. The increase was the result of
higher average balances of cash and short-term investments during the three
months ended March 31, 2000 due to the proceeds from the private placement of
14% senior secured notes and warrants and the public offering of Class A common
stock and Series B convertible redeemable preferred stock, both in the first
quarter of 2000, which exceeded expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
Interest Expense. We capitalized interest costs of $2.2 million and $4.2
million associated with its FCC license and the XM Radio system during the three
months ended March 31, 2000 and 1999, respectively. The decrease was the result
of the conversion of previously outstanding debt, offset by the incurrence of
new debt during the quarter.
Net Loss. The net loss for the three-month periods ended March 31, 2000 and
1999 was $12.7 million and $4.4 million, respectively. The increase in net
losses for the three months ended March 31, 2000, compared with the three months
ended March 31, 1999, reflects an increase in research and development expenses
and additional general and administration expenses, primarily due to increased
headcount and facility expenses in preparation for commercial operations and the
amortization of goodwill and intangibles.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Research and Development. Research and development expenses decreased to
$4.3 million in 1999, compared with $6.9 million in 1998. The decrease in
research and development expenses resulted from the completion of the
development of some of our system technology during 1998.
Professional Fees. Professional fees increased to approximately $10.0
million in 1999, compared with $5.2
20
<PAGE>
million in 1998. The increase primarily reflects additional legal, regulatory
and marketing expenses.
General and Administrative. General and administrative expenses increased to
$16.4 million in 1999, compared with $4.0 million in 1998. The increase
primarily reflects increased headcount and facility expenses to begin program
management and operations. We also commenced the amortization of our goodwill
and intangibles resulting from American Mobile's acquisition of a former
investor's interest in us during 1999. We have granted certain key executives
stock options and incurred a non-cash compensation charge of approximately $4.1
million in the fourth quarter of 1999 primarily for performance-based stock
options. We will continue to incur quarterly non-cash compensation charges over
the vesting period depending on the market value of our Class A common stock.
Interest Income. Interest income increased to $2.9 million in 1999, compared
with 1998, which was insignificant. The increase was the result of higher
average balances of cash and short-term investments during 1999 due to the
proceeds from the issuance of Series A convertible notes in the third quarter of
1999 exceeding the amounts of expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
Interest Expense. As of December 31, 1999 and 1998, we owed $0 and $140.2
million, respectively, including accrued interest, under various debt agreements
which we entered into for the purpose of financing the XM Radio system. Our
capitalized interest costs were $15.3 million and $11.8 million associated with
our FCC license and the XM Radio system during 1999 and 1998, respectively. We
expensed interest costs of $9.1 million and $0 during 1999 and 1998,
respectively. We incurred a one-time $5.5 million charge to interest due to the
beneficial conversion feature of the new American Mobile note. We also exceeded
our interest capitalization threshold by $3.6 million.
Net Loss. The net loss for 1999 and 1998 was $36.9 million and $16.2
million, respectively. The increase in net losses for 1999, compared with 1998,
primarily reflects an increase in net interest expense as discussed above and
additional general and administration expenses, primarily due to increased
headcount and facility expenses, in preparation for commercial operations and
the commencement of amortization of goodwill and intangibles.
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 some of our system technology 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, including accrued interest, 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.
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.
21
<PAGE>
Liquidity and Capital Resources
At March 31, 2000, we had a total of cash and cash equivalents of $448.0
million and working capital of $466.5 million, compared with cash, cash
equivalents and short-term investments of $120.2 million and working capital of
$94.7 million at December 31, 1999. The increases in the respective balances are
due primarily to the proceeds from the issuance of Series B convertible
redeemable preferred stock, which yielded net proceeds of $96.5 million, a
concurrent follow-on offering of Class A common stock, which yielded net
proceeds of $132.1 million, and a private placement of 14% senior secured notes
and warrants, which yielded net proceeds of $191.3 million, which in the
aggregate, exceeded capital expenditures and operating expenses for the first
quarter of 2000.
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 inception through the commencement of
commercial operations, targeted for the second quarter of 2001. Since inception,
we have raised an aggregate of $865.7 million, net of expenses, interest reserve
and repayment of debt. These funds are expected to be sufficient, in the absence
of additional financing, to cover funding needs into the fourth quarter of 2000.
We will require substantial additional funding of approximately $234.3 million
to finish building the XM Radio system and to provide working capital until we
commence commercial operations.
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. We are actively considering
possible financings, and because of our substantial capital needs we may
consummate one or more financings at any 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>
<S> <C>
Sources of Funds
Total funds raised to date............................... $ 865.7
Future capital requirements.............................. 234.3
--------
Total sources......................................... $1,100.0
========
Uses of Funds
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...... 158.2
--------
Total uses............................................ $1,100.0
========
</TABLE>
22
<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 substantial 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
. $9.2 million in equity contributions and an additional $157.8 million in
equity from converted debt instruments funded by Motient and by a former
investor who sold its investment to Motient.
. $238.7 million in net proceeds from convertible notes which were converted
to Class A common stock and Series A convertible preferred stock on October
8, 1999 as a result of our initial public offering. $75 million of these
proceeds were used to repay outstanding debt.
. $114.1 million in net proceeds from our initial public offering.
. $132.1 million in net proceeds from a Class A common stock offering in the
first quarter of 2000.
. $96.5 million in net proceeds from a Series B convertible preferred stock
offering in the first quarter of 2000.
. $191.3 million in net proceeds from a private placement on March 15, 2000,
of 325,000 units, each unit consisting of $1,000 principal amount of 14%
senior secured notes due 2010 and one warrant to purchase 8.024815 shares
of Class A common stock at $49.50 per share, excluding $123.0 million for
an interest reserve.
. $0.7 million in proceeds from the sale of stock under the employee stock
purchase plan and the exercise of stock options.
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 March 31, 2000,
$242.8 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 March 31, 2000, we had incurred
$13.8 million in costs in deploying the ground segment.
Other operating expenses and working capital requirements in the chart above
include cumulative historical operating losses through March 31, 2000 of $67.5
million.
Sources of Funds
To date, we have raised approximately $865.7 million of net proceeds, net of
expenses, interest reserve and repayment of debt. These funds have been used to
acquire our FCC license, make required payments for our system; including the
satellites, terrestrial repeater system, and ground networks, and for working
capital and operating expenses. Of the $865.7 million raised to date,
approximately $167.0 million, excluding the Class A common stock acquired as
part of our initial public offering, has been raised through the issuance of
equity to, and receipt of loans from, our current stockholder, Motient, and a
former stockholder. 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
23
<PAGE>
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 a former
stockholder $75.0 million in July 1999 to redeem an outstanding loan. We
incurred fees and expenses totaling $11.3 million in connection with these
transactions.
In October 1999, we raised $114.1 million from the issuance of 10.2 million
shares of Class A common stock at a price of $12 per share less $8.8 million in
underwriting discounts and commissions and estimated expenses. The Series A
convertible notes, together with related accrued interest, automatically
converted into 16,179,755 shares of our Class A common stock and 10,786,504
shares of our Series A preferred stock. Also, the Motient notes, together with
related accrued interest, automatically converted into 11,182,926 shares of our
Class B common stock. As a result of these transactions, substantially all of
our indebtedness converted into equity.
In the first quarter of 2000, we completed:
. a follow-on offering of 4,370,000 shares of Class A common stock, yielding
net proceeds of $132.1 million;
. a concurrent offering of 2,000,000 shares of our Series B convertible
redeemable preferred stock, which yielded net proceeds of $96.5 million;
and
. a private placement of 325,000 units, each consisting of $1,000 principal
amount of 14% senior secured notes due 2010 and one warrant to purchase
8.024815 shares of Class A common stock at $49.50 per share that provided
net proceeds of $191.3 million excluding $123.0 million for an interest
reserve.
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 inception to March 31,
2000 totaled $366.2 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 March 31, 2000, we had paid approximately $242.8 million
under our satellite contract and have recognized an additional $8.2 million in
accrued milestone payments which were paid subsequently.
Launch Insurance. Based on current industry estimates, we expect that launch
insurance for both satellites will cost approximately $50.0 million. As of March
31, 2000, 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 March 31, 2000, we had incurred costs with respect to
the terrestrial repeater buildout of $24.2 million which we paid. In August
1999, we signed a contract with LCC International, Inc., related party, calling
for payments of approximately $115.0 million for engineering and site
preparation. As of March 31, 2000, we had paid $10.4 million under this contract
and accrued an additional $2.9 million which was subsequently paid. We also
entered into a contract effective October 22, 1999, with Hughes Electronics
Corporation for the design, development and manufacture of the terrestrial
repeaters. Payments under this contract are expected to be approximately $128.0
million. As of March 31, 2000, we had paid $6.0 million under this contract, and
accrued an additional $3.0 million which was subsequently paid.
24
<PAGE>
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 March 31, 2000, we had
incurred $13.8 million with respect to the ground segment.
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. There are no further payments required 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
targeted commercial launch in the second quarter of 2001. From inception through
March 31, 2000, we have incurred total expenses of $67.5 million. Total cash
used in operating activities was $37.3 million. The difference between the loss
incurred to date and cash used in operations is principally due to $5.5 million
beneficial conversion charge, $4.9 million non- cash stock compensation charge
and $18.7 million in accounts payable and accrued expenses.
Joint Development Agreement Funding Requirements. In addition to the above
capital needs, we may require funds to pay license fees or make contributions
towards the development of the technologies used to develop a unified standard
for satellite radios under our joint development agreement with Sirius Radio.
Each party is obligated to fund one half of the development cost for such
technologies. Each party will be entitled to license fees or a credit towards
its one half of the cost based upon the validity, value, use, importance and
available alternatives of the technology it contributes. The amounts of these
fees or credits will be determined over time by agreement of the parties or by
arbitration. We cannot predict at this time the amount of license fees or
contribution payable by us or Sirius Radio or the size of the credits to us and
Sirius Radio from the use of the other's technology. This may require
significant additional capital.
Funds Required for XM Radio Following Commencement of Commercial Operations
Even after commencement of commercial operations, we expect to 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 and
subscriber acquisition expenses, programming costs and any further development
of the XM Radio system that we may undertake after operations commence.
Marketing and distribution expenses are expected to include joint advertising
and joint development with and manufacturing subsidies of certain costs of some
of our manufacturers and distribution partners. We cannot estimate accurately
the total amount of these costs and expenses, but they are expected to be
substantial.
We will have significant payment obligations after commencement of operations
under our distribution agreement with General Motors. We will pay an aggregate
of approximately $35 million in the first four years following commencement of
commercial service. After that, through 2009, we will have additional fixed
annual payments ranging from less than $35 million to approximately $130
million, aggregating approximately $400 million. In order to encourage the broad
installation of XM radios, 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. This 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, starting with 1.24 million units after four years and
thereafter increasing by the lesser of 600,000 units per year and amounts
proportionate to our share of the satellite digital radio 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."
25
<PAGE>
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.
Recent Accounting Pronouncement
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44
becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In July 1999, the Company repriced 818,339 options and FIN 44 requires that
these options be accounted for as variable from July 1, 2000 until the date the
award is exercised, is forfeited, or expires unexercised. For those options that
have vested as of July 1, 2000, compensation cost is recognized only to the
extent that the exercise price exceeds the stock price on July 1, 2000. For
those options that have not vested as of July 1, 2000, the portion of the
award's intrinsic value measured at July 1, 2000 is recognized over the
remaining vesting period. Additional compensation cost is measured for the full
amount of any increases in stock price after the effective date and is
recognized over the remaining vesting period. Any adjustment to compensation
cost for further changes in the stock price after the award vests is recognized
immediately. The effects of implementing FIN 44 may require the Company to
recognize additional non-cash compensation commencing in the third quarter of
2000.
Quantitative and Qualitative Disclosures About Market Risk
As of March 31, 2000, we do not have any derivative financial instruments and
do not intend to use derivatives. We invest our cash in short-term commercial
paper, investment-grade corporate and government obligations and money market
funds. Our long-term debt includes a fixed interest rate and the fair market
value of the debt is sensitive to changes in interest rates. We run the risk
that market rates will decline and the required payments will exceed those based
on current market rates. Under our current policies, we do not use interest rate
derivative instruments to manage our exposure to interest rate fluctuations.
Additionally, we believe that our exposure to interest rate risk is not material
to our results of operations.
26
<PAGE>
BUSINESS
Overview
We seek to become a premier nationwide provider of audio entertainment and
information programming. 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:
. $865.7 million of equity and debt proceeds raised to date, net of expenses
and repayment of debt, including an initial public offering; 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, which
converted into equity at the time of the initial public offering; and
concurrent follow-on offerings of Class A common stock and Series B
convertible redeemable preferred stock ;
. Contract with Hughes for construction and in-orbit delivery of two high-
powered satellites and long lead items for a ground spare;
. Contracts with LCC International for the design of our international
repeater network and Hughes for the design and manufacture of our
terrestrial repeaters;
. 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 Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox, Clarion and SHARP 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;
. Agreement with Lucent Digital Radio to provide coding technology for our
audio signals;
. 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, CNNfn, CNN Sports
Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting Corporation (formerly
Heftel), NASCAR, One-on-One Sports, Radio One, Salem Communications,
Sporting News, Weather Channel and USA Today;
. Engaged Premiere Radio Networks to be our advertising sales representative;
. Entered into marketing arrangements with SFX Entertainment and NASCAR;
. Signed a letter of intent with Freightliner Corporation to install XM
radios in Freightliner trucks; and
. Agreement with Sirius Radio to develop a unified standard for satellite
radios, which will facilitate the ability of consumers to purchase an
interoperable radio capable of receiving both our and Sirius Radio's
service.
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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
for Advertisers, Radio Advertising Bureau, Fall 1999 to Spring 2000).
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 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 1999).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis. In
1999, radio manufacturers sold over 29 million car radios, including 17 million
original equipment automobile radios and 11 million aftermarket automobile
radios, as well as 1.2 million aftermarket automobile CD changers. 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 3.5% 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 1999 climbed to $17.7 billion, an increase of 15% over 1998. Veronis,
Suhler & Associates projects a compound annual increase of 9.7% through 2003.
This growth rate exceeds the projected increase in advertising spending for
television, newspapers, magazines, yellow pages and outdoor advertising
(Communications Industry Forecast, 1999).
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 47
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, Spring 1999 Ratings Report, Duncan's American Radio, 1999).
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We estimate that our coast-to-coast service will reach over 98 million
listeners age 12 and over who are beyond the range of the largest 50 markets as
measured by Arbitron. Of these listeners, 36 million live beyond the largest 276
markets (Census data and Fall 1999 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 52% of all commercial radio stations use one
of only three general programming formats--country, adult contemporary and
news/talk/sports (Veronis, Schuler & Associates Communications Industry Forecast
1999). Over 71% 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, recorded music 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).
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 1999, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $29, and over 11% of TV households subscribe to satellite television at an
average monthly cost of $51 (National Cable Television Association website and
DBSdish.com website). Also in 1999, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 75 million
premium channel units, such as HBO, Showtime and Cinemax, for which they paid an
extra monthly charge on top of the basic monthly fee.
Demand for Satellite Radio Services
Several studies have been conducted demonstrating the demand for satellite
radio service.
In June 1999, we commissioned Strategic Marketing And Research Techniques
(SMART), a leading market research company and Dr. Frank M. Bass, a leading
authority on the diffusion of new products and inventor of the Bass curve, to
estimate the demand for satellite radio based on survey data and historical
information. SMART surveyed 1,800 people ages 16 and over. The study concluded
that as many as 49 million people may subscribe to satellite radio by 2012,
assuming a $9.95 monthly subscription fee and a radio price point of $150-$399
depending upon the type of car or home unit chosen. The study also anticipates
that satellite radio will grow even faster than DBS.
In December 1998, we commissioned SMART to conduct a 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. This assumed 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. This involved surveying 1,000 people via telephone
and correlating the results with the Yankelovich MONITOR study, which is 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 to receive satellite
radio and an additional $150 for a satellite radio when buying a new car.
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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.
<TABLE>
<CAPTION>
XM Radio Traditional AM/FM Radio
<S> <C> <C>
Convenience: go anywhere Virtually seamless signal coverage Local area coverage
capability in the United States
Choice: wide variety/number of Up to 100 channels with a wide Limited formats in many markets
stations variety of programming
Improved audio quality Digital quality sound Analog AM/FM quality sound
Fewer commercials Average 6-7 minutes per hour; Average 13-17 minutes per hour
some channels commercial free
More information about music Text display with title/name of No visual display
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. More
than 52% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; adult contemporary; or
news/talk/sports. 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.
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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, such as Bruce Springsteen and 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.
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
----------
Classic Rock
Classic Hard Rock
New Hard Rock
New Alternative
Classic Alternative
Soft Rock
ECLECTIC MUSIC
---------------
Contemporary Christian (Salem)
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Traditional Christian (Salem)
Blues
Traditional Jazz
Reggae/Island
World Music
American Folk
Pop Classical
Traditional Classical
Modern Jazz
Progressive/Fusion
POP MUSIC
---------
Top 20 Contemporary Hits
Disco/Dance
Broadway Show Tunes
Modern Adult Contemporary
Classic Vocalists
All Request Contemporary Hits
SPORTS
------
Sports Headlines (CNN/Sports)
Sports Talk (One-On-One Sports, Sporting News)
Sportsman Channel
Automotive (NASCAR)
COUNTRY MUSIC
-------------
Mainstream Country
Classic Country
Bluegrass/Traditional Country
All Request Country
INFORMATION
-----------
All News (USA Today)
All News (Bloomberg)
Public Affairs (C-SPAN)
Financial News (CNN fn)
News/Information (BBC World Service)
Home & Garden
Love/Relationship Line
Farm/Rural
Health/Fitness
Comedy
Audio Books
Consumer Classified
Soap Operas
For Truckers Only
Movie Soundtrack Channel
Relationship Classified (-18)
Relationship Classified (19-30)
Relationship Classified (31-50)
Relationship Classified (51+)
Lifestyles
Celebrity Gossip
Entertainment News
Game Show/Contest
URBAN MUSIC
-----------
Hip Hop/Rap (BET/Radio One)
Urban Dance Mix (Radio One)
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Classic Soul (BET/Radio One)
Gospel (BET/Radio One)
Adult Urban (BET/Radio One)
Top 20 Urban
ENVIRONMENTAL MUSIC
-------------------
Soft Jazz
New Age
Electronic
Environmental (Earth Sounds)
Beautiful Instrumentals
HISPANIC
--------
Tejano (Hispanic Broadcasting Corp.)
Caribbean (Hispanic Broadcasting Corp.)
Regional Mexican (Hispanic Broadcasting Corp.)
Rock en Espanol (Hispanic Broadcasting Corp.)
Hispanic Ballads (Hispanic Broadcasting Corp.)
Hispanic News (CNN en Espanol)
OLDIES MUSIC
------------
40's Oldies
50's Oldies
60's Oldies
70's Oldies
80's Oldies
90's Oldies
Love Songs
TALK
----
African American Talk (BET/Radio One)
Asian/Indian Talk (AsiaOne)
Christian/Family Talk (Salem)
Mandarin Talk (AsiaOne)
Conservative Talk
Liberal Talk
Senior Citizen Talk
Rock Talk
Hispanic Talk
Teen Talk
CHILDREN'S MUSIC
----------------
Pre-School
Grade School/pre-teen
SPECIAL/EVENTS
--------------
Reserved Channels
Key Elements of Our Business
We have developed a business strategy to become a premier nationwide provider
of 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 XM Radio 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 -- NASCAR
-- 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, 16-34 years old adults 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 who are 35-53 years old, seniors who are 54 years old and older,
African-Americans, Asian-Americans and Hispanics.
Future Content Arrangements. Under our agreement with Sirius Radio, all new
arrangements with providers of programming or content, including celebrity
talent, must be non-exclusive and may not reward any provider for not providing
content to the other party.
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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.
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 over 4.9 million automobiles in 1999, 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 General Motors 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, Motorola, Pioneer, Alpine, Mitsubishi and Clarion for the
development, manufacture and distribution of XM radios for use in cars and a
contract with Sony Electronics to design, manufacture and market XM radios for
the portable, home, aftermarket and original equipment manufacture car stereo
markets. 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 more than 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 and has signed a contract to build our radios for General
Motors. Sony is the leader in sales of portable CD players by a large margin and
one of the top three sellers of shelf systems. Sony has agreed to assist with
marketing XM Radios and has agreed to incentive arrangements that condition its
compensation on use of XM Radios manufactured by Sony or containing Sony
hardware. Motorola is a leading supplier of integrated electronics systems to
automobile manufacturers. Mitsubishi Electric Automotive America, together with
its parent corporation, Mitsubishi Electric Corp., is the largest Japanese
manufacturer of factory-installed car radios in the United States. Clarion is a
leader in the car audio and mobile electronics industry. Two of our other
manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together
sold over 31% of aftermarket car radios sold in the United States in 1999. We
have also signed a contract with SHARP to manufacture and distribute XM radios
for home and portable 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
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traditional electronic retailers. In addition, we plan to pursue alternative
distribution opportunities such as catalog/direct marketing, the Internet and
marketing through affinity groups.
Future Distribution Arrangements. We have signed an agreement with Sirius
Radio to develop a unified standard for satellite radios to facilitate the
ability of consumers to purchase one radio capable of receiving both our and
Sirius Radio's services. Both companies expect to work with their automobile and
radio manufacturing partners to integrate the new standard. Future agreements
with automakers and radio manufactures will specify the unified satellite radio
standard. Furthermore, future agreements with retail and automotive distribution
partners and content providers will be on a non-exclusive basis and may not
reward any distribution partner for not distributing the satellite radio system
of the other party.
In addition, we have signed a letter of intent with Freightliner Corporation
to install XM radios in Freightliner trucks.
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 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. For
instance, we have entered into an agreement with SFX Entertainment to be the
exclusive satellite radio advertiser at live concerts and sporting events
presented by, and live entertainment venues managed by, SFX.
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
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. 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
and have engaged Premiere Radio Networks to be our advertising sales
representative. 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.
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.
[GRAPHIC]
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 was successfully launched in
the 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.
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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.
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 Russian-developed rocket called the Proton
rocket. The Zenit-2 vehicle has been successfully launched 30 times in 35
attempts, for an 86% success rate. The upper stage has successfully flown in 186
flights on various rockets with five failures, for a 97% 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 also successfully launched its first commercial satellite,
DIRECTV-1R, in October 1999. In March 2000, an unsuccessful satellite launch
from the Sea Launch platform resulted in the loss of the communications payload.
Sea Launch expects to resume flight during summer 2000. Our first satellite is
scheduled for launch in November 2000. We do not expect this unsuccessful
launch to have a material effect on our business as Sea Launch has at least two
satellite launches scheduled before our November launch. Additionally, we will
have an alternative launch vehicle option in place to deal with any unexpected
circumstances. As of March 31, 2000, Sea Launch had contracts for an additional
18 launches.
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 for both satellites 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
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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.
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. We
have a contract with an experienced satellite operator 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. The contract with LCC
International is described in more detail under the caption "Certain
Relationships and Related Party Transactions--Engineering Contract with LCC
International." We have entered into a contract with Hughes Electronics
Corporation for the design, development and manufacture of the terrestrial
repeaters. The contract is described in greater detail under the caption
"Certain Relationships and Related Party Transactions--Contracts with Hughes."
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 have contracted to purchase 1,550 terrestrial repeaters and may install as
many as 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 Motient with its ARDIS
terrestrial two-way data network
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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 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. Lucent Digital Radio has agreed to provide coding technology for our
audio signals.
Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and Clarion have
signed contracts with us to develop, manufacture and distribute XM radios which
can be used in the car, and we have signed a contract with Sony Electronics to
design, manufacture and market XM radios for the portable, home, aftermarket and
original equipment manufacture car stereo markets. We have also signed a
contract with SHARP to manufacture XM radios for home and portable use.
Unified Standard for Satellite Radio. On February 16, 2000, we signed an
agreement with Sirius Radio to develop a unified standard for satellite radios
to facilitate the ability of consumers to purchase one radio capable of
receiving both our and Sirius Radio's services. The technology relating to this
unified standard will be jointly developed, funded and owned by the two
companies. In addition, we will work together with Sirius Radio to proliferate
the new standard by creating a service mark for satellite radio. This unified
standard is intended to meet FCC rules that require interoperability with both
licensed satellite radio systems.
As part of the agreements, each company has licensed to the other its
intellectual property relating to its system; the value of this license will be
considered part of each company's contribution toward the joint development. In
addition, each company has agreed to license its non-core technology, including
non-essential features of its system, to the other at commercially reasonable
rates. In connection with this agreement, the pending patent litigation against
XM Radio has been resolved.
We anticipate that it will take several years to develop radios capable of
receiving both services. At the commercial launch of our service, we anticipate
that our consumers will be able to purchase radios only capable of receiving our
service.
Both companies expect to work with their automobile and radio manufacturing
partners to integrate the new standard. Future agreements with automakers and
radio manufacturers will specify the unified satellite radio standard.
Furthermore, future agreements with retail and automotive distribution partners
and content providers will be on a non-exclusive basis.
We and Sirius Radio have also agreed to negotiate in good faith to provide
service to each other's subscribers in the event of a catastrophic failure of
the XM Radio system or the Sirius Radio system.
Competition
We expect to face competition for both listeners and advertising dollars.
Sirius Satellite Radio
Our direct competitor in satellite radio service is likely to be Sirius Radio,
the only other FCC licensee for satellite radio service in the United States.
Since October 1997, Sirius Radio's common stock has traded on the Nasdaq
National Market. Sirius Radio plans to deploy three satellites in a North
American elliptical orbit and a network of terrestrial repeaters. Sirius
Satellite Radio has announced in recent SEC filings that it has arrangements
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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 a modem, sound card
and speakers. One of the largest Internet radio providers, Broadcast.com,
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. Announcements have been made about plans by one or more companies to
deliver Internet radio to cars or portable radios using satellites. 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 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.
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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 Sirius 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 us without FCC
approval and that WorldSpace has circumvented the FCC's application cut-off
procedures. WorldSpace is no longer a stockholder in Holdings. 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.
Our license, which is held by a subsidiary wholly owned by XM, has a term of
eight years from commencement of XM's operations and may be renewed. The FCC
requires the satellite radio licensees, including us, to adhere to certain
milestones in the development of their systems, including a requirement that the
licensees begin full operation by October 2003.
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.
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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, Sirius Radio, which plans
to use a different transmission technology than we plan to use. Because of
uncertainty regarding the design of Sirius Radio's systems, we may face
difficulties initially in meeting this interoperability requirement. We have
signed an agreement with Sirius Radio to develop a unified standard for
satellite radios, but we anticipate that it will take several years to develop
the technologies necessary for radios that will be capable of receiving both our
service and Sirius Radio's service. Accordingly, we may not be able to meet the
FCC's interoperability requirements by the time we launch our commercial
operations and may need to obtain an extension of time or modification of this
requirement from the FCC. Furthermore, complying with the interoperability
requirement could make the radios more difficult and costly to manufacture.
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 Sirius
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.
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 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
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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 that are used for several other
services. These services are 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, a decision which 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 in response to concerns about the export of technology to
China by the United States defense contractors. The 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.
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, Sony, Motorola, Pioneer, Alpine, Mitsubishi,
Audiovox, Clarion and SHARP (car and home radios); STMicroelectronics
(chipsets); Lucent Digital Radio (audio coding technology); Fraunhofer Institute
(various technologies) 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 March 31,
2000. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system. We anticipate the
Fraunhofer Institute will
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continue to provide various development services for us in connection with the
design of our system.
Motient has granted us a royalty-free license with respect to certain ground
segment communications technology and antenna technology.
Motient 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 Motient 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 Motient 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.
We have signed an agreement with Sirius Radio to develop a unified standard
for satellite radios to facilitate the ability of consumers to purchase one
radio capable of receiving both our and Sirius Radio's services. The technology
relating to this unified standard will be jointly developed, funded and owned by
the two companies. As part of the agreement, each company has licensed to the
other its intellectual property relating to the unified standard and to its
system; the value of this license will be considered part of its contribution
toward the joint project. In addition, each company has agreed to license its
non-core technology, including non-essential features of its system, to the
other at commercially reasonable rates. Each party will be entitled to license
fees or a credit towards its obligation to fund one half of the development cost
of the technologies used to develop a unified standard for satellite radios. The
amount of the fees or credit will be based upon the validity, value, use,
importance and available alternatives of the technology each contributes and
will be determined over time by agreement of the parties or by arbitration. We
cannot predict at this time the amount of license fees, if any, payable by or to
XM or Sirius Radio or the size of the credits to XM and Sirius Radio from the
use of their technology. This may require additional capital, which could be
significant.
Prior Litigation with Sirius Radio; Technology License
On January 12, 1999, Sirius 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 were infringing or would
infringe three patents assigned to Sirius Radio. In its complaint, Sirius Radio
sought money damages to the extent we manufactured, used or sold any product or
method claimed in their patents and injunctive relief. This suit was resolved in
February 2000 accordance with the terms of a joint development agreement between
us and Sirius Radio in which both companies agreed to develop a unified standard
for satellite radios and license our respective intellectual property, including
the patents that were the subject of the suit, for use in this joint
development. If this agreement is terminated before the value of the licenses
has been determined due to our failure to perform a material covenant of
obligation, then this suit could be refiled.
If this litigation were recommenced, we believe based on the planned design of
our system, our knowledge of the differences between our system and the claims
of the Sirius Radio patents and on advice we have previously received from our
patent counsel, that a court would find that we have not and will not infringe
any Sirius Radio patents. However, the litigation could harm us, even if we were
successful. It would divert our management's attention and might make it more
difficult for us to raise financing or enter into other agreements with third
parties. In addition, even if we prevailed, the Sirius Radio litigation might
prevent us from moving forward with the development of the XM Radio system in a
timely manner. The Sirius Radio patents involved in the litigation relate to
certain aspects of signal and reception methodologies that may be employed by a
satellite radio system. If this suit were refiled and we lost all or part of
this litigation, we could become liable to Sirius 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, Sirius 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.
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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 1, 2000, we had 101 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.
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 October 31, 2000. We have entered into a ten year lease of
approximately 120,000 square feet of additional space in Washington, D.C. to be
used as our headquarters office, as well as for our studio and production
facilities.
Legal Proceedings
Except for 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.................. 50 Chairman of the Board of Directors
Hugh Panero...................... 44 President, Chief Executive Officer and Member, Board of Directors
Nathaniel A. Davis(1)............ 46 Member, Board of Directors
Thomas J. Donohue(2)............. 61 Member, Board of Directors
Randall T. Mays (1)(2)........... 34 Member, Board of Directors
Randy S. Segal (1)............... 44 Member, Board of Directors
Jack Shaw (2).................... 61 Member, Board of Directors
Dr. Rajendra Singh (2)........... 45 Member, Board of Directors
Ronald L. Zarrella............... 50 Member, Board of Directors
Lee Abrams....................... 48 Senior Vice President, Chief of Programming
Stephen Cook..................... 45 Senior Vice President, Sales and Marketing
Steven P. Gavenas................ 44 Senior Vice President, New Business Development
Dr. Stelios Patsiokas............ 46 Senior Vice President, Technology
Heinz Stubblefield............... 42 Senior Vice President, Chief Financial Officer
Joseph M. Titlebaum.............. 37 Senior Vice President, General Counsel and Secretary
John R. Wormington............... 55 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 Motient, a position
he has held since March 1998. Mr. Parsons joined Motient 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.
47
<PAGE>
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.
Nathaniel A. Davis has served as a member of the board of directors since
October 1999. Mr. Davis is President, Chief Operating Officer and a director of
Nextlink Communications Inc. From December 1998 to December 1999, he was
Executive Vice President of Nextel Communications where he had responsibility
for the technical and engineering operations of Nextel's nationwide switching
and wireless communications network, billing and information technology 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
Chief Financial Officer of MCI Telecommunications. Mr. Davis serves on the board
of directors of Capital Management Corporation.
Thomas J. Donohue has served as a member of the board of directors since
October 1999. 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. He serves on the board of
directors of Union Pacific Corporation, Sunrise Assisted Living Corporation,
Marymount University and the Hudson Institute.
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 Motient'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 Corporate Senior Executive Vice President-Enterprise Sector of Hughes
Electronics Corporation and served as Chief Executive Officer and Chairman of
Hughes Network Systems, Inc. from 1987 and 1988, respectively, through January
2000. Mr. Shaw is a member of the Hughes Electronics Corporation Executive
Committee. Mr. Shaw has been a director of Motient since July 1996 and has
previously served as Chairman of Motient'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. He is also a director of Aether System, Inc., a provider
of wireless services and systems.
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.
Lee Abrams has served as Senior Vice President, Chief of Programming since
June 1998. Mr. Abrams is a
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<PAGE>
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.
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 Procter & Gamble and has more
than 15 years of experience with launching and marketing new consumer products.
Steven P. Gavenas has served as Senior Vice President, New Business
Development since December 1999. Previously, from June 1996 to November 1999,
Mr. Gavenas held several positions in WorldSpace International, including VP of
Marketing, EVP Corporate Strategy and EVP Commercial Operations. Before joining
WorldSpace, from September 1989 to May 1996 Mr. Gavenas was a management
consultant with McKinsey and Company, Inc., an international strategy consulting
firm.
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 Our Board of Directors
Our board of directors consists of nine members, four of whom are selected by
Motient, including our Chairman and our President and Chief Executive Officer,
and one of whom is selected by each of General Motors, Clear Channel and the TCM
Group, which is owned by Columbia Capital, Telcom Ventures and Madison Dearborn
Partners. The remaining two are independent directors. One of the independent
directors must be approved by Motient, and one must be approved by a majority of
the interests held by General Motors, Clear Channel and the TCM Group. Following
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 will be selected by Motient, one will be selected by each of General
Motors, Clear Channel and the TCM Group, one will be our President and Chief
49
<PAGE>
Executive Officer, and the remaining two will be independent directors of
recognized industry experience and stature whose nominations must be approved by
Motient and a majority of the interests held by General Motors, Clear Channel
and the TCM Group. General Motors, Clear Channel and the TCM Group also have
observation rights at meetings of our board of directors. The foregoing board
and observation rights are subject to these entities, as parties to a
shareholders' agreement, maintaining their original investment or certain
minimum share percentages in us.
Terms of Directors
All members of our board of directors hold office until the next annual
meeting of stockholders and the election and qualification of their successors.
Board Committees
Our board of directors has established compensation and audit committees. Each
committee reports to the board of directors. The compensation committee,
currently consisting of Messrs. Singh, Shaw, Donohue and Mays, 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 Messrs. Mays and Davis 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
Our independent directors (as determined under our shareholders' agreement)
receive retainer fees of $2,500 per quarter. In addition, these independent
directors receive $2,000 for every meeting attended in person and $500 for every
meeting attended telephonically. Independent directors 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 26,757 shares of our Class A
common stock at $9.52 per share. These options are immediately exercisable and
have ten-year terms. Mr. Zarella has elected to forego receipt of these options.
Chairman of the Board. On July 16, 1999, we issued to Mr. Parsons 14,716
shares of Class A common stock in compensation for his service to the company.
We will have a right to repurchase these shares for $9.52 per share if Mr.
Parsons' service with the company ends prior to July 16, 2000. In addition, we
granted Mr. Parsons a ten-year option to purchase 267,570 shares of our Class A
common stock at an exercise price of $9.52 per share. 160,542 will vest one year
after the grant, and 53,514 shares will vest in each of the two years
thereafter. The vesting of 53,514 of the 160,542 shares that vest 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, 1999 exceeded
$100,000.
50
<PAGE>
Summary Compensation Table
--------
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------- --------------
Class A Shares
Name and Principal Position(s) Year Salary Bonus Other Underlying Options
------------------------------ ---- ------ ----- ----- ------------------
<S> <C> <C> <C> <C> <C>
Hugh Panero
President and Chief Executive Officer ............. 1998 $163,333 $ 65,333 $293,060(1) 267,570
1999 286,533 125,000 1,354 100,000
Lee Abrams
Senior Vice President, Chief of Programming ....... 1998 125,417 27,413 30,989(2) 53,514
1999 220,000 56,100 47,900 50,000
Stelios Patsiokas
Senior Vice President, Technology ................. 1998 43,077 16,710 59,966(3) 53,514
1999 211,700 84,680 213 50,000
Heinz Stubblefield
Senior Vice President, Chief Financial Officer..... 1998 116,667 60,000 -- 53,514
1999 208,000 62,400 1,589 50,000
Stephen Cook
Senior Vice President, Sales and Marketing ........ 1998 -- - -- --
1999 205,960 70,082 51,927(4) 103,514
</TABLE>
(1) Includes a signing bonus of $200,000.
(2) Includes a signing bonus of $28,000.
(3) Includes a signing bonus of $59,966.
(4) Includes a signing bonus of $50,000.
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 our 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 267,570 shares of our Class A common stock
at an exercise price of $9.52 per share. This option vests at the rate of
. 107,028 shares in three equal annual installments beginning on the first
anniversary of the grant; and
. 160,542 shares in three equal annual installments beginning on the first
anniversary of the grant based on achievement of performance objectives.
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.
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<PAGE>
His employment agreement restricts Mr. Panero from engaging in any business in
the United States that resembles or competes with us for a period of one year
following termination of his employment.
We also have agreements with the following named executive officers:
Name Title Effective Date
---- ----- --------------
Lee Abrams ............. Senior Vice President, Chief June 8, 1998
of Programming
Stephen Cook ........... Senior Vice President, Sales February 22, 1999
and Marketing
Stelios Patsiokas ...... Senior Vice President, October 19, 1998
Technology
Heinz Stubblefield ..... Senior Vice President, Chief June 1, 1998
Financial Officer
Mr. Stubblefield's agreement is for a term of three years, which will
automatically renew 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' and Mr. Cook's agreement have 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,
up to 35% of annual base salary for Mr. Cook and up to 30% of annual base salary
for Messrs. Stubblefield and Abrams. The agreement for Mr. Patsiokas and Mr.
Cook provide 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, Cook, Patsiokas and Stubblefield a
10-year option to purchase 53,514 shares of our Class A common stock at an
exercise price of $9.52 per share. Each of these options vests in three equal
annual installments beginning on the first anniversary of the grant.
Shares Award Plan
General
In 1998, our board of directors adopted a 1998 Shares Award Plan for
employees, consultants and non-employee directors. The plan is administered by
the board's compensation committee.
We can grant options, stock appreciation rights, restricted stock or
phantom shares under the plan. 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 5,000,000 shares. We may not grant awards of more than 267,570 shares of
our common stock to any participant in any calendar year. 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 of the company 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.
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 our assets, then the holder of an outstanding award will have the right
immediately prior to the effective date of the transaction to exercise such
awards without regard to any installment provision regarding exercisabilty. All
such awards which are not so exercised will be forfeited as of the effective
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time of the transaction. If we have had a change of control, 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 us 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 by us to named executive officers under the 1998 Shares Award Plan in
1999.
<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 Expiration Date Term
---- ---------- ---------- -------- ----------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
-------- ----------
Hugh Panero.......... 100,000 6.8% $12.00 October 8, 2009 $754,674 $1,912,491
Lee Abrams........... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
Stephen Cook......... 53,514 3.6 9.52 February 22, 2009 320,392 811,937
50,000 3.4 12.00 October 8, 2009 377,337 956,245
Stelios Patsiokas.... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
Heinz Stubblefield... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
</TABLE>
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares of
Class A common stock subject to exercisable and unexercisable stock options held
as of December 31, 1999 by each of our named executive officers. Value at fiscal
year end is measured as the difference between the exercise price and the fair
market value at close of market on December 31, 1999, which was $38.13.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Number of Securities Underlying Value of Unexercised
Shares Unexercised Options at In-the-Money Options
Acquired on Value December 31, 1999 December 31, 1999
----------------- -----------------
Name Exercise Realized Exercisable(#) Unexercisable(#) Exercisable(#) Unexercisable(#)
---- ----------- -------- -------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Hugh Panero .......... -- -- 89,190 278,380 2,551,280 7,715,060
Lee Abrams ........... -- -- 17,838 85,676 510,256 2,326,762
Stephen Cook ......... -- -- -- 103,514 -- 2,837,018
Stelios Patsiokas .... -- -- 17,838 85,676 510,256 2,326,762
Heinz Stubblefield ... -- -- 17,838 85,676 510,256 2,326,762
</TABLE>
Employee Stock Purchase Plan
We have an employee stock purchase plan that provides for the issuance of
300,000 shares of Class A common stock. All employees whose customary employment
is more than 20 hours per week and for more than five months in any calendar
year are eligible to participate in the stock purchase plan, provided that any
employee who would own five percent or more of our total combined voting power
immediately after an offering date under the plan is not eligible to
participate. Eligible employees must authorize us to deduct an amount from their
pay during offering periods established by the compensation committee. The
purchase price for shares under the plan will be determined by the compensation
committee but may not be less than 85% of the lesser of the market price of the
common stock on the first or last business day of each offering period.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Contracts with Hughes
Our Satellite Purchase Contract for In-Orbit Delivery, dated March 20,
1998, and amended and restated on July 21, 1999, with Hughes Space and
Communications 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 March 31, 2000, we have paid $242.8 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 $16.0 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 $6.0 million in addition to the contract price.
We have entered into a contract with Hughes Electronics Corporation for the
design, development and manufacture of the terrestrial repeaters, which will
supplement our high-powered satellite signals. Production of the repeaters is
expected to begin in July 2000 and be completed in February 2001. Payments under
this contract are expected to be approximately $128.0 million. As of March 31,
2000, we have paid $6.0 million under this contract.
The contract provides that we may reduce the number of repeaters ordered
under the contract to a specified minimum order or terminate the terrestrial
repeater contract altogether, in which case we are required to pay certain
amounts to Hughes Electronics depending on the date of the reduction or
termination and other factors. We have agreed to make certain incentive payments
to Hughes Electronics for timely delivery of the terrestrial repeaters. In the
event of late delivery of the terrestrial repeaters, we are entitled to
specified liquidated damages. In certain
54
<PAGE>
events of default by Hughes Electronics, we may terminate the contract and would
be entitled to have the work completed by a third party plus certain costs
resulting from the termination.
Hughes Space and Communications is owned by Hughes Electronics Corporation.
On January 13, 2000, Hughes Electronics announced its intention to sell Hughes
Space and Communications to Boeing. We believe this sale, if consummated, would
not have any material effect on us. Motient, whose single largest stockholder on
a fully diluted basis is Hughes Communications, owns approximately 26% of the
outstanding shares of our common stock, or 33% assuming no conversion of
preferred stock. General Motors, which owns Hughes Electronics and with whom we
have a distribution agreement as described below, owns a 9% equity interest in
Holdings and an additional 9% equity interest in Holdings is held by DIRECTV, a
direct subsidiary of Hughes Electronics and an indirect subsidiary of General
Motors.
Distribution Agreement with General Motors 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 Sirius 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, 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,
starting with 1.24 million units after four years and thereafter increasing by
the lesser of 600,000 units per year and amounts proportionate to our share of
the satellite digital radio 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.
In February 2000, we signed an agreement with Sirius Radio to develop a
unified standard for satellite radios, which will facilitate the ability of
consumers to purchase one radio capable of receiving both our and Sirius Radio's
services. In accordance with the terms of the agreement, we expect to work with
General Motors to integrate the new standard under the terms of our distribution
agreement with General Motors. Our agreement with General Motors provides that
if General Motors elects to install radios which are capable of receiving
broadcasts from 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
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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 $115.0 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor. As
of March 31, 2000, we have paid $10.4 million under this contract.
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 program management radio
frequency engineering, site acquisition, architectural and engineering design,
zoning, regulatory services, network management testing and construction and
interim system 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 our principal shareholders, Telcom-XM
Investors L.L.C. See "Principal Stockholders."
Technology License Agreement with Motient
Motient 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 Motient the right to
use such technology. We have granted to Motient 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 Motient'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 Agreement with Motient
We have a technical services agreement with Motient under which Motient
provides us with certain technical, engineering, marketing and strategic
planning services. We pay Motient at specified hourly rates, which we believe
approximate rates available from unrelated parties. On or after our commencement
of commercial operations, Motient or we may terminate the technical services
agreement at any time.
Other Transactions with Motient
In 1997, Motient contributed $143,000 for us to establish our original
application for the FCC license. Also in
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1997, we received $1.5 million as a capital contribution from Motient. During
1998, Motient incurred general and administrative costs and professional fees
for us and established an intercompany balance of $458,000. During June 1999,
Motient provided us a line of credit under which we drew $250,000. This was
repaid, and the line of credit terminated, in July 1999.
Registration Rights Agreement
We have a registration rights agreement with Motient, Baron Asset Fund and
the former holders of our Series A subordinated convertible notes. 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. Motient 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 operations, parties to the registration rights agreement may request
registration of at least $25.0 million of our 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
an offering for high yield debt.
Shareholders' Agreement
We have entered into a shareholders' agreement with Motient, Baron Asset
Fund and the former holders of our Series A subordinated convertible notes,
containing, among others, the provisions described below.
Conversion of Shares of Class B Common Stock to Class A Common Stock
Motient owns all of the Class B common stock, which is convertible into
Class A common stock on a one for one basis at any time at Motient's discretion.
In addition, under the shareholders' agreement, 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 Motient. This
conversion will not be effected, however, if the FCC does not approve the
transfer of control of XM Radio from Motient to a diffuse group of stockholders.
Restrictions on Transfer of Shares of our Securities
Except for affiliated transactions, Motient 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 October 8, 1999, which was the date of
the closing of our initial public offering. Shares of our Class B common stock,
all of which are currently owned by Motient, are transferable only upon
conversion into shares of Class A common stock.
Non-Competition
Motient has agreed not to compete with XM Radio in the satellite radio
business in the United States for so long as Motient holds 5% of our common
stock and for a period of three years following any transfer which results in
Motient owning less than 5% of our common stock.
Governance
The parties to the agreement are entitled to designate directors to our
board of directors and to observe
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meetings of the board of directors. We have described these provisions
previously under the caption ''Management--Provisions Governing the Board of
Directors.'' In addition, the parties have agreed to take all necessary actions
to give effect to the agreement including to prevent any conflict between the
agreement and our governing instruments.
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 have entered 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.
July 1999 Transactions
We engaged in a series of transactions in July 1999 in which WorldSpace,
Inc. ceased to be an owner of us, Motient became the owner of our 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 Consolidated Financial Statements.
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PRINCIPAL STOCKHOLDERS
The following table and the accompanying notes set forth certain
information concerning the beneficial ownership of our Class A common stock 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 March 31, 2000, there were 32,179,581 shares of our Class A common
stock outstanding and 16,557,262 shares of our Class B common stock outstanding,
of which 16,557,262 shares were owned by Motient. On March 8, 2000, Baron
converted all of its shares of Class B common stock into an equal number of
shares of Class A common stock. As of March 31, 2000, there were 16,659,756
shares of our Series A convertible preferred stock outstanding, all of which was
owned between General Motors and DIRECTV. The Class B common stock and the
Series A convertible preferred stock are each convertible into Class A common
stock on a one-for-one basis. Class B common stock is entitled to three votes
for each share. Share ownership in the table below includes shares we may issue
if certain stockholders exercise outstanding options within 60 days after March
31, 2000.
Number of Class A Percentage of
Shares Total Class A
Beneficially Owned Shares
------------------ -------------
Beneficial Owners of More Than 5%:
Motient Corporation 16,757,262(1) 34.3%
10802 Parkridge Boulevard
Reston, VA 20191-5416
General Motors Corporation 11,106,504(2) 25.8%
100 Renaissance Center
3031 West Grand Boulevard
PO Box 100
Detroit, MI 48265-1000
DIRECTV Enterprises, Inc. 5,553,252(3) 14.8%
2230 E. Imperial Highway
El Segundo, CA 90245
Clear Channel Investments, Inc. 8,329,877 25.9%
200 Concord Plaza, Suite 600
San Antonio, TX 78216
Columbia XM Radio Partners, L.L.C. 2,776,626 8.6%
201 N. Union Street, Suite 300
Alexandria, VA 22314
Telcom-XM Investors, L.L.C. 2,776,626(4) 8.6%
211 North Union Street, Suite 300
Alexandria, VA 22314
Madison Dearborn Capital Partners III, L.
Madison Dearborn Special Equity III, L.P.
Special Advisors Fund I, LLC 2,776,626 8.6%
3 First National Plaza, Suite 3800
Chicago, IL 60602
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<TABLE>
<CAPTION>
Percentage
Number of of Total
Class A Shares Class A
Name Beneficially Owned Shares
---- ------------------ ------
<S> <C> <C>
Directors and Named Executive Officers
Gary M. Parsons 113,906(5) *
Hugh Panero 178,380(6) *
Randall T. Mays 26,757 *
Randy S. Segal 26,757 *
Jack Shaw 26,757 *
Rajendra Singh 26,757(4) *
Ronald L. Zarrella --
Nathaniel Davis 26,757 *
Thomas R. Donohue 26,757 *
Lee Abrams 35,779(7) *
Stephen Cook 22,121(8) *
Stelios Patsiokas 20,148(8) *
Heinz Stubblefield 38,096(7) *
All directors and executive officers as a group (16 persons) 606,484(9) 1.9%
</TABLE>
----------------
* Less than 1%.
(1) Includes 16,557,262 shares issuable upon conversion of Class B common stock.
(2) Includes 10,786,504 shares issuable upon conversion of Series A convertible
preferred stock, 5,393,252 of which are owned by DIRECTV.
(3) Includes 5,393,252 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. Dr. Singh disclaims
beneficial ownership of the shares of Class A common stock beneficially
owned by Telcom-XM Investors, L.L.C.
(5) Does not include 178,380 shares issuable upon exercise of options which are
not exercisable within 60 days. A trust for the benefit of Mr. Parsons'
minor children has acquired a minority membership interest in each of
Columbia XM Radio Partners, L.L.C. and Telcom-XM Investors, L.L.C. and a
minority participatory interest in each of Madison Dearborn Capital Partners
III, L.P. and Madison Dearborn Special Equity III, L.P. Mr. Parsons
disclaims beneficial ownership of these interests.
(6) Does not include 189,190 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) Does not include 67,838 shares issuable upon exercise of options which are
not exercisable within 60 days.
(8) Does not include 85,676 shares issuable upon exercise of options which are
not exercisable within 60 days.
(9) Does not include 1,125,668 shares issuable upon exercise of options which
are not exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 180,000,000 shares of Class A common
stock, $.01 par value per share, 30,000,000 shares of Class B common stock, $.01
par value per share, 30,000,000 shares of Class C common stock, $.01 par value
per share, 15,000,000 shares of Series A convertible preferred stock, $.01 par
value per share and 3,000,000 shares of 8.25% Series B convertible redeemable
preferred stock, $.01 par value per share. The following summary description of
our capital stock is subject to our Restated Certificate of Incorporation and
Restated Bylaws and the Delaware General Corporation Law.
Common Stock
As of June 1, 2000, there were 32,241,899 shares of Class A common stock
outstanding and 16,557,262 shares of Class B common stock outstanding.
Class A Common Stock
Holders of our 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 the 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
convertible preferred stock may be entitled.
Holders of our Class A common stock have no preemptive, redemption or sinking
fund rights.
Class B Common Stock
Our Class B common stock has the same rights as our Class A common stock
except that our Class B common stock is entitled to three votes for each share.
Shares of our 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 our Class C common stock are entitled to the same rights as holders
of Class A common stock except that the holders of our Class C common stock are
not entitled to vote on any matter submitted for stockholder approval.
Preferred Stock
Our 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 of our preferred stock may rank senior to
our common stock for the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any shares of our preferred
stock may have class or series voting rights. Issuances of our 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 our 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 could thus be issued quickly with terms calculated to
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delay or prevent a change of control or to make the removal of management more
difficult. In certain circumstances, this could have the effect of decreasing
the market price of our common stock.
Series A Convertible Preferred Stock
Our Series A convertible preferred stock has the following characteristics:
. a right to receive dividends and distributions ratably with the holders of
our common stock;
. a $9.52 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 our 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 our Series A convertible preferred stock
will be convertible into the kind and number of shares of 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 our Class A common stock
immediately prior to the recapitalization.
As of March 31, 2000, there are 10,786,504 shares of our Series A convertible
preferred stock outstanding.
Series B Convertible Preferred Stock
General. Each share of Series B convertible preferred stock has a "liquidation
preference" of $50, which is the amount a holder of one share of Series B
convertible preferred stock would be entitled to receive if we were liquidated.
We will pay cumulative dividends on the Series B convertible preferred stock at
a rate per annum equal to 8.25% of the liquidation preference per share
quarterly in arrears commencing May 1, 2000. Dividends will be payable in cash
or, at our option, in shares of Class A common stock, or a combination thereof.
Optional Conversion by Holders. Holders of the Series B convertible preferred
stock have the right to convert some or all of their shares of Series B
convertible preferred stock into shares of our Class A common stock, unless we
have already redeemed them. The conversion price is $40 per share. At that
price, holders of the Series B convertible preferred stock would receive 1.25
shares of our Class A common stock for each $50 liquidation preference of Series
B convertible preferred stock. Holders of Series B convertible preferred stock
are not entitled to any accrued dividends upon conversion. The conversion price
will be adjusted if specified dilutive events occur.
Upon the occurrence of a change of control (as defined in the certificate of
designation governing the Series B convertible preferred stock), holders will
have the option, during the period commencing on the date that the applicable
change of control notice is mailed to holders and ending at the close of
business on the 45th day thereafter, to convert all, but not less than all, of
their shares of Series B convertible preferred stock into Class A common stock
at a conversion rate equal to $50 (the liquidation preference per share of
Series B convertible
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preferred stock) divided by a special conversion price which will be based upon
a formula dependent upon the market value of our Class A common stock.
Redemption of the Series B Convertible Preferred Stock by Holdings.
Beginning on February 3, 2003, we will have the right to redeem some or all of
the Series B convertible preferred stock at a redemption price equal to 105.775%
of the liquidation preference, or $52.90 per share, plus accrued dividends, if
any, to the date of redemption. The redemption price will decline until it
equals 100.0% on February 2, 2010, and will remain at 100.0% thereafter until
redeemed. We may pay this redemption price in cash or shares of our Class A
common stock (subject to some restrictions) or a combination of the two.
We will be required to redeem any Series B convertible preferred stock still
outstanding on February 1, 2012, at a redemption price equal to 100% of the
total liquidation preference plus accrued dividends, if any, to that date. We
must pay this redemption price in shares of our Class A common stock.
Method of Dividends and Redemption Payments. We may, at our option, make any
dividend payments due on our Series B convertible preferred stock in cash, by
delivery of freely tradeable shares of our Class A common stock or through any
combination of cash and freely tradeable shares of our Class A common stock. Any
optional redemption payments on our Series B convertible preferred stock must be
paid in cash. Mandatory redemption payments due on the Series B convertible
preferred stock must be paid by delivery of shares of Class A common stock.
Shares of Class A common stock issued to make dividend or mandatory redemption
payments on the Series B convertible preferred stock shall be valued at 95% of
the average market value (as defined in the certificate of designation) if such
shares of Class A common stock are freely tradeable, or 90% of the average
market value if such shares of Class A common stock are not freely tradeable.
Ranking. The Series B convertible preferred stock ranks:
. junior to all our existing and future indebtedness and other obligations,
. junior to any of our capital stock or preferred stock which provides that
it be ranked senior to the Series B convertible preferred stock and which
receives the requisite approval of the holders of Series B convertible
preferred stock,
. equal with any of our preferred stock issued in the future which provides
that it be ranked equal with the Series B convertible preferred stock, and
. senior to all Series A convertible preferred stock and all shares of our
other capital stock, unless the other stock expressly provides otherwise.
Limited Voting Rights. Holders will generally not be entitled to any voting
rights, unless we have not declared or paid dividends on the Series B
convertible preferred stock for a total of six quarterly periods.
Trading. We have not applied and do not intend to apply for the listing of the
Series B convertible preferred stock on any securities exchange.
Warrants
In February 2000, we issued a warrant to Sony exercisable for shares of our
Class A common stock. The warrant will vest at the time that we attain our
millionth customer, and the number of shares underlying the warrant will be
determined by the percentage of XM Radios that have a Sony brand name as of the
vesting date. If Sony achieves its maximum performance target, it will receive
2% of the total number of shares of our Class A common stock on a fully-diluted
basis upon exercise of the warrant. The exercise price of the Sony warrant will
equal 105% of fair market value of our Class A common stock on the vesting date,
determined based upon the 20-day trailing average.
In March 2000, we and XM completed a unit offering, which units included the
warrants registered by the
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registration statement of which this prospectus is a part and which are
discussed below under the caption "Description of the Warrants."
Certain Provisions of Our Certificate of Incorporation and Bylaws
Certificate of Incorporation
Our certificate of incorporation permits our 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. We 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 us by means of a proxy contest,
tender offer, merger or otherwise.
Federal communications law prohibits the holding of a broadcast license by a
corporation of which more than 20.0% of the capital stock is owned directly or
beneficially by aliens. Where a corporation controls another entity that holds
such an FCC license, such corporation may not have more than 25.0% of its
directors as aliens and may not have more than 25.0% of its capital stock owned
directly or beneficially by aliens, in each case, if the FCC finds that the
public interest would be served by such prohibitions. Failure to comply with
these requirements may result in the FCC issuing an order requiring divestiture
of alien ownership to bring a company into compliance with federal law. In
addition, fines or a denial of renewal, or revocation of the license are
possible. Although we are not currently subject to these foreign ownership
restrictions, in order to provide flexibility should our regulatory status
change our restated certificate of incorporation permits the redemption of
common stock from stockholders where necessary to protect our license.
Bylaws
As currently in effect, our bylaws require that the number of directors be as
provided in our shareholders' agreement. See "Management--Provisions Governing
the Board of Directors." Our 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 our
shareholders' agreement. If there is a conflict between the bylaws and the
shareholders' agreement, the latter will govern.
Stockholder Actions
Except as otherwise expressly provided in our certificate of incorporation or
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. Our bylaws establish special advance notice procedures for stockholders
who wish to make director nominations or bring other business before a
stockholder 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.
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Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that directors 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, we and our 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 their
expense, for the benefit of the company and of any person to be indemnified by
the company.
Section 203 of the Delaware General Corporation Law applies to us. This
section will prohibit us from engaging in a business combination with an
interested stockholder. This restriction will apply for three years after the
date of the transaction in which the person became an interested stockholder,
unless the business combination is approved in a prescribed manner. A business
combination includes (1) mergers, (2) asset sales and (3) other transactions
resulting in a financial benefit to an interested stockholder. Generally, an
interested stockholder is a person who, together with affiliates and associates,
owns, or within three years did own, 15% or more of our voting stock. Section
203 could delay, defer or prevent a change in control of XM Radio. It might also
reduce the price that investors might be willing to pay in the future for shares
of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock and the
warrants is BankBoston, N.A.
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DESCRIPTION OF THE WARRANTS
The warrants were issued pursuant to a warrant agreement dated March 15, 2000,
between us and the United States Trust Company of New York as warrant agent. The
following summary of certain provisions of the warrant agreement is not complete
and is qualified in its entirety by reference to the warrant agreement. A copy
of the warrant agreement may be obtained by contacting XM Satellite Radio
Holdings Inc., at 1250 23rd Street, N.W. Suite 57, Washington, D.C. 20037-1100,
Attention: General Counsel.
General
Each warrant, when exercised, will entitle the holder thereof to purchase
8.024815 fully paid and non-assessable shares of our Class A common stock at an
exercise price of $49.50 per share. The exercise price and the number of shares
of our Class A common stock issuable upon exercise of a warrant are both subject
to adjustment in certain circumstances described below. The warrants will
entitle the holders thereof to purchase shares of our Class A common stock
representing an aggregate beneficial ownership of approximately 3.9% of our
issued and outstanding common stock on a diluted basis as described below under
"--Amendment."
The warrants may be exercised at any time on or after September 16, 2000.
Unless earlier exercised, the warrants will expire on March 15, 2010. We will
give notice of expiration not less than 90 nor more than 120 days before the
expiration date to the registered holders of the then outstanding warrants. If
we fail to give the notice when required, the warrants will not expire until 90
days after notice is given. The warrants will not trade separately from the
senior secured notes until the separation date.
In order to exercise all or any of the warrants, the holder is required, in
the case of a definitive warrant, to surrender to the warrant agent the
certificate representing the warrants to be exercised, and in the case of a
global warrant, to comply with the applicable procedures set forth in the
warrant agreement in each case with the accompanying form of election to
purchase properly completed and executed, and to pay in full the exercise price
for each share of our Class A common stock or other securities issuable upon
exercise of the warrants. The exercise price may be paid:
(i) in cash or by certified or official bank check or by wire transfer to
an account that we have designated for that purpose; or
(ii) without the payment of cash, by reducing the number of shares of our
Class A common stock that would be obtainable upon the exercise of a warrant
and payment of the exercise price in cash so as to yield a number of shares of
our Class A common stock upon the exercise of the warrant equal to the product
of (a) the number of shares of our Class A common stock for which the warrant
is exercisable as of the date of exercise (if the exercise price were being
paid in cash) and (b) the cashless exercise ratio.
The cashless exercise ratio shall equal a fraction, the numerator of which is
the excess of the current market value per share of our Class A common stock on
the exercise date over the exercise price per share as of the exercise date and
the denominator of which is the current market value per share of our Class A
common stock on the exercise date. When the holder thereof surrenders a warrant
certificate representing more than one warrant in connection with the option to
elect a cashless exercise, the number of shares of our Class A common stock
deliverable upon a cashless exercise shall be equal to the number of shares of
our Class A common stock issuable upon the exercise of warrants that the holder
specifies are to be exercised pursuant to a cashless exercise multiplied by the
cashless exercise ratio. All provisions of the warrant agreement shall be
applicable with respect to a surrender of a warrant certificate pursuant to a
cashless exercise for less than the full number of warrants represented thereby.
When the holder thereof surrenders the warrant certificate and pays the exercise
price, we will deliver or cause to be delivered to such holder, or upon such
holder's written order, a stock certificate representing 8.024815 shares of our
Class A common stock for each warrant evidenced by such warrant certificate,
subject to adjustment as described herein. If the holder exercises less than all
of the warrants evidenced by a warrant certificate, a new warrant certificate
will be issued to such holder for the remaining number of warrants. No
fractional shares of our Class A common stock will be issued upon exercise of
the warrants. At the time of exercise, we will pay the holder an amount in cash
equal to the current market value of any such fractional share of our Class A
common stock.
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If a holder's warrants are not exercised such holder will not be entitled to
receive dividends, to vote, to consent, to exercise any preemptive rights or to
receive notice as a stockholder in respect of any stockholders meeting for the
election of our directors or any other purpose, or to exercise any other rights
whatsoever as a stockholder.
Certificates for warrants will be issued in fully registered form only. No
service charge will be made for registration of transfer or exchange upon
surrender of any warrant certificate at the office of the warrant agent
maintained for that purpose. We may require payment of a sum sufficient to cover
any tax or other governmental charge that may be imposed in connection with any
registration of transfer or exchange of warrant certificates.
In the event a bankruptcy or reorganization is commenced by or against us, a
bankruptcy court may hold that unexercised warrants are executory contracts that
may be subject to our rejection with approval of the bankruptcy court. As a
result, a holder may not, even if sufficient funds are available, be entitled to
receive any consideration or may receive an amount less than such holder would
be entitled to receive if such holder had exercised such holder's warrants
before the commencement of any such bankruptcy or reorganization.
Adjustments
The number of shares of our Class A common stock issuable upon the exercise of
the warrants and the exercise price will be subject to adjustment in certain
circumstances, including:
(i) our payment of dividends and other distributions on our Class A
common stock payable in common stock or other equity interests;
(ii) subdivisions, combinations and certain reclassifications of our Class
A common stock;
(iii) the issuance to all holders of our Class A common stock of rights,
options or warrants entitling them to subscribe for additional shares of
common stock, or of securities convertible into or exercisable or exchangeable
for additional shares of our Class A common stock at an offering price (or
with an initial conversion, exercise or exchange price plus such offering
price) that is less than the then current market value per share of our Class
A common stock;
(iv) the distribution to all holders of our Class A common stock of any of
our assets (including cash), our debt securities or any rights or warrants to
purchase any securities (excluding those rights, options and warrants referred
to in clause (iii) above and cash dividends and other cash distributions from
current or retained earnings);
(v) the issuance of shares of our Class A common stock for a
consideration per share that is less than the then current market value per
share of our Class A common stock; and
(vi) the issuance of securities convertible into or exercisable or
exchangeable for our Class A common stock for a conversion, exercise or
exchange price per share that is less than the then current market value per
share of our Class A common stock.
The events described in clauses (v) and (vi) above are subject to certain
exceptions described in the warrant agreement, including, without limitation,
certain bona fide public offerings and private placements, issuances of our
Class A common stock under any option, warrant, right or convertible security
exercisable upon issuance of the warrants and certain issuances of our Class A
common stock pursuant to employee stock incentive plans.
No adjustment in the exercise price will be required unless the adjustment
would result in an increase or decrease of at least 1% in the exercise price;
provided, however, that any adjustment that is not made as a result of this
paragraph will be carried forward and taken into account in any subsequent
adjustment. In addition, we may at any time reduce the exercise price (but not
to an amount that is less than the par value of our Class A common stock) for
any period of time (but not less than 20 business days) as deemed appropriate by
our board of directors.
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If we consolidate or merge, or sell all or substantially all of our assets to
another person, each warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or property
to which the holder thereof would have been entitled as a result of such
consolidation, merger or sale had the warrants been exercised immediately prior
thereto. However, if (i) we consolidate, merge or sell all or substantially all
of our assets to another person and, in connection therewith, the consideration
payable to the holders of our Class A common stock in exchange for their shares
is payable solely in cash or (ii) we dissolve, liquidate or wind-up, then
holders of the warrants will be entitled to receive distributions on an equal
basis with the holders of our Class A common stock or other securities issuable
upon exercise of the warrants, as if the warrants had been exercised immediately
before such event, less the exercise price. Upon receipt of such payment, if
any, the warrants will expire and your rights will cease. In the case of any
such consolidation, merger or sale of assets, the surviving or acquiring person
and, if we dissolve, liquidate or wind-up, the company must deposit promptly
with the warrant agent the funds, if any, required to pay the holders. After the
funds and the surrendered warrant certificates are received, the warrant agent
is required to deliver a check in the appropriate amount (or, in the case of
consideration other than cash, such other consideration as is appropriate) to
such persons as the warrant agent may be directed by the holders in writing.
In the event of a taxable distribution to holders of our Class A common stock
that results in an adjustment to the number of shares of our Class A common
stock or other consideration for which a warrant may be exercised, holders may,
in certain circumstances, be deemed to have received a distribution subject to
United States federal income tax as a dividend. See "Certain United States
Federal Income Tax Considerations."
Amendment
Any amendment or supplement to the Warrant Agreement that has an adverse
effect on the interests of holders will require the written consent of the
holders of a majority of the then outstanding warrants (excluding any warrants
held by us or any of our affiliates). Notwithstanding the foregoing, from time
to time, we and the warrant agent, without consent of the holders, may amend or
supplement the warrant agreement for certain purposes, including to cure any
ambiguities, defects or inconsistencies or to make any change that does not
adversely affect your rights. The consent of each holder of the warrants
affected will be required for any amendment pursuant to which the exercise price
would be increased or the number of shares of our Class A common stock issuable
upon exercise of the warrants would be decreased (other than pursuant to
adjustments provided for in the warrant agreement) or the exercise period with
respect to the warrants would be shortened.
It is the intent of the warrant agreement to provide that, on and as of the
closing date, the number of warrant shares into which the warrants are
exercisable represents 3.9% of the issued and outstanding shares of common stock
on a fully diluted basis. For purposes of this paragraph, the phrase "on a
fully diluted basis" shall include any and all options, warrants or other
rights to acquire common equity, whether or not exercisable on the closing date
but excluding all such options, warrants (other than the warrants) or other
rights to acquire common equity at an exercise or conversion price greater than
the exercise price of the warrants as of the closing date, as adjusted. If
either (i) the issuance of the warrants causes the application of the anti-
dilution provisions of any of our warrants, options or convertible securities
outstanding as of the closing date to result in an increase in the number of
shares of our common stock issuable thereunder or (ii) after the closing date
the exercise price of our then outstanding warrants, options or convertible
securities is adjusted to an exercise price equal to or less than the exercise
price of the warrants, such additional shares of our Class A common stock, or
such shares of our Class A common stock issuable upon the exercise or conversion
of such warrants, options or convertible securities, as the case may be, will be
included in the calculation of our common stock on a fully diluted basis, then
the number of warrant shares issuable upon exercise of each warrant
automatically shall be adjusted upward by an amount sufficient to bring the
total number of warrant shares issuable pursuant to the warrant agreement to a
number representing 3.9% of the then issued and outstanding shares of our common
stock on a fully diluted basis.
Registration Rights
Pursuant to the warrant agreement and the warrant registration rights
agreement, we have filed this shelf registration statement to cover the resale
of the warrants and the issuance of our Class A common stock upon the
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exercise of the warrants. We are obligated to use our best efforts to keep this
registration statement effective until the earlier either all of the warrants
and Warrant Shares cease to be transfer restricted or April 1, 2010. If we do
not comply with our obligations under the warrant registration rights agreement
we will be required to pay liquidated damages to holders of the warrants under
certain circumstances. There can be no assurance we will be able to keep a
registration statement continuously effective for the required period. In
addition, we will be able to suspend the warrant registration statement for up
to two consecutive 45-day periods during any 365-day period under certain
circumstances.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of some important U.S. federal income
tax considerations relating to the purchase, ownership and disposition of the
warrants and/or shares of common stock that are received upon the exercise of
the warrants to initial purchasers thereof (as defined below). This discussion
is based on currently existing provisions of the Internal Revenue Code (the
"Code"), existing, temporary and proposed Treasury regulations promulgated
thereunder, and administrative and judicial interpretations thereof, all as in
effect or proposed on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This discussion
generally does not address the tax consequences to subsequent purchasers of
warrants (or shares of common stock that are received upon the exercise of the
warrants) and is limited to purchasers who purchased warrants at their "issue
price," as defined below under "Allocation of Purchase Price Between notes and
warrants", and hold such warrants (or shares of common stock that are received
upon the exercise of the warrants) as capital assets, within the meaning of
section 1221 of the Code. Moreover, this discussion is for general information
only and does not address all of the tax consequences that may be relevant to
particular initial purchasers in light of their personal circumstances or to
certain types of initial purchasers who are subject to special rules, such as
certain financial institutions, insurance companies, tax-exempt entities,
traders or dealers in securities or currencies, certain U.S. expatriates and
U.S. holders whose "functional currency" is not the U.S. dollar. This
discussion does not address the tax consequences of the law of any state,
locality or foreign jurisdiction.
ALL PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE WARRANTS (OR SHARES OF COMMON STOCK THAT ARE RECEIVED UPON
THE EXERCISE OF THE WARRANTS), INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX
LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED
CHANGES) IN APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
U.S. HOLDERS
As used herein, a "U.S. holder" is a beneficial owner of a warrant (or shares
of common stock that are received upon the exercise of the warrant) that is, for
U.S. federal income tax purposes:
. an individual citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in or under
the laws of the United States or any political subdivision thereof (unless
in the case of a partnership, applicable Treasury Regulations provide
otherwise);
. an estate the income of which is subject to U.S. federal income taxation
regardless of source;
. a trust if both (A) a United States court is able to exercise primary
supervision over the administration of the trust, and (B) one or more
United States persons have the authority to control all substantial
decisions of the trust (including specified trusts in existence on August
20, 1996 and treated as United States persons prior to that date and that
timely elected to continue to be treated as United States persons).
Allocation of purchase price between notes and warrants
For U.S. federal income tax purposes, the purchase of a unit consisting of a
note and a warrant is treated as the purchase of an "investment unit." The
issue price of a unit for U.S. federal income tax purposes is the first price at
which a substantial amount of units is sold, excluding sales to bond holders,
brokers or similar persons acting as underwriters, placement agents or
wholesalers. The issue price of a unit must be allocated between the note and
the warrant based on the relative fair market values of each such component of
the unit on the issue date. Pursuant to Treasury Regulations issued under
provisions of the Code relating to original issue discount (the "OID
Regulations"), each U.S. holder for U.S. federal income tax purposes will be
bound by XM's and Holding's
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allocation unless such holder discloses on a statement attached to its tax
return for the taxable year that includes the acquisition date of such unit that
its allocation differs from that of XM and Holdings. We believe that the
aggregate issue price of each unit should be allocated $797.70 to the note and
$202.30 to the warrant. We cannot assure you that the IRS will accept XM's
allocation. If XM's allocation were successfully challenged by the IRS, the gain
or loss on the sale or disposition of a warrant would be different from that
resulting under the allocation determined by XM and Holdings.
The warrants
Exercise of warrants and ownership of common stock. Upon the exercise of a
warrant, a U.S. holder will not recognize gain or loss, except to the extent of
cash, if any, received in lieu of the issuance of fractional shares of common
stock, and will have an adjusted tax basis in the common stock acquired pursuant
to such exercise equal to such U.S. holder's tax basis in the warrant, which
will equal the portion of the issue price of the unit properly allocable to the
warrant, as described above, plus the exercise price of the warrant. The holding
period for such common stock so acquired will generally commence on the date
after the date of exercise of the warrant. If any cash is received in lieu of
fractional shares of common stock, the U.S. holder will recognize gain or loss
in an amount and of the same character that such U.S. holder would have
recognized if such U.S. holder had received such fractional shares and then
immediately sold them for cash back to Holdings. Similarly, upon the sale of
common stock received upon exercise of a warrant, a U.S. holder will recognize
capital gain or loss equal to the difference between the amount realized upon
the sale and such U.S. holder's tax basis in the common stock. Distributions
made with respect to the common stock will constitute dividends to the extent
paid out of current or accumulated earnings and profits of Holdings, as
determined for U.S. federal income tax purposes. To the extent that a
distribution exceeds the earnings and profits of Holdings, it will be treated as
a nontaxable return of capital to the extent of the U.S. holder's adjusted tax
basis in the common stock and the excess, if any, will be treated as capital
gain.
If a U.S. holder of warrants acquires shares of common stock through a
cashless exercise of warrants, the U.S. holder may recognize gain or loss equal
to the excess of the fair market value of the warrants deemed surrendered to pay
the exercise price over the U.S. holder's tax basis in such warrants.
Alternatively, a cashless exercise of warrants may be treated as a tax-free
exchange of warrants for common stock. Under such treatment, it is possible that
a U.S. holder may have a holding period in shares of common stock that included
the holding period of warrants surrendered in the cashless exercise of such
warrants. If a U.S. holder exercises a warrant with a combination of the payment
of cash and through a cashless exercise, the transaction may be divided into the
applicable number of parts with each part treated as described above.
Sale or repurchase. The sale of a warrant will result in the recognition of
capital gain or loss to the U.S. holder in an amount equal to the difference
between the amount realized and such U.S. holder's tax basis in the warrant,
which will equal the portion of the issue price of the unit properly allocable
to the warrant, as described above. With respect to non-corporate U.S. holders,
capital gain is subject to reduced rates of tax if the warrant was held for more
than twelve months, and the deductibility of capital losses is subject to
limitations. It is unclear whether the repurchase of a warrant by Holdings
would be treated as a sale or exchange. If it were not so treated, any gain or
loss to a U.S. holder on such repurchase would be treated as ordinary income or
loss.
Lapse. If a warrant expires unexercised, a U.S. holder will recognize a
capital loss equal to such U.S. holder's tax basis in the warrant. Such capital
loss may, subject to certain limitations, be used to offset capital gains, if
any, otherwise realized by a U.S. holder.
Adjustments. Under Section 305 of the Internal Revenue Code, adjustments to
the exercise price or conversion ratio of the warrants which occur under certain
circumstances, or the failure to make such adjustments, may result in the
receipt of taxable constructive dividends by a U.S. holder, subject to a
possible dividends received deduction in the case of corporate U.S. holders, to
the extent of Holdings current or accumulated earnings and profits, regardless
of whether there is a distribution of cash or property.
NON-U.S. HOLDERS
The following discussion summarizes certain United States federal income tax
consequences relevant to a Non-
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U.S. holder of a warrant or common stock acquired through exercise of a warrant.
As used herein, a "Non-U.S. holder" is a beneficial owner of a warrant (or
shares of common stock that are received upon the exercise of the warrant) that
is not a U.S. holder.
This discussion does not deal with all aspects of United States federal income
taxation that may be relevant to any particular Non-U.S. holder in light of that
holder's personal circumstances with respect to such holder's purchase,
ownership or disposition of the warrants or common stock acquired through
exercise of a warrant, or with respect to exercising a warrant, including such
holder holding the warrant or common stock acquired through exercise of a
warrant through a partnership. For example, persons who are partners in foreign
partnerships and beneficiaries of foreign trusts or estates who are subject to
United States federal income tax because of their own status, such as United
States residents or foreign persons engaged in a trade or business in the United
States, may be subject to United States federal income tax even though the
entity is not subject to such tax.
Sale or Redemption of Warrants or Common Stock; Exercise of Warrants
Except as described below and subject to the discussion concerning backup
withholding, a Non-U.S. holder generally will not be subject to withholding of
United States federal income tax with respect to any gain realized upon the sale
or redemption of warrants or common stock acquired on the exercise of warrants
or from the exercise of a warrant. Further, a Non-U.S. holder generally will not
be subject to United States federal income tax with respect to any such gain
unless (i) the gain is effectively connected with a United States trade or
business of such Non-U.S. person (and, if a tax treaty applies, is attributable
to a U.S. permanent establishment of the Non-U.S. holder), (ii) subject to
certain exceptions, the Non-U.S. holder is an individual who holds the warrant
or common stock as a capital asset and is present in the United States for 183
days or more in the taxable year of the disposition, (iii) the Non-U.S. holder
is subject to tax pursuant to the provisions of United States tax law applicable
to certain United States expatriates, or (iv) the common stock constitutes a
United States real property interest by reason of Holdings status as a "United
States real property holding corporation" ("USRPHC") for federal income tax
purposes at any time within the shorter of the five-year period preceding such
disposition or such Non-U.S. holder's holding period for such common stock.
Holdings does not believe that it is or it will become a USRPHC for federal
income tax purposes.
Dividends on Common Stock
Any distribution on common stock to a Non-U.S. holder will generally be subject
to United States federal income tax withholding at a rate of 30%, unless (i) a
lower rate is provided by an applicable tax treaty or (ii) the distribution is
effectively connected with the conduct of a trade or business in the United
States by the Non-U.S. holder, in which case the distribution may be subject to
graduated U.S. federal income tax as if such amounts were earned by a U.S.
holder and, for corporate Non-U.S. holders, may also be subject to an additional
30% branch profits tax (on a lower rate provided by an applicable treaty). For
either of these exceptions to apply, the Non-U.S. holder may be required to
provide a properly executed certificate claiming the benefits of a treaty or
exemption (currently Form 1001 (or W-8BEN) or 4224 (or W-8ECI), as applicable).
Information reporting and backup withholding
In general, information reporting requirements will apply to payments of
dividends on common stock and payments of the proceeds of the sale of a warrant
or common stock to certain non-corporate U.S. holders, and a 31% backup
withholding tax may apply to such payments if the U.S. holder (i) fails to
furnish or certify his correct taxpayer identification number to the payer in
the manner required, (ii) is notified by the IRS that he has failed to report
payments of interest or dividends properly, or (iii) under certain
circumstances, fails to certify that he has not been notified by the IRS that he
is subject to backup withholding for failure to report interest or dividend
payments.
Information reporting requirements will apply to payments of dividends to Non-
U.S. holders where such dividends are subject to withholding or are exempt from
U.S. withholding tax pursuant to a tax treaty. Backup withholding may apply to
payments of dividends on common stock to Non-U.S. holders unless they certify
their
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foreign status or qualify for a treaty benefit. Copies of these information
returns may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. holder
resides.
The payment of proceeds from the disposition of warrants or common stock to or
through the U.S. office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalty of perjury or otherwise establishes an
exemption, provided that the broker does not have actual knowledge that the
holder is a U.S. person or that the conditions of any other exemption are not,
in fact, satisfied. The payment of the proceeds from the disposition of a
warrant or common stock to or through a non-U.S. office of a non-U.S. broker
will not be subject to information reporting or backup withholding unless such
broker is (i) a "controlled foreign corporation" for U.S. federal income tax
purposes, or (ii) a foreign person 50% or more of whose gross income from all
sources for the 3-year period ending with the close of its taxable year
preceding the payment, or for such part of the period that the broker has been
in existence, is derived from activities that are effectively connected with the
conduct of a U.S. trade or business (a "U.S. related person").
In the case of the payment of proceeds from the disposition of warrants or
common stock to or through a non-U.S. office of a broker that is either a U.S.
person or a U.S. related person, Treasury regulations require information
reporting on the payment unless the broker has documentary evidence in its files
that the owner is a Non-U.S. holder and the broker has no knowledge to the
contrary.
Holders of warrants (or holders of common stock received upon exercise of the
warrants) should be aware that the Treasury Department promulgated revised final
regulations regarding the withholding and information reporting rules discussed
above. In general, the final regulations do not significantly alter the
substantive withholding and information reporting requirements but unify certain
certification procedures and forms and clarify reliance standards. The final
regulations would generally be effective for payments made after December 31,
2000, subject to certain transition rules should consult their tax advisors
regarding the application of such Treasury regulations.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's federal
income tax liability, provided the required information is furnished to the IRS.
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SELLING HOLDERS
The warrants were originally issued and sold by the initial purchasers
in a transaction exempt from the registration requirements of the Securities Act
to persons reasonably believed by such initial purchasers to be qualified
institutional buyers. Selling holders, which term includes their transferees,
pledgees or donees or their successors, may from time to time offer and sell
pursuant to this prospectus any or all of the warrants and common stock
receivable from exercise of the warrants.
The following table sets forth the name of each selling holder, any
material relationship of such holder with us, and the following information as
of June 1, 2000:
. the number of warrants owned by each selling holder;
. the maximum number of warrants which may be offered for
the account of such selling holder under this prospectus;
. the amount of common stock owned by each selling holder; and
. the maximum amount of common stock which may be offered for the account of
such selling holder under this prospectus.
This information with respect to each selling holder is based upon
information provided by or on behalf of such selling holder. The selling
holders may offer all, some or none of the warrants or common stock issuable
upon exercise of the warrants. Because the selling holders may offer all or
some portion of the warrants or the common stock, we cannot estimate the amount
of warrants or common stock that will be held by the selling holders upon
termination of sales pursuant to this prospectus. In addition, the selling
holders identified below may have sold, transferred or otherwise disposed of all
or a portion of their warrants since the date on which they provided the
information regarding their warrants in transactions exempt from the
registration requirements of the Securities Act.
<TABLE>
<CAPTION>
Name of Selling Warrants Beneficially Common Stock
Stockholder Owned Prior to the Warrants Beneficially Owned Prior Common Stock
----------- Offering Offered Hereby to the Offering(1) Offered Hereby (2)
---------- -------------- ------------------ -----------------
<S> <C> <C> <C> <C>
American Express Trust
Company 8,025 8,025 64,543 64,543
Bankers Trust Company 14,455 14,455 116,258 116,258
Boston Safe Deposit and
Trust Company 11,145 11,145 89,637 89,637
Bank of New York 29,465 29,465 236,981 236,981
Bear, Stearns Securities
Corp. 8,850 8,850 71,178 71,178
Brown Brothers Harriman &
Co. 970 970 7,801 7,801
Carty & Company, Inc. 250 250 2,010 2,010
Chase Manhattan Bank 27,425 27,425 220,574 220,574
Chase Bank of Texas, N.A. 10,000 10,000 80,428 80,428
Chase Manhattan Bank, Trust 4,000 4,000 32,171 32,171
Citibank, N.A. 26,890 26,890 216,271 216,271
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Credit Suisse First Boston
Corporation 2,000 2,000 16,085 16,085
Custodial Trust Company 2,000 2,000 16,085 16,085
Firstar Bank, N.A. 5,050 5,050 40,616 40,616
Fleet National Bank 60 60 482 482
FUNB - Phila. Main 500 500 4,021 4,021
Investors Fiduciary Trust
Company/SSB 5,255 5,255 42,264 42,264
Investors Bank & Trust
Company 9,500 9,500 76,406 76,406
Lehman Brothers, Inc. 14,250 14,250 114,610 114,610
LBI-Lehman Government
Securities, Inc. 1,250 1,250 10,053 10,053
Mercantile-Safe Deposit &
Trust Company 1,025 1,025 8,243 8,243
Merrill Lynch Professional
Clearing Corp. 1,500 1,500 12,064 12,064
Merrill Lynch
Pierce Fenner & Smith Safekeeping 5,000 5,000 40,214 40,214
Morgan Stanley & Co.
Incorporated 175 175 1,407 1,407
PNC Bank, National
Association 5,350 5,350 43,029 43,029
Merrill Lynch
Pierce Fenner & Smith/DS 10,500 10,500 84,449 84,449
Northern Trust Company 4,850 4,850 39,007 39,007
Prudential Securities
Custody 12,150 12,150 97,720 97,720
RBC Dominion Securities
Corporation 4,500 4,500 36,192 36,192
Salomon Smith Barney
Inc./Salomon Brothers 2,950 2,950 23,726 23,726
SG Cowen Securities Corp. 500 500 4,021 4,021
SG NY Custody 250 250 2,010 2,010
SSB - Trust Custody 3,000 3,000 24,128 24,128
State Street Bank and
Trust Company 75,585 75,585 607,916 607,916
Sumitomo Trust & Banking
Co. 250 250 2,010 2,010
Swiss American Securities
Inc. 100 100 804 804
U.S. Bank National
Association 14,975 14,975 120,441 120,441
Fifth Third Bank 1,000 1,000 8,042 8,042
Any other holder of
warrants or future
transferree of such
holder (3) (4)
</TABLE>
75
<PAGE>
(1) Comprises the shares of common stock owned by each selling holder prior to
the offering, including the shares of common stock which are issuable upon
exercise of the warrants at an exercise price of $49.50 per share, excluding
fractional shares. Fractional shares will not be issued upon exercise of the
warrants; rather, cash will be paid in lieu of fractional shares, if any. The
exercise price and the number of shares of common stock issuable upon exercise
of the warrants are subject to adjustment under specified circumstances, which
are described in more detail under "Description of the Warrants - General."
Accordingly, the number of shares of common stock issuable upon exercise of the
warrants may increase or decrease from time to time .
(2) Assumes issuance of common stock of full amount issuable upon exercise of
the warrants at an exercise price of $49.50 per share and the offering of those
shares by the selling holder pursuant to this prospectus. The exercise price and
the number of shares of common stock issuable upon exercise of the warrants are
subject to adjustment under specified circumstances which are described in more
detail under "Description of Warrants - General." Accordingly, the number of
shares of common stock issuable upon exercise of the warrants may increase or
decrease from time to time. Fractional shares will not be issued upon exercise
of the warrants; rather, cash will be paid in lieu of fractional shares, if any.
The selling holders may offer and sell pursuant to the prospectus, their
warrants, the shares of common stock issued upon exercise of the warrants, or
both.
(3) Information concerning other selling holders of warrants will be set forth
in prospectus supplements from time to time, as required. No holder may offer
warrants pursuant to this prospectus until such holder is included as a selling
holder in a supplement to this prospectus in accordance with the registration
rights agreement.
(4) Assumes that any other holders of warrants or any future transferee from
any such holder does not beneficially own any common stock other than common
stock into which the warrants are convertible at the conversion price of $49.50
per share.
Other than as noted above, none of the selling holders has had any material
relationship with us or our affiliates within the past three years. The
warrants were initially issued by us in a private transaction on March 15, 2000.
All of the warrants were "restricted securities" under the Securities Act prior
to this registration.
We agreed to prepare and file all necessary amendments and supplements to
the registration statement to keep it effective until April 1, 2010.
Information concerning the selling holders may change from time to time and
any such changed information will be set forth in supplements to this prospectus
if and when necessary. In addition, the per share conversion price, and
therefore the number of shares of common stock issuable upon exercise of the
warrants, is subject to adjustment under certain circumstances. Accordingly,
the number of warrants and the number of shares of common stock issuable upon
exercise of the warrants may increase or decrease. We will pay the expenses of
registering the warrants and common stock being offered by this prospectus.
76
<PAGE>
PLAN OF DISTRIBUTION
The selling holders and their successors, which term includes their
transferees, pledgees or donees or their successors, may sell the warrants and
the common stock issuable upon exercise of the warrants directly to purchasers
or through underwriters, broker-dealers or agents, who may receive compensation
in the form of discounts, concessions or commissions from the selling holders or
the purchasers, which discounts, concessions or commissions as to any particular
underwriter, broker-dealer or agent may be in excess of those customary in the
types of transactions involved.
The warrants and the common stock may be sold in one or more transactions
at fixed prices, at prevailing market prices at the time of sale, at prices
related to such prevailing market prices, at varying prices determined at the
time of sale, or at negotiated prices. Such sales may be effected in
transactions, which may involve crosses or block transactions:
. on any national securities exchange or quotation service on which the
warrants or the common stock may be listed or quoted at the time of
sale,
. in the over-the-counter market,
. in transactions otherwise than on such exchanges or services or in the
over-the-counter market,
. through the writing of options, whether such options are listed on an
options exchange or otherwise, or
. through the settlement of short sales.
In connection with the sale of the warrants and the common stock issuable upon
exercise of the warrants or otherwise, the selling holders may enter into
hedging transactions with broker-dealers or other financial institutions which
may in turn engage in short sales of the warrants or the common stock issuable
upon exercise of the warrants and deliver these securities to close out such
short positions, or loan or pledge the warrants or the common stock issuable
upon exercise of the warrants to broker-dealers that in turn may sell these
securities.
At the time a particular offering of the warrants or the common stock
issuable upon exercise of the warrants is made, a supplement to this prospectus
(a "prospectus supplement"), if required, will be distributed which will set
forth the aggregate amount of warrants or common stock being offered and the
terms of the offering, including the name or names of any underwriters, broker-
dealers or agents, any discounts, commissions and other terms constituting
compensation from the selling holders and any discounts, commissions or
concessions allowed or reallowed or paid to broker-dealers. Each broker-dealer
that receives the warrants or common stock for its own account pursuant to this
prospectus must acknowledge that it will deliver the prospectus and any
prospectus supplement in connection with any sale of such warrants or common
stock.
The aggregate proceeds to the selling holders from the sale of the warrants
or the common stock issuable upon exercise of the warrants offered by them
hereby will be the purchase price of such warrants or common stock less
discounts and commissions, if any. Each of the selling holders reserves the
right to accept and, together with their agents from time to time, to reject, in
whole or in part, any proposed purchase of warrants or common stock to be made
directly or through agents. We will not receive any of the proceeds from this
offering.
Our outstanding common stock is listed for trading on the Nasdaq National
Market. We do not intend to list the warrants for trading on any national
securities exchange or on the Nasdaq National Market and can give no assurance
about the development of any trading market for the warrants.
In order to comply with the securities laws of certain jurisdictions, if
applicable, the warrants and the common stock issuable upon exercise of the
warrants may be sold in such jurisdictions only through registered or licensed
brokers or dealers. In addition, in some states the warrants and common stock
issuable upon exercise of the warrants may not be sold unless they have been
registered or qualified for sale or an exemption from registration or
qualification requirements is available and is complied with.
77
<PAGE>
The selling holders and any underwriters, broker-dealers or agents that
participate in the sale of the warrants and common stock issuable upon exercise
of the warrants may be "underwriters" within the meaning of Section 2(11) of the
Securities Act. Any discounts, commissions, concessions or profit they earn on
any resale of the shares may be underwriting discounts and commissions under the
Securities Act. Selling holders who are "underwriters" within the meaning of
Section 2(11) of the Securities Act will be subject to the prospectus delivery
requirements of the Securities Act. The selling holders have acknowledged that
they understand their obligations to comply with the provisions of the Exchange
Act and the rules thereunder relating to stock manipulation, particularly
Regulation M, and have agreed that they will not engage in any transaction in
violation of such provisions.
In addition, any securities covered by this prospectus which qualify for
sale pursuant to Rule 144 or Rule 144A of the Securities Act may be sold under
Rule 144 or Rule 144A rather than pursuant to this prospectus. A selling holder
may not sell any warrants or common stock described herein and may not transfer,
devise or gift such securities by other means not described in this prospectus.
To the extent required, the specific warrants or common stock to be sold,
the names of the selling holders, the respective purchase prices and public
offering prices, the names of any agent, dealer or underwriter, and any
applicable commissions or discounts with respect to a particular offer will be
set forth in an accompanying prospectus supplement or, if appropriate, a post-
effective amendment to the registration statement of which this prospectus is a
part.
We entered into a registration rights agreement for the benefit of holders
of the warrants to register their warrants and common stock under applicable
federal and state securities laws under particular circumstances and at
specified times. The registration rights agreement provides for cross-
indemnification of the selling holders and XM Satellite Radio Holdings Inc. and
their respective directors, officers and controlling persons against certain
liabilities in connection with the offer and sale of the warrants and the common
stock, including liabilities under the Securities Act. We will pay all of our
expenses and substantially all of the expenses incurred by the selling holders
incident to the offering and sale of the warrants and the common stock, provided
that each selling holder will be responsible for payment of commissions,
concessions and discounts of underwriters, broker-dealers or agents.
LEGAL MATTERS
Certain legal matters with respect to the warrants and shares of common stock
offered by this prospectus will be passed upon for us by Hogan & Hartson L.L.P.,
Washington, D.C.
EXPERTS
Our consolidated financial statements as of December 31, 1997, 1998 and 1999
and for the years ended December 31, 1997, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) through December 31, 1999, 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.
78
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
<TABLE>
<CAPTION>
<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-7
Notes to Consolidated Financial Statements............................................................... F-9
Condensed Consolidated Balance Sheets as of December 31, 1999 and March 31, 2000 (unaudited)............. F-24
Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 1999
and 2000 and for the period December 15, 1992 (date of inception) to March 31, 2000..................... F-25
Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999
and 2000 and for the period December 15, 1992 (date of inception) to March 31, 2000..................... F-26
Notes to Unaudited Condensed Consolidated Financial Statements........................................... F-28
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of XM
Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as
of December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the years
in the three-year period ended December 31, 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999. 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 subsidiaries (a development stage company) as of
December 31, 1998 and 1999, and the results of their operations and their cash
flows for each of the years in the three-year period ended December 31, 1999 and
for the period from December 15, 1992 (date of inception) to December 31, 1999,
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 and is dependent upon additional debt or equity financing, 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 16, 2000,
except for Note 14,
which is as of March 15, 2000
F-2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
(in thousands, except
share data)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents................................................................ $ 310 $ 50,698
Short-term investments................................................................... -- 69,472
Prepaid and other current assets......................................................... 172 1,077
-------- --------
Total current assets.................................................................. 482 121,247
Other assets:
System under construction................................................................ 169,029 362,358
Property and equipment, net of accumulated depreciation and amortization of $57
and $347............................................................................... 449 2,551
Goodwill and intangibles, net of accumulated amortization of $0 and $1,220............... -- 25,380
Other assets............................................................................. 525 3,653
-------- --------
Total assets.......................................................................... $170,485 $515,189
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................................................... $ 23,125 $ 23,338
Accrued expenses......................................................................... 444 1,514
Due to related parties................................................................... 13,767 62
Accrued interest on loans payable........................................................ 1,907 --
Loans payable due to related parties..................................................... 91,546 --
Royalty payable.......................................................................... -- 1,646
Term loan................................................................................ 34 --
-------- --------
Total current liabilities............................................................. 130,823 26,560
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 --
Royalty payable, net of current portion.................................................... -- 3,400
Capital lease, net of current portion...................................................... -- 212
-------- --------
Total liabilities..................................................................... 177,668 30,172
-------- --------
Stockholders' equity (deficit):
Preferred stock, par value $0.01; 60,000,000 shares authorized, 15,000,000 shares
designated Series A, no shares and 10,786,504 issued and outstanding at
December 31, 1998 and 1999............................................................. -- 108
Class A common stock, par value $0.01; 180,000,000 shares authorized, no and
26,465,333 shares issued and outstanding at December 31, 1998 and 1999................. -- 265
Class B common stock, par value $0.01; 30,000,000 shares authorized, 125
(6,689,250 post split) and 17,872,176 shares issued and outstanding at
December 31, 1998 and 1999............................................................... -- 179
Class C common stock, par value $0.01; 30,000,000 shares authorized, no shares
issued and outstanding at December 31, 1998 and 1999.................................. -- --
Additional paid-in capital............................................................... 10,643 539,187
Deficit accumulated during development stage............................................. (17,826) (54,722)
-------- --------
Total stockholders' equity (deficit).................................................. (7,183) 485,017
-------- --------
Commitments and contingencies (notes 11 and 12)
Total liabilities and stockholders' equity (deficit).................................. $170,485 $515,189
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 1999 to December 31, 1999
--------------- --------------- ----------------- ------------------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
--------------- --------------- ----------------- ------------------------
Operating expenses:
Research and development....................... -- 6,941 4,274 11,215
Professional fees.............................. 1,090 5,242 9,969 16,301
General and administrative..................... 20 4,010 16,448 20,478
---------- ---------- ----------- ---------
Total operating expenses.................... 1,110 16,193 30,691 47,994
---------- ---------- ----------- ---------
Operating loss.............................. (1,110) (16,193) (30,691) (47,994)
Other income (expense):
Interest income................................ -- 26 2,916 2,942
Interest expense............................... (549) -- (9,121) (9,670)
---------- ---------- ----------- ---------
Net loss.................................... $ (1,659) $ (16,167) $ (36,896) $(54,722)
========== ========== =========== =========
Net loss per share:
Basic and diluted.............................. $ (0.26) $ (2.42) $ (2.40)
========== ========== ===========
Weighted average shares used in computing
net loss per share-basic and diluted............ 6,368,166 6,689,250 $15,344,102
========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
Series A Class A Class B
------------------ ------------------ ------------------
Preferred Stock Common Stock Common Stock
------------------ ------------------ ------------------
Shares Amount Shares Amount Shares Amount
---------- ------ ---------- ------ ---------- ------
(in thousands, except share data)
<S> <C> <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.......................... -- -- -- -- -- --
Issuance of common stock and capital contributions........ -- -- -- -- 25 --
Issuance of options....................................... -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Balance at December 31, 1997.............................. -- -- -- -- 125 --
Net loss.................................................. -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Balance at December 31, 1998.............................. -- -- -- -- 125 --
53,514-for-one stock split................................ -- -- -- -- 6,689,125 67
Initial public offering................................... -- -- 10,241,000 102 -- --
Conversion of Series A convertible debt................... 10,786,504 108 16,179,755 162 -- --
Conversion of subordinated convertible notes payable
to related party......................................... -- -- -- -- 11,182,926 112
Issuance of shares to key executive....................... -- -- 14,716 -- -- --
Issuance of shares through exercise of stock options...... -- -- 1,071 -- -- --
Issuance of shares through the employee stock
purchase plan............................................ -- -- 28,791 1 -- --
Increase in FCC license, goodwill and intangibles from
WorldSpace Transaction................................... -- -- -- -- -- --
Charge for beneficial conversion feature of note issued
to Parent................................................ -- -- -- -- -- --
Non-cash stock compensation............................... -- -- -- -- -- --
Net loss.................................................. -- -- -- -- -- --
---------- ------ ---------- ------ ---------- ------
Balance at December 31, 1999.............................. 10,786,504 $108 26,465,333 $265 17,872,176 $179
========== ====== ========== ====== ========== ======
</TABLE>
F-5
<PAGE>
<TABLE>
<CAPTION>
Class C
--------------
Common Stock
--------------
Deficit
Accumulated Total
Additional During Stockholders'
Paid-in Development Equity
Shares Amount Capital Stage (Deficit)
------ ------ ------- ----- ---------
<S> <C> <C> <C> <C> <C>
Issuance of common stock
(December 15, 1992).......................................... -- $ -- $ -- $ -- $ --
------ ------ -------- ----------- ---------
Balance at December 31, 1992................................. -- -- -- -- --
Net loss..................................................... -- -- -- -- --
------ ------ -------- ----------- ---------
Balance at December 31, 1993................................. -- -- -- -- --
Net loss..................................................... -- -- -- -- --
------ ------ -------- ----------- ---------
Balance at December 31, 1994................................. -- -- -- -- --
Net loss..................................................... -- -- -- -- --
------ ------ -------- ----------- ---------
Balance at December 31, 1995................................. -- -- -- -- --
Net loss..................................................... -- -- -- -- --
------ ------ -------- ----------- ---------
Balance at December 31, 1996................................. -- -- -- -- --
Contributions to paid-in capital............................. -- -- 143 -- 143
Issuance of common stock and capital contributions........... -- 9,000 -- 9,000
Issuance of options.......................................... -- -- 1,500 -- 1,500
Net loss..................................................... -- -- -- (1,659) (1,659)
------ ------ -------- ----------- ---------
Balance at December 31, 1997................................. -- -- 10,643 (1,659) 8,984
Net loss..................................................... -- -- -- (16,167) (16,167)
------ ------ -------- ----------- ---------
Balance at December 31, 1998................................. -- -- 10,643 (17,826) (7,183)
53,514-for-one stock split................................... -- -- (67) -- --
Initial public offering...................................... -- -- 114,032 -- 114,134
Conversion of Series A convertible debt...................... -- -- 246,079 -- 246,349
Conversion of subordinated convertible notes payable
to related party............................................ -- -- 106,843 -- 106,955
Issuance of shares to key executive.......................... -- -- 140 140
Issuance of shares through exercise of stock options......... -- -- 10 -- 10
Issuance of shares through the employee stock
purchase plan............................................... -- -- 293 -- 294
Increase in FCC license, goodwill and intangibles from
WorldSpace Transaction...................................... -- -- 51,624 -- 51,624
Charge for beneficial conversion feature of note issued
to Parent................................................... -- -- 5,520 -- 5,520
Non-cash stock compensation.................................. -- -- 4,070 -- 4,070
Net loss..................................................... -- -- -- (36,896) (36,896)
------ ----- -------- ----------- ---------
Balance at December 31, 1999................................. $ -- $ -- $539,187 $ (54,722) $ 485,017
====== ===== ======== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 1999 December 31, 1999
----------- ------------ ------------ ------------------
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................... $ (1,659) $(16,167) $ (36,896) $ (54,722)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................... 33 57 1,987 2,077
Non-cash stock compensation................................. -- -- 4,210 4,210
Non-cash charge for beneficial conversion feature of
note issued to Parent..................................... -- -- 5,520 5,520
Changes in operating assets and liabilities:
Increase in prepaid and other current assets.............. -- (212) (905) (1,117)
Decrease in other assets.................................. -- -- 43 43
Increase in accounts payable and accrued
expenses................................................. -- 1,701 7,519 9,220
Increase (decrease) in amounts due to related
parties.................................................. 445 13,322 (1,316) 12,451
Increase (decrease) in accrued interest................... 517 (2) 3,053 3,568
-------- -------- --------- ---------
Net cash used in operating activities.................... (664) (1,301) (16,785) (18,750)
-------- -------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................... -- (506) (2,008) (2,514)
Additions to system under construction....................... (90,031) (43,406) (159,510) (292,947)
Purchase of short-term investments........................... -- -- (69,472) (69,472)
Other investing activities. ................................. -- -- (3,422) (3,422)
-------- -------- --------- ---------
Net cash used in investing activities.................... (90,031) (43,912) (234,412) (368,355)
-------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock and capital
contribution................................................ 9,143 -- 114,428 123,571
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 parties.................................... -- 45,583 22,966 68,549
Proceeds from issuance of convertible notes ................ -- -- 250,000 250,000
Repayment of loan payable.................................... -- -- (75,000) (75,000)
Payments for deferred financing costs........................ -- (393) (10,725) (11,118)
Other investing activities................................... -- (5) (84) (89)
-------- -------- --------- ---------
Net cash provided by financing activities................ 90,696 45,522 301,585 437,803
-------- -------- --------- ---------
Net increase in cash and cash equivalents..................... 1 309 50,388 50,698
Cash and cash equivalents at beginning of period.............. -- 1 310 --
-------- -------- --------- ---------
Cash and cash equivalents at end of period.................... $ 1 $ 310 $ 50,698 $ 50,698
-------- -------- --------- ---------
</TABLE>
F-7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 1999 December 31, 1999
------------- ------------- ------------ -----------------
(in thousands)
<S> <C> <C> <C> <C>
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles from
WorldSpace Transaction...................................... $ -- $ -- $ 51,624 $ 51,624
Liabilities exchanged for new convertible note to Parent..... -- -- 81,676 81,676
Non-cash interest capitalized................................ 1,901 11,824 15,162 28,887
Interest converted into principal note balance............... 501 9,157 4,601 14,259
Accrued expenses transferred to loan balance................. -- -- 7,405 7,405
Accrued system milestone payments............................ -- 21,867 15,500 15,500
Property acquired through capital leases..................... -- -- 470 470
Conversion of debt to equity................................. -- -- 353,315 353,315
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
For the period from December 15, 1992 (date of inception) to December 31, 1999
(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" or
"Parent") for the purpose of procuring a digital audio radio service
("DARS") license. Business activity for the period from 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.
On July 7, 1999, AMSC acquired WSI's 20 percent interest in the Company,
which is discussed in note 4.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM
Satellite Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and
XM 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, obtaining its DARS license, 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. The Company has not
generated any revenues and planned principal operations have not commenced.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage
Enterprises.
As discussed in Note 6, on September 9, 1999, the Company effected a
53,514-for-1 stock split. The effect of the stock split has been reflected as of
December 31, 1999 in the consolidated balance sheet and consolidated statement
of stockholders' equity (deficit); however, the activity in prior periods was
not restated in those statements. All references to the number of common shares
and per share amounts in the consolidated financial statements and notes thereto
have been restated to reflect the effect of the split for all periods presented.
(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. The Company
had the following cash and cash equivalents balances (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------------
1998 1999
-------- ---------
<S> <C> <C>
Cash on deposit............... $ 28 $ 66
Money market funds............ 282 10,620
Commercial paper.............. -- 40,012
----- -------
$ 310 $50,698
===== =======
</TABLE>
F-9
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(d) Short-term Investments
For the period from December 15, 1992 (date of inception) to December 31, 1999
The Company holds commercial paper with maturity dates of less than one
year that is stated at amortized cost, which approximates fair value.
(e) 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
</TABLE>
(f) 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, 1999, 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. Depreciation of the Company's satellites will commence upon
in-orbit delivery. Depreciation of the Company's ground stations will commence
upon commercial launch. The satellites and the ground stations will be
depreciated over their estimated useful lives.
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.
System under construction consists of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1999
---------- -----------
<S> <C> <C>
License................................ $ 90,031 $115,055
Satellite system....................... 63,273 204,083
Terrestrial system..................... -- 6,578
Spacecraft control facilities.......... 2,000 2,000
Broadcast facilities and other......... -- 5,574
Capitalized interest................... 13,725 29,068
-------- --------
$169,029 $362,358
======== ========
</TABLE>
The Company's policy is to review its long-lived assets and certain
identifiable intangibles 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
F-10
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
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 or fair value less costs to
sell.
(g) Goodwill and Intangible Assets
Goodwill and intangible assets, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally 15 years. The Company
assesses the recoverability of its intangible assets by determining whether the
amortization of the goodwill and intangible assets balance over its remaining
life can be recovered through undiscounted future operating cash flows. The
amount of goodwill and intangible assets impairment, if any, is measured based
on projected discounted future operating cash flows using a discount rate
reflecting the Company's average cost of funds. The assessment of the
recoverability of goodwill will be impacted if estimated future operating cash
flows are not achieved.
(h) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations, and complies with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB 25, compensation expense is
based upon the difference, if any, on the date of grant, between the fair value
of the Company's stock and the exercise price. All stock-based awards to non-
employees are accounted for at their fair value in accordance with SFAS No. 123.
(i) Research and Development
Research and development costs are expensed as incurred.
(j) Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS
No. 128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB
98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss)
per share is computer by dividing the net income (loss) available to common
stockholders (after deducting preferred dividend requirements) for the period by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) available per share is computed by dividing the net
income (loss) available to common stockholders for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. The Company has presented historical basic and diluted net
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in each of the periods presented, basic and diluted net income (loss)
per share is the same.
(k) Income Taxes
The Company accounts for income taxes in accordance with SFAS 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.
F-11
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(l) 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, 1998 and 1999 that would be classified as
other comprehensive income.
(m) 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, goodwill and intangible assets,
and the valuation allowances against deferred tax assets. Accordingly, actual
amounts could differ from these estimates.
(n) Reclassifications
Certain fiscal year 1997 and 1998 amounts have been reclassified to conform
to the fiscal 1999 consolidated financial statement presentation.
(o) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement, as amended, is effective for all fiscal
quarters beginning after June 15, 2000. The Company does not expect SFAS No. 133
to have a material affect on its financial position or results of operations.
(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 1998 and 1999,
AMSC incurred general and administrative costs and professional fees for the
Company and established an intercompany balance of $458,000 and $62,000,
respectively, (see note 3). Effective January 15, 1999, the Company issued a
convertible note maturing on September 30, 2006 to AMSC for $21,419,000. (See
note 4(d)).
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital
contribution from WSI. The Company
F-12
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
issued WSI 25 (6,689,250 post split) 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 and 1999, the Company
drew down $45,583,000 and $8,953,000, respectively, under the agreement (see
note 4).
As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 9, 1999.
In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and 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
======= ==== =======
<CAPTION>
Year Ended December 31, 1999
------------------------------
WSI AMSC Total
---------- ------- ---------
<S> <C> <C> <C>
Research and development....... $ 50 $ -- $ 50
Professional fees.............. -- 219 219
General and administrative..... -- 5 5
------- ---- -------
Total....................... $ 50 $224 $ 274
======= ==== =======
</TABLE>
Additionally, during 1998 and 1999 the Company incurred $925,000 and $0,
respectively, of WSI project management costs that were capitalized to the
satellite system. With the WorldSpace Transaction, which is discussed in note 4,
on July 7, 1999, WSI ceased to be a related party; therefore, the expenses
reflected for WSI are
F-13
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
representative of the period from January 1, 1999 through July 7, 1999.
(3) Due to Related Parties
Due to related parties included the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
--------- ------
<S> <C> <C>
Advances from WSI.......... $ 7,405 $ --
Due to WSI................. 5,904 --
Due to AMSC................ 458 62
------- -----
$13,767 $ 62
======= =====
</TABLE>
Advances represented funding provided by WSI for 30 days. If amounts were
not repaid within this time period, additional subordinated convertible notes
were 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 had loans payable of $91,546,000 at December 31, 1998
outstanding with WSI as follows (in thousands):
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Bridge loan..................... $25,556
Additional amounts loan......... 64,875
Working capital loan............ 1,115
-------
$91,546
=======
</TABLE>
As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 7, 1999.
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. Interest of $3,034,000 had been converted into additional
loan balance through December 31, 1998.
F-14
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
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. Interest of $6,486,000 had been
converted into additional loan balance through December 31, 1998.
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 and $337,000 against the
line of credit through December 31, 1997 and 1998, respectively. 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. Interest of $115,000 had been converted into
additional loan balance through December 31, 1998.
(b) Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible note
agreement maturing on September 30, 2006 with WSI that provided for a maximum of
$54,536,000 through the issuance of subordinated convertible notes. The notes
carried 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 $16.35
per share. As of December 31, 1998 and July 7, 1999, $45,583,000 and
$54,536,000, respectively, had been drawn through the issuance of subordinated
convertible notes. As discussed in note 4(c), all amounts due to WSI under the
debt agreements were acquired by AMSC or repaid on July 7, 1999.
(c) Exchange of WSI's Interest in the Company (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. Additionally, the Company issued an aggregate $250.0 million of Series A
subordinated convertible notes (see note 4(e)) 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, as of July 7, 1999, AMSC owned all of the issued and outstanding
stock of the Company. Concurrent with AMSC's acquisition of the remaining
interest in the Company, the Company recognized goodwill and intangibles of
$51,624,000, which has been allocated as follows (in thousands):
<TABLE>
<S> <C>
FCC license..................... $25,024
Goodwill........................ 13,738
Programming agreements.......... 8,000
Receiver agreements............. 4,600
Other intangibles............... 262
-------
$51,624
=======
</TABLE>
(d) Notes to Related Party
On January 15, 1999, the Company issued a convertible note maturing on
September 30, 2006 to AMSC for $21,419,000. This note carried an interest rate
of LIBOR plus five percent per annum and was convertible at a price of $16.35
per share. On July 7, 1999 the Company amended the convertible note agreement
with AMSC to change the maturity date to December 31, 2004, modified the
conversion provisions to Class B common stock at a price of $16.35 per share and
the conversion of the accrued interest in Class B common stock at a price of
$9.52 per share.
F-15
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Following the WorldSpace Transaction, the Company issued a convertible note
maturing December 31, 2004 to AMSC for $81,676,000 in exchange for the
$54,536,000 subordinated convertible notes payable, $6,889,000 in demand notes,
$20,251,000 in accrued interest and all of WSI's outstanding options to acquire
the Company's common stock. This note bore interest at LIBOR plus five percent
per annum. The note was convertible at AMSC's option at $8.65 per Class B common
share. The Company took a one-time $5,520,000 charge to interest due to the
beneficial conversion feature of the new AMSC note.
These notes, along with $3,870,000 of accrued interest were converted into
11,182,926 shares of Class B common stock upon the initial public offering.
(e) Issuance of Series A Subordinated Convertible Notes of the Company to New
Investors
At the closing of the WorldSpace Transaction, 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 Series A convertible preferred stock
(in the case of notes held by General Motors Corporation and DIRECTV) or Class A
common stock (in the case of notes held by the other investors) 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 $9.52 aggregate
principal amount of notes for each share of the Company's stock. These notes,
along with $6,849,000 of accrued interest, were converted into 16,179,755 shares
of Class A common stock and 10,786,504 shares of Series A preferred stock upon
the initial public offering.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
receivables, accounts payable, accrued expenses, royalty payable and the term
loan approximate their fair market value because of the relatively short
duration of these instruments as of December 31, 1998 and 1999, in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The fair value of the loans and subordinated convertible notes due to
related party at December 31, 1998 could not be estimated as such amounts are
due to the Company's stockholders.
(6) Equity
(a) Recapitalization
Concurrent with the WorldSpace Transaction discussed in note 4, the
Company's capital structure was reorganized. The Company's common stock was
converted into the newly authorized Class B common stock, which has three votes
per share. The Company also has authorized 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 percent 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.
The Company also authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated
F-16
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Series A convertible preferred stock, par value $0.01 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.
On September 9, 1999, the board of directors of the Company effected a
stock split providing 53,514 shares of stock for each share owned.
(b) Initial Public Offering
On October 8, 1999, the Company completed an initial public offering of
10,000,000 shares of Class A common stock at $12.00 per share. The offering
yielded net proceeds of $111,437,000.
On October 17, 1999, the underwriters of the Company's initial public
offering exercised the over-allotment option for an additional 241,000 shares of
Class A common stock at $12.00 per share. This exercise yielded net proceeds of
$2,697,000.
(c) Stock-Based Compensation
The Company operates two separate stock option plans, the details of which
are described below.
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 Class A common stock of the Company. The
Company initially authorized 1,337,850 shares of common stock under the Plan,
which was increased to 2,675,700 in July 1999. 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. On July 8, 1999, the Company's board of
directors voted to reduce the exercise price of the options outstanding in the
shares award plan from $16.35 to $9.52 per share, which represented the fair
value of the stock on the date of repricing. Transactions and other information
relating to the Plan for the year ended December 31, 1998 and 1999 are
summarized below:
<TABLE>
<CAPTION>
Outstanding Options
----------------------
Weighted-
Average
Number of Exercise
Shares Price
----------- ---------
<S> <C> <C>
Balance, January 1, 1998.......... -- --
Options granted................. 787,297 $16.35
Options canceled or expired..... -- --
Options exercised............... -- --
--------- ------
Balance, December 31, 1998........ 787,297 $16.35
Options granted................. 2,188,988 10.50
Option repricing................ 818,339 16.35
Options canceled or expired..... 57,786 13.91
Options exercised............... 1,071 9.52
--------- ------
Balance, December 31, 1999........ 2,099,089 $10.32
========= ======
</TABLE>
F-17
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------- ----------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998............. $ 16.35 787,297 9.5 years $16.35 -- $16.35
1999............. $9.52-$12.00 2,099,089 9.24 years $10.32 416,294 $ 9.52
</TABLE>
There were no and 416,294 stock options exercisable at December 31, 1998
and 1999, respectively. There were 575,540 shares available under the plan for
future grants at December 31, 1999. At December 31, 1999, all options have been
issued to employees, officers and directors.
The per share weighted-average fair value of employee options granted
during the year ended December 31, 1998 and 1999 was $10.54 and $6.21,
respectively, on the date of grant using the Black-Scholes Option Pricing Model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Expected dividend yield................. 0% 0%
Volatility.............................. 56.23% 63.92%
Risk-free interest rate range........... 4.53% to 5.57% 5.47% to 5.97%
Expected life........................... 7.5 years 5 years
</TABLE>
Employee Stock Purchase Plan
In 1999, the Company established an employee stock purchase plan that
provides for the issuance of 300,000 shares of Class A common stock. All
employees whose customary employment is more than 20 hours per week and for more
than five months in any calendar year are eligible to participate in the stock
purchase plan, provided that any employee who would own five percent or more of
the Company's total combined voting power immediately after an offering date
under the plan is not eligible to participate. Eligible employees must authorize
the Company to deduct an amount from their pay during offering periods
established by the compensation committee. The purchase price for shares under
the plan will be determined by the compensation committee but may not be less
than 85 percent of the lesser of the market price of the common stock on the
first or last business day of each offering period. As of December 31, 1999,
28,791 shares had been issued by the Company under this plan.
The per share weighted-average fair value of purchase rights granted during
the year was $3.30 for the year ended December 31, 1999. The estimates were
calculated at the grant date using the Black-Scholes Option Pricing Model with
the following assumptions at December 31, 1999:
<TABLE>
<S> <C>
Expected dividend yield.................. 0%
Volatility............................... 63.92%
Risk-free interest rate range............ 4.73%
Expected life............................ 0.23 years
</TABLE>
The Company applies APB 25 in accounting for stock-based compensation for
both plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements other than for performance based stock
options and for options granted with exercise prices below fair value on the
date of grant. During 1999, the Company incurred $4,070,000 in compensation cost
for these options. Had the Company determined compensation cost based on the
fair value at the grant date for its stock options under SFAS 123, the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1998 1999
------------ -----------
<S> <C> <C>
Net loss:
As reported.................................................... $16,167 $36,896
Pro forma...................................................... 17,508 37,706
As reported--net loss per share--basic and diluted............. (2.42) (2.40)
Pro forma--net loss per share--basic and diluted............... (2.62) (2.46)
</TABLE>
F-18
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(7) WSI Options
In 1997, the Company issued WSI three options. Under the first option, WSI
could have purchased 5,202,748 shares of common stock at $4.52 per share to
acquire common stock. The option could have been exercised in whole or in
incremental amounts between April 16, 1998 and October 16, 2002. Under certain
circumstances, AMSC could have required WSI to exercise the option in whole. The
Company allocated $1,250,000 to the option. Under the second option, WSI could
have purchased 6,897,291 shares at $8.91 per share. The option could have been
exercised between October 16, 1997 and October 16, 2003. The Company allocated
$170,000 to the option. Under the third option, WSI could have purchased 187,893
shares of common stock at $5.32 per share. The option could have been exercised
between October 16, 1997 and October 17, 2002. The Company allocated $80,000 to
the option.
The options were acquired by AMSC and exchanged for the $81,676,000 note to
AMSC as part of the WorldSpace Transaction (see note 4(d)).
(8) Profit Sharing and Employee Savings Plan
On July 1, 1998, the Company 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 and 1999 for every dollar the employees contributed up to 6 percent of
compensation, which amounted to $14,000 and $164,000, respectively.
(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, 1997, 1998 and 1999,
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 1999 December 31, 1999
-------- --------- --------- ----------------------
<S> <C> <C> <C> <C>
Interest cost capitalization.................... $1,901 $11,824 $15,343 $29,068
Interest cost charged to expense................ 549 -- 9,120 9,669
------ ------- ------- -------
Total interest cost incurred.................. $2,450 $11,824 $24,463 $38,737
====== ======= ======= =======
</TABLE>
Interest costs incurred prior to the award of the license were expensed in
1997. During 1999, the Company exceeded its capitalization threshold by
$3,600,000 and incurred a charge to interest of $5,520,000 for the beneficial
conversion feature of the new AMSC note.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to October 8,
1999, 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 that 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 for the three-
year period ending December 31, 1999, the Company's tax provision would be as
follows:
F-19
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Taxes on income included in the statements of operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Current taxes:
Federal............................. $ -- $ -- $ --
State............................... -- -- --
---------- ---------- ----------
Total current taxes.............. -- -- --
---------- ---------- ----------
Deferred taxes:
Federal............................. -- -- --
State............................... -- -- --
---------- ---------- ----------
Total deferred taxes............. -- -- --
---------- ---------- ----------
Total tax expense (benefit)...... $ -- $ -- $ --
========== ========== ==========
</TABLE>
A reconciliation of the statutory tax expense, assuming all income is taxed
at the statutory rate applicable to the income and the actual tax expense is as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------------
1997 1998 1999
----------- ------------- -------------
<S> <C> <C> <C>
Income before taxes on income, as reported in the statements of income.......... $(1,659) $(16,167) $(36,896)
======= ======== ========
Theoretical tax on the above amount at 35%...................................... (581) (5,658) (12,914)
State tax, net of federal benefit............................................... (165) (1,605) 701
Increase in taxes resulting from permanent differences, net..................... -- 31 2,120
Adjustments arising from differences in the basis of measurement for tax
purposes and financial reporting purposes and other.......................... -- -- 13,252
Change in valuation allowance................................................... 746 7,232 (3,159)
------- -------- --------
Taxes on income for the reported year........................................... $ -- $ -- $ --
======= ======== ========
</TABLE>
At December 31, 1997, 1998 and 1999, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------------
1997 1998 1999
--------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss/other tax attribute carryovers..... $ 36 $ 477 $ 2,650
Start-up costs........................................ 710 7,501 17,605
----- ------- --------
Gross total deferred tax assets.................... 746 7,978 20,255
Valuation allowance for deferred tax assets............. (746) (7,978) (4,819)
----- ------- --------
Net deferred assets................................ -- -- 15,436
----- ------- --------
Deferred tax liabilities:
Fixed assets.......................................... -- -- (51)
FCC license........................................... -- -- (10,160)
Other intangible assets............................... -- -- (5,225)
----- ------- --------
Net deferred tax liabilities....................... -- -- (15,436)
----- ------- --------
Deferred income tax, net........................... $ -- $ -- $ --
===== ======= ========
</TABLE>
(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
F-20
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 15, 1992 (date of inception) to December 31, 1999
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 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.
(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 WSI had 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 as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Company entered into agreements with AMSC and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which AMSC and WorldSpace MC would provide technical support in areas related to
the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be
terminated by the parties on or after the date of the commencement of commercial
operation following the launch of the Company's first satellite. There are no
minimum services purchase requirements. The Company incurred costs of $413,000
and $224,000 under its agreement with AMSC during 1998 and 1999, respectively.
The Company incurred costs of $4,357,000 and $0 under its agreement with
WorldSpace MC during 1998 and 1999, respectively.
(d) Technology Licenses
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 to WorldSpace MC over a ten-year period. XMSR
incurred costs of $6,624,000 and $50,000, payable to WorldSpace MC, under the
agreement during 1998 and 1999, respectively. Any additional amounts to be
incurred under this agreement are dependent upon further development of the
F-21
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 15, 1992 (date of inception) to December 31, 1999
technology, which is at XMSR's option. No liability exists to AMSC or WorldSpace
MC should such developments prove unsuccessful. The Company maintains an accrual
of $5,046,000, payable to WorldSpace MC for quarterly royalty payments to be
made. In addition, XMSR agreed to pay 1.2 percent of quarterly net revenues to
WorldSpace MC and a royalty of $0.30 per chipset, payable to WorldSpace MC for
equipment manufactured using certain source encoding and decoding signals
technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to construct and
launch the Company's satellites to implement a revised work timetable, payment
schedule to reflect the timing of the receipt of additional funding, and
technical modifications. The Company expects to incur total payment obligations
under this contract of approximately $541,300,000, 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 December 31, 1998 and 1999, the Company had paid $40,481,250 and
$183,918,000, respectively, under this contract.
(f) LCC International Services Contract
In August 1999, the Company signed a contract with LCC International, Inc., a
related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the
Company has paid $6,578,000 under this contract.
(g) 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 $35,000,000 in the aggregate during this period. Additional annual
fixed payment obligations beyond the initial four years of the contract term
range from less than $35,000,000 to approximately $130,000,000 through 2009,
aggregating approximately $400,000,000. 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 systems. The agreement is subject to renegotiations at any time based
upon the installation of radios that are compatible with a unified standard or
capable of receiving Sirius Satellite Radio's (formerly known as CD Radio)
service. The agreement is subject to renegotiations 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 1,240,000 units after four years, and thereafter increasing by the lesser
of 600,000 units per year 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-22
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 15, 1992 (date of inception) to December 31, 1999
(h) Terrestrial Repeater Contract
In February 2000, the Company entered into a contract with Hughes Electronics
Corporation, a related party, for the design, development and purchase of
terrestrial repeater equipment. The total contract value is $128,000,000 and the
Company incurred and paid $3,500,000 under a letter agreement in anticipation of
this contract through December 31, 1999.
(i) Joint Development Agreement
On February 16, 2000, the Company signed an agreement with Sirius Satellite
Radio ("Sirius Radio"), a competitor of the Company, to develop a unified
standard for satellite radios, to facilitate the ability of consumers to
purchase one radio capable of receiving both the Company's and Sirius Radio's
services. The technology relating to the unified standard will be jointly
developed, funded and owned by the two companies. As part of the agreement, each
company has licensed to the other its intellectual property relating to its
system, the value of this license will be considered part of its contribution
toward the joint development. In addition, each company has agreed to license
its non-core technology, including non-essential features of its system, to the
other at commercially reasonable rates.
(j) Sony Warrant
In February 2000, the Company issued a warrant to Sony exercisable for shares
of the Company's Class A common stock. The warrant will vest at the time that we
attain our millionth customer, and the number of shares underlying the warrant
will be determined by the percentage of XM Radios that have a Sony brand name as
of the vesting date. If Sony achieves its maximum performance target, it will
receive 2% of the total number of shares of the Company's Class A common stock
on a fully-diluted basis upon exercise of the warrant. The exercise price of the
Sony warrant will equal 105% of fair market value of the Class A common stock on
the vesting date, determined based upon the 20-day trailing average.
(k) Leases
The Company has three noncancelable operating leases for office space and two
noncancelable capital leases for equipment that expire over the next ten years.
The future minimum lease payments under noncancelable leases as of December 31,
1999 are (in thousands):
<TABLE>
<CAPTION>
Operating Capital
--------- ---------
leases leases
------ ------
Year ending December 31:
<S> <C> <C>
2000 ................................................ $ 755 $ 172
2001 ................................................ 2,113 172
2002 ................................................ 2,180 86
2003 ................................................ 2,248 --
2004 ................................................ 2,281 --
Thereafter .......................................... 14,354 --
------- -----
Total ............................................ $23,931 $ 430
=======
Less amount representing interest ................... (52)
-----
Present value of net minimum lease payments ...... 378
Less current maturities ............................. (139)
-----
Long-term obligations ............................ $ 239
=====
</TABLE>
Rent expense for 1997, 1998 and 1999 was $0, $231,000 and $649,000,
respectively.
F-23
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 15, 1992 (date of inception) to December 31, 1999
In January 2000, the Company established a $3,400,000 letter of credit as a
security deposit for one of its leases for office space.
(l) Prior Litigation
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite radio
license, commenced an action against the Company in the United States District
Court for the Southern District of New York, alleging that the Company was
infringing or would infringe three patents assigned to Sirius Radio. In its
complaint, Sirius Radio sought money damages to the extent the Company
manufactured, used or sold any product or method claimed in their patents and
injunctive relief. On February 16, 2000, this suit was resolved in accordance
with the terms of a joint development agreement between the Company and Sirius
Radio and both companies agreed to cross-license their respective property (see
note 12(i)). However, if this agreement is terminated before the value of the
license has been determined due to the Company's failure to perform a material
covenant or obligation, then this suit could be refiled.
(13) Secondary Offering and Sale of Series B Convertible Redeemable Preferred
Stock
On January 31, 2000, the Company closed on a secondary offering of its Class A
common stock and newly designated Series B convertible redeemable preferred
stock. The Company sold 4,000,000 shares of its Class A common stock for $32.00
per share, which yielded net proceeds of approximately $121,000,000. The Company
concurrently sold 2,000,000 shares of its Series B convertible redeemable
preferred stock for $50.00 per share, which yielded net proceeds of
approximately $96,300,000. The Series B convertible redeemable preferred stock
provides for 8.25% cumulative dividends that may be paid in Class A common stock
or cash. The Series B convertible redeemable preferred stock is convertible into
Class A common stock at a conversion price of $40 per share and is redeemable in
Class A common stock on February 3, 2003.
On February 9, 2000, the underwriters exercised a portion of the over-
allotment option for 370,000 shares of Class A common stock, which yielded net
proceeds of approximately $11,233,000.
(14) Private Units Offering
On March 15, 2000 the Company closed a private placement of 325,000 units,
each unit consisting of $1,000 principal amount of 14% senior secured notes due
2010 of its subsidiary XM Satellite Radio Inc. and one warrant to purchase
8.042815 shares of the Company's Class A common stock at a price of $49.50 per
share. The Company realized net proceeds of $191.0 million, excluding $123.0
million used to acquire securities which will be used to pay interest payments
due under the notes for the first three years.
(15) Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------------ ---------- ---------- ----------
(in thousands, except for per share data)
<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--basis and diluted ..... $ -- $(0.04) $ (0.07) $ (0.14)
====== ====== ======= =======
</TABLE>
F-24
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Period from December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
1998
--------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................... $ -- $ -- $ -- $ --
Operating loss ............................. 3,100 5,032 3,865 4,196
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--basis and diluted .... $(0.46) $(0.75) $ (0.58) $ (0.62)
====== ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues ................................... $ -- $ -- $ -- $ --
Operating loss ............................. 4,421 4,020 9,374 12,876
Loss before income taxes ................... 4,367 3,999 17,402 11,128
Net loss ................................... 4,367 3,999 17,402 11,128
------ ------ ------- -------
Net loss per share--basis and diluted .... $(0.65) $(0.60) $ (2.60) $ (0.27)
====== ====== ======= =======
</TABLE>
The sum of quarterly per share net losses do not necessarily agree to the net
loss per share for the year due to the timing of stock issuances.
F-25
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and March 31, 2000
<TABLE>
<CAPTION>
December 31, March 31,
1999 2000
------------ -----------
(unaudited)
in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 50,698 $ 448,037
Short-term investments.................................... 69,472 --
Restricted investments.................................... -- 58,817
Prepaid and other current assets.......................... 1,077 1,200
---------- ----------
Total current assets........................................ 121,247 508,054
Other assets:
Restricted investments, net of current portion............. -- 79,599
System under construction................................. 362,358 437,274
Property and equipment, net................................ 2,551 7,949
Goodwill and intangibles, net.............................. 25,380 25,037
Other assets, net.......................................... 3,653 14,233
---------- ----------
Total assets................................................ $ 515,189 $1,072,146
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 23,338 $ 36,599
Accrued expenses.......................................... 1,514 1,116
Due to related parties.................................... 62 62
Accrued interest on senior secured notes................... -- 1,896
Royalty payable........................................... 1,646 1,869
---------- ----------
Total current liabilities................................... $ 26,560 $ 41,542
Senior secured notes........................................ -- 259,528
Royalty payable, net of current portion..................... 3,400 3,200
Capital lease, net of current portion....................... 212 202
---------- ----------
Total liabilities........................................... 30,172 304,472
---------- ----------
Stockholders' equity:
Series A convertible preferred stock, par value $0.01;
15,000,000 shares authorized, 10,761,677 shares issued
and outstanding at December 31, 1999 and March 31, 2000.. 108 108
Series B convertible redeemable preferred stock, par
value $0.01 (liquidation preference of $100,000,000);
3,000,000 shares authorized, no shares and 2,000,000
shares issued and outstanding at December 31, 1999
and March 31, 2000, respectively........................ -- 20
Class A common stock, par value $0.01; 180,000,000
shares authorized, 26,465,333 shares and 32,179,581
shares issued and outstanding at December 31, 1999,
and March 31, 2000, respectively......................... 265 322
Class B common stock, par value $0.01; 30,000,000
shares authorized, 17,872,176 and 16,557,262 shares
issued and outstanding at December 31, 1999 and
March 31, 2000, respectively............................. 179 166
Class C common stock, par value $0.01; 30,000,000
shares authorized, no shares issued and outstanding
at December 31, 1999 and March 31, 2000, respectively... -- --
Additional paid-in capital................................. 539,187 834,520
Deficit accumulated during development stage............... (54,722) (67,462)
---------- ----------
Total stockholders' equity.................................. 485,017 767,674
---------- ----------
Commitments and contingencies
Total liabilities and stockholders' equity............... $ 515,189 $1,072,146
========== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-26
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Month Period ended March 31, 1999 and 2000,
and for the period from December 15, 1992 (date of inception) to March 31, 2000
<TABLE>
<CAPTION>
Three Months ended
March 31, December 15, 1992
--------------------- (date of inception)
1999 2000 to March 31, 2000
---------- ---------- ------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue........................................ $ -- $ -- $ --
======= ========= ===========
Operating expenses:
Research and development..................... 748 4,519 15,735
Professional fees............................ 1,297 5,594 21,894
General and administrative................... 2,376 6,775 27,253
------- --------- -----------
Total operating expenses.................... 4,421 16,888 64,882
------- --------- -----------
Operating loss.............................. (4,421) (16,888) (64,882)
Other expense--interest income
(expense), net................................ 54 4,148 (2,580)
Net loss.................................... $(4,367) $ (12,740) $ (67,462)
======= ========= ==========
Preferred stock dividend accrual............... -- (1,472)
Net loss attributable to common stockholders... $ (4,367) $ (14,212)
========= ==========
Net loss per share:
Basic and diluted............................ $ (0.65) $ (0.30)
========= ==========
Weighted average shares used in
computing net loss per share-basic
and diluted................................... 6,689,250 47,195,963
========= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-27
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three-Month Period ended March 31, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to March 31, 2000
<TABLE>
<CAPTION>
Three Months ended December 15, 1992
March 31, (date of inception)
-----------------------------
1999 2000 to March 31, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................... $ (4,367) $ (12,740) $ (67,462)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization............................... 57 503 2,070
Amortization of deferred financing fees..................... -- -- 509
Non-cash stock compensation................................. -- 658 4,868
Non-cash charge for beneficial conversion
feature of note issued to Parent........................ -- -- 5,520
Changes in operating assets and liabilities:
(Increase) decrease in prepaid and other
current assets........................................ 15 (123) (1,200)
(Increase) decrease in other assets...................... 21 -- (374)
Increase in accounts payable and
accrued expenses........................................ 864 4,527 18,716
Increase (decrease) in amounts due to related
parties................................................. (136) (1) 62
Increase (decrease) in accrued interest.................. -- (36) --
-------- --------- ---------
Net cash used in operating activities.......................... (3,546) (7,212) (37,291)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.......................... (206) (4,929) (7,443)
Additions to system under construction......................... (15,827) (62,422) (358,791)
Net Purchase/Maturity of short-term investments............. -- 69,472 --
Purchase of restricted investments............................. -- (123,416) (123,416)
Other investing activities..................................... -- (18,493) (18,493)
-------- --------- ---------
Net cash used in investing activities.......................... (16,033) (139,788) (508,143)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock and
capital contribution........................................ -- 132,594 256,173
Proceeds from issuance of Series B convertible
redeemable preferred stock.................................. -- 96,499 96,499
Proceeds from issuance of convertible notes
payable to related party.................................... 22,967 -- 148,939
Proceeds from issuance of options............................. -- -- 1,500
Proceeds from issuance of Series A convertible
notes..................................................... -- -- 250,000
Proceeds from issuance of 14% Senior Secured
Notes and Warrants......................................... -- 325,000 325,000
Repayments of loans payable to related party.................. -- -- (75,000)
Payments for deferred financing costs......................... (249) (9,754) (9,640)
Other net financing activities................................ (7) -- --
-------- --------- ---------
Net cash provided by financing activities...................... 22,711 544,339 993,471
-------- --------- ---------
Net increase in cash and cash equivalents...................... 3,132 397,339 448,037
-------- --------- ---------
Cash and cash equivalents at beginning of
period....................................................... 310 50,698 --
-------- --------- ---------
Cash and cash equivalents at end of period..................... $ 3,442 $ 448,037 $ 448,037
======== ========= =========
</TABLE>
F-28
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months ended December 15, 1992
March 31, (date of inception)
-----------------------------
1999 2000 to March 31, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles............ $ -- $ -- $ 51,624
Liabilities exchanged for convertible note to Parent......... -- -- 81,676
Non-cash interest capitalized................................ 4,236 2,247 31,134
Accrued system milestone payments............................ 45,396 23,854 23,854
Property acquired through capital lease........................ -- -- 470
Conversion of debt to equity................................. -- -- 363,815
Use of deposit for terrestrial repeater contract............. -- 3,422 --
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-29
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XMSR") was incorporated on December 15, 1992 in
the State of Delaware as a wholly owned subsidiary of Motient Corporation
("Motient" or "Parent"), formerly American Mobile Satellite Corporation, for the
purpose of procuring a digital audio radio service ("DARS") license. Business
activity for the period from December 15, 1992 through December 31, 1996 was
insignificant. Pursuant to various financing agreements entered into in 1997
between Motient, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc.
(the "Company") 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. Motient 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.
On July 7, 1999, Motient acquired WSI's 20 percent interest in the Company.
(2) Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of XM
Satellite Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and
XM 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, obtaining its DARS license, 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. The Company has not
generated any revenues and planned principal operations have not commenced.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial Accounting
Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage
Enterprises.
In the opinion of management, the accompanying unaudited condensed
consolidated 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 subsidiaries, a
development stage entity, as of March 31, 2000, and the results of operations
and cash flows for the three months ended March 31, 1999 and 2000, and the
period from December 15, 1992 (date of inception) through March 31, 2000. The
results of operations for the three months ended March 31, 1999 and 2000 are not
necessarily indicative of the results that may be expected for the full year.
These condensed consolidated financial statements are unaudited, and do not
include all related footnote disclosures. The interim unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements of the Company included in the Company's filings with the
Securities and Exchange Commission.
(3) Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS
No. 128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computed by dividing the net income (loss) available to common
stockholders (after deducting preferred dividend requirements) for the period by
the weighted average number of common shares outstanding during the period.
Diluted net income (loss) available per share is computed by dividing the net
income (loss) available to common stockholders for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. The Company has presented historical basic and diluted net
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in each of the periods presented, basic and diluted net income (loss)
per share is the same.
F-30
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(4) Restricted Investments
Restricted investments consist of fixed income securities and are stated at
amortized costs plus accrued interest income. The securities included in
restricted investments are $123.4 million of US Treasury strips restricted to
provide for the first six scheduled interest payments on the Company's 14%
Senior Secured Notes due 2010, which are classified as held-to-maturity
securities under the provision of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and $15.0 million in money market
funds for scheduled milestone payments under the Hughes Electronics Corporation
contract.
(5) Secondary Offering of Class A Common Stock and Sale of Series B Convertible
Redeemable Preferred Stock
On January 31, 2000, the Company closed on a secondary offering of its Class A
common stock and newly designated Series B convertible redeemable preferred
stock. The Company sold 4,000,000 shares of its Class A common stock for $32.00
per share, which yielded net proceeds of approximately $120,900,000. The Company
concurrently sold 2,000,000 shares of its Series B convertible redeemable
preferred stock for $50.00 per share, which yielded net proceeds of
approximately $96,500,000. The Series B convertible redeemable preferred stock
provides for 8.25% cumulative dividends that may be paid in Class A common stock
or cash at the Company's option. The Series B convertible redeemable preferred
stock is convertible into Class A common stock at a conversion price of $40 per
share and is mandatorily redeemable in Class A common stock on February 1, 2012.
The Company has the right to redeem the Series B convertible redeemable
preferred stock in Class A common stock or cash commencing on February 3, 2003.
The Company does not currently intend to exercise this right.
On February 9, 2000, the underwriters exercised a portion of the over-
allotment option for 370,000 shares of Class A common stock, which yielded net
proceeds of approximately $11,233,000.
(6) Conversion of Class B Common Stock to Class A Common Stock
On March 8, 2000, at the request of the Company, one of the Class B common
stockholders converted 1,314,914 shares of the Company's Class B common stock
into Class A common stock on a one-for-one basis. As of March 31, 2000, Motient
held all of the Company's outstanding Class B common stock.
(7) 14% Senior Secured Notes and Warrants
On March 15, 2000, the Company closed a $325.0 million private debt placement
consisting of 325,000 units, each unit consisting of $1,000 principal amount of
14% senior secured notes due 2010 of its subsidiary XM Satellite Radio Inc. and
one warrant to purchase 8.024815 shares of the Company's Class A common stock at
a price of $49.50 per share. The Company realized net proceeds of $191.3
million, excluding $123.0 million used to acquire securities which will be used
to make interest payments due under the notes for the first three years.
(8) FCC Approval for Reduction of Motient Voting Stock
Motient is the Company's controlling stockholder. Motient has certain rights
regarding the election of persons to serve on the Company's board of directors
and as of the date of this report, holds 61.0% of the voting power of XM
Satellite Radio Holdings, or 50.5% giving effect to the conversion of all of XM
Satellite Radio Holdings' outstanding common stock equivalents. Motient cannot
relinquish its position as the Company's controlling shareholder without
obtaining the prior approval of the FCC. Accordingly, prior to obtaining FCC
approval of the transfer of control from Motient, the Company will only have
been able to issue a limited amount of voting securities or securities
convertible into voting securities unless certain of the Company's stockholders
holding nonvoting convertible securities agree not to convert them into voting
securities or the Company takes other steps to permit voting securities on a
basis consistent with FCC rules. On March 30, 2000, the FCC approved the
Company's application to allow Motient to reduce its ownership of the voting
stock of XM Satellite Radio Holdings to a minimum of 40%, provided that Motient
retain its right to elect a majority of the directors of the Company's board of
directors.
F-31
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(9) Reclassifications
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period presentation.
(10) 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.
(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 WSI had 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 as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Company entered into agreements with Motient
and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which Motient and WorldSpace MC would provide technical support in areas related
to the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be
terminated by the parties on or after the date of the commencement of commercial
operation following the launch of the Company's first satellite. There are no
minimum services purchase requirements. The Company incurred costs of $62,000
and $45,000 under its agreement with Motient and no costs were incurred under
its agreement with WorldSpace MC during the quarter ended March 31, 2000 and
1999, respectively.
(d) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing agreement
with Motient 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 to WorldSpace MC over a ten-year period. As of March
31, 2000, XMSR incurred costs of $6,696,000 payable to WorldSpace MC. 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 Motient or WorldSpace MC should such developments prove unsuccessful.
The Company maintains an accrual of $5,069,000 payable to WorldSpace MC, for
quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2
percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per
chipset, payable to WorldSpace MC, for equipment manufactured using certain
source encoding and decoding signals technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to construct and
launch the Company's satellites to implement a revised work timetable, payment
schedule to reflect the timing of the receipt of additional funding, and
technical modifications. The Company expects to incur total payment obligations
under this contract of approximately $541,300,000, 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 March 31, 2000, the Company had paid $242,765,000 under the
Satellite contract with Hughes and had accrued $8,200,000, which was
subsequently paid.
F-32
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(f) Terrestrial Repeater System Contracts
In August 1999, the Company signed a contract with LCC International, Inc., a
related party, calling for payments of approximately $115,000,000 for
engineering and site preparation. As of March 31, 2000, the Company has paid
$10,387,000 under this contract, and accrued an additional $2,900,000 which was
subsequently paid. The Company also entered into a contract effective October
22, 1999, with Hughes Electronics Corporation for the design, development and
manufacture of the terrestrial repeaters. Payments under this contract are
expected to be approximately $128,000,000. As of March 31, 2000, the Company had
paid $6,000,000 under this contract, and accrued an additional $3,000,000 which
was subsequently paid.
(g) Joint Development Agreement
On February 16, 2000, the Company signed an agreement with Sirius Satellite
Radio ("Sirius Radio"), a competitor of the Company, to develop a unified
standard for satellite radios to facilitate the ability of consumers to purchase
one radio capable of receiving both the Company's and Sirius Radio's services.
The technology relating to the unified standard will be jointly developed,
funded and owned by the two companies. As part of the agreement, each company
has licensed to the other its intellectual property relating to its system; the
value of this license will be considered part of its contribution toward the
joint development. In addition, each company has agreed to license its non-core
technology, including non-essential features of its system, to the other at
commercially reasonable rates.
(h) 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 $35,000,000 in the aggregate during this period. Additional annual
fixed payment obligations beyond the initial four years of the contract term
range from less than $35,000,000 to approximately $130,000,000 through 2009,
aggregating approximately $400,000,000. 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 systems. The agreement is subject to renegotiations at any time based
upon the installation of radios that are compatible with a unified standard or
capable of receiving Sirius Satellite Radio's service. The agreement is subject
to renegotiations 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 1,240,000 units after four years, and
thereafter increasing by the lesser of 600,000 units per year 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.
(i) Sony Warrant
In February 2000, the Company issued a warrant to Sony exercisable for shares
of the Company's Class A common stock. The warrant will vest at the time that
the Company attains its millionth customer, and the number of shares underlying
the warrant will be determined by the percentage of XM Radios that have a Sony
brand name as
F-33
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
of the vesting date. If Sony achieves its maximum performance target, it will
receive 2% of the total number of shares of the Company's Class A common stock
on a fully-diluted basis upon exercise of the warrant. The exercise price of the
Sony warrant will equal 105% of fair market value of the Class A common stock on
the vesting date, determined based upon the 20-day trailing average.
(j) Prior Litigation
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite radio
license, commenced an action against the Company in the United States District
Court for the Southern District of New York, alleging that the Company was
infringing or would infringe three patents assigned to Sirius Radio. In its
complaint, Sirius Radio sought money damages to the extent the Company
manufactured, used or sold any product or method claimed in their patents and
injunctive relief. On February 16, 2000, this suit was resolved in accordance
with the terms of a joint development agreement between the Company and Sirius
Radio and both companies agreed to cross-license their respective property (see
note 10(g)). However, if this agreement is terminated before the value of the
license has been determined due to the Company's failure to perform a material
covenant or obligation, then this suit could be refiled.
(k) Preferred Stock Dividend
On March 28, 2000, the Company announced its regular quarterly dividend on its
8.25% Series B convertible redeemable preferred stock, which will be paid on May
1, 2000. The dividend will be paid in shares of Class A common stock; 62,318
shares of Class A common stock will be issued to the holders of record on April
12, 2000. The net loss attributable to common stockholders reflects the accrual
of the dividend to the preferred stockholders which was accrued through March
31, 2000.
F-34
<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.
SEC registration fee............... $
Printing and engraving expenses....
Legal fees and expenses............
Blue Sky fees and expenses.........
NASD filing fees...................
Accounting fees and expenses.......
Transfer agent fees................
Listing fees.......................
Miscellaneous......................
Total.......................... $
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 provide 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.
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 1,337,850 shares of common stock to WorldSpace,
Inc. for cash consideration of $7.5 million. (American Mobile held the
remaining 5,351,400 shares of common stock.)
(2) As of May 16, 1997, we formed as a parent company for XM Satellite
Radio. We issued 5,351,400 shares of common stock to American Mobile
and 1,337,850 shares of common stock to WorldSpace in exchange for the
5,351,400 shares and 1,337,850 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 5,202,748, 6,897,291 and 187,893 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 Motient.
(6) In June 1999, we issued a $1.0 million promissory note for cash to
Motient.
(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
Motient, 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 6,689,250 shares of our Class B common stock to
Motient in exchange for the cancellation of 6,689,250 shares of our common stock
held by Motient. This transaction was exempt from registration under Section
3(a)(9) of the Securities Act.
From June 1998 through September 9, 1999, we have granted options to
purchase 2,103,917 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.
In February 2000, we issued a warrant to Sony exercisable for shares of our
Class A common stock. The warrant will vest at the time that we attain our
millionth customer, and the number of shares underlying the warrant will be
determined by the percentage of XM Radios that have a Sony brand name as of the
vesting date. If Sony achieves its maximum performance target, it will receive
2% of the total number of shares of our Class A common stock on a fully-diluted
basis upon exercise of the warrant. The exercise price of the Sony warrant will
equal 105% of fair market value of the Class A common stock on the vesting date,
determined based upon the 20-day trailing average.
In March 2000, we and our wholly owned subsidiary, XM, sold 325,000 units,
each unit consisting of $1,000
II-2
<PAGE>
principal amount of XM's 14% Senior Secured Notes due 2010 and one warrant to
purchase 8.024815 shares of our Class A Common Stock in an offering exempt from
registration under Rule 144A of the Securities Act.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Incorporated by reference to the Exhibit Index beginning on page II-7
hereto.
(b) Financial Statement Schedules included separately in the Registration
Statement:
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)3 of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment 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.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(b) 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, as amended, 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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia, on
June 13, 2000.
XM SATELLITE RADIO HOLDINGS INC.
By: /s/ Hugh Panero
______________________________
Hugh Panero
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Hugh Panero, Heinz Stubblefield and Joseph
M. Titlebaum his true and lawful attorney-in-fact and agent, with full power of
substitution and resubstitution, for him and in his name, place, and stead, in
any and all capacities, to sign any and all amendments to this registration
statement, and to file the same, with exhibits thereto, and other documents in
connection therewith with the Securities and Exchange Commission, granting unto
said attorney-in-fact and agent full power and authority to do and perform each
and every act and thing requisite and necessary to be done, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or either of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Hugh Panero President, Chief Executive Officer and June 13, 2000
_____________________________ Director (Principal Executive Officer)
Hugh Panero
/s/ Heinz Stubblefield Senior Vice President, Chief Financial June 13, 2000
_____________________________ Officer (Principal Financial and
Heinz Stubblefield Accounting Officer)
/s/ Gary M. Parsons Chairman of the Board of Directors June 13, 2000
_____________________________
Gary M. Parsons
/s/ Nathaniel A. Davis Director June 13, 2000
_____________________________
Nathaniel A. Davis
/s/ Thomas J. Donohue Director June 13, 2000
_____________________________
Thomas J. Donohue
/s/ Randall T. Mays Director June 13, 2000
_____________________________
Randall T. Mays
/s/ Randy S. Segal Director June 13, 2000
_____________________________
Randy S. Segal
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
/s/ Jack Shaw Director June 13, 2000
_____________________________
Jack Shaw
/s/ Dr. Rajendra Singh Director June 13, 2000
_____________________________
Dr. Rajendra Singh
/s/ Ronald L. Zarrella Director June 13, 2000
_____________________________
Ronald L. Zarrella
</TABLE>
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<PAGE>
EXHIBIT INDEX
Exhibit
-------
No. Description
--- -------------------------------------------------------------------
3.1/\ Restated Certificate of Incorporation of XM Satellite Radio Holdings
Inc.
3.2/\ Restated Bylaws of XM Satellite Radio Holdings Inc.
4.1/\ Form of Certificate for our Class A common stock (incorporated by
reference to Exhibit 3 to the XM Satellite Radio Holdings Inc.
Registration Statement on Form 8-A, filed with the SEC on September
23, 1999).
4.2/\/\ Form of Certificate for our 8.25% Series B Convertible Redeemable
Preferred Stock.
4.3- Certificate of Designation Establishing the Voting Powers,
Designations, Preferences, Limitations, Restrictions and Relative
Rights of 8.25% Series B Convertible Redeemable Preferred Stock due
2012 (incorporated by reference to the Registrant's Annual Report on
Form 10-K, filed with the SEC on March 16, 2000)
4.4- Warrant to purchase shares of XM Satellite Radio Holdings Inc.'s
Class A common stock, dated February 9, 2000, issued to Sony
Electronics, Inc. (incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q, filed with the SEC on May 12, 2000).
4.5- Warrant Agreement, dated March 15, 2000, between XM Satellite Radio
Holdings Inc. and United States Trust Company of New York.
4.6- Warrant Registration Rights Agreement, dated March 15, 2000, between
XM Satellite Radio Holdings Inc. and Bear, Stearns & Co. Inc.,
Donaldson, Lufkin and Jenrette Securities Corporation, Salomon Smith
Barney Inc. and Lehman Brothers Inc.
4.7- Form of Warrant.
5.1- Opinion of Hogan & Hartson L.L.P. concerning the legality of the
warrants and underlying common stock.
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.
II-7
<PAGE>
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 July 21, 1999.
10.7/\* Amended and Restated Agreement by and between XM Satellite Radio, Inc
and STMicroelectronics Srl, dated September 27, 1999.
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 Communication, Inc.
10.11/\* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and TCM, LLC.
10.12/\ Agreement, dated as of July 16, 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 dated 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 (incorporated by reference to the Registrant's
Registration Statement on Form S-8, File No. 333-92049).
10.19/\ Form of Employee Non-Qualified Stock Option Agreement.
10.20/\ Firm Fixed Price Contract #001 between XM Satellite Radio Inc. and
the Fraunhofer Gesellschaft zur Foderung Der angewandten Forschung
e.V., dated July 16, 1999.
10.21/\* Contract for Engineering and Construction of Terrestrial Repeater
Network System by and between XM Satellite Radio Inc. and LCC
International, Inc., dated August 18, 1999.
10.22 Employee Stock Purchase Plan (Incorporated by reference to the
Registrant's Registration Statement on Form S-8, File No. 333-92049).
10.23/\ Non-Qualified Stock Option Agreement between Gary Parsons and XM
Satellite Radio Holdings Inc., dated July 16, 1999.
10.24/\ Non-Qualified Stock Option Agreement between Hugh Panero and XM
Satellite Radio Holdings Inc., dated July 1, 1998, as amended.
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<PAGE>
10.25/\ Form of Director Non-Qualified Stock Option Agreement.
10.26/\ Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio
Inc., dated September 29, 1999
10.27/\/\ Letter Agreement with Stephen Cook dated January 12, 1999
10.28** Contract for the Design, Development and Purchase of Terrestrial
Repeater Equipment by and between XM Satellite Radio Inc. and Hughes
Electronics Corporation, dated February 14, 2000 (incorporated by
reference to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1999, filed with the SEC on March 16,
2000).
10.29** Joint Development Agreement, dated February 16, 2000, between XM
Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by
reference to the Registrant's Quarterly Report on Form 10-Q, filed
with the SEC on May 12, 2000).
21.1 Subsidiaries of XM Satellite Radio Holdings Inc.
23.1 Consent of KPMG LLP.
23.2- Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
27.1 Financial Data Schedule.
/\ Incorporated by reference to the Registrant's Registration Statement on
Form S-1, File No. 333-83619.
/\/\ Incorporated by reference to the Registrant's Registration Statement on
Form S-1, File No. 333-93529.
* Pursuant to the SEC's Order Granting Confidential Treatment under Rule 406
of the Securities Act of 1933, certain confidential portions of this
Exhibit were omitted by means of redacting a portion of the text.
** Certain 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 SEC with such text pursuant to our Application Requesting
Confidential Treatment under Rule 246-2 under the Securities Exchange Act
of 1934.
- To be filed by amendment.
II-9
