<PAGE>
As filed with the Securities and Exchange Commission on January 7, 2000.
Registration No. 333-93529
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
Under the Securities Act of 1933
----------------
XM SATELLITE RADIO HOLDINGS INC.
(Exact name of registrant as specified in its charter)
Delaware 4899 54-1878819
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification
incorporation or Number)
organization)
1250 23rd Street, N.W., Suite 57
Washington, D.C. 20037-1100
(202) 969-7100
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Joseph M. Titlebaum
Senior Vice President, General
Counsel and Secretary
XM Satellite Radio Holdings Inc.
1250 23rd Street, N.W., Suite 57
Washington, D.C. 20037-1100
(202) 969-7100
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
With Copies To:
Steven M. Kaufman, Esq. Gregory A. Ezring, Esq.
HOGAN & HARTSON L.L.P. LATHAM & WATKINS
555 13th Street, N.W. 885 Third Avenue
Washington, D.C. 20004 Suite 1000
(202) 637-5600 New York, New York 10022
(212) 906-1200
----------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (as defined below), check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Proposed
maximum offering maximum aggregate Amount of
Title of each Class of Amount being price per offering registration
Securities to be registered(1) share(2) price(1)(2) fee(2)
registered ------------- ---------------- ----------------- ------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$0.01 par value per
share.................. 4,600,000 $31.00 $142,600,000 $37,647
Series B Preferred
Stock, $0.01 par value
per share(3)........... 2,300,000 $50.00 $115,000,000 $30,360
Total................... $68,007
</TABLE>
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(1) Includes 600,000 shares of Class A common stock and 300,000 shares of
Series B preferred stock that may be purchased to cover over-allotments.
(2) Estimated in accordance with Rule 457 under the Securities Act solely for
the purpose of computing the amount of the registration fee. Of this
amount, $37,647 was previously paid on December 23, 1999.
(3) Includes an indeterminate number of shares of Class A common stock issuable
as dividends on, and upon conversion or redemption of, the Series B
convertible preferred stock. Pursuant to Rule 457(i), no separate
registration fee is payable with respect to these shares of Class A common
stock. Pursuant to Rule 416, this Registration Statement also covers such
shares of Class A common stock as may be issuable pursuant to the anti-
dilution provisions of the Series B preferred stock.
----------------
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
EXPLANATORY NOTE
This registration statement contains two prospectuses. The first prospectus
relates to a Class A common stock offering and is produced in its entirety. The
second prospectus relates to a Series B convertible preferred stock offering
and is also produced in its entirety and follows the Class A common stock
prospectus.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold nor may any offers to buy be +
+accepted prior to the time this prospectus is delivered in final form. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+a solicitation of an offer to buy these securities in any jurisdiction where +
+such offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 7, 2000
PRELIMINARY PROSPECTUS
4,000,000 Shares
XM SATELLITE RADIO HOLDINGS INC.
[Satellite Radio Logo]
Class A Common Stock
This is an offering of 4,000,000 shares of our Class A common stock.
Our Class A common stock is traded on the Nasdaq National Market under the
symbol "XMSR." The last reported sale price of our Class A common stock on
January 6, 2000 was $37.50 per share.
We are currently offering, by means of a separate prospectus, 2,000,000 shares
of our Series B convertible redeemable preferred stock, excluding up to 300,000
shares available to cover over-allotments. This offering and the Series B
convertible preferred stock offering are not dependent on each other.
See "Risk Factors" beginning on page 5 of this prospectus to read about certain
risks that you should consider before buying shares of our Class A common
stock.
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Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
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<TABLE>
<CAPTION>
---------------------------------------------------------
Per
Share Total
---------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds, before expenses, to our company:
---------------------------------------------------------
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 600,000 shares of our Class A common stock from us at the offering
price less underwriting discount.
Donaldson, Lufkin & Jenrette Bear, Stearns & Co. Inc.
-----------
C. E. Unterberg, Towbin Salomon Smith Barney
The date of this prospectus is January , 2000.
<PAGE>
[The artwork on the inside cover of the prospectus depicts two vertical,
overlapping sine-wave patterns connecting a car resting on a silhouette of the
earth with a satellite above the earth. On the left side of the page is an
illustration of a radio displaying "CHANNEL 83, CLASSIC ROCK," and underneath,
"LOU REED, SATELLITE OF LOVE." The radio has AM and FM buttons, a dial, and the
XM Radio logo. On the right of the page is the phrase "RADIO WILL NEVER BE THE
SAME!" At the bottom of the page appears "Song title and artist for illustrative
purposes only. The artist is not affiliated with nor endorses XM Satellite Radio
or this offering."]
[The two-page foldout of the cover page of the prospectus depicts a number of
pictures of well-known musical artists and lists several radio formats, such as
"Top 20", "Classical" and "Sports". These pictures and text appear to be
emanating from a satellite and broadcast to a car. There are additional pictures
of cars, houses and enthusiastic people at the bottom of the page beneath the
caption: "MUSIC NEWS INFORMATION".]
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all the information you should consider before
investing in our common stock. Please read the entire prospectus carefully,
including the section entitled "Risk Factors."
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 radio signals, 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 and will have a
ground spare in reserve. A network of terrestrial repeaters, which are ground-
based electronics equipment, will receive and re-transmit the satellite signals
to augment our satellite signal coverage.
We have contracts to develop, manufacture and distribute XM automobile
radios with Delco Electronics Corporation, Motorola Inc., Pioneer Electronics
Corporation, Alpine Electronics, Mitsubishi Electronic Automotive America,
Inc., Audiovox and Clarion Co. Ltd.; XM home and portable radios with SHARP
Corporation; and chipsets for XM radios with STMicroelectronics. We have
reached a preliminary agreement with Sony Electronics to design, manufacture
and market XM radios. 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, - Radio One
CNN Sports Illustrated
- - 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 between 34
million and 43 million customers would be willing to pay between $200 and $400
for a satellite radio and $10.00 per month for satellite radio service.
Our strategy includes offering diverse programming designed to appeal to a
large audience, including urban and rural listeners of virtually all ages,
ethnicities, economic groups and specialty interests. We 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.
In October 1999, we completed our initial public offering of 10,241,000
shares of our Class A common stock at an initial public offering price of
$12.00 per share, which resulted in net proceeds to us of $114 million. At this
time, substantially all of our indebtedness also converted into equity. As of
the date of this prospectus, we have raised $445 million in equity proceeds,
net of expenses and repayment of debt, from investors and strategic partners.
Our strategic investor companies include General Motors, DIRECTV, Clear Channel
Communications and our parent company, American Mobile Satellite Corporation.
We are currently offering, by means of a separate prospectus, 2,000,000
shares of our Series B convertible preferred stock, excluding up to 300,000
shares available to cover over-allotments. This offering and the Series B
convertible preferred stock offering are not dependent on each other.
----------------
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 website is not,
and should not be deemed to be, part of this prospectus.
2
<PAGE>
The Offering (1)
<TABLE>
<S> <C>
Class A common stock
offered................ 4,000,000 shares
Common stock to be outstanding
after the offering:
Class A .............. 30,435,471 shares (2)
Class B .............. 17,872,176 shares (3)
---------------------
Total............... 48,307,647 shares
=====================
</TABLE>
Nasdaq National Market
symbol..................... XMSR
- --------
(1) Concurrently with this offering, we are offering 2,000,000 shares of our
% Series B Convertible Redeemable Preferred Stock (excluding a maximum
of 300,000 shares which may be issued upon exercise of an over-allotment
option) which are initially convertible into million shares of Class A
common stock. The closing of this offering and the offering of Series B
convertible preferred stock are not contingent upon each other.
(2) Based on the number of shares of Class A common stock outstanding as of
December 15, 1999, and excludes
. 2,258,805 shares of Class A common stock issuable upon exercise of
outstanding options exercisable at exercise prices ranging from $9.52
per share to $27.00 per share;
. 10,786,504 shares of Class A common stock issuable upon conversion of
Series A convertible preferred stock which will convert on a one-for-one
basis; and
. 17,872,176 shares of Class A common stock issuable upon conversion of
Class B common stock, which will convert on a one-for-one basis.
(3) The Class B common stock is substantially identical to Class A common
stock, except that it has three votes per share as compared to one vote per
share for Class A common stock.
----------------
3
<PAGE>
Summary Consolidated Financial Data
The pro forma information in the following balance sheets table
additionally gives effect to the following as if each had occurred on
September 30, 1999:
. our sale of 10,241,000 shares of Class A common stock through an initial
public offering at $12 per share, which yielded net proceeds of $114.1
million;
. the conversion of the $250 million Series A convertible debt, together
with associated accrued interest of $6.3 million, into 10,761,677 shares
of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; and
. the conversion of the $21.4 million and $81.7 million of notes issued to
American Mobile, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock.
The pro forma "as adjusted" information in the following balance sheets
table additionally gives effect to the following as if it had occurred on
September 30, 1999:
. our sale of 4,000,000 shares of Class A common stock in this offering at
an assumed offering price of $37.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
The pro forma "as further adjusted" information in the following balance
sheets table additionally gives effect to the following as if it had
occurred on September 30, 1999:
. our concurrent sale of 2,000,000 shares of Series B convertible
redeemable preferred stock at an assumed offering price of $50 per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
<TABLE>
<CAPTION>
December 15,
Years Ended Nine Months Ended 1992
December 31, September 30, (Date of
-------------------- -------------------- Inception)
1997 1998 1998 1999 to September 30,
Actual Actual Actual Actual 1999 (1)
--------- --------- --------- --------- ----------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------
Operating expenses:
Research and
development........... -- 6,941 5,834 3,597 10,538
Professional fees...... 1,090 5,242 4,260 5,932 12,264
General and
administrative........ 20 4,010 1,903 8,286 12,316
--------- --------- --------- --------- --------
Total operating
expenses.............. 1,110 16,193 11,997 17,815 35,118
--------- --------- --------- --------- --------
Operating loss.......... (1,110) (16,193) (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. (549) 26 8 (7,952) (8,475)
--------- --------- --------- --------- --------
Net loss................ $ (1,659) $ (16,167) $ (11,989) $ (25,767) $(43,593)
========= ========= ========= ========= ========
Net loss per share--
basic and diluted...... $ (0.26) $ (2.42) $ (1.79) $ (3.85)
========= ========= ========= =========
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 6,368,166 6,689,250 6,689,250 6,693,338
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------
Pro Forma
December 31, Pro Pro Forma As Further
1998 Actual Forma As Adjusted Adjusted
------------ -------- -------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash
equivalents............ $ 310 $ 54,356 $168,490 $310,090 $406,090
System under
construction........... 169,029 282,316 282,316 282,316 282,316
Total assets............ 170,485 406,817 510,187 651,787 747,787
Total debt.............. 140,332 363,260 310 310 310
Total liabilities....... 177,668 382,483 19,533 19,533 19,533
Stockholders' equity
(deficit).............. (7,183) 24,334 490,654 632,254 728,254
</TABLE>
- -------
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
4
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision.
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 September 30, 1999, we had incurred significant costs, aggregating
approximately $282.3 million, in connection with the development of the XM
Radio system. We incurred net aggregate losses approximating $17.8 million from
our inception through December 31, 1998, and an additional $25.8 million in the
nine month period ended September 30, 1999. We expect our net losses and
negative cash flow to grow as we build the XM Radio system, make payments under
our various contracts and begin to incur marketing costs.
We need substantial further financing but such financing might not be
available.
We estimate that we will need approximately $397.7 million, after giving
effect to the proceeds from this offering and our concurrent offering of Series
B convertible preferred stock, to meet our needs until we begin commercial
operation of our services. If we are unable to complete the proposed concurrent
sale of our Series B convertible preferred stock, we would need approximately
$493.7 million. 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 projections. We may have to raise more funds than expected
to remain in business and to continue to develop and market the XM Radio
system.
We plan to raise future funds by selling debt or equity securities, or both,
publicly and/or privately and by obtaining loans or other credit lines from
banks or other financial institutions. We may not be able to raise sufficient
funds on favorable terms or at all. If we are successful in raising additional
financing, we anticipate that a significant portion of future financing will
consist of debt securities. As a result, we may be highly leveraged. If we fail
to obtain any necessary financing on a timely basis, then
. our satellite construction, launch, or other events necessary to our
business could be materially delayed, or their costs could materially
increase;
. we could default on our commitments to our satellite construction or
launch contractors, creditors or others, leading to termination of
construction or inability to launch our satellites; and
. 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.
5
<PAGE>
We may not be able to complete the proposed offering of our Series B
convertible preferred stock.
We may not be able to complete the offering of 2,000,000 shares of our
Series B convertible preferred stock being conducted concurrently with this
offering, or such offering may not raise the amount of proceeds we expect. This
would increase our need for financing by the amount of the expected net
proceeds of the Series B convertible preferred stock offering, less any amount
actually raised. In addition, if we are unable to complete the Series B
convertible preferred stock offering, the information in this prospectus
regarding the Series B convertible preferred stock offering would not be
applicable or would need to be revised, perhaps significantly.
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, or improper
orbital placement. Launch failure rates vary depending on the particular launch
vehicle and contractor. There is a limited track record for the specific rocket
that will be used for the launch of our satellites, and even launch vehicles
with good track records experience some launch failures. 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 terrestrial repeater networks have not been
integrated and used together on the scale we contemplate. We
6
<PAGE>
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 and 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 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.
7
<PAGE>
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
. 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 satellite radio
services. These payment obligations, which could total several hundred million
dollars over
8
<PAGE>
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."
Sirius Satellite Radio's patent infringement suit against us could impair our
business.
On January 12, 1999, Sirius Satellite Radio, the only other owner of an FCC
license for satellite radio service, sued us, claiming that we are infringing
or will infringe three Sirius Satellite Radio patents. The Sirius Satellite
Radio patents involved in this litigation relate to certain aspects of signal
and reception methodologies that may be employed by a satellite radio system.
In its complaint, Sirius Satellite Radio seeks money damages to the extent we
have manufactured, used or sold any product or method claimed in Sirius
Satellite Radio's patents, and an injunction. Based on the planned design of
our system, our knowledge of the differences between the XM Radio system and
the claims of the Sirius Satellite Radio patents and on advice we have received
from our patent counsel, we believe that we have not infringed and will not
infringe any Sirius Satellite Radio patents. However, the litigation could harm
us, even if we prevail. It may divert management's attention and may make it
more difficult for us to raise financing or enter other agreements with third
parties. It may also impede our ability to move forward with the development of
our system in a timely manner. If we do not prevail in this litigation, we
could become liable to Sirius Satellite Radio for substantial money damages or
be subject to an injunction preventing us from using certain technology in our
satellite radio system, or both. Any such injunction could force us to develop
new technology which would not be subject to the injunction. Alternatively, we
could be required to license alternative technology from a third party, or seek
a license from, and pay royalties to, Sirius Satellite Radio to use its
technology. Any of the foregoing could delay or increase the costs of deploying
the XM Radio system.
Our business may be impaired by third party intellectual property rights.
Development of the XM Radio system will depend largely upon the intellectual
property that we will develop and license from third parties. If the
intellectual property that we may develop or use is not adequately protected,
others will be permitted to 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;
. 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.
9
<PAGE>
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
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., the Recording Industry
Association of America and SESAC, Inc. We expect to negotiate or establish by
arbitration royalty
10
<PAGE>
arrangements with these organizations, but such royalty arrangements may be
more costly than anticipated or unavailable. We also have to negotiate royalty
arrangements with the owners of the sound recordings. Cable audio services
currently pay a royalty rate of 6.5% of gross subscriber revenue set by the
Librarian of Congress. Although we believe we can distinguish XM Radio
sufficiently from the cable audio services in order to negotiate a lower
statutory rate, we may not be able to do so.
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.
Problems related to the Year 2000 issue could disrupt our operations and harm
our business.
Year 2000 could require us to incur delays and unanticipated expenses. Many
currently installed computer systems and software products are not able to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software that fail to recognize the proper date at the end of 1999
may suffer major system failures or miscalculations. If we are unable to
identify and resolve a problem related to the Year 2000 in time to avoid
adverse consequences, there could be an interruption in, or a failure of,
certain of our normal business activities and operations, harming our business
and financial results.
A small number of stockholders own approximately 83% of our stock on a fully
diluted basis and effectively control us. Their interests may conflict with
yours as a stockholder.
As of December 31, 1999, our current principal stockholders owned
approximately 83% of our common stock on a fully diluted basis with total
voting power of approximately 90%. We have entered into material contracts and
transactions with our principal stockholders and their affiliates, and we may
enter into additional contracts in the future. The composition of our board of
directors is governed by a shareholders' agreement among our principal
stockholders, which grants them effective management control of XM Radio. These
stockholders could use their position as principal stockholders and their
management control to cause us to take actions that might not be in our
interests or your interests as a stockholder.
We 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 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 authorized 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.
11
<PAGE>
The market price of our stock may fluctuate widely.
The market price of our common stock could fluctuate substantially due to
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
. announcements of acquisitions or technological innovations; or
. changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. This market volatility
could depress the price of our common stock without regard to our operating
performance.
Future sales of our common stock in the public market could lower our stock
price and impair our ability to raise funds in new stock offerings.
After this offering, we will have 30,435,471 shares of Class A common stock
outstanding, or 59,094,151 shares assuming conversion of all 17,872,176 shares
of Class B common stock and 10,786,504 shares of Series A convertible preferred
stock outstanding, but not assuming the conversion of any Series B convertible
preferred stock. If the underwriters of this offering exercise their over-
allotment option in full, we will have 31,035,471 shares of Class A common
stock outstanding, or 59,694,151 shares assuming conversion of all outstanding
Series A convertible preferred stock and Class B common stock. There could be
additional dilution as a result of our concurrent offering of 2,000,000 shares
of our Series B convertible preferred stock, which is initially convertible
into shares of Class A common stock. Sales of a large number of shares
could adversely affect the market price of our Class A common stock and could
impair our ability to raise funds in additional stock offerings.
The shares of Class A common stock sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless the shares are purchased by an affiliate of ours, sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or any other applicable exemption under the
Securities Act.
16,887,293 shares of our Class A common stock and all 10,786,504 shares of
our Series A convertible preferred stock are subject to lock-up agreements that
expire ninety days after the date of this prospectus. American Mobile, which
owns 200,000 shares of Class A common stock and an additional 17,872,176 shares
of Class B common stock that may be converted into Class A common stock on a
one-for-one basis, 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 those times, the shares released from these lock-up
restrictions will be freely tradable, subject to the provisions of Rule 144 or
Rule 701 under the Securities Act. The owners of all locked-up shares have
experienced substantial appreciation in the value of their shares relative to
the price paid for them. In the event all or a significant portion of these
stockholders elect to sell their 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 Class A common stock subject to
outstanding stock options or reserved for issuance under our 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 December 15, 1999, options to purchase
2,258,805 shares of Class A common stock were outstanding.
12
<PAGE>
In addition, following the closing of this offering, the holders of
16,179,755 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.
You would lose part of your investment if our assets were sold for their book
value.
The offering price per share will significantly exceed the net tangible book
value of your shares because of our intangible assets, operating losses and
other factors. In the event of a liquidation of our assets for their book
value, you would not receive back a portion of your investment. See "Dilution"
for the calculations of these figures. If we issue debt securities with
warrants to purchase our common stock as part of future financings, such
warrants might be exercisable for less than the offering price which may result
in further dilution. The amount of stock subject to such warrants would depend
on market conditions at the time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements 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.
13
<PAGE>
USE OF PROCEEDS
The net proceeds from this offering, at an assumed offering price of $37.50
per share, are estimated to be $141.6 million, after deducting estimated
underwriting discounts and commissions and offering expenses of $8.4 million.
The net proceeds are estimated to be $162.9 million if the underwriters' over-
allotment option is exercised in full, after deducting estimated underwriting
discounts and commissions and offering expenses of $9.6 million. We estimate
the net proceeds from our concurrent sale of 2,000,000 shares of Series B
convertible preferred stock will be approximately $96 million, assuming an
offering price of $50 per share and after deducting estimated underwriting
discounts and commissions and offering expenses (estimated net proceeds would
be approximately $110.5 million if the underwriters' over-allotment option were
exercised in full). The net proceeds from these offerings will be used as set
forth below.
<TABLE>
<CAPTION>
The Offering
and Series B
Convertible
Preferred
The Offering Stock Offering
------------ --------------
(In millions)
<S> <C> <C>
Payments under satellite contract.............. $ 63.7 $146.7
Payments under terrestrial repeater contracts.. 45.1 51.6
Payments under ground segment contracts........ 20.3 21.4
Working capital, operating losses and general
corporate expenses............................ 12.5 17.9
------ ------
Total uses................................... $141.6 $237.6
====== ======
</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 these offerings 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 our initial public offering on October 5, 1999. The
following table presents, for the period indicated, the high and low sales
prices per share of our Class A common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
1999: ------- -------
<S> <C> <C>
Fourth Quarter (beginning October 5, 1999)..................... $44.75 $11.625
<CAPTION>
2000:
<S> <C> <C>
First Quarter (through January 6, 2000)........................ $45.875 $36.25
</TABLE>
On January 6, 2000, the last reported sale price of our Class A common stock
on the Nasdaq National Market was $37.50. As of January 5, 2000, there were 42
holders of record of our Class A common stock.
DIVIDEND POLICY
We have not declared or paid any dividends since our date of inception. We
do not intend to pay cash dividends on our common stock in the foreseeable
future. We anticipate we will retain any earnings for use in our operations and
the expansion of our business.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999 our capitalization
on
. an actual basis;
. a pro forma basis, which additionally gives effect to (i) the sale of
10,241,000 shares of Class A common stock through an initial public
offering at $12 per share, which yielded net proceeds of $114.1 million;
(ii) the conversion of the $250 million Series A convertible debt,
together with associated accrued interest of $6.3 million, into
10,761,677 shares of Series A convertible preferred stock and 15,748,333
shares of Class A common stock; and (iii) the conversion of the $21.4
million and $81.7 million of notes issued to American Mobile, together
with associated accrued interest of $3.6 million, into 11,133,558 shares
of Class B common stock, as if these transactions had occurred at
September 30, 1999;
. a pro forma as adjusted basis, which additionally gives effect to our
sale of 4,000,000 shares of Class A common stock in this offering at
$37.50 per share, after deducting underwriting discounts and commissions
and estimated offering expenses; and
. a pro forma as further adjusted basis, which additionally gives effect
to our concurrent sale of 2,000,000 shares of Series B convertible
redeemable preferred stock at an assumed offering price of $50 per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
These adjustments are described more fully in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------
Pro Forma
Pro Pro Forma As Further
Actual Forma As Adjusted Adjusted
-------- -------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 54,356 $168,490 $310,090 $406,090
======== ======== ======== ========
Subordinated convertible notes
payable to related party........... 106,692 -- -- --
Series A subordinated convertible
notes.............................. 256,258 -- -- --
Capital lease....................... 310 310 310 310
-------- -------- -------- --------
Total debt......................... $363,260 $ 310 $ 310 $ 310
======== ======== ======== ========
Stockholders' Equity
Series A convertible preferred
stock, par value $0.01; 15,000,000
shares authorized, no shares
issued and outstanding actual,
10,761,677 shares issued and
outstanding pro forma and pro
forma as adjusted................. $ -- $ 108 $ 108 $ 108
Series B convertible redeemable
preferred stock, par value $0.01
(liquidation preference of
$100,000,000 pro forma as further
adjusted); 3,000,000 shares
authorized, no shares issued and
outstanding actual, pro forma, and
pro forma as adjusted, 2,000,000
shares issued and outstanding pro
forma as further adjusted......... -- -- -- 20
Class A common stock, par value
$0.01; 180,000,000 shares
authorized, 14,716 shares issued
and outstanding actual, 26,004,049
shares issued and outstanding pro
forma and 30,004,049 shares issued
and outstanding pro forma as
adjusted.......................... -- 260 300 300
Class B common stock, par value
$0.01; 30,000,000 shares
authorized; 6,689,250 shares
issued and outstanding actual and
17,822,808 shares issued and
outstanding pro forma and pro
forma as adjusted................. 67 178 178 178
Class C non-voting common stock,
par value $0.01; 30,000,000 shares
authorized, no shares issued and
outstanding actual, pro forma and
pro forma as adjusted............. -- -- -- --
Additional paid-in capital.......... 67,860 533,701 675,261 771,241
Accumulated deficit................. (43,593) (43,593) (43,593) (43,593)
-------- -------- -------- --------
Total stockholders' equity ........ 24,334 490,654 632,254 728,254
-------- -------- -------- --------
Total capitalization................ $387,594 $490,964 $632,564 $728,564
======== ======== ======== ========
</TABLE>
15
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was $230.1
million, or $5.25 per share. The per share amount results from dividing total
tangible assets less total actual liabilities and preferred stock by the number
of our common shares outstanding as of September 30, 1999, assuming the
conversion of the $250.0 million Series A subordinated convertible notes,
together with associated accrued interest of $6.3 million, and the $21.4
million and $81.7 million of notes issued to American Mobile, together with
associated accrued interest of $3.6 million, into various classes of common
stock and the sale of 10,241,000 shares of Class A common stock through an
initial public offering at $12.00 per share, yielding net proceeds of
$114.1 million. After giving effect to the sale of 4,000,000 shares of Class A
common stock at an assumed offering price of $37.50 per share, and after
deducting the underwriting discounts and commissions and estimated offering
expenses, our adjusted net tangible book value as of September 30, 1999 would
have been $371.7 million, or $7.77 per share. This represents an immediate
increase in as adjusted net tangible book value of $2.52 per share to existing
stockholders and an immediate dilution of $29.73 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Public offering price per share............................... $37.50
Pro forma net tangible book value per share as of September
30, 1999..................................................... $5.25
Increase per share attributable to new investors.............. 2.52
-----
Pro forma net tangible book value per share after the offer-
ing.......................................................... 7.77
------
Dilution per share to new investors........................... $29.73
======
</TABLE>
16
<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 years ended December 31, 1997 and 1998, and the consolidated balance sheets
data as of December 31, 1997 and 1998, 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, have negative working capital and
are dependent upon additional debt and 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
consolidated statements of operations data for the nine months ended September
30, 1998 and 1999, and for the period from December 15, 1992, which was our
date of inception, through September 30, 1999, and the consolidated balance
sheet data as of September 30, 1999, are derived from our unaudited
consolidated financial statements. 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 nine months ended September 30, 1998 and 1999 indicate what
our results will be for the full year.
The pro forma information in the following balance sheets table
additionally gives effect to the following as if each had occurred on
September 30, 1999:
. our sale of 10,241,000 shares of Class A common stock through an initial
public offering at $12 per share, which yielded net proceeds of $114.1
million;
. the conversion of the $250 million Series A convertible debt, together
with associated accrued interest of $6.3 million, into 10,761,677 shares
of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; and
. the conversion of the $21.4 million and $81.7 million of notes issued to
American Mobile, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock.
The pro forma "as adjusted" information in the following balance sheets
table further additionally gives effect to the following as if it had
occurred on September 30, 1999:
. our sale of 4,000,000 shares of Class A common stock in this offering at
an assumed offering price of $37.50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
The pro forma "as further adjusted" information in the following balance
sheets table additionally gives effect to the following as if it had
occurred on September 30, 1999:
. our concurrent sale of 2,000,000 shares of Series B convertible
redeemable preferred stock at an assumed offering price of $50 per
share, after deducting underwriting discounts and commissions and
estimated offering expenses.
(tables appear on the following page)
17
<PAGE>
<TABLE>
<CAPTION>
December 15,
Years Ended Nine Months Ended 1992
December 31, September 30, (Date of
-------------------- -------------------- Inception)
1997 1998 1998 1999 to September 30,
Actual Actual Actual Actual 1999 (1)
--------- --------- --------- --------- ----------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------
Operating expenses:
Research and
development........... -- 6,941 5,834 3,597 10,538
Professional fees...... 1,090 5,242 4,260 5,932 12,264
General and
administrative........ 20 4,010 1,903 8,286 12,316
--------- --------- --------- --------- --------
Total operating
expenses.............. 1,110 16,193 11,997 17,815 35,118
--------- --------- --------- --------- --------
Operating loss.......... (1,110) (16,193) (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. (549) 26 8 (7,952) (8,475)
--------- --------- --------- --------- --------
Net loss................ $ (1,659) $ (16,167) $ (11,989) $ (25,767) $(43,593)
========= ========= ========= ========= ========
Net loss per share--
basic and diluted...... $ (0.26) $ (2.42) $ (1.79) $ (3.85)
========= ========= ========= =========
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 6,368,166 6,689,250 6,689,250 6,693,338
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
---------------------------------------------------
Pro Forma
December 31, Pro Pro Forma As Further
1998 Actual Forma As Adjusted Adjusted
------------ -------- -------------- ------------ ----------
Balance Sheets Data: (In thousands)
<S> <C> <C> <C> <C> <C>
Cash and cash
equivalents............ $ 310 $ 54,356 $168,490 $310,090 $406,090
System under
construction........... 169,029 282,316 282,316 282,316 282,316
Total assets............ 170,485 406,817 510,187 651,787 747,787
Total debt.............. 140,332 363,260 310 310 310
Total liabilities....... 177,668 382,483 19,533 19,533 19,533
Stockholders' equity
(deficit).............. (7,183) 24,334 490,654 632,254 728,254
</TABLE>
- --------
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
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.
Introduction
XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-
owned subsidiary of American Mobile. XM Satellite Radio Holdings Inc. became a
holding company for XM Satellite Radio Inc. in connection with a strategic
investment by a former shareholder in early 1997. In July 1999, following our
repayment of $75.0 million in debt owed to the former shareholder, it conveyed
all of its interest in us to a trust. American Mobile then acquired all of that
interest from the trust, making American Mobile our only stockholder at that
time. Also, in July, we issued $250.0 million of Series A subordinated
convertible notes. In October 1999, we completed an initial public offering and
exercised an overallotment option for a cumulative total of 10,241,000 shares
of Class A common stock, yielding net proceeds of $114.1 million. Concurrent
with the closing of our initial public offering, the $250.0 million of Series A
subordinated convertible notes, together with associated accrued interest of
$6.8 million, converted into 10,786,504 shares of Series A convertible
preferred stock and 16,179,755 shares of Class A common stock. Additionally,
the $21.4 million and $81.7 million of convertible notes issued to American
Mobile, together with associated accrued interest of $3.8 million, converted
into 11,182,926 shares of Class B common stock.
We are in the development stage. Since our inception in December 1992, we
have devoted our efforts to establishing and commercializing the XM Radio
system. Our activities were fairly limited until 1997, when we pursued and
obtained regulatory approval from the FCC to provide satellite radio service.
Our principal activities to date have included
. designing and developing the XM Radio system;
. negotiating contracts with satellite and launch vehicle operators,
specialty programmers, radio manufacturers and car manufacturers;
. developing technical standards and specifications;
. conducting market research; and
. securing financing for working capital and capital expenditures.
We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement
of commercial operations.
We intend to capitalize all costs related to our satellite contract and our
FCC license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground
control stations. Depreciation of our satellites will commence upon in-orbit
delivery. Depreciation of our satellite control facilities and terrestrial
repeaters and the amortization of our FCC license will commence upon commercial
operations.
After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.
Results of Operations
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
Research and Development. Research and development expenses decreased to
$3.6 million for the nine months ended September 30, 1999 compared with $5.8
million for the nine months ended September 30, 1998. The decrease in research
and development expenses resulted from the completion of the development of
some of our system technology during 1998.
19
<PAGE>
Professional Fees. Professional fees increased to approximately $5.9 million
for the nine months ended September 30, 1999, compared with $4.3 million for
the nine months ended September 30, 1998. The increase primarily reflects
additional legal, regulatory and marketing expenses.
General and Administrative. General and administrative expenses increased to
$8.3 million for the nine months ended September 30, 1999, compared with $1.9
million for the nine months ended September 30, 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 the nine months ended September 30, 1999. This
amortization expense will be adjusted to reflect the final allocation to
tangible and intangible assets. We have granted certain key executives
performance-based stock options. We anticipate a non-cash compensation charge
of approximately $4.1 million for performance-based stock options and stock
options granted at prices below fair market value to be incurred in the fourth
quarter.
Interest Expense. As of September 30, 1999 and 1998, we owed $363.0 million
and $112.2 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 $14.7 million and $7.3 million
associated with our FCC license and the XM Radio system during the nine months
ended September 30, 1999 and 1998, respectively. We expensed interest costs of
$8.9 million and $0 during the nine months ended September 30, 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 $3.4 million.
Interest Income. Interest income increased to $0.9 million for the nine
months ended September 30, 1999, compared with the nine months ended September
30, 1998 which was insignificant. The increase was the result of higher average
balances of cash and short-term investments during the nine months ended
September 30, 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.
Net Loss. The net loss for the nine months ended September 30, 1999 and 1998
was $25.8 million and $12.0 million, respectively. The increase in net losses
for the nine months ended September 30, 1999, compared with the nine months
ended September 30, 1998, primarily reflects an increase in interest expense
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 completion
of 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.
20
<PAGE>
Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.7 million, respectively, primarily reflecting research and
development activities, professional fees and general and administrative
expenses.
Liquidity and Capital Resources
At September 30, 1999, we had a total of cash and cash equivalents of $54.4
million and working capital of $35.7 million, compared with cash and cash
equivalents of $0.3 million and working capital of $(130.3) million at December
31, 1998. The increases in the respective balances are due primarily to the
proceeds from the issuance of Series A subordinated convertible notes in July
1999 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Funds Required for XM Radio Through Commencement of
Commercial Operations--Sources of Funds") exceeding capital expenditures and
operating expenses for the first nine months of 1999, which was off-set by a
$75 million payment to retire loans payable, and the conversion of current
loans payable to a former shareholder into the non-current American Mobile new
convertible note. Subsequent to September 30, 1999, we successfully completed
an initial public offering, which raised $114.1 million in net proceeds, and
converted the Series A subordinated convertible notes into Series A convertible
preferred stock and Class A common stock.
Funds Required for XM Radio Through Commencement of Commercial Operations
We estimate that we will require approximately $1.1 billion to develop and
implement the XM Radio system from our inception through the commencement of
commercial operations, which we are targeting for the second quarter of 2001.
After we receive the estimated proceeds from this offering, we will have raised
an aggregate of $586.4 million since our inception net of expense and repayment
of debt. If we complete our concurrent offering of Series B convertible
preferred stock, we will have raised $682.4 million. We will require
substantial additional funding, approximately $397.7 million, to finish
building the XM Radio system, to provide working capital and fund operating
losses until we commence commercial operations. The funds raised in this
offering are expected to be sufficient in the absence of additional financing
to cover our funding needs into the second quarter of 2000, or the third
quarter of 2000 assuming completion of our concurrent offering of Series B
convertible preferred stock as described above. We may not be able to complete
the offering of 2,000,000 shares of our Series B convertible preferred stock
being conducted concurrently with this offering, or such offering may not raise
the amount of proceeds we expect. This would increase our need for financing by
the amount of the expected net proceeds of the Series B convertible preferred
stock offering, less any amount actually raised.
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 future 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 offer debt securities in a private placement at the time of or
shortly after this offering, or at other times in the near future. Often, high
yield debt securities are issued as part of units with warrants to purchase
common stock. If warrants were issued in any debt placement by us, the amount
of common stock that may be purchased and the price at which stock would be
purchased under the warrants would depend upon market conditions at that time.
We may not be able to raise any funds or obtain loans on favorable terms or
at all. Our ability to obtain the required financing depends on several
factors, including future market conditions; our success or lack of success in
developing, implementing and marketing our satellite radio service; our future
creditworthiness; and restrictions contained in agreements with our investors
or lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or their
costs could materially increase. We could default on our commitments to our
satellite construction or launch contractors, creditors or others, leading to
termination of construction or inability to launch our satellites. Finally, we
may not be able to launch our satellite radio service as planned and may have
to discontinue operations or seek a purchaser for our business or assets.
21
<PAGE>
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
<TABLE>
<CAPTION>
Sources of Funds
- ----------------
<S> <C>
Total funds raised to
date................... $ 444.8
Net proceeds from this
offering............... 141.6
Net proceeds from
offering
of Series B convertible
preferred stock........ 96.0
--------
Total capital raised.. 682.4
Future capital
requirements........... 397.7
--------
Total sources......... $1,080.1
========
</TABLE>
<TABLE>
<CAPTION>
Uses of Funds
- -------------
<S> <C>
Satellites and launch.... $ 472.6
Launch insurance......... 50.0
Terrestrial repeater
system.................. 263.3
Ground segment........... 65.9
--------
Total system........... 851.8
FCC license.............. 90.0
Operating expenses and
working capital
requirements............ 138.3
--------
Total uses............. $1,080.1
========
</TABLE>
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 American Mobile and by
a former investor who sold its investment to American Mobile.
. $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.
Net proceeds from this offering in the chart above reflects the expected
gross proceeds of this offering of $150.0 million less $8.4 million in
underwriting discounts and commissions and estimated offering expenses. Net
proceeds from the concurrent Series B convertible preferred stock offering in
the chart above reflects the expected gross proceeds of the offering of $100
million less $4 million in underwriting discounts and commissions and
estimated offering expenses.
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
September 30, 1999, $147.9 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 September 30, 1999, we had not
incurred any costs in deploying the ground segment.
Other operating expenses and working capital requirements in the chart
above include cumulative historical operating losses through September 30,
1999 of $43.6 million.
Sources of Funds. To date, we have raised approximately $444.8 million of
equity proceeds, net of expenses and repayment of debt. These funds have been
used to acquire our FCC license, make required payments under our
22
<PAGE>
satellite contract with Hughes, and for working capital and operating expenses.
Of the $444.8 million raised to date, approximately $167.0 million has been
raised through the issuance of equity to, and receipt of loans from, our
current stockholder, American Mobile, and 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 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 totalling $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 American Mobile 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.
Uses of Funds. Of the approximately $1.1 billion of funds to be used through
commencement of commercial operations, an estimated $569.4 million are expected
to be incurred under contracts presently in place and for our FCC license,
which has already been paid for in full. Total capital expenditures from our
inception to September 30, 1999, totaled $245.2 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 September 30, 1999, we had paid approximately $147.9
million under our satellite contract and recognized an additional $5.0 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 an aggregate of approximately $50.0
million. As of September 30, 1999, we had not incurred any costs with respect
to launch insurance.
Terrestrial Repeater System. Based on the current design of the XM Radio
system and preliminary bids, we estimate that through our expected commencement
of operations in the second quarter of 2001 we will incur aggregate costs of
approximately $263.3 million for a terrestrial repeater system. We expect these
costs to cover the capital cost of the design, development and installation of
a system of terrestrial repeaters to cover approximately 70 cities and
metropolitan areas. As of September 30, 1999, we had incurred costs with
respect to the terrestrial repeater buildout of $3.9 million which we paid. In
August 1999, we signed a contract calling for payments of approximately $115
million for engineering and site preparation.
Ground Segment. Based on the design of the XM Radio system, available
research, preliminary bids and actual contract costs, we expect to incur
aggregate ground segment costs through the expected commencement of operations
in the second quarter of 2001 of approximately $65.9 million. We expect these
costs will cover the satellite control facilities, programming production
studios and various other equipment and facilities. As of September 30, 1999,
we had not incurred any costs with respect to the ground segment.
23
<PAGE>
FCC License. In October 1997, we received one of two satellite radio
licenses issued by the FCC. We have paid approximately $90.0 million for this
license, including the initial bid right. No additional payments have been made
relating to the license.
Operating Expenses and Working Capital Requirements. In addition to the
above capital needs, we will require funds for working capital, operating
expenses and royalty payments currently estimated to be approximately $138.3
million through our targeted commercial launch in the second quarter of 2001.
From our inception through September 30, 1999, we have incurred total operating
expenses of $43.6 million. Total cash used in operating activities was $17.6
million. The difference between the loss incurred to date and cash used in
operations is principally due to a $5.5 million beneficial conversion charge,
$13.5 million in amounts due to related parties and $3.3 million in accrued
interest.
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 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 operational, promotional, subscriber acquisition, joint
development and manufacturing 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."
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.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Many such systems will
need to accept four-digit entries in order to distinguish 20th century dates
from 21st century dates. As a result, by the end of 1999, computer systems and
software used by many companies have been upgraded to comply with these Year
2000 requirements. Otherwise these systems may cause miscalculations that will
interfere with business activities or simply fail to work. When we use the
terms "Year 2000 Ready" or "Year 2000 Readiness," we mean that customers will
not experience any
24
<PAGE>
material difference in performance and functionality of our networks as a
result of the date being prior to, during or after the Year 2000.
We began to assess our Year 2000 Readiness in mid-1998. We have completed
the identification, necessary modification and testing of all our current
systems, which we believe are Year 2000 compliant. This required no significant
expense. Because we are a development stage company and do not expect to
commence commercial operations until the second quarter of 2001, as of the date
of this prospectus, we have not experienced and do not expect any significant
operational or financial problems for our company as a result of Year 2000
issues. Our existing technology development contracts require Year 2000
Readiness, and we require Year 2000 Readiness in all new contracts that we
enter.
In addition to our internal review process, we have had communications with
certain significant third parties with which we do business to
. evaluate their Year 2000 Readiness and state of compliance; and
. determine the extent to which our systems may be affected if they fail
to remediate their own Year 2000 issues.
To date, we have not identified any system which demonstrates symptoms of
not being Year 2000 Ready or for which a suitable alternative cannot be
implemented.
Qualitative and Quantitative Discussion of Market Risk
To date, we do not have any derivative financial instruments and do not
intend to use derivatives. We invest our cash in short-term commercial paper
and money market funds. All of our indebtedness was automatically converted
into equity upon completion of our initial public offering. As a result, we
believe that our exposure to interest rate risk is not material to our results
of operations.
25
<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:
. $444.8 million of equity proceeds raised to date, net of expenses and
repayment of debt, including an initial public offering and 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 our initial public offering;
. Contract with Hughes for construction and in-orbit delivery of two high-
powered satellites and long lead items for a ground spare;
. Long-term agreement with the OnStar division of General Motors covering
the installation and exclusive marketing and distribution of XM Radio
service in General Motors vehicles;
. Contracts with Delphi-Delco Electronics, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM
radios; preliminary agreement with Sony Electronics to design,
manufacture and market 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; and
. Agreements with leading specialty programmers, for many of which we will
be the exclusive satellite radio platform, covering at least 24
channels, including AsiaOne, Black Entertainment Television (BET), BBC
World Service, Bloomberg News Radio, Clear Channel, CNN en Espanol,
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.
Market Opportunity
We believe that there is a significant market for our satellite radio
service. Market studies show strong demand for radio service, as evidenced by
radio listening trends, data relating to sales and distribution of radios and
the general growth in radio advertising. In addition, we note that in many
markets audio programming choices are limited to mass appeal formats. We
believe our national subscription service will complement traditional local
radio. Moreover, the success of subscription entertainment services in other
media such as cable television and market research further indicate potential
for significant consumer demand for satellite radio services.
Radio Listening
On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that
over 75% of the entire United States population age 12 and older listen to the
radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and
Factbook, Radio Advertising Bureau, 1998).
In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting
26
<PAGE>
our service initially. An estimated 69% of consumers chose radio as their most
listened to format in the car as compared to 15% for cassettes and 9% for CDs
(Radio Listening Habits, CEMA 1998).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis.
In 1997, radio manufacturers sold over 23 million car radios, including 15.7
million original equipment automobile radios and 7.4 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 5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.
Radio Advertising
The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1998 climbed to $15.4 billion, an increase of 12% over 1997.
Veronis, Suhler & Associates projects a compound annual increase of 9.3%
through 2002. This growth rate exceeds the projected increase in advertising
spending for television, newspapers, magazines, yellow pages and outdoor
advertising (Communications Industry Forecast, 1998).
Current Limitations on Programming Choice
Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.
Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the up to 100
channels we expect to offer on a nationwide basis. In 1998, there were only 49
AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Summer 1998 Ratings Report, Duncan's American Radio, 1998).
We estimate that our coast-to-coast service will reach 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, over 36 million live beyond the
largest 268 markets (Statistical Abstract of the United States 1998 and Fall
1998 Market Rankings, The Arbitron Company). In addition, there are 22 million
people age 12 and above who receive five or fewer stations (The Satellite
Report 1999, C. E. Unterberg, Towbin).
Limited Programming Formats. We believe that there is significant demand for
a satellite radio service that expands the current programming choices
available to these potential listeners. Over 50% of all commercial radio
stations use one of only three general programming formats--country,
news/talk/sports, and adult contemporary (M Street Radio Directory, 1998). Over
70% of all commercial radio stations use one of only five general formats--the
same three, plus oldies and religion. The small number of available programming
choices means that artists representing niche music formats likely receive
little or no airtime in many markets. Radio stations prefer featuring artists
they believe appeal to the broadest market. However, according to the Recording
Industry Association of America, 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).
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Demand for Subscription Services and Products
Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1998, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $28, and nearly 9% of TV households subscribe to satellite television at an
average monthly cost of $52 (National Cable Television Association website and
DBSdish.com website). Also in 1998, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 69 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 December 1998, we commissioned Strategic Marketing And
Research Techniques, a leading market research company, 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.
In July 1997, Critical Mass Media, a leading radio research firm, conducted
a demand and segmentation study for us involving telephone surveys of 6,000
people. The study estimated that 34 million consumers would be willing to
subscribe to satellite radio with a $400 equipment price point increasing to 43
million consumers with a $200 equipment price point. The study was based on a
$10 subscription fee and 50 channels. XM Radio plans to have a monthly
subscription fee of $9.95 and up to 100 channels.
The XM Radio Service
We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout
the continental United States, will position us to become the leading provider
of the next generation in radio.
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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 Local area coverage
capability coverage in the United
States
Choice: wide Up to 100 channels with a Limited formats in many markets
variety/number of wide variety of programming
stations
Improved audio quality Digital quality sound Analog AM/FM quality sound
Fewer commercials Average 6-7 minutes per Average 13-17 minutes per hour
hour; some channels
commercial free
More information about Text display with title/name No visual display
music of song/artist
</TABLE>
We plan to further differentiate XM Radio from traditional AM/FM radio in
the following ways.
Provide music formats unavailable in many markets. XM Radio will offer many
music formats that are popular but currently unavailable in many markets. More
than 50% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; news/talk/sports; or adult
contemporary. There are many types of music with significant popularity, as
measured by recorded music sales and concert revenues, that are unavailable in
many traditional AM/FM radio markets. Such music could include classical
recordings or popular blues and rap music that have retail appeal but are not
commonly played on traditional AM/FM radio. This music also includes special
recordings such as the Irish dance soundtrack "Riverdance" and the "Three
Tenors" concerts which generate millions of CD sales, yet are not typically
played on today's AM/FM stations. Additionally, heavy metal and dance are two
of the more popular musical styles not currently broadcast in many small and
medium sized markets. Even major markets do not always offer a full complement
of formats.
Superserve popular music formats. We will be able to offer more specific
programming choices than traditional AM/FM radio generally offers for even the
most popular listening formats. For example, on traditional AM/FM radio oldies
music is often generalized on a single format. We will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.
Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on specific
formats, we have the ability to provide more variety to attract listeners
dissatisfied with repetitive and/or limited playlist selection offered by
traditional radio.
Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using
our national platform to aggregate geographically disparate groups through
affinity programming, we will provide advertisers a valuable way to market
products and services to these groups by advertising on our affinity channels.
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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.
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Representative XM Radio Channel List
The following table is a list of representative channels we may offer.
Channels in italics represent contractual commitments with content providers.
Representative Channels of XM Radio
ROCK MUSIC INFORMATION HISPANIC
Classic Rock All News (USA Today) Tejano (Hispanic
Classic Hard Rock All News (Bloomberg) Broadcasting Corp.)
New Hard Rock Public Affairs (C-SPAN) Caribbean (Hispanic
New Alternative Financial News (CNNfn) Broadcasting Corp.)
Classic Alternative News/Information (BBC Regional Mexican
Soft Rock World Service) (Hispanic Broadcasting
ECLECTIC MUSIC Home & Garden Corp.)
Contemporary Christian Love/Relationship Line Rock en Espanol
(Salem) Farm/Rural (Hispanic Broadcasting
Traditional Christian Health/Fitness Corp.)
(Salem) Comedy Hispanic Ballads
Blues Audio Books (Hispanic Broadcasting
Traditional Jazz Consumer Classified Corp.)
Reggae/Island Soap Operas Hispanic News (CNN en
World Music For Truckers Only Espanol)
American Folk Movie Soundtrack Channel OLDIES MUSIC
Pop Classical Relationship Classified 40's Oldies
Traditional Classical (-18) 50's Oldies
Modern Jazz Relationship Classified 60's Oldies
Progressive/Fusion (19-30) 70's Oldies
POP MUSIC Relationship Classified 80's Oldies
Top 20 Contemporary Hits (31-50) 90's Oldies
Disco/Dance Relationship Classified Love Songs
Broadway Show Tunes (51+) TALK
Modern Adult Lifestyles African American Talk
Contemporary Celebrity Gossip (BET/Radio One)
Classic Vocalists Entertainment News Asian/Indian Talk
All Request Contemporary Game Show/Contest (AsiaOne)
Hits URBAN MUSIC Christian/Family Talk
SPORTS Hip Hop/Rap (BET/Radio (Salem)
Sports Headlines One) Mandarin Talk (AsiaOne)
(CNN/Sports) Urban Dance Mix (Radio Conservative Talk
Sports Talk (One-On-One One) Liberal Talk
Sports) Classic Soul (BET/Radio Senior Citizen Talk
Sportsman Channel One) Rock Talk (18-34)
Automotive (NASCAR) Gospel (BET/Radio One) Hispanic Talk
COUNTRY MUSIC Adult Urban (BET/Radio Teen Talk
Mainstream Country One) CHILDREN'S MUSIC
Classic Country Top 20 Urban Pre-School
Bluegrass/Traditional ENVIRONMENTAL MUSIC Grade School/pre-teen
Country Soft Jazz SPECIAL/EVENTS
All Request Country New Age Reserved Channels
Electronic
Environmental (Earth
Sounds)
Beautiful Instrumentals
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.
Marketing and Distribution
Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.
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Establish Broad Distribution Channels for XM Radios
We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.
Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold over 4.5 million automobiles in 1998, which represented more than 29% of
the United States automobile market. Under the agreement, we have substantial
payment obligations to General Motors, including among others, certain
guaranteed, annual, fixed payment obligations. While we have discussed with
General Motors certain installation projections, General Motors is not required
to meet any minimum targets for installing XM radios in General Motors
vehicles. In addition, certain of the payments to be made by us under this
agreement will not be directly related to the number of XM radios installed in
General Motors vehicles. Our contract with General Motors is described in more
detail under the caption "Certain Relationships and Related Party
Transactions--Distribution Agreement with 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, Audiovox and Clarion for
the development, manufacture and distribution of XM radios for use in cars. We
have reached a preliminary agreement 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. Motorola is a leading
supplier of integrated electronics systems to automobile manufacturers.
Mitsubishi Electronic Automotive America, together with its parent corporation
Mitsubishi Electronic 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 produced over 31% of
aftermarket car radios sold in the United States in 1997. We have also signed a
contract with SHARP to manufacture and distribute XM radios for home 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
traditional electronic retailers. In addition, we plan to pursue alternative
distribution opportunities such as catalog/direct marketing, the Internet and
marketing through affinity groups.
Maximize Revenue Through Dual Sources
As with other subscription-based entertainment media such as cable
television, we expect to generate revenue by charging a monthly subscription
fee and selling limited advertising time. We will earn all of the
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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.
Although XM Radio will be available nationwide upon commencement of
operations, we will initially concentrate promotional activities in several key
markets and rapidly expand to other large markets. This phased roll-out
strategy, similar to that employed by consumer electronics manufacturers and
special services such as DIRECTV and Web TV, will enable us to refine our
launch implementation throughout the roll-out period. The advertising will
consist of both branding and promotion efforts for XM Radio, as well as
separate campaigns to promote and brand individual channels. Initially, we will
focus marketing efforts on the various channels targeting young adults, who we
believe are more likely to drive early penetration. We also expect to benefit
from free local media coverage as XM Radio is first offered in each new market.
XM Radio will promote subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This might include
. promotional campaigns directed towards automobile manufacturers and
dealers;
. promotional campaigns for free months of service with purchase of an XM
radio or free installations for aftermarket car radios;
. incentive programs for retailer sales forces;
. in-store promotional campaigns, including displays located in
electronics, music and other retail stores, rental car agencies and
automobile dealerships; and
. jointly funded local advertising campaigns with retailers.
Advertiser Development and Acquisition
Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups.
We will also work with ratings agencies in our advertising-supported business.
Statistical Research, Inc., which produces Radar reports, has agreed to work
with us to develop other ratings methodologies for satellite radio.
During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.
Charter Advertising Agreements. We have contracts with several advertisers,
advertising agencies and media buying companies offering charter advertising
packages at reduced rates for a limited time. Each charter advertiser will
purchase a minimum amount of advertising from us during the period that the
reduced rates are in effect. We intend to sign additional contracts on similar
terms.
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Foreign Language Advertising. We and our programmers plan to offer foreign
language advertising on specific foreign language-based channels. Several major
national advertisers have expressed strong interest in the ability to advertise
to these hard-to-reach customer segments.
The XM Radio System
We are designing our system to provide satellite radio to the continental
United States and coastal waters using radio frequencies allocated by the FCC
for satellite radio. These radio frequencies are within a range of frequencies
called the S-Band. The XM Radio system will be capable of providing high
quality satellite services to XM radios in automobiles, trucks, recreation
vehicles and pleasure craft, as well as to fixed or portable XM radios in the
home, office or other fixed locations. The XM Radio system design uses a
network consisting of an uplink facility, two high-power satellites and, where
necessary, ground-based repeaters to provide digital audio service to XM
radios.
[PICTURE OF RADIO WAVES REFLECTED OFF SATELLITES TO CAR APPEARS HERE]
Space Segment
Satellite Construction. Under our satellite contract with Hughes, Hughes is
building and will launch two HS 702 high-power satellites for the XM Radio
system. Hughes has also agreed to provide, at our option, one ground spare
satellite, to be available in the event of a failed launch of any satellite or
to accommodate our satellite system growth.
We believe that the HS 702 model will provide higher quality performance
than other satellite options. The first HS 702 satellite 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.
Hughes has engaged Alcatel to provide the communications payload electronics
for our satellites. The communications payload electronics are designed to make
best use of technologies that have already been developed or used in previous
satellite programs. The design includes significant redundancy and protective
measures to prevent loss of service.
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Satellite Transmission. We anticipate that our two satellites will be
deployed at 85 West Longitude and 115 West Longitude. After reaching their
designated orbital location, the satellites will receive audio signals from our
programming center and retransmit the signals across the continental United
States. The satellites will be 30(degrees) apart in longitude in order to
enhance the probability of clear line-of-sight communication between the
satellites and XM mobile radios.
The transmission coverage areas, or footprints, of our satellites encompass
the 48 contiguous states and nearby coastal waters. We have tailored these
footprints to provide nearly uniform availability over the United States and to
minimize transmission spillage across the United States borders into Canada and
Mexico. However, because coverage does extend to the Gulf of Mexico, the
California coast and the Atlantic coast, we also expect to be able to provide
XM Radio to the cruise ships, cargo vessels and leisure boats which frequent
these waters.
Our satellites will transmit audio programming within a 12.5 MHz range of S-
Band radio frequencies that have been allocated by the FCC for our exclusive
use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth
will be subdivided to carry the transmission of six signals, two signals to be
transmitted from each of our two satellites and two signals to be transmitted
by the terrestrial repeater network. The audio programming for XM Radio will be
carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals will repeat the audio programming to enhance
overall signal reception. The transmission of higher quality sound requires the
use of more kilobits per second than the transmission of lesser quality sound.
In order to provide high-quality digital sound, we expect that music channels
will require approximately 56 to 64 kilobits per second depending on the type
of compression technology used, whereas talk channels will require
significantly less band width. We expect to use our allocated bandwidth in such
a way as to provide up to 100 channels of programming, with our music channels
having a high bandwidth allocation so as to provide high-quality digital sound.
Launch Services. Hughes has signed an agreement with Sea Launch Limited
Partnership, a joint venture in which Boeing Commercial Space Company has a
controlling 40% interest, to provide the launch services for our satellites.
The launch vehicle uses a new rocket called the Zenit-3SL, which is based on a
flight-proven two-stage rocket called the Zenit-2, plus a stage which is the
flight-proven upper stage of a Russian-developed rocket called the Proton
rocket. The Zenit-2 vehicle has been successfully launched 29 times in 34
attempts, for an 85% success rate. The upper stage has successfully flown in
185 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 commerical satellite,
DIRECTV 1-R, in October 1999. As of October 9, 1999, Sea Launch has 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 time of
launch through each satellite's expected lifetime. We intend to obtain coverage
which will exceed all hardware, insurance and launch service costs related to
the in-orbit replacement of a lost satellite. However, any insurance we may
obtain will not protect us from the adverse effect on our business operations
due to the loss of a satellite. We expect that these policies will contain
standard commercial satellite insurance provisions, including standard coverage
exclusions.
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Ground Segment
Satellite Control. Each of our satellites will be monitored by a telemetry,
tracking and control station, and both satellites will be controlled by a
satellite control station. Each of the stations will have a backup station. We
are evaluating proposals from experienced satellite operators to perform the
telemetry, tracking and control functions.
Programming and Business Center. Programming from both our studios and
external sources will be sent to our programming center, which will package and
retransmit signals to our satellites through the uplink station. Financial
services and certain administrative support will be carried on at our business
center. Communications traffic between the various XM Radio facilities will be
controlled by the network monitoring center. The network monitoring center will
monitor satellite signals and the terrestrial repeater network to ensure that
the XM Radio system is operating properly. We plan to design and install fault
detection systems to detect various system failures before they cause
significant damage.
Terrestrial Repeaters. We intend to install a terrestrial repeater system to
supplement the coverage of our satellites. Terrestrial repeaters are ground-
based electronics equipment which receive and re-transmit the satellite
signals. We have signed a contract with LCC International, a wireless service
site planner, for the design and deployment of our terrestrial repeater
network. LCC International has completed initial site planning for 70 markets.
The contract with LCC International is described in more detail under the
caption "Certain Relationships and Related Party Transactions--Engineering
Contract with LCC International."
In some areas, satellite signals may be subject to blockages from tall
buildings and other obstructions. Due to the satellites' longitudinal
separation, in most circumstances where reception is obscured from one
satellite, XM Radio will still be available from the other satellite. In some
urban areas with a high concentration of tall buildings, however, line-of-sight
obstructions to both satellites may be more frequent. In such areas, we will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do
not expect this to present a serious problem to our construction of a
terrestrial repeater network.
The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.
We plan to install approximately 1,700 terrestrial repeaters to cover urban
areas in approximately 70 markets. We expect that this system will be
operational by the second quarter of 2001. We estimate that the largest urban
markets may require in excess of 100 repeaters, while smaller cities with fewer
tall buildings may require as few as one to three repeaters. We also intend to
use additional small repeaters in areas such as tunnels, where reception would
otherwise be severely restricted. Our placement of terrestrial repeaters will
be guided by a newly developed radio frequency analysis technique which,
employing technology similar to that used in certain cellular telephone
systems, analyzes the satellite footprint to discover areas likely to have
impaired reception of XM Radio. We are currently negotiating with Hughes
Network Systems for the design, development and manufacture of the terrestrial
repeaters.
We expect to benefit from the expertise gained by American Mobile with its
ARDIS terrestrial two-way data network consisting of approximately 1,700 base
stations sites serving cities throughout the United States. We may use a
portion of these sites in our system.
XM Radios. We will transmit XM Radio throughout the continental United
States to vehicle, portable, home and plug and play radios. Our radios will be
capable of receiving both XM Radio and traditional AM/FM
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stations. We believe prototypes will be available and limited production will
begin by December 2000, and radios will be commercially available by
commencement of commercial operation.
We have signed a contract with STMicroelectronics to design and produce
chips which will decode the XM Radio signal. Additionally, some of the design
elements in the chipsets currently being made for the WorldSpace International
system, which operates in a different frequency band, will be integrated into
our chipsets. 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 to develop, manufacture and distribute XM radios which
can be used in the car. We have signed a contract with SHARP to manufacture XM
radios for home and portable use. We have also reached a preliminary agreement
with Sony Electronics to design, manufacture and market XM radios for the
portable, home, aftermarket and original equipment manufacture car stereo
markets.
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
Satellite Radio, the only other FCC licensee for satellite radio service in the
United States. Since October 1997, Sirius Satellite Radio's common stock has
traded on the Nasdaq National Market. Sirius Satellite 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 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
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a modem, sound card and speakers. One of the largest Internet radio providers,
Broadcast.com Inc., currently provides a large number of stations on the
Internet and has recently completed an initial public offering of stock,
indicating growth in the industry. Although we believe that the current sound
quality of Internet radio is below standard and may vary depending on factors
such as network traffic, which can distort or interrupt the broadcast, we
expect that improvements from higher bandwidths, faster modems and wider
programming selection may make Internet radio a more significant competitor in
the future.
There are a number of Internet-based audio formats in existence or in
development which could compete directly with XM Radio. For example, Internet
users with the appropriate hardware and software can download sound files for
free or for a nominal charge and play them from their personal computers or
from specialized portable players. In addition, prominent members of the music
and computer industry have supported an initiative known as the Secure Digital
Music Initiative to become a standard for fee-based electronic distribution of
copyrighted sound recordings. Although presently available formats have
drawbacks such as hardware requirements and download bandwidth constraints,
which we believe would make XM Radio a more attractive option to consumers,
Internet-based audio formats may become increasingly competitive as quality
improves and costs are reduced.
Direct Broadcast Satellite and Cable Audio
A number of companies provide specialized audio service through either
direct broadcast satellite and cable audio systems. These services are targeted
to fixed locations, mostly in-home. The radio service offered by direct
broadcast satellite and cable audio is generally an add-on service to the
higher priced video service.
Regulatory Matters
XM Radio and Sirius Satellite 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 our company. 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 us, has a term of
eight years from commencement of our 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.
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Our FCC license requires us to meet the following milestones:
<TABLE>
<CAPTION>
Deadline Milestone Status
- -------- --------- ------
<S> <C> <C>
October 1998 Complete contracting for first satellite Completed March 1998
October 1999 Complete contracting for second satellite Completed March 1998
October 2001 Begin in-orbit operation of at least one satellite Expected Fourth Quarter 2000
October 2003 Begin full operation of the XM Radio system Expected Second Quarter 2001
</TABLE>
While we have already fulfilled the first two milestones, we may not meet
the remaining two milestones, in part because we depend on third parties to
build and launch our satellites. If we fail to meet these milestones, the FCC
could take a range of actions, any of which may harm our business.
For business and technical reasons, we have decided to modify certain
aspects of the satellite radio system described in our May 1997 amended
application to the FCC. Specifically, we intend to
. increase the satellites' transmission power;
. eliminate coverage of Alaska and Hawaii; and
. change the total number of signals carried by the satellites and
terrestrial repeaters.
We will subdivide our 12.5 MHz of allocated bandwidth to carry six signals
instead of five as previously stated in our FCC application. Two signals will
be transmitted by each of the two satellites, and two signals will be
transmitted by our terrestrial repeaters. We plan to request that the FCC allow
us to modify the XM Radio system to incorporate these changes. While the FCC
regularly approves modifications to commercial licenses, it may not approve our
request.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees.
The FCC's rules require interoperability with all licensed satellite radio
systems that are operational or under construction. The FCC conditioned our
license on certification by us that our final receiver design is interoperable
with the final receiver design of the other licensee, Sirius Satellite Radio,
which plans to use a different transmission technology than we plan to use.
Because of uncertainty regarding the design of Sirius Satellite Radio's
systems, we may not be able initially to meet this interoperability
requirement. We may not be able initially to design a commercially viable
interoperable receiver, and Sirius Satellite Radio may not cooperate with us on
the issue of interoperability. Accordingly, we may not be able to meet the
FCC's interoperability requirements, and may need to obtain an extension of
time or modification of this requirement from the FCC. Complying with the
interoperability requirement could make the radios more difficult and costly to
manufacture. Accordingly, this requirement could delay the commercial
introduction of our service.
The FCC is currently conducting a rulemaking proceeding to establish rules
for terrestrial repeater transmitters, which we plan to deploy to fill in gaps
in satellite coverage. The FCC has proposed to permit us to deploy these
facilities. Specifically, the FCC has proposed a form of blanket licensing for
terrestrial repeaters and service rules which would prohibit satellite radio
licensees from using terrestrial repeating transmitters to originate local
programming or transmit signals other than those received from the satellite
radio satellites. Various parties, including the National Association of
Broadcasters, have asked the FCC to
. delay consideration of terrestrial repeater rules until our company and
Sirius Satellite Radio provide additional information regarding planned
terrestrial repeaters;
. require individual licensing of each terrestrial repeater;
. limit the number of repeaters that may be deployed; and
. impose a waiting period on the use of repeaters in order to determine if
signal reception problems can be resolved through other means.
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Our plans to deploy terrestrial repeaters in our system may be impacted,
possibly materially, by whatever rules the FCC issues in this regard.
The FCC also may adopt limits on emissions of terrestrial repeaters to
protect other services using nearby frequencies. While we believe that we will
meet any reasonable non-interference standard for terrestrial repeaters, the
FCC has no specific standard at this time, and the application of such limits
might increase our cost of using repeaters. Although we are optimistic that we
will be able to construct and use terrestrial repeaters as needed, the
development and implementation of the FCC's ultimate rules might delay this
process or restrict our ability to do so.
We will need to coordinate the XM Radio system with systems operating in the
same frequency bands in adjacent countries. Canada and Mexico are the countries
whose radio systems are most likely to be affected by satellite radio. The
United States government, which conducts the coordination process, has resolved
the issue with Canada and has begun discussions with the Mexican government.
However, the negotiations with Mexico could be complicated by that country's
interest in developing a similar digital satellite radio service that might
operate on the same frequencies as XM Radio will use in the United States.
Although we are optimistic that the FCC will coordinate satellite radio
frequency use with Mexico without compromising our ability to operate as
planned, it may not be able to do so, which could materially affect XM Radio.
We will operate the communication uplinks between our own earth station and
our satellites in a band of radio frequencies 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 recently in response to concerns about the export of
technology to China by the United States defense contractors. The recent
negative publicity may lead the United States Congress to alter the relevant
laws or regulations, or may change the State Department's policy in enforcing
the regulations. Any change in applicable law or policy may result in delay of
our satellite launch.
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, 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
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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 September
30, 1999. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system. We anticipate that the
Fraunhofer Institute will continue to provide various development services for
us in connection with the design of our system.
American Mobile has granted us a royalty-free license with respect to
certain ground segment communications technology and antenna technology.
American Mobile and WorldSpace Management have also granted us royalty-free,
non-exclusive and irrevocable licenses to use and sublicense all improvements
to their technology. The technology licenses from American Mobile and
WorldSpace Management renew automatically on an annual basis unless terminated
for a breach which has not been or cannot be remedied.
We believe that the intellectual property rights we have licensed under our
technology license were independently developed or duly licensed by American
Mobile or WorldSpace International, as the case may be. We cannot assure you,
however, that third parties will not bring suit against us for patent or other
infringement of intellectual property rights.
Litigation with Sirius Satellite Radio
On January 12, 1999, Sirius Satellite Radio, the other holder of an FCC
satellite radio license, commenced an action against us in the United States
District Court for the Southern District of New York, alleging that we are
infringing or may infringe three patents assigned to Sirius Satellite Radio. In
its complaint, Sirius Satellite Radio seeks money damages to the extent we have
manufactured, used or sold any product or method claimed in their patents and
injunctive relief.
We responded to the complaint on February 26, 1999, denying that
. Sirius Satellite Radio's patents have been or will be infringed;
. the claims of Sirius Satellite Radio's patents are valid;
. Sirius Satellite Radio has any right to either damages or injunctive
relief against our proposed satellite radio system by reason of
statements made by Sirius Satellite Radio to the FCC and by reason of
the conditions of Sirius Satellite Radio's authorization from the FCC to
provide satellite radio; and
. Sirius Satellite Radio has any right to either damages or injunctive
relief against our proposed satellite radio system because Sirius
Satellite Radio is required to license the Sirius Satellite Radio
patents to us by reason of statements made by Sirius Satellite Radio to
the FCC and by reason of the conditions of Sirius Satellite Radio's
authorization from the FCC to provide satellite radio.
Based on the planned design of our system, our knowledge of the differences
between our system and the claims of the Sirius Satellite Radio patents and on
advice we have previously received from our patent counsel,
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we believe that we have not and will not infringe any Sirius Satellite Radio
patents. However, the litigation could harm our company, even if we are
successful. It will divert our management's attention and may make it more
difficult for us to raise financing or enter into other agreements with third
parties. In addition, even if we prevail, the Sirius Satellite Radio litigation
could prevent us from moving forward with the development of the XM Radio
system in a timely manner. The Sirius Satellite Radio patents involved in the
Sirius Satellite Radio litigation relate to certain aspects of signal and
reception methodologies that may be employed by a satellite radio system. If,
despite our efforts, we lose all or part of this litigation, we could become
liable to Sirius Satellite 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 Satellite Radio. If any of these strategies
becomes necessary, it could be costly and time-consuming and would likely delay
any implementation of our system. If we could not accomplish any strategy, or
could not do so in a timely manner at an acceptable cost, our business would be
harmed.
Copyrights to Programming
We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc., and SESAC, Inc. These organizations
collect royalties and distribute them to songwriters and music publishers and
negotiate fees with copyright users based on a percentage of revenues. Radio
broadcasters currently pay a combined total of approximately 3-4% of their
revenues to these performing rights societies. We expect to negotiate or
establish by arbitration royalty arrangements with these organizations, but
such royalty arrangements may be more costly than anticipated or unavailable.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the
Digital Millennium Copyright Act of 1998, we also have to negotiate royalty
arrangements with the owners of the sound recordings. The Recording Industry
Association of America will negotiate licenses and collect royalties on behalf
of copyright owners for this performance right in sound recordings. Cable audio
services currently pay a royalty rate of 6.5% of gross subscriber revenue. This
rate was set by the Librarian of Congress, which has statutory authority to
decide rates through arbitration, and was affirmed on May 21, 1999 by the
United States Court of Appeals for the District of Columbia. Although we
believe we can distinguish XM Radio sufficiently from the cable audio services
in order to negotiate a lower statutory rate, we may not be able to do so.
The XM(TM) Trademark
We believe that XM Radio will be seen as the complement to AM and FM radio.
We have an application pending in the United States Patent and Trademark Office
for the registration of the trademark "XM" in connection with the transmission
services offered by our company and expect that our brand name and logo will be
prominently displayed on the surface of XM radios together with the radio
manufacturer's brand name. This will identify the equipment as being XM Radio-
compatible and build awareness of XM Radio. We intend to maintain our trademark
and the anticipated registration. We are not aware of any material claims of
infringement or other challenges to our right to use the "XM" trademark in the
United States.
Personnel
As of December 15, 1999, we had 62 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.
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Property
Our executive offices are located at 1250 23rd Street, N.W., Suite 57,
Washington, D.C. 20037-1100, and are leased pursuant to a lease agreement that
will expire on 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 Sirius Satellite Radio litigation and the FCC proceeding
described under the caption "Business--Regulatory Matters," we are not a party
to any material litigation or other proceedings.
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MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table sets forth information concerning our directors,
executive officers and key employees. All directors hold office until the next
annual meeting of stockholders and the election and qualification of their
successors. Officers are elected by and serve at the discretion of our board of
directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gary M. Parsons......... 49 Chairman of the Board of Directors
Hugh Panero............. 43 President, Chief Executive Officer and Member, Board of Directors
Nathaniel A. Davis (1).. 45 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)...... 43 Member, Board of Directors
Jack Shaw (2)........... 60 Member, Board of Directors
Dr. Rajendra Singh (2).. 45 Member, Board of Directors
Ronald L. Zarrella...... 50 Member, Board of Directors
Lee Abrams.............. 47 Senior Vice President, Content and Programming
Stephen Cook............ 44 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..... 36 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 American Mobile, a
position he has held since March 1998. Mr. Parsons joined American Mobile in
July 1996 and has also served as its Chief Executive Officer and President.
Previously, Mr. Parsons was with MCI Communications Corporation where he served
in a variety of roles from 1990 to 1996, including most recently as Executive
Vice President of MCI Communications, and as Chief Executive Officer of MCI's
subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsons was one of the
principals of Telecom*USA, which was acquired by MCI. Prior to the recruitment
of Hugh Panero, Mr. Parsons served as our Chief Executive Officer.
Hugh Panero has served as a member of the board of directors and as
President and Chief Executive Officer since June 1998. Mr. Panero has over 16
years experience building and managing entertainment distribution services.
Most recently, from 1993 to 1998, Mr. Panero served as President and Chief
Executive Officer of Request TV, a national pay-per-view network owned by
Liberty Media and Twentieth Century Fox. Prior to his employment with Request
TV, Mr. Panero spent ten years with Time Warner Cable where he was part of the
team which built the cable systems serving parts of Queens and Brooklyn, New
York. Mr. Panero held various positions with Time Warner Cable, including Vice
President, Marketing.
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Nathaniel A. Davis has served as a member of the board of directors since
October 1999. Mr. Davis is President and Chief Operating Officer 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 and audit committee 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 American Mobile's Senior Vice President, General Counsel and
Secretary since October 1992. From October 1983 to October 1992, Ms. Segal was
associated with the law firm of Debevoise & Plimpton in New York, New York.
Prior to joining Debevoise, Ms. Segal clerked for the Honorable Jerre S.
Williams of the United States Court of Appeals for the Fifth Circuit, and for
the Honorable Edmund L. Palmieri for the United States District Court for the
Southern District of New York.
Jack Shaw has served as a member of the board of directors since May 1997.
Mr. Shaw is Chairman and Chief Executive Officer of Hughes Network Systems,
Inc. and Executive Vice President of Hughes Electronics Corporation. Mr. Shaw
is a member of the Hughes Electronics Corporation Executive Committee. Mr. Shaw
has been a director of American Mobile since July 1996 and has previously
served as Chairman of American Mobile's Board. Previously, Mr. Shaw held senior
management positions with companies including ITT Space Communications, Inc.,
Digital Communications Corporation and M/A-Com Telecommunications, Inc., which
was acquired by Hughes Electronics Corporation in 1987.
Rajendra Singh has served as a board member since July 1999. Dr. Singh is a
member of the board of directors and a co-founder of LCC International. Dr.
Singh was President of LCC International 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 Systems, 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, Content and Programming
since June 1998. Mr. Abrams is a prominent radio programmer/consultant with
more than 30 years of experience in radio, and since 1970 has been a consultant
to a variety of radio stations, networks and record companies. He is credited
with many innovations in radio programming, including transforming FM radio,
pioneering the album rock format in the 1970s, adult contemporary radio and
urban, classic and smooth jazz radio in the 1980s and active rock radio in the
1990s. He most recently has served as a consultant for ABC Radio Networks,
Capstar, Thorn-EMI and Sony, among others.
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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 the Board of Directors
Our board of directors consists of nine members, four of whom are selected
by American Mobile, 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 American Mobile, 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 American
Mobile, one will be selected by each of General Motors, Clear Channel and the
TCM Group, one will be our President and Chief Executive Officer, and the
remaining two will be independent directors of recognized industry experience
and stature whose nominations must be approved by American Mobile 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 under a shareholders' agreement
with us. The foregoing board and observation rights are subject to these
entities, as parties to the shareholders' agreement, maintaining their original
investment or certain
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minimum share percentages in us. For additional details regarding the
shareholders' agreement, see "Certain Relationships and Related Party
Transactions--Shareholders' Agreement."
Terms of Directors
All members of the board of directors hold office until the next annual
meeting of stockholders and the election and qualification of their successors.
Board Committees
The board of directors has established compensation and audit committees.
Each committee reports to the board of directors. The compensation committee,
currently consisting of Messrs. 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
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 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. Zarrella 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 us. We will
have a right to repurchase these shares for $9.52 per share if Mr. Parsons'
service with us 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 of these shares 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.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation 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 $267,309(1) 267,570
1999 286,533 125,000 1,354 100,000
Lee Abrams
Senior Vice President,
Content and
Programming............ 1998 125,417 27,413 30,989(2) 53,514
1999 220,000 56,100 625 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.
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<PAGE>
Employment Agreements
Hugh Panero is employed as our President, Chief Executive Officer and member
of the board of directors for a term of three years under an employment
agreement effective June 1, 1998. His employment agreement provides for an
annual base salary of $280,000, subject to increase from time to time by the
board of directors. Mr. Panero is also eligible for a pro-rata annual bonus to
be determined by the board of directors according to Mr. Panero's personal job
performance and mutually agreed upon corporate goals and objectives. The bonus
target guideline is 40% of Mr. Panero's annual base salary. Under Mr. Panero's
employment agreement and pursuant to our shares award plan, we granted to Mr.
Panero a 10-year option to purchase 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.
His employment agreement restricts Mr. Panero from engaging in any business in
the United States which resembles or competes with XM Radio for a period of one
year following termination of his employment.
We also have agreements with the following named executive officers:
<TABLE>
<CAPTION>
Name Title Effective Date
- ---- ----- -----------------
<S> <C> <C>
Lee Abrams........................... Senior Vice President, June 8, 1998
Content and Programming
Stephen Cook......................... Senior Vice President, February 22, 1999
Sales and Marketing
Stelios Patsiokas.................... Senior Vice President, October 19, 1998
Technology
Heinz Stubblefield................... Senior Vice President, June 1, 1998
Chief Financial Officer
</TABLE>
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 agreements 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 agreements 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
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<PAGE>
purchase 53,514 shares of 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 2,675,700 shares. We may not grant awards of more than 267,570 shares of our
common stock to any participant in any calendar year. Options 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 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
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 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 to our 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
- ---- ---------- ---------- -------- ----------------- ---------------------------
5% 10%
------------ --------------
<S> <C> <C> <C> <C> <C> <C>
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
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<PAGE>
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
$38.13.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at December In-the-Money Options
31, 1999 December 31, 1999
------------------------------- -------------------------------
Number of
Shares
Acquired on Value
Name Exercise Realized Exercisable(#) Unexercisable(#) Exercisable($) 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,
as amended thereafter, 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 September 30, 1999, we have paid $147.9 million under this
contract.
We have granted Hughes a first priority security interest in any rights we
may have in Hughes' work product under the satellite contract to secure our
payment obligations to Hughes under the contract. This security interest will
be released once we have made substantial pre-arranged payments to Hughes under
our satellite contract or, if earlier, upon the launch of the satellites.
We may, subject to certain conditions, terminate the satellite contract at
our convenience, in which case Hughes will be entitled to certain payments. We
may also terminate the satellite contract for certain events of default by
Hughes or in case it becomes reasonably certain that the total amount of
excusable delay in Hughes' performance under the satellite contract caused by
events beyond Hughes' control, excluding delays we caused, will exceed 485
calendar days.
The first satellite is to be delivered to us in orbit by December 31, 2000,
the second by April 11, 2001. The scheduled launch period for the first
satellite is the period from November 1, 2000 through February 1, 2001. The
scheduled launch period for the second satellite is the period from February
15, 2001 through May 15, 2001. If there is a delay of more than six months in
the launch of either the first or second satellite, we would be able to select
an alternative launch system from within or outside of Hughes' inventory of
launch vehicles, subject to certain payment conditions set forth in the
satellite contract.
For each satellite, title will transfer to us after Hughes successfully
completes certain tests and analyses on each satellite upon arrival at its
specified orbital location. If Hughes fails to deliver either satellite on or
before the fiftieth day following its delivery date, then Hughes must pay us
liquidated damages which accrue on a daily basis. The total aggregate amount of
liquidated damages for failure to meet the delivery dates of both satellites is
limited to $16 million. These liquidated damages are in addition to other
limited liquidated damages for delay in the launch of the satellites. We would
have no other damages or remedies for late delivery of a satellite. If, on the
other hand, Hughes launches both satellites on or before December 31, 2000, we
will pay Hughes $6 million in addition to the contract price.
We are currently negotiating with Hughes Network Systems for the design,
development and manufacture of our terrestrial repeaters. Hughes Network
Systems has begun work on the terrestrial repeaters while negotiations are
proceeding. As of December 15, 1999, we have paid $2.5 million for this work,
which will count as an installment of the contract price if we are able to
successfully negotiate a definitive contract with Hughes Network.
Hughes Space and Communications and Hughes Network Systems are both owned by
Hughes Electronics Corporation. American Mobile, whose single largest
stockholder on a fully diluted basis is Hughes Communications, owns
approximately 31% of the outstanding shares of our common stock, or 41%
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 10% equity interest in our company and an additional 10% equity interest
in our company is held by DIRECTV, a direct subsidiary of Hughes Electronics
and an indirect subsidiary of General Motors.
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<PAGE>
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
Satellite 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.
Furthermore, if General Motors elects to install radios which are
interoperable radios with other satellite radio providers, in the absence of
any regulatory requirements to do so, we may seek to renegotiate the
distribution agreement. If the FCC requires the installation of interoperable
radios, we will renegotiate the distribution agreement on mutually acceptable
terms.
Engineering Contract with LCC International
We have signed a contract with LCC International for the engineering of and
site preparation of our terrestrial repeater network. The repeater network will
supplement our high-powered satellite signals. Payments by XM Radio under this
contract are expected to approximate $115 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor. As
of December 15, 1999, we have paid $6 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.
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<PAGE>
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 stockholders, Telcom-XM
Investors L.L.C. See "Principal Stockholders."
Technology License Agreement with American Mobile
American Mobile has granted us a royalty-free license with respect to
certain technology to be used in connection with the implementation of the XM
Radio system, including, among other things, certain ground segment
communications technology and antenna technology. We also have the right to
sublicense this technology to any third party, including chipset manufacturers,
terrestrial repeater manufacturers and receiver manufacturers in connection
with the XM Radio system.
Under cross-license provisions in the license, if we obtain from any third
party the right to use any technology which could be used to develop, implement
and commercialize a satellite radio system for transmission in the United
States, we will make all reasonable efforts to obtain for American Mobile the
right to use such technology. We have granted to American Mobile a royalty-
free, non-exclusive and irrevocable license to any and all technology and
improvements we develop relating to the XM Radio system. This cross-license is
for use and sublicensing worldwide outside the United States and its
territories, or inside the United States and its territories only in connection
with American Mobile's mobile satellite business in the United States and other
than in connection with any satellite radio system.
The technology license renews automatically on an annual basis unless
terminated for a breach which has not been or cannot be remedied.
Technical Services Agreement with American Mobile
We have a technical services agreement with American Mobile under which
American Mobile provides us with certain technical, engineering, marketing and
strategic planning services. We pay American Mobile at specified hourly rates,
which we believe approximate rates available from unrelated parties. On or
after our commencement of commercial operations, American Mobile or we may
terminate the technical services agreement at any time.
Other Transactions with American Mobile
In 1997, American Mobile contributed $143,000 for us to establish our
original application for the FCC license. Also in 1997, we received $1.5
million as a capital contribution from American Mobile. During 1998, American
Mobile incurred general and administrative costs and professional fees for us
and established an intercompany balance of $458,000. During June 1999, American
Mobile provided us a line of credit under which we drew $250,000. This was
repaid, and the line of credit terminated, in July 1999.
Registration Rights Agreement
We have a registration rights agreement with American Mobile, 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
54
<PAGE>
demand registration with respect to its Class A common stock, including shares
issuable upon conversion of other securities. American Mobile is entitled to
make two demands. These rights are subject to our right to defer the timing of
a demand registration and an underwriters' right to cut back shares in an
underwritten offering. In certain instances if a demand registration is cut
back by more than 75% of the number of shares originally requested to be
registered, then the party requesting registration shall be entitled to one
additional demand registration request.
In addition to these demand rights, following our commencement of commercial
operation, parties to the registration rights agreement may request
registration of at least $25.0 million of Class A common stock.
Parties to the registration rights agreement also have rights to include
their Class A common stock in registered offerings initiated by us, other than
an offering for high yield debt. The parties have waived their registration
rights with respect to this offering and our concurrent offering of Series B
preferred stock.
Shareholders' Agreement
We have entered into a shareholders' agreement with American Mobile, Baron
Asset Fund and the former holders of our subordinated convertible notes,
containing, among others, the provisions described below.
Conversion of Shares of Class B Common Stock to Class A Common Stock
Our Class B common stock owned by American Mobile is convertible into our
Class A common stock, on a one for one basis, following this offering at any
time at American Mobile's discretion. In addition, under the shareholders'
agreement, following this offering, the holders of a majority of our
outstanding Class A common stock, which must include at least 20% of the public
holders of the Class A common stock, may require conversion by American Mobile.
This conversion will not be effected, however, if the FCC does not approve the
transfer of control of XM Radio from American Mobile to a diffuse group of
stockholders.
Restrictions on Transfer of Shares of Our Securities
Except for affiliated transactions, American Mobile will not be permitted to
transfer any of our securities until the earlier of the date on which we begin
commercial operations or one year after October 8, 1999, which was the date of
the closing of our initial public offering. Shares of Class B common stock are
transferable only upon conversion into shares of Class A common stock and, in
certain circumstances, to Baron Asset Fund, which can transfer its shares only
upon conversion into shares of Class A common stock.
Non-Competition
American Mobile has agreed not to compete with XM Radio in the satellite
radio business in the United States for so long as American Mobile holds 5% of
our common stock and for a period of three years following any transfer which
results in American Mobile owning less than 5% of our common stock.
Governance
The parties to the agreement are entitled to designate directors to our
board of directors and to observe 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
55
<PAGE>
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
ceased to be an owner of XM Radio, American Mobile became the owner of the
securities previously held by WorldSpace, and several of the transactions and
agreements described above were entered into. These transactions are described
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Sources of Funds"
and in the notes to our Unaudited Condensed Consolidated Financial Statements.
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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 December 15, 1999, there were 26,435,471 shares of Class A common
stock outstanding, and 17,872,176 shares of Class B common stock outstanding,
all of which Class B common stock was owned by American Mobile. Class B common
stock is convertible into Class A common stock on a one-for-one basis. Class B
common stock is entitled to three votes for each share. Share ownership in the
table below includes shares we may issue if certain stockholders exercise
outstanding options within 60 days after December 15, 1999. The beneficial
ownership percentages in the table below will not be affected as a result of
our concurrent Series B convertible preferred stock offering since it is
assumed that the Series B convertible preferred stock has not been converted
into Class A common stock.
<TABLE>
<CAPTION>
Percentage of Total
Number of Class A Shares
Name and Address of Class A Shares -------------------------------
Beneficial Owner Beneficially Owned Before Offering After Offering
------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Beneficial Owners of More
Than 5%:
American Mobile Satellite
Corporation................ 18,072,176(1) 40.8% 37.4%
10802 Parkridge Boulevard
Reston, VA 20191-5416
General Motors
Corporation............... 11,106,504(2) 29.8% 26.9%
100 Renaissance Center
3031 West Grand Boulevard
PO Box 100
Detroit, MI 48265-1000
DIRECTV Enterprises,
Inc. ..................... 5,553,252(3) 17.4% 15.5%
2230 E. Imperial Highway
El Segundo, CA 90245
Clear Channel Investments,
Inc. ..................... 8,329,877 31.5% 27.4%
200 Concord Plaza, Suite
600
San Antonio, TX 78216
Columbia XM Radio Partners,
L.L.C. ................... 2,776,626 10.5% 9.1%
201 N. Union Street, Suite
300
Alexandria, VA 22314
Telcom-XM Investors,
L.L.C. ................... 2,776,626(4) 10.5% 9.1%
211 North Union Street,
Suite 300
Alexandria, VA 22314
Madison Dearborn Capital
Partners III, L.P. ....... 2,702,222 10.2% 8.9%
Madison Dearborn Special
Equity III, L.P........... 58,225 * *
Special Advisors Fund I,
LLC....................... 16,179 * *
3 First National Plaza,
Suite 3800
Chicago, IL 60602
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Percentage of Total
Number of Class A Shares
Name and Address of Class A Shares -------------------------------
Beneficial Owner Beneficially Owned Before Offering After Offering
------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Directors and Named
Executive Officers
Gary M. Parsons ........... 24,716(5) * *
Hugh Panero ............... 89,190(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 ................ 17,838(7) * *
Stephen Cook............... 17,838(7) * *
Stelios Patsiokas ......... 17,838(7) * *
Heinz Stubblefield ........ 17,838(7) * *
All directors and executive
officers as a group (16
persons).................. 384,276(8) 1.4% 1.2%
</TABLE>
- --------
* Less than 1%.
(1) Includes 17,872,176 shares issuable upon conversion of Class B common
stock.
(2) Includes 11,106,504 shares issuable upon conversion of Series A convertible
preferred stock, 5,553,252 of which are owned by DIRECTV.
(3) Includes 5,553,252 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 267,570 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 278,384 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 85,665 shares issuable upon exercise of options which are
not exercisable within 60 days.
(8) Does not include 1,113,506 shares issuable upon exercise of options which
are not exercisable within 60 days.
58
<PAGE>
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 Series B convertible
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 December 15, 1999, there were 26,435,471 shares of Class A common
stock outstanding and 17,872,176 shares of Class B common stock outstanding.
After giving effect to the issuance of 4,000,000 shares of Class A common stock
by us in this offering, there will be 30,435,471 shares of Class A common stock
outstanding.
Class A Common Stock
Holders of Class A common stock are entitled
. to one vote for each share held on any matter submitted for stockholder
approval;
. to receive on a pro rata basis, dividends and distributions, if any, as
the board of directors may declare out of legally available funds; and
. upon the liquidation, dissolution, winding up or insolvency of our
company, to share ratably in the net assets of our company available
after we pay our liabilities and any preferential amounts to which
holders of the Series A convertible preferred stock may be entitled.
Holders of Class A common stock have no preemptive, redemption or sinking
fund rights.
Class B Common Stock
Class B common stock has the same rights as Class A common stock except that
Class B common stock is entitled to three votes for each share. Shares of Class
B common stock are convertible into shares of Class A common stock on a one-
for-one basis, subject to antidilution protection if we effect a
recapitalization.
Class C Common Stock
Holders of Class C common stock are entitled to the same rights as holders
of Class A common stock except that the holders of Class C common stock are not
entitled to vote on any matter submitted for stockholder approval.
Preferred Stock
The board of directors may issue preferred stock in one or more series and
may fix the designations, powers, preferences and relative, participating,
optional and other special rights, qualifications, limitations and restrictions
on the preferred stock, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and may fix the number of
shares to be included in any such series. Any preferred stock may rank senior
to the common stock for the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any shares of preferred stock
may have class or series voting rights. Issuances of preferred stock, while
providing us with flexibility in connection with general corporate purposes,
may, among other things, have an adverse effect on the rights of holders of
common stock. The board of directors, without stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of common stock. Preferred stock
59
<PAGE>
could thus be issued quickly with terms calculated to 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
Series A convertible preferred stock has the following characteristics:
. a right to receive dividends and distributions ratably with the holders
of 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 Class A common
stock; and
. shares of our Series A convertible preferred stock do not have
-- voting rights;
-- any preference with respect to dividends and distributions;
-- preemptive rights;
-- sinking fund rights; or
-- redemption rights.
Following the occurrence of a recapitalization, as described under the
caption "Class B Common Stock", each share of Series A convertible preferred
stock will be convertible into the kind and number of shares of securities or
other property to which the holders of such share of Series A convertible
preferred stock would have been entitled to receive if the holder had
converted such share of Series A convertible preferred stock into Class A
common stock immediately prior to the recapitalization.
As of December 15, 1999, there were 10,786,504 shares of Series A
convertible preferred stock outstanding.
Proposed Terms of Series B Convertible Preferred Stock
We are concurrently offering, with a separate prospectus, 2,000,000 shares
of our % Series B Convertible Redeemable Preferred Stock, excluding up to
300,000 shares available to cover over-allotments. We may not be able to
complete the Series B convertible preferred stock offering. This offering and
the Series B convertible preferred stock offering are not contingent upon each
other. The following summary of the proposed terms of the Series B convertible
preferred stock is not complete and is subject to, and qualified in its
entirety by reference to, our certificate of incorporation and the certificate
of designation governing the Series B convertible preferred stock.
General. Each share of Series B convertible preferred stock will have 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 our
company were liquidated. We will pay cumulative dividends on the Series B
convertible preferred stock at a rate per annum equal to % of the liquidation
preference per share quarterly in arrears commencing , 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 will 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 initial conversion price will be $
per share. At that price, holders of the Series B convertible preferred
stock would receive 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 will not be entitled to any accrued
dividends upon conversion. The conversion price will be adjusted if specified
dilutive events occur.
60
<PAGE>
Upon the occurrence of a change of control (as defined in the certificate of
designation) of our company, 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 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 Us. Beginning on
, 2003, we will have the right to redeem some or all of the Series B
convertible preferred stock at a redemption price equal to % of the
liquidation preference, or $ per share, plus accrued dividends, if any, to
the date of redemption. The redemption price will decline until it equals
100.0% on , 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 , 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 our Series B
convertible preferred stock must be paid by delivery of shares of our 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 will rank:
.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.
Certain Provisions of Our Certificate of Incorporation and Bylaws
Certificate of Incorporation
Our certificate of incorporation permits the board of directors without
stockholder approval to issue shares of preferred stock up to the number of
shares authorized for issuance in our certificate of incorporation, except
61
<PAGE>
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 our company 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 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 the shareholders' agreement. See "Management--Provisions
Governing the Board of Directors." The bylaws provide that special meetings of
the stockholders may be called by the board of directors, by stockholders
holding at least 15% of the outstanding common stock or by the chief executive
officer or the president. The bylaws may be amended or repealed, or new bylaws
may be adopted, by the stockholders or the board of directors, subject to the
shareholders' agreement. 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 our bylaws, resolutions may be adopted at stockholders' meetings by the
affirmative vote of a simple majority of the aggregate number of votes
represented by all shares entitled to vote thereon and represented, in person
or by proxy, at the meeting. 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.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that directors shall not be
personally liable to us or our 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 us or our
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.
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<PAGE>
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 our
expense, for the benefit of XM Radio and of any person to be indemnified by us.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock is BankBoston,
N.A.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co. Inc., as Joint
Book Running Managers, the underwriters have severally agreed to purchase from
us the following respective numbers of shares of Class A common stock at the
public offering price less the underwriting discounts and commissions set forth
on the cover page of this prospectus.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc.....................................
C. E. Unterberg, Towbin.....................................
Salomon Smith Barney Inc. ..................................
---------
Total...................................................... 4,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a comfort letter from our accountants and no occurrence of an event
that would have a material adverse effect on our business. The underwriters are
obligated to purchase and accept delivery of all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 600,000 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the Class A common stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
--------- ---------
<S> <C> <C>
Per share................................................ $ $
Total.................................................... $ $
</TABLE>
In order to facilitate this offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A common stock. Specifically, the
underwriters may over-allot shares of the Class A common stock in connection
with this offering, thereby creating a short position in the Class A common
stock for their own account. Additionally, to cover such over-allotments or to
stabilize the market price of the Class A common stock, the underwriters may
bid for, and purchase, shares of the Class A common stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the
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<PAGE>
underwriting syndicate repurchases shares distributed by that underwriter or
dealer. Any of these activities may maintain the market price of our Class A
common stock at a level above that which might otherwise prevail in the open
market. The underwriters are not required to engage in these activities and, if
commenced, may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Our Class A Common Stock is listed on the Nasdaq National Market under the
symbol "XMSR".
Donaldson, Lufkin & Jenrette Securities Corporation and Bear, Stearns & Co.
Inc. are acting as Joint Book Running Managers of the concurrent offering of
our Series B convertible preferred stock, and acted as such for our initial
public offering and as our financial advisors in connection with our issuance
of $250.0 million of subordinated convertible notes, for which they received
customary compensation. Salomon Smith Barney is acting as a co-underwriter of
the concurrent offering of our Series B convertible preferred stock. Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc., the other
underwriters or their affiliates have also provided and may in the future
provide investment banking or other financial services to us and American
Mobile and its affiliates in the ordinary course of business, for which they
have received and are expected to receive customary fees and expenses. To date,
Bear, Stearns & Co. Inc. has served American Mobile as an initial purchaser for
its issuance of units in March 1998, as an underwriter in its sale of common
stock in July 1999, and as financial advisor in several of its acquisition and
financing transactions.
LEGAL MATTERS
Certain legal matters with respect to the shares of Class A common stock
offered by this prospectus will be passed upon for XM Radio by Hogan & Hartson
L.L.P., Washington, D.C. Certain legal matters with respect to communications
regulatory issues will be passed upon for XM Radio by Fisher Wayland Cooper
Leader & Zaragoza L.L.P., Washington, D.C. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Latham &
Watkins, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for the years ended December 31, 1997 and 1998 and for the period from December
15, 1992 (date of inception) through December 31, 1998, have been included
herein and in the registration statement, in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG LLP contains an explanatory paragraph that states that we have
not commenced operations, have negative working capital and are dependent upon
additional debt and equity financings, which raise substantial doubt about our
ability to continue as a going concern. Our consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
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<PAGE>
CERTAIN INFORMATION ABOUT THIS PROSPECTUS
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933 covering the Class A common stock being offered by this
prospectus. As permitted by SEC rules, this prospectus omits certain
information that is included in the registration statement. For further
information about us and our Class A common stock, you should refer to the
registration statement and its exhibits. Since the prospectus may not contain
all the information that you may find important, you should review the full
text of these documents. If we have filed a contract, agreement or other
document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Each statement in this prospectus, including statements incorporated by
reference as discussed below, regarding a contract, agreement or other document
is qualified in its entirety by reference to the actual document. You may read
and copy any document we file with the SEC at the SEC's public reference rooms
located at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, at 7 World
Trade Center, 13th Floor, New York, NY 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. You can also obtain copies of
filed documents by mail from the Public Reference Section of the SEC at Room
1024, 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our SEC filings
are also available to the public at the SEC's website at www.sec.gov. You can
also inspect such reports, proxy and information statements and other
information at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, DC. 20006.
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY (A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Unaudited Condensed Consolidated Balance Sheet............................. F-18
Unaudited Condensed Consolidated Statements of Operations.................. F-19
Unaudited Condensed Consolidated Statements of Cash Flows.................. F-20
Notes to Unaudited Condensed Consolidated Financial Statements............. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiary (a development stage company) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM
Satellite Radio Holdings Inc. and subsidiary (a development stage company) as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for the years then ended and for the period from December 15, 1992
(date of inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, the Company has not commenced
operations, has negative working capital of $130,341,000, and is dependent upon
additional debt and equity financings, which raises substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is also described in note 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
McLean, VA
February 12, 1999, except for note 14, which is as of September 9, 1999
F-2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- -----------
(in thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1 $ 310
Prepaid and other current assets...................... -- 172
---------- -----------
Total current assets................................ 1 482
Other assets:
System under construction............................. 91,932 169,029
Property and equipment, net of accumulated
depreciation and amortization of $0 and $57.......... -- 449
Other assets.......................................... -- 525
---------- -----------
Total assets........................................ $ 91,933 $ 170,485
========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ -- $ 23,125
Due to related parties.................................... 445 13,767
Accrued interest on loans payable......................... 1,886 1,907
Loans payable due to related parties...................... 80,618 91,546
Term loan................................................. -- 34
Accrued expenses.......................................... -- 444
------- --------
Total current liabilities............................... 82,949 130,823
Term loan, net of current portion........................... -- 53
Subordinated convertible notes payable due to related
party...................................................... -- 45,583
Accrued interest on subordinated convertible notes payable
due to related party....................................... -- 1,209
------- --------
Total liabilities....................................... 82,949 177,668
------- --------
Common stock--$0.10 par value; authorized 3,000 and
160,542,000 shares; 125 and 6,689,250 shares issued and
outstanding at December 31, 1997 and 1998 (note 14)........ -- 669
Additional paid-in capital (note 14)........................ 10,643 9,974
Deficit accumulated during development stage................ (1,659) (17,826)
------- --------
Total stockholders' equity (deficit).................... 8,984 (7,183)
------- --------
Commitments and contingencies (notes 4, 7, 8, 11, 12, and
13)
Total liabilities and stockholders' equity (deficit).... $91,933 $170,485
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 to December 31, 1998
--------- --------- --------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue............................ $ -- $ -- $ --
--------- --------- --------
Operating expenses:
Research and development......... -- 6,941 6,941
Professional fees................ 1,090 5,242 6,332
General and administrative....... 20 4,010 4,030
--------- --------- --------
Total operating expenses....... 1,110 16,193 17,303
--------- --------- --------
Operating loss................. (1,110) (16,193) (17,303)
Other expense--interest income
(expense), net.................... (549) 26 (523)
--------- --------- --------
Net loss....................... $ (1,659) $ (16,167) $(17,826)
========= ========= ========
Net loss per share:
Basic and diluted................ $ (0.26) $ (2.42)
========= =========
Weighted average shares used in
computing net loss per share-basic
and diluted....................... 6,368,166 6,689,250
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
----------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity (Deficit)
---------- ------ ---------- ----------- ----------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Issuance of common stock
(December 15, 1992).... 100 $ -- $ -- $ -- $ --
---------- ---- ------ -------- --------
Balance at December 31,
1992................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1993................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1994................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1995................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1996................... 100 -- -- -- --
Contributions to paid-in
capital................ -- -- 143 -- 143
Issuance of common stock
and capital
contributions.......... 25 -- 9,000 -- 9,000
Issuance of options..... -- -- 1,500 -- 1,500
Net loss................ -- -- -- (1,659) (1,659)
---------- ---- ------ -------- --------
Balance at December 31,
1997................... 125 -- 10,643 (1,659) 8,984
Net loss................ -- -- -- (16,167) (16,167)
53,514-for-one stock
split (note 14)........ 6,689,125 669 (669) -- --
---------- ---- ------ -------- --------
Balance at December 31,
1998................... 6,689,250 $669 $9,974 $(17,826) $ (7,183)
========== ==== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 December 31, 1998
------- -------- -----------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(1,659) $(16,167) $(17,826)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ -- 57 57
Note discount amortization.............. 33 -- 33
Changes in operating assets and
liabilities:
Increase in prepaid and other current
assets................................ -- (212) (212)
Increase in accounts payable and
accrued expenses...................... -- 1,701 1,701
Increase in amounts due to related
parties............................... 445 13,322 13,767
Increase (decrease) in accrued
interest.............................. 517 (2) 515
------- -------- --------
Net cash provided by (used in)
operating activities................. (664) (1,301) (1,965)
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment....... -- (506) (506)
Additions to system under construction... (90,031) (43,406) (133,437)
------- -------- --------
Net cash used in investing
activities........................... (90,031) (43,912) (133,943)
------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and
capital contribution.................... 9,143 -- 9,143
Proceeds from issuance of loan payable to
related party........................... 80,053 337 80,390
Proceeds from issuance of options........ 1,500 -- 1,500
Proceeds from issuance of subordinated
convertible notes to related party...... -- 45,583 45,583
Payment to establish collateral for term
loan.................................... -- (92) (92)
Proceeds from term loan.................. -- 92 92
Repayments of term loan.................. -- (5) (5)
Payments for deferred financing costs.... -- (393) (393)
------- -------- --------
Net cash provided by financing
activities........................... 90,696 45,522 136,218
------- -------- --------
Net increase in cash and cash
equivalents.......................... 1 309 310
------- -------- --------
Cash and cash equivalents at beginning of
year..................................... -- 1 --
Cash and cash equivalents at end of year.. $ 1 $ 310 $ 310
======= ======== ========
Supplemental cash flow disclosure:
Interest capitalized..................... $ 1,901 $ 11,824 $ 13,725
Interest converted into principal note
balance................................. $ 501 $ 9,157 $ 9,658
Accrued system milestone payments........ $ -- $ 21,867 $ 21,867
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1998
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC") for
the purpose of procuring a digital audio radio service ("DARS") license.
Business activity for the period December 15, 1992 through December 31, 1996
was insignificant. Pursuant to various financing agreements entered into in
1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiary, XM Satellite Radio Inc. All significant
intercompany transactions and accounts have been eliminated. The Company's
management has devoted substantially all of its time to the planning and
organization of the Company and to the process of addressing regulatory
matters, initiating research and development programs, conducting market
research, initiating construction of the satellite system, securing content
providers, and securing adequate debt and equity capital for anticipated
operations and growth. Accordingly, the Company's financial statements are
presented as those of a development stage enterprise, as prescribed by
Statement of Financial Accounting Standards No. 7, Accounting and Reporting by
Development Stage Enterprises.
As discussed in Note 14, on September 9, 1999, the Company determined to
effect a 53,514-for-1 stock split. The effect of the stock split has been
retroactively reflected as of December 31, 1998 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 elsewhere 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.
(d) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and computer equipment........... 3 years
Machinery and equipment.............................. 7 years
Leasehold improvements............................... Remaining lease term
</TABLE>
F-7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) System Under Construction
The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1998, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC license
will be amortized using the straight line method over an estimated useful life
of fifteen years. Amortization of the license will begin on commercial launch.
On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. The FCC has the authority to revoke the
authorizations and in connection with such revocation could exercise its
authority to rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
The license asset value consists of the total payments made to the FCC for
the license of $90,031,000. Associated with this license is capitalized
interest of $1,901,000 and $10,991,000 as of December 31, 1997 and 1998,
respectively. Costs incurred for system development were $65,273,000.
Associated with the system development costs is capitalized interest of
$2,734,000 at December 31, 1998.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), during fiscal year
1997. SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. Adoption of SFAS 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity during 1997 or 1998.
(f) Stock-Based Compensation
During fiscal year 1997, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-based Compensation (SFAS 123), which
encourages, but does not require, the recognition of stock-based employee
compensation at fair value. SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and to provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made during the
year of adoption and in future years as if the fair-value-based method defined
in SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123. Accordingly, compensation cost for options to purchase
common stock granted to employees is measured as the excess, if any, of the
fair value of common stock at the date of the grant over the exercise price an
employee must pay to acquire the common stock.
Warrants to purchase common stock granted to other than employees as
consideration for goods or services rendered are recognized at fair market
value.
F-8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Research and Development
Research and development costs are expensed as incurred.
(h) Net Loss Per Share
In December 1997, the Company adopted the provisions of SFAS No. 128,
Earnings per Share, (SFAS 128). SFAS 128 supersedes APB Opinion No. 15,
Earnings per Share and its related interpretations, and promulgates new
accounting standards for the computation and manner of presentation of the
Company's loss per share. SFAS 128 requires the presentation of basic and
diluted loss per share. Basic earnings per share is calculated by dividing net
income by the weighted-average number of common shares outstanding during the
period. The computation of diluted earnings per share includes all common stock
options and warrants and other common stock, to the extent dilutive, that
potentially may be issued as a result of conversion privileges, including the
subordinated convertible notes payable due to related party. Due to losses
incurred during 1997 and 1998, the impact of other potentially dilutive
securities is anti-dilutive and is not included in the diluted loss per share
calculation.
(i) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and the financial
reporting amounts at each year-end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the sum of tax payable for the period and the change during the period in
deferred tax assets and liabilities.
(j) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997 and 1998 that would be classified as other
comprehensive income.
(k) Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses
during the reporting period. The estimates involve judgments with respect to,
among other things, various future factors which are difficult to predict and
are beyond the control of the Company. Significant estimates include valuation
of the Company's investment in the DARS license and the benefit for income
taxes and related valuation allowances. Accordingly, actual amounts could
differ from these estimates.
(l) Reclassifications
Certain fiscal year 1997 amounts have been reclassified to conform to the
fiscal 1998 consolidated financial statement presentation.
F-9
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, AMSC incurred
general and administrative costs and professional fees for the Company and
established an intercompany balance of $458,000 (see note 3).
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital contribution
from WSI. The Company issued WSI 25 shares of common stock for this
consideration.
On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as
a six-month bridge loan (see note 4).
On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 4).
On October 16, 1997, the Company received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 4).
On April 1, 1998, the Company entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998, the Company drew
down $45,583,000 under the agreement (see note 4).
In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and has established a due to WSI for the balance (see note 3).
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Professional fees......................... $ 960 130 1,090
General and administrative................ -- 20 20
----------- ------- ----------
Total................................... $ 960 150 1,110
=========== ======= ==========
<CAPTION>
Year Ended December 31, 1998
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Research and development.................. $ 6,624 -- 6,624
Professional fees......................... 2,529 353 2,882
General and administrative................ 903 60 963
----------- ------- ----------
Total................................... $ 10,056 413 10,469
=========== ======= ==========
</TABLE>
Additionally, during 1998 the Company incurred $925,000 of WSI project
management costs that were capitalized to the satellite system.
F-10
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Due to Related Parties
Due to related parties included the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Advances from WSI........................................... $ -- 7,405
Due to WSI.................................................. 390 5,904
Due to AMSC................................................. 55 458
----- -------
$ 445 13,767
===== =======
</TABLE>
Advances represent funding provided by WSI for 30 days. If amounts are not
repaid within this time period, additional subordinated convertible notes will
be issued.
(4) Debt
(a) Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements (the "Participation
Agreement") with AMSC and WSI in which both companies provided various equity
and debt funding commitments to XMSR for the purpose of financing the
activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997 certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement").
The Company has loans payable with a face amount of $82,053,000 and
$91,546,000 with a carrying amount of $80,618,000 and $91,546,000 at December
31, 1997 and 1998, respectively, outstanding with WSI as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Bridge loan............................................. $23,001 25,556
Additional amounts loan................................. 58,389 64,875
Working capital loan.................................... 663 1,115
------- ------
82,053 91,546
Discount arising from concurrent issuance of options
(note 7), net.......................................... (1,435) --
------- ------
$80,618 91,546
======= ======
</TABLE>
Bridge Loan
The Company executed the bridge loan with WSI in two tranches. On April 16,
1997, the Company received proceeds of $8,479,000 for a loan with a face amount
of $9,000,000. On October 16, 1997, the Company received proceeds of
$12,771,000 for a loan with a face amount of $13,522,000. The first tranche was
a six-month loan at LIBOR plus five percent per annum, equaling 11.03 percent.
The first tranche was rolled over with the establishment of the second tranche,
which is a six-month loan at LIBOR plus five percent per annum, equaling 9.94
percent at December 31, 1998 and due in April 1999. The accrued interest under
the bridge loan is compounded to the loan balance each April and October.
F-11
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional Amounts Loan
On October 16, 1997, the Company executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. This loan is a six-month loan at LIBOR plus five percent per
annum, equaling 9.94 percent at December 31, 1998 and due in April 1999. The
accrued interest under the additional amounts loan is compounded to the loan
balance each April and October.
Working Capital Loan
On May 16, 1997, the Company executed the working capital loan with WSI
whereby the Company would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Company drew down $663,000 against the line of credit
through December 31, 1997. This loan is a six-month loan at LIBOR plus five
percent per annum, with an interest rate of 10.19 percent at December 31, 1998
and due in May 1999. The accrued interest on the loan is compounded to the
balance in May and November.
Restrictive Covenants
The financing agreements contain restrictive covenants which include a
prohibition of the Company or its subsidiary to merge or consolidate, or sell,
transfer, or otherwise dispose of substantially all of its assets. The Company
or the subsidiary may not incur additional indebtedness in excess of $1,000,000
without prior written consent of WSI. Additionally, the financing agreements
provide for other restrictive covenants including a restriction on the payment
of dividends.
The Company has pledged 64.7511 percent of its share of the issued and
outstanding common stock of the subsidiary to WSI as collateral for the
financings.
(b) Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible note
agreement with WSI that provides for a maximum of $54,536,000 through the
issuance of subordinated convertible notes. The notes mature on September 30,
2006 and carry an interest rate of LIBOR plus five percent per annum, which was
10.15 percent as of December 31, 1998. Under the terms of the note agreement,
WSI shall have the right to convert all or a portion of the aggregate principal
amount of the notes into shares of common stock at a conversion price of
$875,000 per share. As of December 31, 1998, $45,583,000 had been drawn through
the issuance of subordinated convertible notes. Interest is payable upon
maturity.
(c) Term Loan
On November 1, 1998, the Company reached an agreement with a commercial bank
for a $92,000 installment loan with a 36 month term at 7 percent interest per
annum. The Company pledged $92,000 as collateral for the loan and placed this
balance on deposit at the commercial bank. At December 31, 1998, the Company's
outstanding balance was $87,000.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, accrued expenses, and the term loan approximate their fair market
value because of the relatively short duration of these instruments as of
December 31, 1997 and 1998, in accordance with SFAS No. 107, Disclosures about
Fair Value of Financial Instruments.
F-12
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the loans and subordinated convertible notes due to
related party could not be estimated as such amounts are due to the Company's
stockholders.
(6) Common Stock
(a) 1998 Shares Award Plan
On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan")
under which employees, consultants, and non-employee directors may be granted
options to purchase shares of common stock of the Company. The Company has
authorized 1,337,850 shares of common stock under the Plan. The options are
exercisable in installments determined by the compensation committee of the
Company's board of directors. The options expire as determined by the
committee, but no later than ten years from the date of grant. Transactions and
other information relating to the Plan for the year ended December 31, 1998 are
summarized below:
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, January 1, 1998......................... -- --
Options granted................................ 787,297 $16.35
Options canceled or expired.................... -- --
Options exercised.............................. -- --
------- ------
Balance, December 31, 1998....................... 787,297 $16.35
======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1998 Life Price December 31, 1998 Price
- -------- ----------------- ----------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$16.35 787,297 9.5 years $16.35 -- $16.35
====== ======= ========= ====== === ======
</TABLE>
There were no stock options exercisable at December 31, 1998. There were
550,552 shares available under the plan for future grants at December 31, 1998.
At December 31, 1998, all options have been issued to employees.
The per share weighted-average fair value of employee options granted during
the year ended December 31, 1998 was $10.54 on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Expected dividend yield.... 0%
Volatility................. 56.23%
Risk-free interest rate
range..................... 4.53% to 5.67%
Expected life.............. 7.5 years
=============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined
F-13
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Net loss:
As reported............................................ $16,167
Pro forma.............................................. 17,508
As reported--net loss per share--basic and diluted..... (2.42)
Pro forma--net loss per share--basic and diluted....... (2.62)
=======
</TABLE>
(b) Restrictive Covenants
Certain actions require the unanimous affirmative vote of the board of
directors of the Company. Such actions include the entry into, or the
amendment, modification, extension or termination of any agreements for amounts
in excess of $40,000,000 or with AMSC or WSI; the entry into any agreements
outside of the ordinary course of business; merger or consolidation; issuance
of additional shares of capital stock; and the declaration and payment of
dividends. If WSI holds more than 50 percent of the shares of common stock,
this provision requiring the unanimous affirmative vote of the board of
directors will be of no further force and effect. Additionally, an affirmative
vote of 81 percent of all the issued and outstanding shares of common stock
shall be required to approve any voluntary filing of a bankruptcy petition by
the Company or its subsidiary.
(7) WSI Options
The Company issued WSI three options. Under the first option, WSI may
purchase 5,202,748 shares of common stock at $4.52 per share to acquire common
stock. The option may be exercised in whole or in incremental amounts between
April 16, 1998 and October 16, 2002. Under certain circumstances, AMSC may
require WSI to exercise the option in whole. The Company allocated $1,250,000
to the option. Under the second option, WSI may purchase 6,897,291 shares at
$8.91 per share. The option may be exercised between October 16, 1997 and
October 16, 2003. The Company allocated $170,000 to the option. Under the third
option, WSI may purchase 187,893 shares of common stock at $5.32 per share. The
option may be exercised between October 16, 1997 and October 17, 2002. The
Company allocated $80,000 to the option.
The exercise of these options is subject to prior approval of the FCC to the
extent that such exercise would constitute transfer of control. The allocation
was based upon independent valuation.
(8) Employee Benefit Plan
On July 1, 1998, the Company has adopted a profit sharing and employee
savings plan under Section 401(k) of the Internal Revenue Code. This plan
allows eligible employees to defer up to 15 percent of their compensation on a
pre-tax basis through contributions to the savings plan. The Company
contributed $0.50 in 1998 for every dollar the employees contributed up to 6
percent of compensation, which amounted to $14,000.
(9) Interest Cost
The Company capitalizes a portion of interest cost as a component of the
cost of the FCC license and satellite system under construction. The following
is a summary of interest cost incurred during December 31,
F-14
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 15, 1992
(date of inception) to
1997 1998 December 31, 1998
------ ------ ----------------------
<S> <C> <C> <C>
Interest cost capitalized........... $1,901 11,824 13,725
Interest cost charged to expense.... 549 -- 549
------ ------ ------
Total interest cost incurred...... $2,450 11,824 14,274
====== ====== ======
</TABLE>
Interest costs incurred prior to the award of the license were expensed in
1997.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to December 31,
1998, the Company filed consolidated federal and state tax returns with its
majority stockholder AMSC. The Company generated net operating losses and other
deferred tax benefits which were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the net
operating losses. Had the Company filed on a stand-alone basis, it would have
had no tax provision as the deferred tax benefit of approximately $650,000 and
$7,164,000 for 1997 and 1998, respectively, would have been fully offset by a
valuation allowance.
(11) Accumulated Deficit
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and future
operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the DARS
system, develop and launch radio communications satellites, retire debt
incurred in connection with the acquisition of the DARS license and to sustain
operations until it generates positive cash flow. At December 31, 1998, the
Company has negative working capital of $130,341,000.
At the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required
long-term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and
equity securities through public and private sources. There are no assurances,
however, that such financing will be obtained.
(12) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
F-15
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WorldSpace has effectively
taken control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge, no prediction of the
outcome of this challenge can be made with any certainty.
(c) Satellite Purchase Contract
On March 20, 1998, as amended on June 5, 1998, the Company entered into an
agreement for the construction of two satellites, two launch vehicles, and
related equipment, services and spare parts, including launch services. The
total commitment under the amended agreement, excluding financing fees, is
approximately $438,013,000 as of December 31, 1998. These amounts are due upon
the completion of certain milestones. The Company has incurred costs of
$64,348,000 as of December 31, 1998. One of the members of the board of
directors is an executive of an affiliate of the Contractor.
Under the terms of this agreement, the Contractor shall invest $15,000,000
in a private or public equity offering of the Company, should it be consummated
prior to March 20, 1999.
(d) Technical Services and Technology Licenses
Effective January 1, 1998, the Company entered into an agreement with AMSC
and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI,
in which WorldSpace MC provides technical support in areas related to the
development of a DARS system. Payments for services provided under this
agreement are made based on negotiated hourly rates. This agreement may be
terminated by either party on or after the date of the commencement of
commercial operation following the launch of the Company's first satellite.
There is no minimum services purchase requirement. The Company incurred costs
of $4,770,000 under the agreement during 1998.
Effective January 1, 1998, XMSR entered into a technology licensing
agreement with AMSC and WorldSpace MC by which as compensation for certain
licensed technology currently under development to be used in the XM Radio
system, XMSR will pay up to $14,300,000 over a ten-year period. XMSR incurred
costs of $6,624,000 under the agreement during 1998. Any additional amounts to
be incurred under this agreement are dependent upon further development of the
technology, which is at XMSR's option. No liability exists to AMSC or
WorldSpace MC should such developments prove unsuccessful. In addition, XMSR
agreed to pay 1.2 percent of quarterly net revenues to WorldSpace MC and a
royalty of $0.30 per chipset for equipment manufactured using certain source
encoding and decoding signals technology.
(e) FCC Occurrences
On October 30, 1998, AMSC and WSI submitted an application for Consent and
Transfer Control with the FCC. These entities have requested the FCC's consent
to WSI's exercise of certain options that would increase its shareholding
interest in the Company. There have been challenges filed against the
application.
F-16
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Leases
The Company has two noncancelable operating leases for office space that
expire over the next four years. The future minimum lease payments under
noncancelable leases as of December 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999.................................... $ 42
2000.................................... 44
2001.................................... 46
2002.................................... 48
2003.................................... --
----
$180
====
</TABLE>
Rent expense for 1997 and 1998 was $0 and $231,000, respectively.
(13) Subsequent Events
On January 12, 1999, a competitor of the Company commenced action against
the Company for patent infringement and for a declaratory judgment of future
patent infringement by the Company. There have been no damages specified in the
action and the Company is in the process of responding to the complaint. Should
it be unsuccessful in its defense, the Company could be liable for monetary
damages, and could be forced to engineer alternative technologies related to
signal reception or seek a license from, or pay royalties to, the competitor.
The Company intends to vigorously defend against the suit; however, the outcome
is uncertain at this time.
Effective January 15, 1999, the Company issued a convertible note to AMSC
for $21,419,000. This note matures on September 30, 2006 and carries an
interest rate of LIBOR plus five percent per annum. Under the terms of this
note, AMSC shall have the right to convert all or a portion of the aggregate
principal amount of the note into shares of common stock at a conversion price
of $16.35 per share. Interest is payable upon maturity.
(14) Stock Split
On September 9, 1999, the board of directors of the Company determined to
effect a stock split providing 53,514 shares of stock for each share owned.
(15) Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................. $-- -- -- --
Operating loss........................... -- 51 185 874
Loss before income taxes................. -- 270 459 930
Net loss................................. -- 270 459 930
==== ===== ===== =====
Net loss per share--basic and diluted.... $-- (0.04) (0.07) (0.14)
==== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................ $ -- -- -- --
Operating loss.......................... 3,100 5,032 3,865 4,204
Loss before income taxes................ 3,100 5,032 3,857 4,178
Net loss................................ 3,100 5,032 3,857 4,178
====== ===== ===== =====
Net loss per share--basic and diluted... $(0.46) (0.75) (0.58) (0.62)
====== ===== ===== =====
</TABLE>
The sum of quarterly per share net losses for 1997 do not necessarily agree
to the net loss per share for the year due to the timing of stock issuances.
F-17
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
September 30, September 30,
1999 1999
------------- -------------
(in thousands,
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 54,356 168,490
Prepaid and other current assets................. 579 579
-------- -------
Total current assets........................... 54,935 169,069
Other assets:
System under construction........................ 282,316 282,316
Property and equipment, net of accumulated
depreciation and amortization................... 1,153 1,153
Goodwill and intangibles, net of accumulated
amortization.................................... 50,823 50,823
Other assets, net of accumulated amortization.... 17,590 6,826
-------- -------
Total assets................................... $406,817 510,187
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expense............. $19,051 19,051
Due to related parties........................... 172 172
-------- -------
Total current liabilities...................... 19,223 19,223
Subordinated convertible notes payable to related
party............................................. 103,094 --
Series A convertible notes payable................. 250,000 --
Accrued interest on notes payable.................. 9,856 --
Capital lease, net of current portion.............. 310 310
-------- -------
Total liabilities.............................. 382,483 19,533
-------- -------
Preferred stock, par value $0.01; 60,000,000 shares
authorized, no shares issued and outstanding at
September 30, 1999 and 10,761,677 shares issued
and outstanding pro forma September 30, 1999...... -- 108
Class A common stock, par value $0.01; 180,000,000
shares authorized, 14,716 shares issued and
outstanding at September 30, 1999 and 26,004,049
shares issued and outstanding pro forma September
30, 1999.......................................... -- 260
Class B common stock, par value $0.01; 30,000,000
shares authorized, 6,689,250 shares issued and
outstanding at September 30, 1999 and 17,822,808
shares issued and outstanding pro forma September
30, 1999.......................................... 67 178
Class C common stock, par value $0.01; 30,000,000
shares authorized, no shares issued and
outstanding at September 30, 1999 and pro forma
September 30, 1999................................ -- --
Additional paid-in capital......................... 67,860 533,701
Deficit accumulated during development stage....... (43,593) (43,593)
-------- -------
Total stockholders' equity..................... 24,334 490,654
-------- -------
Commitments and contingencies .....................
Total liabilities and stockholders' equity..... $406,817 510,187
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-18
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Month Periods ended September 30, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) to September 30, 1999
<TABLE>
<CAPTION>
Nine Months Ended December 15, 1992
September 30, (date of inception)
---------------------------------- to September 30,
1998 1999 1999
---------------- ---------------- -------------------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenue................. $ -- $ -- $ --
---------------- ---------------- ---------------
Operating expenses:
Research and
development.......... 5,834 3,597 10,538
Professional fees..... 4,260 5,932 12,264
General and
administrative....... 1,903 8,286 12,316
---------------- ---------------- ---------------
Total operating
expenses........... 11,997 17,815 35,118
---------------- ---------------- ---------------
Operating loss.......... (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. 8 (7,952) (8,475)
---------------- ---------------- ---------------
Net loss................ $ (11,989) $ (25,767) $ (43,593)
================ ================ ===============
Net loss per share:
Basic and diluted..... $ (1.79) $ (3.85)
================ ================
Weighted average shares
used in computing net
loss per share:
Basic and diluted..... 6,689,250 6,693,338
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to September 30, 1999
<TABLE>
<CAPTION>
Nine Months December 15,
Ended September 30, 1992 (date of
--------------------- inception) to
1998 1999 September 30, 1999
--------- ---------- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $ (11,989) $ (25,767) $ (43,593)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 16 1,469 1,559
Beneficial conversion charge..... -- 5,520 5,520
Stock compensation............... -- 140 140
Changes in operating assets and
liabilities:
Increase in prepaid and other
currrent assets............... (100) (407) (619)
Increase in other assets....... -- (609) (609)
Increase in accounts payable
and accrued expenses.......... 464 1,488 3,189
Increase (decrease) in amounts
due to related parties........ 29,449 (286) 13,481
Increase in accrued interest... -- 2,829 3,344
--------- ---------- ---------
Net cash provided by (used
in) operating activities.... 17,840 (15,623) (17,588)
--------- ---------- ---------
Cash flows from investing activities:
Purchase of property and
equipment......................... (279) (478) (984)
Additions to system under
construction...................... (40,746) (110,802) (244,239)
Other investing activities......... -- (6,085) (6,085)
--------- ---------- ---------
Net cash used in investing
activities.................. (41,025) (117,365) (251,308)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock
and capital contribution.......... -- -- 9,143
Proceeds from issuance of loan
payable to related party.......... 336 1,548 81,938
Proceeds from issuance of options.. -- -- 1,500
Proceeds from issuance of
subordinated convertible notes to
related party..................... 21,999 21,419 67,002
Proceeds from issuance of Series A
convertible notes................. -- 250,000 250,000
Repayments of loans payable to
related party..................... -- (75,000) (75,000)
Payment for deferred financing
costs............................. -- (10,849) (11,242)
Other net financing activities..... 849 (84) (89)
--------- ---------- ---------
Net cash provided by
financing activities........ 23,184 187,034 323,252
--------- ---------- ---------
Net increase in cash and cash
equivalents................. (1) 54,046 54,356
Cash and cash equivalents at
beginning of year .................. 1 310 --
--------- ---------- ---------
Cash and cash equivalents at end of
period ............................. $ 0 $ 54,356 $ 54,356
========= ========== =========
Supplemental cash flow disclosure:
Liabilities exchanged for new
debt.............................. $ -- $ 81,676 $ 81,676
Interest capitalized............... $ 7,311 $ 14,533 $ 28,258
Interest converted into principal
note balance...................... $ 4,582 $ 4,601 $ 14,259
Acquisition of goodwill............ $ -- $ 51,624 $ 51,624
Accrued system milestone payments.. $ -- $ 5,000 $ 5,000
Accrued expenses transferred to
loan balance...................... $ -- $ 7,405 $ 7,405
Property acquired through capital
lease............................. $ -- $ 431 $ 431
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-20
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC") for
the purpose of procuring a digital audio radio service ("DARS") license.
Business activity for the period December 15, 1992 through December 31, 1996
was insignificant. Pursuant to various financing agreements entered into in
1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
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 (see Note 4).
(2) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the consolidated financial
position of XM Satellite Radio Holdings Inc. and subsidiary, a development
stage entity, as of September 30, 1999, and the results of operations and cash
flows for the three and nine months ended September 30, 1998 and 1999, and the
period from December 15, 1992 (date of inception) through September 30, 1999.
The results of operations for the three and nine months ended September 30,
1998 and 1999 are not necessarily indicative of the results that may be
expected for the full year. These condensed financial statements are unaudited,
and do not include all related footnote disclosures. The interim unaudited
condensed financial statements should be read in conjunction with the audited
financial statements of the Company included in the Company's filings with the
Securities and Exchange Commission.
On September 9, 1999, the board of directors of the Company determined to
effect a stock split providing 53,514 shares of stock for each share owned. All
references to the number of common shares and per share amounts in the
unaudited condensed consolidated financial statements and notes thereto have
been restated to reflect the effect of the split for all periods presented.
The pro forma September 30, 1999 condensed consolidated balance sheet gives
effect to (i) the conversion of the $250 million Series A convertible debt,
together with associated accrued interest of $6.3 million, into 10,761,677
shares of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; (ii) the conversion of the $21.4 million and $81.7 million of
notes issued to AMSC, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock; and (iii) the sale of
10,241,000 shares of Class A common stock through an initial public offering at
$12 per share, which yielded net proceeds of $114.1 million, as if these
transactions had occurred on September 30, 1999 (see Note 11 -- Subsequent
Events).
(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
F-21
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(4) Exchange of WSI's Interest in XM Radio (WorldSpace Transaction)
On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Company in exchange for approximately 8.6 million shares of AMSC's common
stock. Additionally, the Company issued an aggregate $250.0 million of Series A
subordinated convertible notes (see Note 6) 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 of $51.6 million,
which is being amortized over 15 years.
(5) Recapitalization
Concurrently with the transaction discussed in Note 4, the Company's capital
structure was reorganized. As a result, AMSC held 6,689,250 shares of Class B
common stock. The Class B common stock 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. As of September 30, 1999, there
were 14,716 shares of Class A common stock issued and outstanding. The Class B
common stock is convertible into Class A common stock on a one for one basis,
as follows: (1) at any time at the discretion of AMSC, (2) following the
Company's initial public offering, at the direction of the holders of a
majority of the then outstanding shares of Class A common stock (which majority
must include at least 20% of the public holders of Class A common stock), and
(3) on or after January 1, 2002, at the direction of the holders of a majority
of the then outstanding shares of the Company's Class A common stock. Such
conversion will be effected only upon receipt of FCC approval of AMSC's
transfer of control of the Company to a diffuse group of shareholders.
The Company also authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated 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. No such shares had been issued as of September 30, 1999 (see Note
11--Subsequent Events).
(6) Issuance of Series A Subordinated Convertible Notes of XM Radio to New
Investors
At the closing of the transaction described in Note (4) above, the Company
issued an aggregate $250.0 million of Series A subordinated convertible notes
to six new investors--General Motors Corporation, $50.0 million; Clear Channel
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. The Series A subordinated convertible notes issued by the Company are
convertible into shares of the Company's 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 (see Note 11--Subsequent
F-22
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Events). The conversion price is $9.52 aggregate principal amount of notes for
each share of the Company's stock. The notes mature on December 31, 2004, or,
if the Company issues at least $50.0 million aggregate such high yield debt
securities. The notes are senior to all existing Company indebtedness,
including certain notes held by AMSC that are convertible into the Company's
stock, but will be subordinate to any future high yield debt securities issued
by the Company.
(7) Repayment and Conversion of Notes
Using part of the proceeds from the issuance of its Series A subordinated
convertible notes, described in Note 6, on July 7, 1999, the Company paid WSI
$75.0 million to repay an outstanding portion of notes payable to WSI. The
Company then exchanged the $54.5 million of the subordinated convertible notes
payable, $6.9 million in demand notes, $20.3 million in accrued interest and
all of the outstanding options to acquire the Company's common stock for an
$81.7 million note to AMSC.
(8) Notes to Related Party
On January 15, 1999, the Company issued a convertible note to AMSC for $21.4
million . This note matures on September 30, 2006 and carries an interest rate
of LIBOR plus five percent per annum. Interest is payable upon maturity. AMSC
shall have a right to convert all or a portion of the aggregate principal
amount of the note into shares of common stock at a conversion price of $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, unless extended in
certain circumstances if the Company issues high yield debt securities,
modified the conversion provisions to Class B common stock. It also provided
for the conversion of the aggregate principal into 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.
Following the Worldspace Transaction described in Notes (4) and (7) above,
the Company issued a convertible note to AMSC for $81.7 million. This note
bears interest at LIBOR plus five percent per annum and is due December 31,
2004, unless extended in certain circumstances if the Company issues high yield
debt securities. The note is convertible at AMSC's option at $8.65 per Class B
common share. The Company took a one-time $5.5 million charge to interest due
to the beneficial conversion feature of the new AMSC note (see Note 11--
Subsequent Events).
(9) 1998 Shares Award Plan
On June 6, 1999, the Company's board of directors defined shares under the
1998 Shares Award Plan as referring to the Company's Class A common stock. On
July 8, 1999, the Company's board of directors voted to reduce the exercise
price of the options outstanding under the Shares Award Plan from $16.35 to
$9.52 per share, which represented the fair value of the stock on the date of
the repricing. Additionally, the total number of shares reserved for the Plan
was increased from 1,337,850 to 2,675,700.
(10) Commitments and Contingencies
(a) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to implement a
revised work 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 $541.3
million, which includes amounts the Company expects to pay pursuant to the
exercise
F-23
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the option to build the ground spare satellite and certain financing costs
and in- orbit incentive payments. As of September 30, 1999, the Company had
paid $147.9 million under this contract.
(b) Technology Licenses Agreement
During the nine months ended September 30, 1999, the Company incurred
additional costs of $100,000 under the technology licenses agreement with AMSC
and Worldspace Management Corporation, giving a cumulative total from inception
of $6,724,000. The Company does not currently anticipate incurring any further
costs under this agreement.
(c) LCC International Services Contract
In August 1999, the Company signed a contract with LLC International, a
related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115 million, through April 15, 2001. As of September 30, 1999,
the Company has paid $3.9 million under this contract.
(d) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors has agreed to distribute the service to the exclusion of other
S-band satellite digital radio services. The Company will also have a non-
exclusive right to arrange for the installation of XM radios included in OnStar
systems in non-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35 million in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35 million to approximately $130
million through 2009, aggregating approximately $400 million. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors vehicles
with installed XM radios become subscribers for the Company's service. The
Company must also share with General Motors a percentage of the subscription
revenue attributable to General Motors vehicles with installed XM radios, which
percentage increases until there are more than 8 million General Motors
vehicles with installed XM radios. The Company will also make available to
General Motors bandwidth on the Company's system. The agreement is subject to
renegotiation at any time based upon the installation of radios that are
interoperable or capable of receiving Sirius Satellite Radio's (formerly known
as CD Radio) service. The agreement is subject to renegotiation if, four years
after the commencement of XM Radio's commercial operations and at two-year
intervals thereafter GM does not achieve and maintain specified installation
levels of General Motors vehicles capable of receiving the Company's service,
starting with 1.24 million units after four years, and 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-24
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Office Lease
On September 29, 1999, XMSR entered into a noncancelable operating lease for
office space that will expire in 2010. The future minimum lease payments under
the noncancelable lease will be as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999........................................... $ --
2000........................................... 667
2001........................................... 2,021
2002........................................... 2,085
2003........................................... 2,149
Thereafter..................................... 16,566
-------
$23,488
=======
</TABLE>
Concurrent with the execution of the lease agreement, XMSR established a $3.4
million letter of credit as a security deposit for the office space.
(f) Patent Infringement Action
In January, 1999, a competitor of XMSR commenced an action against XMSR for
patent infringement. In February, 1999, XMSR filed an answer to the action.
XMSR does not believe that it has infringed and will not infringe any of the
competitor's patents and intends to vigorously defend against the suit;
however, the outcome is uncertain at this time.
(g) FCC Occurrences
AMSC and WSI had previously submitted an application for Consent and
Transfer of Control with the FCC. Challenges have been filed against the
application. The application was withdrawn on July 7, 1999 based upon the
WorldSpace Transaction.
(11) Subsequent Events
(a) 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 $111.4 million.
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 $2.7 million.
(b) Conversion of Series A Subordinated Convertible Notes
Concurrent with the closing of the Company's initial public offering, the
$250 million of Series A subordinated convertible notes together with
associated accrued interest of $6.8 million were converted into 10,786,504
shares of Series A convertible preferred stock and 16,179,755 shares of Class A
common stock.
(c) Conversion of Notes to Related Party
Concurrent with the closing of the Company's initial public offering, the
$21.4 million and $81.7 million notes issued to AMSC together with associated
accrued interest of $3.8 million were converted into 11,182,926 shares of Class
B common stock.
F-25
<PAGE>
Credits for certain photographs on the inside front cover:
Barenaked Ladies courtesy of Reprise Records and Jay Blakesberg Photography;
Ricky Martin courtesy of Mark Harlan/Star File; Reba McIntyre courtesy of MCA
Records and Starstruck Entertainment; Sarah McLachlan courtesy of Arista
Records and Nettwerk Management; Tom Petty & The Heartbreakers courtesy of
Warner Bros. Records and Martin Atkins/Photographer; Santana courtesy of Arista
Records and Jay Blakesberg Photography; Britney Spears courtesy of Jive Records
and the Wright Entertainment Group; and George Strait courtesy of MCA Records
and The Erv Woolsey Company.
[On the inside back cover of the prospectus are titles of a number of the "XM
Originals", which are radio channels being developed by XM Radio, each
accompanied by the XM Radio logo. The text and logos appear to be emanating from
a satellite and broadcast to a car. At the top of the page is the phrase "RADIO
WILL NEVER BE THE SAME!", and the text at the bottom reads "Up TO 100 CHANNELS
COAST-TO-COAST DIGITAL QUALITY".]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where
that would not be permitted or legal. Neither the delivery of this prospectus
nor any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the
Company have not changed since the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Use of Proceeds.......................................................... 14
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Consolidated Financial Data..................................... 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 26
Management............................................................... 45
Certain Relationships and Related Party Transactions..................... 52
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Underwriting............................................................. 64
Legal Matters............................................................ 65
Experts.................................................................. 65
Certain Information About This Prospectus................................ 66
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
4,000,000 Shares
[LOGO OF XM SATELLITE RADIO]
XM Satellite Radio
Holdings Inc.
Class A
Common Stock
------------------------------
PRELIMINARY PROSPECTUS
------------------------------
Donaldson, Lufkin & Jenrette
Bear, Stearns & Co. Inc.
C. E. Unterberg, Towbin
Salomon Smith Barney
, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold nor may any offers to buy be +
+accepted prior to the time this prospectus is delivered in final form. This +
+preliminary prospectus is not an offer to sell these securities and it is not +
+a solicitation of an offer to buy these securities in any jurisdiction where +
+such offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JANUARY 7, 2000
PRELIMINARY PROSPECTUS
2,000,000 Shares
XM SATELLITE RADIO HOLDINGS INC.
[LOGO OF SATELLITE RADIO]
% Series B Convertible Redeemable Preferred Stock due 2012
(LIQUIDATION PREFERENCE OF $50 PER SHARE)
-----------
We are offering 2,000,000 shares of our % Series B Convertible Redeemable
Preferred Stock due 2012. We will pay dividends quarterly in arrears beginning
2000, in cash, in shares of our Class A common stock (subject to certain
limitations) or in a combination thereof. You may convert each share of the
Series B preferred stock, at any time, into shares of our Class A common
stock, subject to future adjustment. In addition, upon the occurrence of a
change of control, you will have the option to convert all, but not less than
all, of your shares of Series B preferred stock into Class A Common Stock at a
conversion rate equal to $50 (the liquidation preference per share of Series B
preferred stock) divided by the special conversion price described herein. We
must redeem the Series B preferred stock at the liquidation preference on
, 2012 in shares of our Class A common stock. We may not require
redemption of the Series B preferred stock before , 2003. Conversion
and redemption prices are specified herein under "Description of Series B
Preferred Stock." We have not applied and do not intend to apply for the
listing of the Series B preferred stock on any securities exchange.
Our Class A common stock is traded on the Nasdaq National Market under the
symbol "XMSR." The last reported sale price of our Class A common stock on
January 6, 2000 was $37.50 per share.
We are currently offering, by means of a separate prospectus, 4,000,000 shares
of our Class A common stock, excluding up to 600,000 shares available to cover
over-allotments. This offering and the Class A common stock offering are not
dependent on each other.
See "Risk Factors" beginning on page 7 of this prospectus to read about certain
risks that you should consider before buying shares of our Series B preferred
stock.
- --------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the adequacy or
accuracy of this prospectus. Any representation to the contrary is a criminal
offense.
- --------------------------------------------------------------------------------
-----------------------------------------------------------
<TABLE>
<CAPTION>
Per
Share Total
-----------------------------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds, before expenses, to our company:
</TABLE>
-----------------------------------------------------------
The underwriters may, under certain circumstances, purchase up to an
additional 300,000 shares of our Series B preferred stock from us at the
offering price less underwriting discount.
Bear, Stearns & Co. Inc_____________________________Donaldson,.Lufkin & Jenrette
Banc of America Securities LLC Salomon Smith Barney
The date of this prospectus is January , 2000.
<PAGE>
[The artwork on the inside cover of the prospectus depicts two vertical,
overlapping sine-wave patterns connecting a car resting on a silhouette of the
earth with a satellite above the earth. On the left side of the page is an
illustration of a radio displaying "CHANNEL 83, CLASSIC ROCK," and underneath,
"LOU REED, SATELLITE OF LOVE." The radio has AM and FM buttons, a dial, and the
XM Radio logo. On the right of the page is the phrase "RADIO WILL NEVER BE THE
SAME!" At the bottom of the page appears "Song title and artist for illustrative
purposes only. The artist is not affiliated with nor endorses XM Satellite Radio
or this offering."]
[The two-page foldout of the cover page of the prospectus depicts a number of
pictures of well-known musical artists and lists several radio formats, such as
emanating from a satellite and broadcast to a car. There are additional pictures
of cars, houses and enthusiastic people at the bottom of the page beneath the
caption: "MUSIC NEWS INFORMATION".]
<PAGE>
PROSPECTUS SUMMARY
This summary does not contain all the information you should consider before
investing in our common stock. Please read the entire prospectus carefully,
including the section entitled "Risk Factors."
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 radio signals, 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 and will have a
ground spare in reserve. A network of terrestrial repeaters, which are ground-
based electronics equipment, will receive and re-transmit the satellite signals
to augment our satellite signal coverage.
We have contracts to develop, manufacture and distribute XM automobile
radios with Delco Electronics Corporation, Motorola Inc., Pioneer Electronics
Corporation, Alpine Electronics, Mitsubishi Electronic Automotive America,
Inc., Audiovox and Clarion Co. Ltd.; XM home and portable radios with SHARP
Corporation; and chipsets for XM radios with STMicroelectronics. We have
reached a preliminary agreement with Sony Electronics to design, manufacture
and market XM radios. 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, - Radio One
CNN Sports Illustrated
- - 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 between 34
million and 43 million customers would be willing to pay between $200 and $400
for a satellite radio and $10.00 per month for satellite radio service.
Our strategy includes offering diverse programming designed to appeal to a
large audience, including urban and rural listeners of virtually all ages,
ethnicities, economic groups and specialty interests. We 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.
In October 1999, we completed our initial public offering of 10,241,000
shares of our Class A common stock at an initial public offering price of
$12.00 per share, which resulted in net proceeds to us of $114 million. At this
time, substantially all of our indebtedness also converted into equity. As of
the date of this prospectus, we have raised $445 million in equity proceeds,
net of expenses and repayment of debt, from investors and strategic partners.
Our strategic investor companies include General Motors, DIRECTV, Clear Channel
Communications and our parent company, American Mobile Satellite Corporation.
We are currently offering, by means of a separate prospectus, 4,000,000
shares of our Class A common stock, excluding up to 600,000 shares available to
cover over-allotments. This offering and the Class A common stock offering are
not dependent on each other.
----------------
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 website is not,
and should not be deemed to be, part of this prospectus.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Securities Being Offered........ 2,000,000 shares of % Series B convertible
redeemable preferred stock.
Liquidation Preference.......... Each share of Series B preferred stock has a
"liquidation preference" of $50, which is the
amount a holder of one share of Series B
preferred stock would be entitled to receive
if XM Radio were liquidated.
Total Liquidation Preference.... $100,000,000 that is, $50 per share times
2,000,000 shares of Series B preferred stock.
Use of Proceeds................. Estimated proceeds of $96.0 million will be
used for payments under our satellite
contract, terrestrial repeater contracts and
ground segment contracts, and for working
capital, operating losses and general
corporate expenses.
Dividends....................... We will pay cumulative dividends on the
Series B preferred stock at a rate per annum
equal to % of the liquidation preference
per share and such dividends will be payable
quarterly in arrears on , , and
of each year, commencing , 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.. You will have the right to convert some or
all of your shares of Series B preferred
stock into shares of our Class A common
stock, unless we have already redeemed them.
The initial conversion price is $ per
share. At that price, you would receive
shares of our Class A common stock for each
$50 liquidation preference of Series B
preferred stock. You will not be 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 this prospectus), you will
have the option, during the period commencing
on the date that the applicable change of
control notice is mailed to you and ending at
the close of business on the 45th day
thereafter, to convert all, but not less than
all, of your shares of Series B preferred
stock into Class A common stock at a
conversion rate equal to $50 (the liquidation
preference per share of Series B preferred
stock) divided by the special conversion
price described herein.
Redemption of the Series B Beginning on , 2003, we will have
Preferred Stock by Us.......... the right to redeem some or all of the Series
B preferred stock at a redemption price equal
to % of the liquidation preference, or $
per share, plus accrued dividends, if any, to
the date of redemption. The redemption price
will decline until it equals 100.0% on
, 2010, and will remain at
100.0% until redeemed. This redemption price
is payable in cash.
We will be required to redeem any Series B
preferred stock still outstanding on
, 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.
</TABLE>
3
<PAGE>
<TABLE>
<C> <S>
Method of Dividends and We may, at our option, make any dividend
Mandatory Redemption Payments.. payments due on our Series B 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.
Mandatory redemption payments due on our
Series B preferred stock must be paid by
delivery of shares of our Class A common
stock. Shares of our Class A common stock
issued to make dividend or mandatory
redemption payments on the Series B preferred
stock shall be valued at 95% of the average
market value (as defined) 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 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 preferred
stock and which receives the requisite
approval of the holders of Series B
preferred stock,
. equal with any of our preferred stock
issued in the future which provides that it
be ranked equal with the Series B 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........... You are generally not entitled to any voting
rights, unless we have not declared or paid
dividends for a total of six quarterly
periods.
Trading......................... Our Class A common stock currently trades on
the Nasdaq National Market under the symbol
"XMSR". We have not applied and do not intend
to apply for the listing of the Series B
preferred stock on any securities exchange.
</TABLE>
4
<PAGE>
Summary Consolidated Financial Data
The pro forma information in the following balance sheets table
additionally gives effect to the following as if each had occurred on
September 30, 1999:
. our sale of 10,241,000 shares of Class A common stock through an initial
public offering at $12 per share, which yielded net proceeds of $114.1
million;
. the conversion of the $250 million Series A convertible debt, together
with associated accrued interest of $6.3 million, into 10,761,677 shares
of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; and
. the conversion of the $21.4 million and $81.7 million of notes issued to
American Mobile, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock.
The pro forma "as adjusted" information in the following balance sheets
table additionally gives effect to the following as if it had occurred on
September 30, 1999:
. our sale of 2,000,000 shares of preferred stock in this offering at an
assumed offering price of $50.00 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
The pro forma "as further adjusted" information in the following balance
sheets table additionally gives effect to the following as if it had
occurred on September 30, 1999:
. our concurrent sale of 4,000,000 shares of Class A common stock at an
assumed offering price of $37.50 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
<TABLE>
<CAPTION>
December 15,
Years Ended Nine Months Ended 1992
December 31, September 30, (Date of
-------------------- -------------------- Inception)
1997 1998 1998 1999 to September 30,
Actual Actual Actual Actual 1999 (1)
--------- --------- --------- --------- ----------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------
Operating expenses:
Research and
development........... -- 6,941 5,834 3,597 10,538
Professional fees...... 1,090 5,242 4,260 5,932 12,264
General and
administrative........ 20 4,010 1,903 8,286 12,316
--------- --------- --------- --------- --------
Total operating
expenses.............. 1,110 16,193 11,997 17,815 35,118
--------- --------- --------- --------- --------
Operating loss.......... (1,110) (16,193) (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. (549) 26 8 (7,952) (8,475)
--------- --------- --------- --------- --------
Net loss................ $ (1,659) $ (16,167) $ (11,989) $ (25,767) $(43,593)
========= ========= ========= ========= ========
Net loss per share--
basic and diluted...... $ (0.26) $ (2.42) $ (1.79) $ (3.85)
========= ========= ========= =========
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 6,368,166 6,689,250 6,689,250 6,693,338
Other Data (2):
Ratio of earnings to
combined fixed charges
and preferred dividends
(3).................... -- -- -- -- --
--------- --------- --------- --------- --------
Deficiency of earnings
to cover combined fixed
charges and preferred
dividends.............. $ 3,560 $ 27,991 $ 19,300 $ 40,482 $ 72,033
--------- --------- --------- --------- --------
Pro forma deficiency of
earnings to cover
combined fixed charges
and preferred dividends
(4).................... $ $
--------- ---------
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------
Pro Forma
December 31, Pro Pro Forma As Further
1998 Actual Forma As Adjusted Adjusted
------------ -------- -------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash
equivalents............ $ 310 $ 54,356 $168,490 $264,490 $406,090
System under
construction........... 169,029 282,316 282,316 282,316 282,316
Total assets............ 170,485 406,817 510,187 606,187 747,787
Total debt.............. 140,332 363,260 310 310 310
Total liabilities....... 177,668 382,483 19,533 19,533 19,533
Stockholders' equity
(deficit).............. (7,183) 24,334 490,654 586,654 728,254
</TABLE>
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(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) For purpose of determining the ratio of earnings to combined fixed charges
and preferred dividends and the deficiency of earnings to cover combined
fixed charges and preferred dividends, "earnings" includes pre-tax income
(loss) adjusted for fixed charges and preferred dividends. "Fixed charges"
consist of interest expensed and capitalized, amortization of deferred
financing charges, and that portion of operating lease rental expense
(deemed to be one-third of rental expense) representative of interest.
(3) The ratios of combined fixed charges and preferred dividends to earnings
are not presented for the years ended 1997 and 1998, the nine months ended
September 30, 1998 and 1999 and for the period from December 15, 1992 (date
of inception) to September 30, 1999 because earnings were inadequate to
cover combined fixed charges and preferred dividends.
(4) Pro forma deficiency of earnings to combined fixed charges and preferred
dividends is calculated based upon a % dividend rate as of the beginning
of the period.
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RISK FACTORS
You should carefully consider the risks described below before making an
investment decision.
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 September 30, 1999, we had incurred significant costs, aggregating
approximately $282.3 million, in connection with the development of the XM
Radio system. We incurred net aggregate losses approximating $17.8 million from
our inception through December 31, 1998, and an additional $25.8 million in the
nine month period ended September 30, 1999. We expect our net losses and
negative cash flow to grow as we build the XM Radio system, make payments under
our various contracts and begin to incur marketing costs.
We need substantial further financing but such financing might not be
available.
We estimate that we will need approximately $397.7 million, after giving
effect to the proceeds from this offering and our concurrent offering of Class
A common stock, to meet our needs until we begin commercial operation of our
services. If we are unable to complete the proposed concurrent sale of our
Class A common stock, we would need approximately $539.3 million. 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 projections. We may have to raise
more funds than expected to remain in business and to continue to develop and
market the XM Radio system.
We plan to raise future funds by selling debt or equity securities, or both,
publicly and/or privately and by obtaining loans or other credit lines from
banks or other financial institutions. We may not be able to raise sufficient
funds on favorable terms or at all. If we are successful in raising additional
financing, we anticipate that a significant portion of future financing will
consist of debt securities. As a result, we may be highly leveraged. If we fail
to obtain any necessary financing on a timely basis, then
. our satellite construction, launch, or other events necessary to our
business could be materially delayed, or their costs could materially
increase;
. we could default on our commitments to our satellite construction or
launch contractors, creditors or others, leading to termination of
construction or inability to launch our satellites; and
. 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.
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We may not be able to complete the proposed offering of our Class A common
stock.
We may not be able to complete the offering of 4,000,000 shares of our Class
A common stock being conducted concurrently with this offering, or such
offering may not raise the amount of proceeds we expect. This would increase
our need for financing by the amount of the expected net proceeds of the Class
A common stock offering, less any amount actually raised. In addition, if we
are unable to complete the Class A common stock offering, the information in
this prospectus regarding the Class A common stock offering would not be
applicable or would need to be revised, perhaps significantly.
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, or improper
orbital placement. Launch failure rates vary depending on the particular launch
vehicle and contractor. There is a limited track record for the specific rocket
that will be used for the launch of our satellites, and even launch vehicles
with good track records experience some launch failures. 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 terrestrial repeater networks have not been
integrated and used together on the scale we contemplate. We
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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 and 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 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.
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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
. 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 satellite radio
services. These payment obligations, which could total several hundred million
dollars over
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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."
Sirius Satellite Radio's patent infringement suit against us could impair our
business.
On January 12, 1999, Sirius Satellite Radio, the only other owner of an FCC
license for satellite radio service, sued us, claiming that we are infringing
or will infringe three Sirius Satellite Radio patents. The Sirius Satellite
Radio patents involved in this litigation relate to certain aspects of signal
and reception methodologies that may be employed by a satellite radio system.
In its complaint, Sirius Satellite Radio seeks money damages to the extent we
have manufactured, used or sold any product or method claimed in Sirius
Satellite Radio's patents, and an injunction. Based on the planned design of
our system, our knowledge of the differences between the XM Radio system and
the claims of the Sirius Satellite Radio patents and on advice we have received
from our patent counsel, we believe that we have not infringed and will not
infringe any Sirius Satellite Radio patents. However, the litigation could harm
us, even if we prevail. It may divert management's attention and may make it
more difficult for us to raise financing or enter other agreements with third
parties. It may also impede our ability to move forward with the development of
our system in a timely manner. If we do not prevail in this litigation, we
could become liable to Sirius Satellite Radio for substantial money damages or
be subject to an injunction preventing us from using certain technology in our
satellite radio system, or both. Any such injunction could force us to develop
new technology which would not be subject to the injunction. Alternatively, we
could be required to license alternative technology from a third party, or seek
a license from, and pay royalties to, Sirius Satellite Radio to use its
technology. Any of the foregoing could delay or increase the costs of deploying
the XM Radio system.
Our business may be impaired by third party intellectual property rights.
Development of the XM Radio system will depend largely upon the intellectual
property that we will develop and license from third parties. If the
intellectual property that we may develop or use is not adequately protected,
others will be permitted to 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;
. 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.
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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
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., the Recording Industry Association of
America and SESAC, Inc. We expect to negotiate or establish by arbitration
royalty arrangements with these organizations, but such royalty arrangements
may be more costly than anticipated or
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unavailable. We also have to negotiate royalty arrangements with the owners of
the sound recordings. Cable audio services currently pay a royalty rate of 6.5%
of gross subscriber revenue set by the Librarian of Congress. Although we
believe we can distinguish XM Radio sufficiently from the cable audio services
in order to negotiate a lower statutory rate, we may not be able to do so.
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.
Problems related to the Year 2000 issue could disrupt our operations and harm
our business.
Year 2000 could require us to incur delays and unanticipated expenses. Many
currently installed computer systems and software products are not able to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software that fail to recognize the proper date at the end of 1999
may suffer major system failures or miscalculations. If we are unable to
identify and resolve a problem related to the Year 2000 in time to avoid
adverse consequences, there could be an interruption in, or a failure of,
certain of our normal business activities and operations, harming our business
and financial results.
A small number of stockholders own approximately 83% of our stock on a fully
diluted basis and effectively control us. Their interests may conflict with
yours as a stockholder.
As of December 31, 1999, our current principal stockholders owned
approximately 83% of our common stock on a fully diluted basis with total
voting power of approximately 90%. We have entered into material contracts and
transactions with our principal stockholders and their affiliates, and we may
enter into additional contracts in the future. The composition of our board of
directors is governed by a shareholders' agreement among our principal
stockholders, which grants them effective management control of XM Radio. These
stockholders could use their position as principal stockholders and their
management control to cause us to take actions that might not be in our
interests or your interests as a preferred stockholder.
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 replacement personnel, it could harm
our business and our future prospects.
We may issue additional preferred stock, which could dilute your interests or
deter a change of control of our company, even if the change of control is
favored by our shareholders.
Our certificate of incorporation does not limit the issuance of additional
series of preferred stock ranking ratably with or junior to the preferred
stock. The issuance of additional preferred stock could dilute the interests of
holders of the convertible preferred stock. None of the provisions relating to
the convertible preferred stock affords the holders of the convertible
preferred stock protection in the event of a highly leveraged or other
transaction that might adversely affect their interests. We are a Delaware
corporation, and 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.
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The market price of our Class A common stock may fluctuate widely.
The market price of our common stock could fluctuate substantially due to
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
. announcements of acquisitions or technological innovations; or
. changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons which may be unrelated to operating results. This market volatility
could depress the price of our common stock without regard to our operating
performance.
Future sales of our Class A common stock in the public market could lower our
stock price and impair our ability to raise funds in new stock offerings.
After giving effect to our concurrent offering of Class A common stock, we
will have 30,435,471 shares of Class A common stock outstanding, or 59,094,151
shares assuming conversion of all 17,872,176 shares of Class B common stock and
10,786,504 shares of Series A convertible preferred stock outstanding, but not
assuming the conversion of any Series B preferred stock. If the underwriters of
the Class A common stock offering exercise their over-allotment option in full,
we will have 31,035,471 shares of Class A common stock outstanding, or
59,694,151 shares assuming conversion of all outstanding Series A convertible
preferred stock and Class B common stock. There could be additional dilution as
a result of the conversion of the Series B preferred stock sold in this
offering, which is initially convertible into shares of Class A common
stock. Sales of a large number of shares could adversely affect the value of
our stock and could impair our ability to raise funds in additional stock
offerings.
The shares of Series B preferred stock sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless the shares are purchased by an affiliate of ours, sales of which will be
limited by Rule 144 under the Securities Act. Holders of restricted shares
generally will be entitled to sell these shares in the public market without
registration either under Rule 144 or any other applicable exemption under the
Securities Act.
16,887,293 shares of our Class A common stock and all 10,786,504 shares of
our Series A convertible preferred stock are subject to lock-up agreements that
expire ninety days after the date of this prospectus. American Mobile, which
owns 200,000 shares of Class A common stock and an additional 17,872,176 shares
of Class B common stock that may be converted into Class A common stock on a
one-for-one basis, 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 those times, the shares released from these lock-up
restrictions will be freely tradable, subject to the provisions of Rule 144 or
Rule 701 under the Securities Act. The owners of all locked-up shares have
experienced substantial appreciation in the value of their shares relative to
the price paid for them. In the event all or a significant portion of these
stockholders elect to sell their 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 Class A common stock subject to
outstanding stock options or reserved for issuance under our 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 December 15, 1999, options to purchase
2,258,805 shares of Class A common stock were outstanding.
In addition, following the closing of our Class A common stock offering, the
holders of 16,179,755 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.
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Payment of dividends in shares of Class A common stock may not result in stated
dividend yield.
In the event dividends are paid in shares of Class A common stock, each
share of Class A common stock will be valued for this purpose as equal to a
percentage of the average market value, as defined under "Description of Series
B Preferred Stock--Dividends." If the market price of Class A common stock
applicable in determining the average market value is higher than the actual
market price for the Class A common stock on the dividend payment date and you
sell your Class A common stock at such lower price, your actual dividend yield
could be lower than the stated dividend yield on the Series B preferred stock.
In addition, you are likely to incur commissions and other transaction costs in
connection with the sale of such Class A common stock.
There is no public market for the Series B preferred stock.
There has not been an established trading market for the Series B preferred
stock. Accordingly, we cannot assure you as to the development of liquidity of
any market for the Series B preferred stock. If a market for the Series B
preferred stock were to develop, the Series B preferred stock could trade for
less than the initial offering price, depending on many factors, including
prevailing interest rates, our operating results and the markets for similar
securities, and such market may cease to continue at any time.
You would lose part of your investment if our assets were sold for their book
value.
The offering price per share will significantly exceed the net tangible book
value of your shares because of our intangible assets, operating losses and
other factors. In the event of a liquidation of our assets for their book
value, you would not receive back a portion of your investment. See "Dilution"
for the calculations of these figures. If we issue debt securities with
warrants to purchase our common stock as part of future financings, such
warrants might be exercisable for less than the offering price which may result
in further dilution. The amount of stock subject to such warrants would depend
on market conditions at the time. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements 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 net proceeds from this offering, at an assumed offering price of $50 per
share, are estimated to be $96 million, after deducting estimated underwriting
discounts and commissions and offering expenses of $4 million. The net proceeds
are estimated to be $110.5 million if the underwriters' over-allotment option
is exercised in full, after deducting estimated underwriting discounts and
commissions and offering expenses of $4.5 million. We estimate the net proceeds
from our concurrent sale of 4,000,000 shares of Class A common stock will be
approximately $141.6 million, assuming an offering price of $37.50 per share
and after deducting estimated underwriting discounts and commissions and
offering expenses (estimated net proceeds would be approximately $162.9 million
if the underwriters' over-allotment option were exercised in full). The net
proceeds from these offerings will be used as set forth below.
<TABLE>
<CAPTION>
The Offering and
Class A Common
The Offering Stock Offering
------------ ----------------
(In millions)
<S> <C> <C>
Payments under satellite contract............ $55.5 $146.7
Payments under terrestrial repeater
contracts................................... 13.4 51.6
Payments under ground segment contracts...... 11.7 21.4
Working capital, operating losses and general
corporate expenses.......................... 15.4 17.9
----- ------
Total uses................................. $96.0 $237.6
===== ======
</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 these offerings 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 our initial public offering on October 5, 1999. The
following table presents, for the period indicated, the high and low sales
prices per share of our Class A common stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
High Low
1999: ------- -------
<S> <C> <C>
Fourth Quarter (beginning October 5, 1999).................... $ 44.75 $11.625
<CAPTION>
2000:
<S> <C> <C>
First Quarter (through January 6, 2000)....................... $45.875 $ 36.25
</TABLE>
On January 6, 2000, the last reported sale price of our Class A common stock
on the Nasdaq National Market was $37.50. As of January 5, 2000, there were 42
holders of record of our Class A common stock.
DIVIDEND POLICY
We have not declared or paid any dividends since our date of inception. We
do not intend to pay cash dividends on our common stock in the foreseeable
future. We anticipate 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 September 30, 1999 our capitalization
on
. an actual basis;
. a pro forma basis, which additionally gives effect to (i) the sale of
10,241,000 shares of Class A common stock through an initial public
offering at $12 per share, which yielded net proceeds of $114.1 million;
(ii) the conversion of the $250 million Series A convertible debt,
together with associated accrued interest of $6.3 million, into
10,761,677 shares of Series A convertible preferred stock and 15,748,333
shares of Class A common stock; and (iii) the conversion of the $21.4
million and $81.7 million of notes issued to American Mobile, together
with associated accrued interest of $3.6 million, into 11,133,558 shares
of Class B common stock, as if these transactions had occurred at
September 30, 1999;
. a pro forma as adjusted basis, which additionally gives effect to our
sale of 2,000,000 shares of Series B preferred stock in this offering at
$50 per share, after deducting underwriting discounts and commissions
and estimated offering expenses; and
. a pro forma as further adjusted basis, which additionally gives effect
to our concurrent sale of 4,000,000 shares of Class A common stock at
$37.50 per share, after deducting underwriting discounts and commissions
and estimated offering expenses.
These adjustments are described more fully in "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
September 30, 1999
------------------------------------------
Pro Forma
Pro Pro Forma As Further
Actual Forma As Adjusted Adjusted
-------- -------- ----------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents........... $ 54,356 $168,490 $264,490 $406,090
======== ======== ======== ========
Debt:
Subordinated convertible notes
payable to related party........... 106,692 -- -- --
Series A subordinated convertible
notes.............................. 256,258 -- -- --
Capital lease...................... 310 310 310 310
-------- -------- -------- --------
Total debt......................... $363,260 $ 310 $ 310 $ 310
======== ======== ======== ========
Stockholders' equity:
Series A convertible preferred
stock, par value $0.01; 15,000,000
shares authorized, no shares
issued and outstanding actual,
10,761,677 shares issued and
outstanding pro forma, pro forma
as adjusted, and pro forma as
further adjusted.................. $ -- $ 108 $ 108 $ 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, no shares issued and
outstanding actual and pro forma
and 2,000,000 shares issued and
outstanding pro forma as adjusted
and pro forma as further
adjusted.......................... -- -- 20 20
Class A common stock, par value
$0.01; 180,000,000 shares
authorized, 14,716 shares issued
and outstanding actual, 26,004,049
shares issued and outstanding pro
forma and pro forma as adjusted,
30,004,049 shares issued and
outstanding pro forma as further
adjusted.......................... -- 260 260 300
Class B common stock, par value
$0.01; 30,000,000 shares
authorized; 6,689,250 shares
issued and outstanding actual and
17,822,808 shares issued and
outstanding pro forma, pro forma
as adjusted, and pro forma as
further adjusted.................. 67 178 178 178
Class C non-voting common stock,
par value $0.01; 30,000,000 shares
authorized, no shares issued and
outstanding actual, pro forma, pro
forma as adjusted, and pro forma
as further adjusted............... -- -- -- --
Additional paid-in capital......... 67,860 533,701 629,681 771,241
Accumulated deficit................ (43,593) (43,593) (43,593) (43,593)
-------- -------- -------- --------
Total stockholders' equity ........ 24,334 490,654 586,654 728,254
-------- -------- -------- --------
Total capitalization................ $387,594 $490,964 $586,964 $728,564
======== ======== ======== ========
</TABLE>
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 years ended December 31, 1997 and 1998, and the consolidated balance sheets
data as of December 31, 1997 and 1998, 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, have negative working capital and
are dependent upon additional debt and 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
consolidated statements of operations data for the nine months ended September
30, 1998 and 1999, and for the period from December 15, 1992, which was our
date of inception, through September 30, 1999, and the consolidated balance
sheet data as of September 30, 1999, are derived from our unaudited
consolidated financial statements. 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 nine months ended September 30, 1998 and 1999 indicate what
our results will be for the full year.
The pro forma information in the following balance sheets table
additionally gives effect to the following as if each had occurred on
September 30, 1999:
. our sale of 10,241,000 shares of Class A common stock through an initial
public offering at $12 per share, which yielded net proceeds of $114.1
million;
. the conversion of the $250 million Series A convertible debt, together
with associated accrued interest of $6.3 million, into 10,761,677 shares
of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; and
. the conversion of the $21.4 million and $81.7 million of notes issued to
American Mobile, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock.
The pro forma "as adjusted" information in the following balance sheets
table additionally gives effect to the following as if it had occurred on
September 30, 1999:
. our sale of 2,000,000 shares of Series B preferred stock in this
offering at an assumed offering price of $50 per share, after deducting
underwriting discounts and commissions and estimated offering expenses.
The pro forma "as further adjusted" information in the following balance
sheets table additionally gives effect to the following as if it had
occurred on September 30, 1999:
. our concurrent sale of 4,000,000 shares of Class A common stock at an
assumed offering price of $37.50 per share, after deducting underwriting
discounts and commissions and estimated offering expenses.
(tables appear on the following page)
18
<PAGE>
<TABLE>
<CAPTION>
December 15,
Years Ended Nine Months Ended 1992
December 31, September 30, (Date of
-------------------- -------------------- Inception)
1997 1998 1998 1999 to September 30,
Actual Actual Actual Actual 1999 (1)
--------- --------- --------- --------- ----------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue................. $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- --------
Operating expenses:
Research and
development........... -- 6,941 5,834 3,597 10,538
Professional fees...... 1,090 5,242 4,260 5,932 12,264
General and
administrative........ 20 4,010 1,903 8,286 12,316
--------- --------- --------- --------- --------
Total operating
expenses.............. 1,110 16,193 11,997 17,815 35,118
--------- --------- --------- --------- --------
Operating loss.......... (1,110) (16,193) (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. (549) 26 8 (7,952) (8,475)
--------- --------- --------- --------- --------
Net loss................ $ (1,659) $ (16,167) $ (11,989) $ (25,767) $(43,593)
========= ========= ========= ========= ========
Net loss per share--
basic and diluted...... $ (0.26) $ (2.42) $ (1.79) $ (3.85)
========= ========= ========= =========
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 6,368,166 6,689,250 6,689,250 6,693,338
Other Data (2):
Ratio of earnings to
combined fixed charges
and preferred dividends
(3).................... -- -- -- -- --
--------- --------- --------- --------- --------
Deficiency of earnings
to cover combined fixed
charges and preferred
dividends.............. $ 3,560 $ 27,991 $ 19,300 $ 40,482 $ 72,033
--------- --------- --------- --------- --------
Pro forma deficiency of
earnings to cover
combined fixed charges
and preferred dividends
(4).................... $ $
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------------------
Pro Forma
December 31, Pro Pro Forma As Further
1998 Actual Forma As Adjusted Adjusted
------------ -------- -------------- ------------ ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheets Data:
Cash and cash
equivalents............ $ 310 $ 54,356 $168,490 $264,490 $406,090
System under
construction........... 169,029 282,316 282,316 282,316 282,316
Total assets............ 170,485 406,817 510,187 606,187 747,787
Total debt.............. 140,332 363,260 310 310 310
Total liabilities....... 177,668 382,483 19,533 19,533 19,533
Stockholders' equity
(deficit).............. (7,183) 24,334 490,654 586,654 728,254
</TABLE>
- --------
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) For purpose of determining the ratio of earnings to combined fixed charges
and preferred dividends and the deficiency of earnings to cover combined
fixed charges and preferred dividends, "earnings" includes pre-tax income
(loss) adjusted for fixed charges and preferred dividends. "Fixed charges"
consist of interest expensed and capitalized, amortization of deferred
financing charges, and that portion of operating lease rental expense
(deemed to be one-third of rental expense) representative of interest.
(3) The ratios of combined fixed charges and preferred dividends to earnings
are not presented for the years ended 1997 and 1998, the nine months ended
September 30, 1998 and 1999 and for the period from December 15, 1992 (date
of inception) to September 30, 1999 because earnings were inadequate to
cover combined fixed charges and preferred dividends.
(4) Pro forma deficiency of earnings to combined fixed charges and preferred
dividends is calculated based upon a % dividend rate as of the beginning
of the period.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis provides information which we believe
is relevant to an assessment and understanding of our financial condition and
consolidated results of operations. This discussion should be read together
with our consolidated financial statements, pro forma financial information and
related notes beginning on page F-1 of this prospectus.
Introduction
XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-
owned subsidiary of American Mobile. XM Satellite Radio Holdings Inc. became a
holding company for XM Satellite Radio Inc. in connection with a strategic
investment by a former shareholder in early 1997. In July 1999, following our
repayment of $75.0 million in debt owed to the former shareholder, it conveyed
all of its interest in us to a trust. American Mobile then acquired all of that
interest from the trust, making American Mobile our only stockholder at that
time. Also, in July, we issued $250.0 million of Series A subordinated
convertible notes. In October 1999, we completed an initial public offering and
exercised an overallotment option for a cumulative total of 10,241,000 shares
of Class A common stock, yielding net proceeds of $114.1 million. Concurrent
with the closing of our initial public offering, the $250.0 million of Series A
subordinated convertible notes, together with associated accrued interest of
$6.8 million, converted into 10,786,504 shares of Series A convertible
preferred stock and 16,179,755 shares of Class A common stock. Additionally,
the $21.4 million and $81.7 million of convertible notes issued to American
Mobile, together with associated accrued interest of $3.8 million, converted
into 11,182,926 shares of Class B common stock.
We are in the development stage. Since our inception in December 1992, we
have devoted our efforts to establishing and commercializing the XM Radio
system. Our activities were fairly limited until 1997, when we pursued and
obtained regulatory approval from the FCC to provide satellite radio service.
Our principal activities to date have included
. designing and developing the XM Radio system;
. negotiating contracts with satellite and launch vehicle operators,
specialty programmers, radio manufacturers and car manufacturers;
. developing technical standards and specifications;
. conducting market research; and
. securing financing for working capital and capital expenditures.
We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement
of commercial operations.
We intend to capitalize all costs related to our satellite contract and our
FCC license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground
control stations. Depreciation of our satellites will commence upon in-orbit
delivery. Depreciation of our satellite control facilities and terrestrial
repeaters and the amortization of our FCC license will commence upon commercial
operations.
After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.
Results of Operations
Nine Months Ended September 30, 1999 Compared With Nine Months Ended September
30, 1998
Research and Development. Research and development expenses decreased to
$3.6 million for the nine months ended September 30, 1999 compared with $5.8
million for the nine months ended September 30, 1998. The decrease in research
and development expenses resulted from the completion of the development of
some of our system technology during 1998.
20
<PAGE>
Professional Fees. Professional fees increased to approximately $5.9 million
for the nine months ended September 30, 1999, compared with $4.3 million for
the nine months ended September 30, 1998. The increase primarily reflects
additional legal, regulatory and marketing expenses.
General and Administrative. General and administrative expenses increased to
$8.3 million for the nine months ended September 30, 1999, compared with $1.9
million for the nine months ended September 30, 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 the nine months ended September 30, 1999. This
amortization expense will be adjusted to reflect the final allocation to
tangible and intangible assets. We have granted certain key executives
performance-based stock options. We anticipate a non-cash compensation charge
of approximately $4.1 million for performance-based stock options and stock
options granted at prices below fair market value to be incurred in the fourth
quarter.
Interest Expense. As of September 30, 1999 and 1998, we owed $363.0 million
and $112.2 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 $14.7 million and $7.3 million
associated with our FCC license and the XM Radio system during the nine months
ended September 30, 1999 and 1998, respectively. We expensed interest costs of
$8.9 million and $0 during the nine months ended September 30, 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 $3.4 million.
Interest Income. Interest income increased to $0.9 million for the nine
months ended September 30, 1999, compared with the nine months ended September
30, 1998 which was insignificant. The increase was the result of higher average
balances of cash and short-term investments during the nine months ended
September 30, 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.
Net Loss. The net loss for the nine months ended September 30, 1999 and 1998
was $25.8 million and $12.0 million, respectively. The increase in net losses
for the nine months ended September 30, 1999, compared with the nine months
ended September 30, 1998, primarily reflects an increase in interest expense
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 completion
of 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.
21
<PAGE>
Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.7 million, respectively, primarily reflecting research and
development activities, professional fees and general and administrative
expenses.
Liquidity and Capital Resources
At September 30, 1999, we had a total of cash and cash equivalents of $54.4
million and working capital of $35.7 million, compared with cash and cash
equivalents of $0.3 million and working capital of $(130.3) million at December
31, 1998. The increases in the respective balances are due primarily to the
proceeds from the issuance of Series A subordinated convertible notes in July
1999 (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Funds Required for XM Radio Through Commencement of
Commercial Operations--Sources of Funds") exceeding capital expenditures and
operating expenses for the first nine months of 1999, which was off-set by a
$75 million payment to retire loans payable, and the conversion of current
loans payable to a former shareholder into the non-current American Mobile new
convertible note. Subsequent to September 30, 1999, we successfully completed
an initial public offering, which raised $114.1 million in net proceeds, and
converted the Series A subordinated convertible notes into Series A convertible
preferred stock and Class A common stock.
Funds Required for XM Radio Through Commencement of Commercial Operations
We estimate that we will require approximately $1.1 billion to develop and
implement the XM Radio system from our inception through the commencement of
commercial operations, which we are targeting for the second quarter of 2001.
After we receive the estimated proceeds from this offering, we will have raised
an aggregate of $540.8 million since our inception net of expense and repayment
of debt. If we complete our concurrent offering of Class A common stock, we
will have raised $682.4 million. We will require substantial additional
funding, approximately $397.7 million, to finish building the XM Radio system,
to provide working capital and fund operating losses until we commence
commercial operations. The funds raised in this offering are expected to be
sufficient in the absence of additional financing to cover our funding needs
into the second quarter of 2000, or the third quarter of 2000 assuming
completion of our concurrent offering of Class A common stock as described
above. We may not be able to complete the offering of 4,000,000 shares of our
Class A common stock being conducted concurrently with this offering, or such
offering may not raise the amount of proceeds we expect. This would increase
our need for financing by the amount of the expected net proceeds of the Class
A common stock offering, less any amount actually raised.
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 future 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 offer debt securities in a private placement at the time of or
shortly after this offering, or at other times in the near future. Often, high
yield debt securities are issued as part of units with warrants to purchase
common stock. If warrants were issued in any debt placement by us, the amount
of common stock that may be purchased and the price at which stock would be
purchased under the warrants would depend upon market conditions at that time.
We may not be able to raise any funds or obtain loans on favorable terms or
at all. Our ability to obtain the required financing depends on several
factors, including future market conditions; our success or lack of success in
developing, implementing and marketing our satellite radio service; our future
creditworthiness; and restrictions contained in agreements with our investors
or lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or their
costs could materially increase. We could default on our commitments to our
satellite construction or launch contractors, creditors or others, leading to
termination of construction or inability to launch our satellites. Finally, we
may not be able to launch our satellite radio service as planned and may have
to discontinue operations or seek a purchaser for our business or assets.
22
<PAGE>
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
<TABLE>
<CAPTION>
Sources of Funds
- ----------------
<S> <C>
Total funds raised to
date.................... $ 444.8
Net proceeds from this
offering................ 96.0
Net proceeds from
offering of Class A
common stock............ 141.6
--------
Total capital raised... 682.4
Future capital
requirements............ 397.7
--------
Total sources.......... $1,080.1
========
</TABLE>
<TABLE>
<CAPTION>
Uses of Funds
- -------------
<S> <C>
Satellites and launch.... $ 472.6
Launch insurance......... 50.0
Terrestrial repeater
system.................. 263.3
Ground segment........... 65.9
--------
Total system........... 851.8
FCC license.............. 90.0
Operating expenses and
working capital
requirements............ 138.3
--------
Total uses............. $1,080.1
========
</TABLE>
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 American Mobile and by
a former investor who sold its investment to American Mobile.
. $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.
Net proceeds from this offering in the chart above reflects the expected
gross proceeds of this offering of $110 million less $4 million in
underwriting discounts and commissions and estimated offering expenses. Net
proceeds from the concurrent Class A common stock offering in the chart above
reflects the expected gross proceeds of the offering of $150.0 million less
$8.4 million in underwriting discounts and commissions and estimated offering
expenses.
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
September 30, 1999, $147.9 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 September 30, 1999, we had not
incurred any costs in deploying the ground segment.
Other operating expenses and working capital requirements in the chart
above include cumulative historical operating losses through September 30,
1999 of $43.6 million.
Sources of Funds. To date, we have raised approximately $444.8 million of
equity proceeds, net of expenses and repayment of debt. These funds have been
used to acquire our FCC license, make required payments under our satellite
contract with Hughes, and for working capital and operating expenses. Of the
$444.8 million raised to date, approximately $167.0 million has been raised
through the issuance of equity to, and receipt of loans from, our current
stockholder, American Mobile, and 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.
23
<PAGE>
In July 1999, we issued $250.0 million of Series A subordinated convertible
notes to six strategic and financial investors--General Motors, $50.0 million;
Clear Channel Communications, $75.0 million; DIRECTV, $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million in the aggregate. Using part of the proceeds from the issuance of the
Series A subordinated convertible notes, we paid a former stockholder $75.0
million in July 1999 to redeem an outstanding loan. We incurred fees and
expenses totalling $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 American Mobile 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.
Uses of Funds. Of the approximately $1.1 billion of funds to be used through
commencement of commercial operations, an estimated $569.4 million are expected
to be incurred under contracts presently in place and for our FCC license,
which has already been paid for in full. Total capital expenditures from our
inception to September 30, 1999, totaled $245.2 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 September 30, 1999, we had paid approximately $147.9
million under our satellite contract and recognized an additional $5.0 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 an aggregate of approximately $50.0
million. As of September 30, 1999, we had not incurred any costs with respect
to launch insurance.
Terrestrial Repeater System. Based on the current design of the XM Radio
system and preliminary bids, we estimate that through our expected commencement
of operations in the second quarter of 2001 we will incur aggregate costs of
approximately $263.3 million for a terrestrial repeater system. We expect these
costs to cover the capital cost of the design, development and installation of
a system of terrestrial repeaters to cover approximately 70 cities and
metropolitan areas. As of September 30, 1999, we had incurred costs with
respect to the terrestrial repeater buildout of $3.9 million which we paid. In
August 1999, we signed a contract calling for payments of approximately $115
million for engineering and site preparation.
Ground Segment. Based on the design of the XM Radio system, available
research, preliminary bids and actual contract costs, we expect to incur
aggregate ground segment costs through the expected commencement of operations
in the second quarter of 2001 of approximately $65.9 million. We expect these
costs will cover the satellite control facilities, programming production
studios and various other equipment and facilities. As of September 30, 1999,
we had not incurred any costs 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. No additional payments have been made
relating to the license.
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Operating Expenses and Working Capital Requirements. In addition to the
above capital needs, we will require funds for working capital, operating
expenses and royalty payments currently estimated to be approximately $138.3
million through our targeted commercial launch in the second quarter of 2001.
From our inception through September 30, 1999, we have incurred total operating
expenses of $43.6 million. Total cash used in operating activities was $17.6
million. The difference between the loss incurred to date and cash used in
operations is principally due to a $5.5 million beneficial conversion charge,
$13.5 million in amounts due to related parties and $3.3 million in accrued
interest.
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 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 operational, promotional, subscriber acquisition, joint
development and manufacturing 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."
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.
Year 2000 Readiness
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Many such systems will
need to accept four-digit entries in order to distinguish 20th century dates
from 21st century dates. As a result, by the end of 1999, computer systems and
software used by many companies have been upgraded to comply with these Year
2000 requirements. Otherwise these systems may cause miscalculations that will
interfere with business activities or simply fail to work. When we use the
terms "Year 2000 Ready" or "Year 2000 Readiness," we mean that customers will
not experience any material difference in performance and functionality of our
networks as a result of the date being prior to, during or after the Year 2000.
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We began to assess our Year 2000 Readiness in mid-1998. We have completed
the identification, necessary modification and testing of all our current
systems, which we believe are Year 2000 compliant. This required no significant
expense. Because we are a development stage company and do not expect to
commence commercial operations until the second quarter of 2001, as of the date
of this prospectus, we have not experienced and do not expect any significant
operational or financial problems for our company as a result of Year 2000
issues. Our existing technology development contracts require Year 2000
Readiness, and we require Year 2000 Readiness in all new contracts that we
enter.
In addition to our internal review process, we have had communications with
certain significant third parties with which we do business to
. evaluate their Year 2000 Readiness and state of compliance; and
. determine the extent to which our systems may be affected if they fail
to remediate their own Year 2000 issues.
To date, we have not identified any system which demonstrates symptoms of
not being Year 2000 Ready or for which a suitable alternative cannot be
implemented.
Qualitative and Quantitative Discussion of Market Risk
To date, we do not have any derivative financial instruments and do not
intend to use derivatives. We invest our cash in short-term commercial paper
and money market funds. All of our indebtedness was automatically converted
into equity upon completion of our initial public offering. As a result, we
believe that our exposure to interest rate risk is not material to our results
of operations.
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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:
. $444.8 million of equity proceeds raised to date, net of expenses and
repayment of debt, including an initial public offering and 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 our initial public offering;
. Contract with Hughes for construction and in-orbit delivery of two high-
powered satellites and long lead items for a ground spare;
. Long-term agreement with the OnStar division of General Motors covering
the installation and exclusive marketing and distribution of XM Radio
service in General Motors vehicles;
. Contracts with Delphi-Delco Electronics, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM
radios; preliminary agreement to allow Sony Electronics to design,
manufacture and market 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; and
. Agreements with leading specialty programmers, for many of which we will
be the exclusive satellite radio platform, covering at least 24
channels, including AsiaOne, Black Entertainment Television (BET), BBC
World Service, Bloomberg News Radio, Clear Channel, CNN en Espanol,
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.
Market Opportunity
We believe that there is a significant market for our satellite radio
service. Market studies show strong demand for radio service, as evidenced by
radio listening trends, data relating to sales and distribution of radios and
the general growth in radio advertising. In addition, we note that in many
markets audio programming choices are limited to mass appeal formats. We
believe our national subscription service will complement traditional local
radio. Moreover, the success of subscription entertainment services in other
media such as cable television and market research further indicate potential
for significant consumer demand for satellite radio services.
Radio Listening
On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that
over 75% of the entire United States population age 12 and older listen to the
radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and
Factbook, Radio Advertising Bureau, 1998).
In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting
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our service initially. An estimated 69% of consumers chose radio as their most
listened to format in the car as compared to 15% for cassettes and 9% for CDs
(Radio Listening Habits, CEMA 1998).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis.
In 1997, radio manufacturers sold over 23 million car radios, including 15.7
million original equipment automobile radios and 7.4 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 5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.
Radio Advertising
The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1998 climbed to $15.4 billion, an increase of 12% over 1997.
Veronis, Suhler & Associates projects a compound annual increase of 9.3%
through 2002. This growth rate exceeds the projected increase in advertising
spending for television, newspapers, magazines, yellow pages and outdoor
advertising (Communications Industry Forecast, 1998).
Current Limitations on Programming Choice
Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.
Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the up to 100
channels we expect to offer on a nationwide basis. In 1998, there were only 49
AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Summer 1998 Ratings Report, Duncan's American Radio, 1998).
We estimate that our coast-to-coast service will reach 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, over 36 million live beyond the
largest 268 markets (Statistical Abstract of the United States 1998 and Fall
1998 Market Rankings, The Arbitron Company). In addition, there are 22 million
people age 12 and above who receive five or fewer stations (The Satellite
Report 1999, C. E. Unterberg, Towbin).
Limited Programming Formats. We believe that there is significant demand for
a satellite radio service that expands the current programming choices
available to these potential listeners. Over 50% of all commercial radio
stations use one of only three general programming formats--country,
news/talk/sports, and adult contemporary (M Street Radio Directory, 1998). Over
70% of all commercial radio stations use one of only five general formats--the
same three, plus oldies and religion. The small number of available programming
choices means that artists representing niche music formats likely receive
little or no airtime in many markets. Radio stations prefer featuring artists
they believe appeal to the broadest market. However, according to the Recording
Industry Association of America, 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).
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Demand for Subscription Services and Products
Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1998, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $28, and nearly 9% of TV households subscribe to satellite television at an
average monthly cost of $52 (National Cable Television Association website and
DBSdish.com website). Also in 1998, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 69 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 December 1998, we commissioned Strategic Marketing And
Research Techniques, a leading market research company, 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.
In July 1997, Critical Mass Media, a leading radio research firm, conducted
a demand and segmentation study for us involving telephone surveys of 6,000
people. The study estimated that 34 million consumers would be willing to
subscribe to satellite radio with a $400 equipment price point increasing to 43
million consumers with a $200 equipment price point. The study was based on a
$10 subscription fee and 50 channels. XM Radio plans to have a monthly
subscription fee of $9.95 and up to 100 channels.
The XM Radio Service
We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout
the continental United States, will position us to become the leading provider
of the next generation in radio.
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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 Local area coverage
capability coverage in the United
States
Choice: wide Up to 100 channels with a Limited formats in many markets
variety/number of wide variety of programming
stations
Improved audio quality Digital quality sound Analog AM/FM quality sound
Fewer commercials Average 6-7 minutes per Average 13-17 minutes per hour
hour; some channels
commercial free
More information about Text display with title/name No visual display
music of song/artist
</TABLE>
We plan to further differentiate XM Radio from traditional AM/FM radio in
the following ways.
Provide music formats unavailable in many markets. XM Radio will offer many
music formats that are popular but currently unavailable in many markets. More
than 50% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; news/talk/sports; or adult
contemporary. There are many types of music with significant popularity, as
measured by recorded music sales and concert revenues, that are unavailable in
many traditional AM/FM radio markets. Such music could include classical
recordings or popular blues and rap music that have retail appeal but are not
commonly played on traditional AM/FM radio. This music also includes special
recordings such as the Irish dance soundtrack "Riverdance" and the "Three
Tenors" concerts which generate millions of CD sales, yet are not typically
played on today's AM/FM stations. Additionally, heavy metal and dance are two
of the more popular musical styles not currently broadcast in many small and
medium sized markets. Even major markets do not always offer a full complement
of formats.
Superserve popular music formats. We will be able to offer more specific
programming choices than traditional AM/FM radio generally offers for even the
most popular listening formats. For example, on traditional AM/FM radio oldies
music is often generalized on a single format. We will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.
Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on specific
formats, we have the ability to provide more variety to attract listeners
dissatisfied with repetitive and/or limited playlist selection offered by
traditional radio.
Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using
our national platform to aggregate geographically disparate groups through
affinity programming, we will provide advertisers a valuable way to market
products and services to these groups by advertising on our affinity channels.
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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.
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Representative XM Radio Channel List
The following table is a list of representative channels we may offer.
Channels in italics represent contractual commitments with content providers.
Representative Channels of XM Radio
ROCK MUSIC INFORMATION HISPANIC
Classic Rock All News (USA Today) Tejano (Hispanic
Classic Hard Rock All News (Bloomberg) Broadcasting Corp.)
New Hard Rock Public Affairs (C-SPAN) Caribbean (Hispanic
New Alternative Financial News (CNNfn) Broadcasting Corp.)
Classic Alternative News/Information (BBC Regional Mexican
Soft Rock World Service) (Hispanic Broadcasting
ECLECTIC MUSIC Home & Garden Corp.)
Contemporary Christian Love/Relationship Line Rock en Espanol
(Salem) Farm/Rural (Hispanic Broadcasting
Traditional Christian Health/Fitness Corp.)
(Salem) Comedy Hispanic Ballads
Blues Audio Books (Hispanic Broadcasting
Traditional Jazz Consumer Classified Corp.)
Reggae/Island Soap Operas Hispanic News (CNN en
World Music For Truckers Only Espanol)
American Folk Movie Soundtrack Channel OLDIES MUSIC
Pop Classical Relationship Classified 40's Oldies
Traditional Classical (-18) 50's Oldies
Modern Jazz Relationship Classified 60's Oldies
Progressive/Fusion (19-30) 70's Oldies
POP MUSIC Relationship Classified 80's Oldies
Top 20 Contemporary Hits (31-50) 90's Oldies
Disco/Dance Relationship Classified Love Songs
Broadway Show Tunes (51+) TALK
Modern Adult Lifestyles African American Talk
Contemporary Celebrity Gossip (BET/Radio One)
Classic Vocalists Entertainment News Asian/Indian Talk
All Request Contemporary Game Show/Contest (AsiaOne)
Hits URBAN MUSIC Christian/Family Talk
SPORTS Hip Hop/Rap (BET/Radio (Salem)
Sports Headlines One) Mandarin Talk (AsiaOne)
(CNN/Sports) Urban Dance Mix (Radio Conservative Talk
Sports Talk (One-On-One One) Liberal Talk
Sports) Classic Soul (BET/Radio Senior Citizen Talk
Sportsman Channel One) Rock Talk (18-34)
Automotive (NASCAR) Gospel (BET/Radio One) Hispanic Talk
COUNTRY MUSIC Adult Urban (BET/Radio Teen Talk
Mainstream Country One) CHILDREN'S MUSIC
Classic Country Top 20 Urban Pre-School
Bluegrass/Traditional ENVIRONMENTAL MUSIC Grade School/pre-teen
Country Soft Jazz SPECIAL/EVENTS
All Request Country New Age Reserved Channels
Electronic
Environmental (Earth
Sounds)
Beautiful Instrumentals
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.
Marketing and Distribution
Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.
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Establish Broad Distribution Channels for XM Radios
We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.
Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold over 4.5 million automobiles in 1998, which represented more than 29% of
the United States automobile market. Under the agreement, we have substantial
payment obligations to General Motors, including among others, certain
guaranteed, annual, fixed payment obligations. While we have discussed with
General Motors certain installation projections, General Motors is not required
to meet any minimum targets for installing XM radios in General Motors
vehicles. In addition, certain of the payments to be made by us under this
agreement will not be directly related to the number of XM radios installed in
General Motors vehicles. Our contract with General Motors is described in more
detail under the caption "Certain Relationships and Related Party
Transactions--Distribution Agreement with 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, Audiovox and Clarion for
the development, manufacture and distribution of XM radios for use in cars. We
have reached a preliminary agreement 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. Motorola is a leading
supplier of integrated electronics systems to automobile manufacturers.
Mitsubishi Electronic Automotive America, together with its parent corporation
Mitsubishi Electronic 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 produced over 31% of
aftermarket car radios sold in the United States in 1997. We have also signed a
contract with SHARP to manufacture and distribute XM radios for home 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
traditional electronic retailers. In addition, we plan to pursue alternative
distribution opportunities such as catalog/direct marketing, the Internet and
marketing through affinity groups.
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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.
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 WebTV, will enable us to refine our launch
implementation throughout the roll-out period. The advertising will consist of
both branding and promotion efforts for XM Radio, as well as separate campaigns
to promote and brand individual channels. Initially, we will focus marketing
efforts on the various channels targeting young adults, who we believe are more
likely to drive early penetration. We also expect to benefit from free local
media coverage as XM Radio is first offered in each new market.
XM Radio will promote subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This might include
. promotional campaigns directed towards automobile manufacturers and
dealers;
. promotional campaigns for free months of service with purchase of an XM
radio or free installations for aftermarket car radios;
. incentive programs for retailer sales forces;
. in-store promotional campaigns, including displays located in
electronics, music and other retail stores, rental car agencies and
automobile dealerships; and
. jointly funded local advertising campaigns with retailers.
Advertiser Development and Acquisition
Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups.
We will also work with ratings agencies in our advertising-supported business.
Statistical Research, Inc., which produces Radar reports, has agreed to work
with us to develop other ratings methodologies for satellite radio.
During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.
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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.
[PICTURE OF RADIO WAVES REFLECTED OFF SATELLITES TO CAR APPEARS HERE]
Space Segment
Satellite Construction. Under our satellite contract with Hughes, Hughes is
building and will launch two HS 702 high-power satellites for the XM Radio
system. Hughes has also agreed to provide, at our option, one ground spare
satellite, to be available in the event of a failed launch of any satellite or
to accommodate our satellite system growth.
We believe that the HS 702 model will provide higher quality performance
than other satellite options. The first HS 702 satellite 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 29 times in 34
attempts, for an 85% success rate. The upper stage has successfully flown in
185 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 commerical satellite,
DIRECTV 1-R, in October 1999. As of October 9, 1999, Sea Launch has 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
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of either of the satellites that occurs from the time of launch through each
satellite's expected lifetime. We intend to obtain coverage which will exceed
all hardware, insurance and launch service costs related to the in-orbit
replacement of a lost satellite. However, any insurance we may obtain will not
protect us from the adverse effect on our business operations due to the loss
of a satellite. We expect that these policies will contain standard commercial
satellite insurance provisions, including standard coverage exclusions.
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
are evaluating proposals from experienced satellite operators to perform the
telemetry, tracking and control functions.
Programming and Business Center. Programming from both our studios and
external sources will be sent to our programming center, which will package and
retransmit signals to our satellites through the uplink station. Financial
services and certain administrative support will be carried on at our business
center. Communications traffic between the various XM Radio facilities will be
controlled by the network monitoring center. The network monitoring center will
monitor satellite signals and the terrestrial repeater network to ensure that
the XM Radio system is operating properly. We plan to design and install fault
detection systems to detect various system failures before they cause
significant damage.
Terrestrial Repeaters. We intend to install a terrestrial repeater system to
supplement the coverage of our satellites. Terrestrial repeaters are ground-
based electronics equipment which receive and re-transmit the satellite
signals. We have signed a contract with LCC International, a wireless service
site planner, for the design and deployment of our terrestrial repeater
network. LCC International has completed initial site planning for 70 markets.
The contract with LCC International is described in more detail under the
caption "Certain Relationships and Related Party Transactions--Engineering
Contract with LCC International."
In some areas, satellite signals may be subject to blockages from tall
buildings and other obstructions. Due to the satellites' longitudinal
separation, in most circumstances where reception is obscured from one
satellite, XM Radio will still be available from the other satellite. In some
urban areas with a high concentration of tall buildings, however, line-of-sight
obstructions to both satellites may be more frequent. In such areas, we will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do
not expect this to present a serious problem to our construction of a
terrestrial repeater network.
The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.
We plan to install approximately 1,700 terrestrial repeaters to cover urban
areas in approximately 70 markets. We expect that this system will be
operational by the second quarter of 2001. We estimate that the largest urban
markets may require in excess of 100 repeaters, while smaller cities with fewer
tall buildings may require as few as one to three repeaters. We also intend to
use additional small repeaters in areas such as tunnels, where reception would
otherwise be severely restricted. Our placement of terrestrial repeaters will
be guided by a newly developed radio frequency analysis technique which,
employing technology similar to that used in certain cellular telephone
systems, analyzes the satellite footprint to discover areas likely to have
impaired reception of XM Radio. We are currently negotiating with Hughes
Network Systems for the design, development and manufacture of the terrestrial
repeaters.
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We expect to benefit from the expertise gained by American Mobile with its
ARDIS terrestrial two-way data network consisting of approximately 1,700 base
stations sites serving cities throughout the United States. We may use a
portion of these sites in our system.
XM Radios. We will transmit XM Radio throughout the continental United
States to vehicle, portable, home and plug and play radios. Our radios will be
capable of receiving both XM Radio and traditional AM/FM 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 to develop, manufacture and distribute XM radios which
can be used in the car. We have signed a contract with SHARP to manufacture XM
radios for home and portable use. We have also reached a preliminary agreement
with Sony Electronics to design, manufacture and market XM radios for the
portable, home, aftermarket and original equipment manfacture car stereo
markets.
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
Satellite Radio, the only other FCC licensee for satellite radio service in the
United States. Since October 1997, Sirius Satellite Radio's common stock has
traded on the Nasdaq National Market. Sirius Satellite 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 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.
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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 Inc., currently provides a large number of stations on the
Internet and has recently completed an initial public offering of stock,
indicating growth in the industry. Although we believe that the current sound
quality of Internet radio is below standard and may vary depending on factors
such as network traffic, which can distort or interrupt the broadcast, we
expect that improvements from higher bandwidths, faster modems and wider
programming selection may make Internet radio a more significant competitor in
the future.
There are a number of Internet-based audio formats in existence or in
development which could compete directly with XM Radio. For example, Internet
users with the appropriate hardware and software can download sound files for
free or for a nominal charge and play them from their personal computers or
from specialized portable players. In addition, prominent members of the music
and computer industry have supported an initiative known as the Secure Digital
Music Initiative to become a standard for fee-based electronic distribution of
copyrighted sound recordings. Although presently available formats have
drawbacks such as hardware requirements and download bandwidth constraints,
which we believe would make XM Radio a more attractive option to consumers,
Internet-based audio formats may become increasingly competitive as quality
improves and costs are reduced.
Direct Broadcast Satellite and Cable Audio
A number of companies provide specialized audio service through either
direct broadcast satellite and cable audio systems. These services are targeted
to fixed locations, mostly in-home. The radio service offered by direct
broadcast satellite and cable audio is generally an add-on service to the
higher priced video service.
Regulatory Matters
XM Radio and Sirius Satellite 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 our company. 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.
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Our license, which is held by a subsidiary wholly owned by us, has a term of
eight years from commencement of our 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.
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 Satellite Radio,
which plans to use a different transmission technology than we plan to use.
Because of uncertainty regarding the design of Sirius Satellite Radio's
systems, we may not be able initially to meet this interoperability
requirement. We may not be able initially to design a commercially viable
interoperable receiver, and Sirius Satellite Radio may not cooperate with us on
the issue of interoperability. Accordingly, we may not be able to meet the
FCC's interoperability requirements, and may need to obtain an extension of
time or modification of this requirement from the FCC. Complying with the
interoperability requirement could make the radios more difficult and costly to
manufacture. Accordingly, this requirement could delay the commercial
introduction of our service.
The FCC is currently conducting a rulemaking proceeding to establish rules
for terrestrial repeater transmitters, which we plan to deploy to fill in gaps
in satellite coverage. The FCC has proposed to permit us to deploy these
facilities. Specifically, the FCC has proposed a form of blanket licensing for
terrestrial repeaters and service rules which would prohibit satellite radio
licensees from using terrestrial repeating transmitters to originate local
programming or transmit signals other than those received from the satellite
radio satellites. Various parties, including the National Association of
Broadcasters, have asked the FCC to
. delay consideration of terrestrial repeater rules until our company and
Sirius Satellite Radio provide additional information regarding planned
terrestrial repeaters;
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. 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 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 recently in response to concerns about the export of
technology to China by the United States defense contractors. The recent
negative publicity may lead the United States Congress to alter the relevant
laws or regulations, or may change the State Department's policy in enforcing
the regulations. Any change in applicable law or policy may result in delay of
our satellite launch.
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Intellectual Property
System Technology
We have contracted with several technology companies to implement portions
of the XM Radio system. These technology companies include Hughes and Alcatel
(satellites); Delphi-Delco, 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 September
30, 1999. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system. We anticipate that the
Fraunhofer Institute will continue to provide various development services for
us in connection with the design of our system.
American Mobile has granted us a royalty-free license with respect to
certain ground segment communications technology and antenna technology.
American Mobile and WorldSpace Management have also granted us royalty-free,
non-exclusive and irrevocable licenses to use and sublicense all improvements
to their technology. The technology licenses from American Mobile and
WorldSpace Management renew automatically on an annual basis unless terminated
for a breach which has not been or cannot be remedied.
We believe that the intellectual property rights we have licensed under our
technology license were independently developed or duly licensed by American
Mobile or WorldSpace International, as the case may be. We cannot assure you,
however, that third parties will not bring suit against us for patent or other
infringement of intellectual property rights.
Litigation with Sirius Satellite Radio
On January 12, 1999, Sirius Satellite Radio, the other holder of an FCC
satellite radio license, commenced an action against us in the United States
District Court for the Southern District of New York, alleging that we are
infringing or may infringe three patents assigned to Sirius Satellite Radio. In
its complaint, Sirius Satellite Radio seeks money damages to the extent we have
manufactured, used or sold any product or method claimed in their patents and
injunctive relief.
We responded to the complaint on February 26, 1999, denying that
. Sirius Satellite Radio's patents have been or will be infringed;
. the claims of Sirius Satellite Radio's patents are valid;
. Sirius Satellite Radio has any right to either damages or injunctive
relief against our proposed satellite radio system by reason of
statements made by Sirius Satellite Radio to the FCC and by reason of
the conditions of Sirius Satellite Radio's authorization from the FCC to
provide satellite radio; and
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. Sirius Satellite Radio has any right to either damages or injunctive
relief against our proposed satellite radio system because Sirius
Satellite Radio is required to license the Sirius Satellite Radio
patents to us by reason of statements made by Sirius Satellite Radio to
the FCC and by reason of the conditions of Sirius Satellite Radio's
authorization from the FCC to provide satellite radio.
Based on the planned design of our system, our knowledge of the differences
between our system and the claims of the Sirius Satellite Radio patents and on
advice we have previously received from our patent counsel, we believe that we
have not and will not infringe any Sirius Satellite Radio patents. However, the
litigation could harm our company, even if we are successful. It will divert
our management's attention and may make it more difficult for us to raise
financing or enter into other agreements with third parties. In addition, even
if we prevail, the Sirius Satellite Radio litigation could prevent us from
moving forward with the development of the XM Radio system in a timely manner.
The Sirius Satellite Radio patents involved in the Sirius Satellite Radio
litigation relate to certain aspects of signal and reception methodologies that
may be employed by a satellite radio system. If, despite our efforts, we lose
all or part of this litigation, we could become liable to Sirius Satellite
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 Satellite Radio. If any of these strategies becomes necessary, it could
be costly and time-consuming and would likely delay any implementation of our
system. If we could not accomplish any strategy, or could not do so in a timely
manner at an acceptable cost, our business would be harmed.
Copyrights to Programming
We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc., and SESAC, Inc. These organizations
collect royalties and distribute them to songwriters and music publishers and
negotiate fees with copyright users based on a percentage of revenues. Radio
broadcasters currently pay a combined total of approximately 3-4% of their
revenues to these performing rights societies. We expect to negotiate or
establish by arbitration royalty arrangements with these organizations, but
such royalty arrangements may be more costly than anticipated or unavailable.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the
Digital Millennium Copyright Act of 1998, we also have to negotiate royalty
arrangements with the owners of the sound recordings. The Recording Industry
Association of America will negotiate licenses and collect royalties on behalf
of copyright owners for this performance right in sound recordings. Cable audio
services currently pay a royalty rate of 6.5% of gross subscriber revenue. This
rate was set by the Librarian of Congress, which has statutory authority to
decide rates through arbitration, and was affirmed on May 21, 1999 by the
United States Court of Appeals for the District of Columbia. Although we
believe we can distinguish XM Radio sufficiently from the cable audio services
in order to negotiate a lower statutory rate, we may not be able to do so.
The XM(TM) Trademark
We believe that XM Radio will be seen as the complement to AM and FM radio.
We have an application pending in the United States Patent and Trademark Office
for the registration of the trademark "XM" in connection with the transmission
services offered by our company and expect that our brand name and logo will be
prominently displayed on the surface of XM radios together with the radio
manufacturer's brand name. This will identify the equipment as being XM Radio-
compatible and build awareness of XM Radio. We intend to maintain our trademark
and the anticipated registration. We are not aware of any material claims of
infringement or other challenges to our right to use the "XM" trademark in the
United States.
Personnel
As of December 15, 1999, we had 62 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
44
<PAGE>
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 Sirius Satellite Radio litigation and the FCC proceeding
described under the caption "Business--Regulatory Matters," we are not a party
to any material litigation or other proceedings.
45
<PAGE>
MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table sets forth information concerning our directors,
executive officers and key employees. All directors hold office until the next
annual meeting of stockholders and the election and qualification of their
successors. Officers are elected by and serve at the discretion of our board of
directors.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Gary M. Parsons......... 49 Chairman of the Board of Directors
Hugh Panero............. 43 President, Chief Executive Officer and Member, Board of Directors
Nathaniel A. Davis (1).. 45 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)...... 43 Member, Board of Directors
Jack Shaw (2)........... 60 Member, Board of Directors
Dr. Rajendra Singh (2).. 45 Member, Board of Directors
Ronald L. Zarrella...... 50 Member, Board of Directors
Lee Abrams.............. 47 Senior Vice President, Content and Programming
Stephen Cook............ 44 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..... 36 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 American Mobile, a
position he has held since March 1998. Mr. Parsons joined American Mobile in
July 1996 and has also served as its Chief Executive Officer and President.
Previously, Mr. Parsons was with MCI Communications Corporation where he served
in a variety of roles from 1990 to 1996, including most recently as Executive
Vice President of MCI Communications, and as Chief Executive Officer of MCI's
subsidiary MCImetro, Inc. From 1984 to 1990, Mr. Parsons was one of the
principals of Telecom*USA, which was acquired by MCI. Prior to the recruitment
of Hugh Panero, Mr. Parsons served as our Chief Executive Officer.
Hugh Panero has served as a member of the board of directors and as
President and Chief Executive Officer since June 1998. Mr. Panero has over 16
years experience building and managing entertainment distribution services.
Most recently, from 1993 to 1998, Mr. Panero served as President and Chief
Executive Officer of Request TV, a national pay-per-view network owned by
Liberty Media and Twentieth Century Fox. Prior to his employment with Request
TV, Mr. Panero spent ten years with Time Warner Cable where he was part of the
team which built the cable systems serving parts of Queens and Brooklyn, New
York. Mr. Panero held various positions with Time Warner Cable, including Vice
President, Marketing.
Nathaniel A. Davis has served as a member of the board of directors since
October 1999. Mr. Davis is President and Chief Operating Officer 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
46
<PAGE>
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 and audit committee 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 American Mobile's Senior Vice President, General Counsel and
Secretary since October 1992. From October 1983 to October 1992, Ms. Segal was
associated with the law firm of Debevoise & Plimpton in New York, New York.
Prior to joining Debevoise, Ms. Segal clerked for the Honorable Jerre S.
Williams of the United States Court of Appeals for the Fifth Circuit, and for
the Honorable Edmund L. Palmieri for the United States District Court for the
Southern District of New York.
Jack Shaw has served as a member of the board of directors since May 1997.
Mr. Shaw is Chairman and Chief Executive Officer of Hughes Network Systems,
Inc. and Executive Vice President of Hughes Electronics Corporation. Mr. Shaw
is a member of the Hughes Electronics Corporation Executive Committee. Mr. Shaw
has been a director of American Mobile since July 1996 and has previously
served as Chairman of American Mobile's Board. Previously, Mr. Shaw held senior
management positions with companies including ITT Space Communications, Inc.,
Digital Communications Corporation and M/A-Com Telecommunications, Inc., which
was acquired by Hughes Electronics Corporation in 1987.
Rajendra Singh has served as a board member since July 1999. Dr. Singh is a
member of the board of directors and a co-founder of LCC International. Dr.
Singh was President of LCC International 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 Systems, 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, Content and Programming
since June 1998. Mr. Abrams is a prominent radio programmer/consultant with
more than 30 years of experience in radio, and since 1970 has been a consultant
to a variety of radio stations, networks and record companies. He is credited
with many innovations in radio programming, including transforming FM radio,
pioneering the album rock format in the 1970s, adult contemporary radio and
urban, classic and smooth jazz radio in the 1980s and active rock radio in the
1990s. He most recently has served as a consultant for ABC Radio Networks,
Capstar, Thorn-EMI and Sony, among others.
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
47
<PAGE>
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 implemen-tation deadlines, including
responsibility for conducting all launch and range operations at Cape
Canaveral.
Provisions Governing the Board of Directors
Our board of directors consists of nine members, four of whom are selected
by American Mobile, 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 American Mobile, 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 American
Mobile, one will be selected by each of General Motors, Clear Channel and the
TCM Group, one will be our President and Chief Executive Officer, and the
remaining two will be independent directors of recognized industry experience
and stature whose nominations must be approved by American Mobile 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 under a shareholders' agreement
with us. The foregoing board and observation rights are subject to these
entities, as parties to the shareholders' agreement, maintaining their original
investment or certain minimum share percentages in us. For additional details
regarding the shareholders' agreement, see "Certain Relationships and Related
Party Transactions--Shareholders' Agreement."
48
<PAGE>
Terms of Directors
All members of the board of directors hold office until the next annual
meeting of stockholders and the election and qualification of their successors.
Board Committees
The board of directors has established compensation and audit committees.
Each committee reports to the board of directors. The compensation committee,
currently consisting of Messrs. 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
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 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. Zarrella 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 us. We will
have a right to repurchase these shares for $9.52 per share if Mr. Parsons'
service with us 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 of these shares 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.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Annual Compensation 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 $267,309(1) 267,570
1999 286,533 125,000 1,354 100,000
Lee Abrams
Senior Vice President,
Content and
Programming............ 1998 125,417 27,413 30,989(2) 53,514
1999 220,000 56,100 625 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.
49
<PAGE>
Employment Agreements
Hugh Panero is employed as our President, Chief Executive Officer and member
of the board of directors for a term of three years under an employment
agreement effective June 1, 1998. His employment agreement provides for an
annual base salary of $280,000, subject to increase from time to time by the
board of directors. Mr. Panero is also eligible for a pro-rata annual bonus to
be determined by the board of directors according to Mr. Panero's personal job
performance and mutually agreed upon corporate goals and objectives. The bonus
target guideline is 40% of Mr. Panero's annual base salary. Under Mr. Panero's
employment agreement and pursuant to our shares award plan, we granted to Mr.
Panero a 10-year option to purchase 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.
His employment agreement restricts Mr. Panero from engaging in any business in
the United States which resembles or competes with XM Radio for a period of one
year following termination of his employment.
We also have agreements with the following named executive officers;
<TABLE>
<CAPTION>
Name Title Effective Date
- ---- ----- -----------------
<S> <C> <C>
Lee Abrams........................... Senior Vice President, June 8, 1998
Content and Programming
Stephen Cook......................... Senior Vice President, February 22, 1999
Sales and Marketing
Stelios Patsiokas.................... Senior Vice President, October 19, 1998
Technology
Heinz Stubblefield................... Senior Vice President, June 1, 1998
Chief Financial Officer
</TABLE>
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 agreements 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 agreements 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 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.
50
<PAGE>
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 2,675,700 shares. We may not grant awards of more than 267,570 shares of our
common stock to any participant in any calendar year. Options 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 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
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 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 to our 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
- ---- ---------- ---------- -------- ----------------- ---------------------------
5% 10%
------------ --------------
<S> <C> <C> <C> <C> <C> <C>
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
51
<PAGE>
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
$38.13.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at December In-the-Money Options
31, 1999 December 31, 1999
------------------------------- -------------------------------
Number of
Shares
Acquired on Value
Name Exercise Realized Exercisable(#) Unexercisable(#) Excersiable($) 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.
52
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Contracts with Hughes
Our Satellite Purchase Contract for In-Orbit Delivery, dated March 20, 1998,
as amended thereafter, 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 September 30, 1999, we have paid $147.9 million under this
contract.
We have granted Hughes a first priority security interest in any rights we
may have in Hughes' work product under the satellite contract to secure our
payment obligations to Hughes under the contract. This security interest will
be released once we have made substantial pre-arranged payments to Hughes under
our satellite contract or, if earlier, upon the launch of the satellites.
We may, subject to certain conditions, terminate the satellite contract at
our convenience, in which case Hughes will be entitled to certain payments. We
may also terminate the satellite contract for certain events of default by
Hughes or in case it becomes reasonably certain that the total amount of
excusable delay in Hughes' performance under the satellite contract caused by
events beyond Hughes' control, excluding delays we caused, will exceed 485
calendar days.
The first satellite is to be delivered to us in orbit by December 31, 2000,
the second by April 11, 2001. The scheduled launch period for the first
satellite is the period from November 1, 2000 through February 1, 2001. The
scheduled launch period for the second satellite is the period from February
15, 2001 through May 15, 2001. If there is a delay of more than six months in
the launch of either the first or second satellite, we would be able to select
an alternative launch system from within or outside of Hughes' inventory of
launch vehicles, subject to certain payment conditions set forth in the
satellite contract.
For each satellite, title will transfer to us after Hughes successfully
completes certain tests and analyses on each satellite upon arrival at its
specified orbital location. If Hughes fails to deliver either satellite on or
before the fiftieth day following its delivery date, then Hughes must pay us
liquidated damages which accrue on a daily basis. The total aggregate amount of
liquidated damages for failure to meet the delivery dates of both satellites is
limited to $16 million. These liquidated damages are in addition to other
limited liquidated damages for delay in the launch of the satellites. We would
have no other damages or remedies for late delivery of a satellite. If, on the
other hand, Hughes launches both satellites on or before December 31, 2000, we
will pay Hughes $6 million in addition to the contract price.
We are currently negotiating with Hughes Network Systems for the design,
development and manufacture of our terrestrial repeaters. Hughes Network
Systems has begun work on the terrestrial repeaters while negotiations are
proceeding. As of December 15, 1999, we have paid $2.5 million for this work,
which will count as an installment of the contract price if we are able to
successfully negotiate a definitive contract with Hughes Network.
Hughes Space and Communications and Hughes Network Systems are both owned by
Hughes Electronics Corporation. American Mobile, whose single largest
stockholder on a fully diluted basis is Hughes Communications, owns
approximately 31% of the outstanding shares of our common stock, or 41%
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 10% equity interest in our company and an additional 10% equity interest
in our company is held by DIRECTV, a direct subsidiary of Hughes Electronics
and an indirect subsidiary of General Motors.
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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
Satellite 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.
Furthermore, if General Motors elects to install radios which are
interoperable radios with other satellite radio providers, in the absence of
any regulatory requirements to do so, we may seek to renegotiate the
distribution agreement. If the FCC requires the installation of interoperable
radios, we will renegotiate the distribution agreement on mutually acceptable
terms.
Engineering Contract with LCC International
We have signed a contract with LCC International for the engineering of and
site preparation of our terrestrial repeater network. The repeater network will
supplement our high-powered satellite signals. Payments by XM Radio under this
contract are expected to approximate $115 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor. As
of December 15, 1999, we have paid $6 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.
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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 stockholders, Telcom-XM
Investors L.L.C. See "Principal Stockholders."
Technology License Agreement with American Mobile
American Mobile has granted us a royalty-free license with respect to
certain technology to be used in connection with the implementation of the XM
Radio system, including, among other things, certain ground segment
communications technology and antenna technology. We also have the right to
sublicense this technology to any third party, including chipset manufacturers,
terrestrial repeater manufacturers and receiver manufacturers in connection
with the XM Radio system.
Under cross-license provisions in the license, if we obtain from any third
party the right to use any technology which could be used to develop, implement
and commercialize a satellite radio system for transmission in the United
States, we will make all reasonable efforts to obtain for American Mobile the
right to use such technology. We have granted to American Mobile a royalty-
free, non-exclusive and irrevocable license to any and all technology and
improvements we develop relating to the XM Radio system. This cross-license is
for use and sublicensing worldwide outside the United States and its
territories, or inside the United States and its territories only in connection
with American Mobile's mobile satellite business in the United States and other
than in connection with any satellite radio system.
The technology license renews automatically on an annual basis unless
terminated for a breach which has not been or cannot be remedied.
Technical Services Agreement with American Mobile
We have a technical services agreement with American Mobile under which
American Mobile provides us with certain technical, engineering, marketing and
strategic planning services. We pay American Mobile at specified hourly rates,
which we believe approximate rates available from unrelated parties. On or
after our commencement of commercial operations, American Mobile or we may
terminate the technical services agreement at any time.
Other Transactions with American Mobile
In 1997, American Mobile contributed $143,000 for us to establish our
original application for the FCC license. Also in 1997, we received $1.5
million as a capital contribution from American Mobile. During 1998, American
Mobile incurred general and administrative costs and professional fees for us
and established an intercompany balance of $458,000. During June 1999, American
Mobile provided us a line of credit under which we drew $250,000. This was
repaid, and the line of credit terminated, in July 1999.
Registration Rights Agreement
We have a registration rights agreement with American Mobile, 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
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demand registration with respect to its Class A common stock, including shares
issuable upon conversion of other securities. American Mobile is entitled to
make two demands. These rights are subject to our right to defer the timing of
a demand registration and an underwriters' right to cut back shares in an
underwritten offering. In certain instances if a demand registration is cut
back by more than 75% of the number of shares originally requested to be
registered, then the party requesting registration shall be entitled to one
additional demand registration request.
In addition to these demand rights, following our commencement of commercial
operation, parties to the registration rights agreement may request
registration of at least $25.0 million of Class A common stock.
Parties to the registration rights agreement also have rights to include
their Class A common stock in registered offerings initiated by us, other than
an offering for high yield debt. The parties have waived their registration
rights with respect to this offering and our concurrent offering of Class A
common stock.
Shareholders' Agreement
We have entered into a shareholders' agreement with American Mobile, Baron
Asset Fund and the former holders of our subordinated convertible notes,
containing, among others, the provisions described below.
Conversion of Shares of Class B Common Stock to Class A Common Stock
Our Class B common stock owned by American Mobile is convertible into our
Class A common stock, on a one for one basis, following this offering at any
time at American Mobile's discretion. In addition, under the shareholders'
agreement, following this offering, the holders of a majority of our
outstanding Class A common stock, which must include at least 20% of the public
holders of the Class A common stock, may require conversion by American Mobile.
This conversion will not be effected, however, if the FCC does not approve the
transfer of control of XM Radio from American Mobile to a diffuse group of
stockholders.
Restrictions on Transfer of Shares of Our Securities
Except for affiliated transactions, American Mobile will not be permitted to
transfer any of our securities until the earlier of the date on which we begin
commercial operations or one year after October 8, 1999, which was the date of
the closing of our initial public offering. Shares of Class B common stock are
transferable only upon conversion into shares of Class A common stock and, in
certain circumstances, to Baron Asset Fund, which can transfer its shares only
upon conversion into shares of Class A common stock.
Non-Competition
American Mobile has agreed not to compete with XM Radio in the satellite
radio business in the United States for so long as American Mobile holds 5% of
our common stock and for a period of three years following any transfer which
results in American Mobile owning less than 5% of our common stock.
Governance
The parties to the agreement are entitled to designate directors to our
board of directors and to observe 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
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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
ceased to be an owner of XM Radio, American Mobile became the owner of the
securities previously held by WorldSpace, and several of the transactions and
agreements described above were entered into. These transactions are described
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources--Sources of Funds"
and in the notes to our Unaudited Condensed Consolidated Financial Statements.
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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 December 15, 1999, there were 26,435,471 shares of Class A common
stock outstanding, and 17,872,176 shares of Class B common stock outstanding,
all of which Class B common stock was owned by American Mobile. Class B common
stock is convertible into Class A common stock on a one-for-one basis. Class B
common stock is entitled to three votes for each share. Share ownership in the
table below includes shares we may issue if certain stockholders exercise
outstanding options within 60 days after December 15, 1999. The table below
provides the percentage of the total number of shares of Class A common stock
owned by each listed person before and after giving effect to our concurrent
sale of 4,000,000 shares of Class A common stock. The beneficial ownership
percentages in the table below will not be affected as a result of this Series
B preferred stock offering since it is assumed that the Series B preferred
stock has not been converted into Class A common stock.
<TABLE>
<CAPTION>
Percentage of Total Class A Shares
----------------------------------
Number of Before Concurrent After Concurrent
Name and Address of Class A Shares Common Stock Common Stock
Beneficial Owner Beneficially Owned Offering Offering
------------------- ------------------ ----------------- ----------------
<S> <C> <C> <C>
Beneficial Owners of
More Than 5%:
American Mobile
Satellite Corporation... 18,072,176(1) 40.8% 37.4%
10802 Parkridge
Boulevard
Reston, VA 20191-5416
General Motors
Corporation............ 11,106,504(2) 29.8% 26.9%
100 Renaissance Center
3031 West Grand
Boulevard
PO Box 100
Detroit, MI 48265-1000
DIRECTV Enterprises,
Inc. .................. 5,553,252(3) 17.4% 15.5%
2230 E. Imperial Highway
El Segundo, CA 90245
Clear Channel
Investments, Inc. ..... 8,329,877 31.5% 27.4%
200 Concord Plaza, Suite
600
San Antonio, TX 78216
Columbia XM Radio Part-
ners, L.L.C. .......... 2,776,626 10.5% 9.1%
201 N. Union Street,
Suite 300
Alexandria, VA 22314
Telcom-XM Investors,
L.L.C. ................ 2,776,626(4) 10.5% 9.1%
211 North Union Street,
Suite 300
Alexandria, VA 22314
Madison Dearborn Capital
Partners III, L.P. .... 2,702,222 10.2% 8.9%
Madison Dearborn Special
Equity III, L.P........ 58,225 * *
Special Advisors Fund I,
LLC.................... 16,179 * *
3 First National Plaza,
Suite 3800
Chicago, IL 60602
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage of Total
Number of Class A Shares
Name and Address of Class A Shares -------------------------------
Beneficial Owner Beneficially Owned Before Offering After Offering
------------------- ------------------ --------------- ---------------
<S> <C> <C> <C>
Directors and Named
Executive Officers
Gary M. Parsons ........... 24,716(5) * *
Hugh Panero ............... 89,190(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 ................ 17,838(7) * *
Stephen Cook............... 17,838(7) * *
Stelios Patsiokas ......... 17,838(7) * *
Heinz Stubblefield ........ 17,838(7) * *
All directors and executive
officers as a group (16
persons).................. 384,276(8) 1.4% 1.2%
</TABLE>
- --------
* Less than 1%.
(1) Includes 17,872,176 shares issuable upon conversion of Class B common
stock.
(2) Includes 11,106,504 shares issuable upon conversion of Series A convertible
preferred stock, 5,553,252 of which are owned by DIRECTV.
(3) Includes 5,553,252 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 267,570 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 278,384 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 85,665 shares issuable upon exercise of options which are
not exercisable within 60 days.
(8) Does not include 1,113,506 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 Series B convertible
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 December 15, 1999, there were 26,435,471 shares of Class A common
stock outstanding and 17,872,176 shares of Class B common stock outstanding.
After giving effect to our concurrent offering of 4,000,000 shares of Class A
common stock, there will be 30,435,471 shares of Class A common stock
outstanding.
Class A Common Stock
Holders of Class A common stock are entitled
. to one vote for each share held on any matter submitted for stockholder
approval;
. to receive on a pro rata basis, dividends and distributions, if any, as
the board of directors may declare out of legally available funds; and
. upon the liquidation, dissolution, winding up or insolvency of our
company, to share ratably in the net assets of our company available
after we pay our liabilities and any preferential amounts to which
holders of the Series A convertible preferred stock may be entitled.
Holders of Class A common stock have no preemptive, redemption or sinking
fund rights.
Class B Common Stock
Class B common stock has the same rights as Class A common stock except that
Class B common stock is entitled to three votes for each share. Shares of Class
B common stock are convertible into shares of Class A common stock on a one-
for-one basis, subject to antidilution protection if we effect a
recapitalization.
Class C Common Stock
Holders of Class C common stock are entitled to the same rights as holders
of Class A common stock except that the holders of Class C common stock are not
entitled to vote on any matter submitted for stockholder approval.
Preferred Stock
The board of directors may issue preferred stock in one or more series and
may fix the designations, powers, preferences and relative, participating,
optional and other special rights, qualifications, limitations and restrictions
on the preferred stock, including the dividend rate, conversion rights, voting
rights, redemption price and liquidation preference, and may fix the number of
shares to be included in any such series. Any preferred stock may rank senior
to the common stock for the payment of dividends or amounts upon liquidation,
dissolution or winding-up, or both. In addition, any shares of preferred stock
may have class or series voting rights. Issuances of preferred stock, while
providing us with flexibility in connection with general corporate purposes,
may, among other things, have an adverse effect on the rights of holders of
common stock. The board of directors, without stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of common stock. Preferred stock
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could thus be issued quickly with terms calculated to 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
Series A convertible preferred stock has the following characteristics:
. a right to receive dividends and distributions ratably with the holders
of 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 Class A common
stock; and
. shares of our Series A convertible preferred stock do not have
-- voting rights;
-- any preference with respect to dividends and distributions;
-- preemptive rights;
-- sinking fund rights; or
-- redemption rights.
Following the occurrence of a recapitalization, as described under the
caption "Class B Common Stock", each share of Series A convertible preferred
stock will be convertible into the kind and number of shares of securities or
other property to which the holders of such share of Series A convertible
preferred stock would have been entitled to receive if the holder had
converted such share of Series A convertible preferred stock into Class A
common stock immediately prior to the recapitalization.
As of December 15, 1999, there were 10,786,504 shares of Series A
convertible preferred stock outstanding.
Series B Convertible Preferred Stock
The Series B convertible preferred stock is discussed below under the
caption "Description of Series B Preferred Stock."
Certain Provisions of Our Certificate of Incorporation and Bylaws
Certificate of Incorporation
Our certificate of incorporation permits the board of directors without
stockholder approval to issue shares of preferred stock up to the number of
shares authorized for issuance in our certificate of incorporation, except as
limited by Nasdaq rules. 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 our company 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
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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 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 the shareholders' agreement. See "Management--Provisions
Governing the Board of Directors." The bylaws provide that special meetings of
the stockholders may be called by the board of directors, by stockholders
holding at least 15% of the outstanding common stock or by the chief executive
officer or the president. The bylaws may be amended or repealed, or new bylaws
may be adopted, by the stockholders or the board of directors, subject to the
shareholders' agreement. 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 our bylaws, resolutions may be adopted at stockholders' meetings by the
affirmative vote of a simple majority of the aggregate number of votes
represented by all shares entitled to vote thereon and represented, in person
or by proxy, at the meeting. 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.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that directors shall not be
personally liable to us or our 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 us or our
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
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which such person was or is made a party or is threatened to be made a party by
reason of serving in any of the foregoing capacities. The indemnification
includes, to the full extent authorized or permitted by the Delaware General
Corporation Law, payment by us of the expenses in advance of any proceeding. In
addition, we have entered or will enter into indemnification agreements with
our directors and executive officers that provide indemnification in addition
to the indemnification provided in our bylaws. Under the bylaws, we may, but
are not obligated to, maintain insurance, at our expense, for the benefit of XM
Radio and of any person to be indemnified by us.
Transfer Agent and Registrar
The transfer agent and registrar for the Class A common stock is BankBoston,
N.A.
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DESCRIPTION OF SERIES B PREFERRED STOCK
General
The terms of the Series B preferred stock will be set forth in the
Certificate of Designation of Voting Power, Designation Preferences and
Relative, Participating, Optional or Other Special Rights and Qualifications,
Limitations and Restrictions. The following summary of the Series B preferred
stock and the certificate of designation is not intended to be complete and is
subject to, and qualified in its entirety by reference to, our certificate of
incorporation and the certificate of designation, including the definitions
therein of certain terms used below. Copies of the proposed form of certificate
of designation are available upon request. As used in this description of
Series B preferred stock, the term XM Radio refers to XM Satellite Radio
Holdings Inc., excluding its subsidiaries.
XM Radio's operations are, and will continue to be, conducted through its
subsidiaries and, therefore, XM Radio is dependent upon the cash flow of its
subsidiaries to meet its obligations, including its obligations under the
Series B preferred stock. Any right of XM Radio to receive assets of any of its
subsidiaries will be effectively subordinated to all indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
XM Radio's subsidiaries.
Under the certificate of designation, 3,000,000 shares of Series B preferred
stock with a liquidation preference of $50 per share will be authorized for
issuance. The Series B preferred stock will, when issued and paid for, be fully
paid and nonassessable, and holders thereof will have no preemptive rights in
connection therewith.
The transfer agent for the Series B preferred stock will be BankBoston, N.A.
unless and until a successor is selected by XM Radio.
Ranking
The Series B preferred stock will, with respect to dividend distributions
and distributions upon the liquidation, winding-up and dissolution of XM Radio,
rank (i) senior to all classes of our common stock, our outstanding Series A
convertible preferred stock and each other class of capital stock or series of
preferred stock established after the date of the certificate of designation by
the board of directors, the terms of which do not expressly provide that it
ranks senior to or on a parity with the Series B preferred stock as to dividend
distributions and distributions upon the liquidation, winding-up and
dissolution of XM Radio (collectively referred to with the common stock of XM
Radio as junior securities); (ii) on a parity with any class of capital stock
or series of preferred stock issued by us established after the date of the
certificate of designation by the board of directors, the terms of which
expressly provide that such class or series will rank on a parity with the
Series B preferred stock as to dividend distributions and distributions upon
the liquidation, winding-up and dissolution of XM Radio (collectively referred
to as parity securities); and (iii) junior to each class of capital stock or
series of preferred stock issued by the Company established after the date of
the certificate of designation by the board of directors the terms of which
expressly provide that such class or series will rank senior to the Series B
preferred stock as to dividend distributions and distributions upon
liquidation, winding-up and dissolution of the Company (collectively referred
to as senior securities) and which receives the requisite approval of the
holders of the Series B preferred stock.
No dividend whatsoever shall be declared or paid upon, or any sum set apart
for the payment of dividends upon, any outstanding share of the Series B
preferred stock with respect to any dividend period unless all dividends for
all preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of senior securities.
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Dividends
The holders of shares of the Series B preferred stock will be entitled to
receive, when, as and if dividends are declared by the board of directors out
of funds of XM Radio legally available therefor, cumulative dividends from the
issue date of the Series B preferred stock accruing at the rate per annum of
% of the liquidation preference per share, payable quarterly in arrears
on each , , and
, commencing on , 2000. Dividends are payable in
cash, shares of our Class A common stock or a combination thereof, as described
under "Method of Payment" below. If any such date is not a Business Day, such
payment shall be made on the next succeeding Business Day to the holders of
record as of the next preceding , ,
and .
Dividends on the Series B preferred stock will accrue whether or not XM
Radio has earnings or profits, whether or not there are funds legally available
for the payment of such dividends and whether or not dividends are declared.
Dividends will accumulate to the extent they are not paid on the dividend
payment date for the period to which they relate. The certificate of
designation will provide that we will take all actions required or permitted
under Delaware corporate law to permit the payment of dividends on the Series B
preferred stock, including, without limitation, through the revaluation of our
assets in accordance with Delaware corporate law to make or keep funds legally
available for the payment of dividends.
No dividend shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any outstanding share of the Series B preferred
stock with respect to any dividend period unless all dividends for all
preceding dividend periods have been declared and paid, or declared and a
sufficient sum set apart for the payment of such dividend, upon all outstanding
shares of Series B preferred stock. Unless full cumulative dividends on all
outstanding shares of Series B preferred stock for all past dividend periods
shall have been declared and paid, or declared and a sufficient sum for the
payment thereof set apart, then: (i) no dividend (other than a dividend payable
solely in shares of any junior securities) shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any shares of junior
securities; (ii) no other distribution shall be declared or made upon, or any
sum set apart for the payment of any distribution upon, any shares of junior
securities, other than a distribution consisting solely of junior securities;
(iii) no shares of junior securities shall be purchased, redeemed or otherwise
acquired or retired for value (excluding an exchange for shares of other junior
securities) by XM Radio or any of its subsidiaries; and (iv) no monies shall be
paid into or set apart or made available for a sinking or other like fund for
the purchase, redemption or other acquisition or retirement for value of any
shares of junior securities by XM Radio or any of its subsidiaries. Holders of
the Series B preferred stock will not be entitled to any dividends, whether
payable in cash, property or stock, in excess of the full cumulative dividends
as herein described.
Future credit agreements or other agreements relating to indebtedness to
which XM Radio or any if its subsidiaries becomes a party may contain
restrictions on the ability of the Company to pay dividends on the Series B
preferred stock.
Method of Payment
We may make dividend payments on the Series B preferred stock (i) in cash,
(ii) by delivery of our Class A common stock, or (iii) through any combination
of cash and our Class A common stock. Any optional redemption payments on the
Series B preferred stock must be in cash. We must make the mandatory redemption
payments on the Series B preferred stock by delivery of our Class A common
stock. However, up until mandatory redemption is required we have an optional
redemption right to make such payments in cash instead. If any such dividend or
mandatory redemption payments are made in shares of our Class A common stock,
such shares shall be valued for such purpose: (a) if on the date of such
payment such shares of Class A common stock are freely tradeable at 95% of the
average market value and (b) if on the date of such payment such shares of
Class A common stock are not freely tradeable, at 90% of the average market
value. Stock issued in payment of dividends will be freely tradeable.
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If, as a matter of law, we are not able to issue our Class A common stock in
payment of the mandatory redemption price, then we will cause the Series B
preferred stock to be converted on the mandatory redemption date into the same
number of shares of our Class A common stock as we could otherwise have issued
in satisfaction of the mandatory redemption price, provided that we have given
the holders of the Series B preferred stock notice of the exercise of this
option at least 30 days prior to the mandatory redemption date. No fractional
shares of Class A common stock will be delivered to the holders of the Series B
preferred stock, but we will instead pay a cash adjustment to each holder that
would otherwise be entitled to a fraction of a share of Class A common stock.
The amount of such cash adjustment will be determined based on the proceeds
received by the transfer agent from the sale of that number of shares of our
Class A common stock, which we will deliver to the transfer agent for such
purpose, equal to the aggregate of all such fractions rounded up to the nearest
whole share.
The transfer agent is authorized and directed in the certificate of
designation to sell such shares at the best available prices and distribute the
proceeds to the holders in proportion to their respective interests therein.
We will pay the expenses of the transfer agent with respect to such sale,
including brokerage commissions. Any portion of any such payment that is
declared and not paid through the delivery of shares of Class A common stock
will be paid in cash. We will make a public announcement no later than the
close of business on the tenth business day prior to the record date for each
dividend as to whether we will pay such dividend and, if so, the form of
consideration we will use to make such payment.
"Average market value" of our Class A common stock means the arithmetic
average of the current market value of our Class A common stock for the ten
trading days ending on the fifth business day prior to (a) in the case of the
payment of any dividend, the record date for such dividend and (b) in the case
of the mandatory redemption payment, the date of such payment.
"Current market value" of our Class A common stock means the average of the
high and low sale prices of our Class A common stock as reported on the Nasdaq
National Market or such other SEC-recognized national securities exchange or
trading system which we may from time to time designate upon which the greatest
number of shares of our Class A common stock is then listed or traded, for the
trading day in question.
Optional Redemption
The Series B preferred stock may not be required to be redeemed before
, 2003. The Series B preferred stock may be redeemed for cash, in
whole or in part, at our option on or after , 2003 at the
redemption prices specified below (expressed as percentages of the liquidation
preference), in each case, together with accumulated and unpaid dividends
(including an amount equal to a prorated dividend for any partial dividend
period), if any, to the date of redemption, upon not less than 30 nor more than
60 days' prior written notice, if redeemed during the 12-month period
commencing on of each of the years set forth below:
<TABLE>
<CAPTION>
Year Percentage
- ---- ----------
<S> <C>
2003................................................................. %
2004................................................................. %
2005................................................................. %
2006................................................................. %
2007................................................................. %
2008................................................................. %
2009................................................................. %
2010 and thereafter.................................................. %
</TABLE>
No optional redemption may be authorized or made unless, prior to giving the
applicable redemption notice, all accumulated and unpaid dividends for periods
ended prior to the date of such redemption notice shall have been paid in cash
or Class A common stock. In the event of partial redemptions of Series B
preferred stock, the shares to be redeemed will be determined pro rata or by
lot, as determined by us.
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Mandatory Redemption
Unless it has already been redeemed or converted, the Series B preferred
stock will be mandatorily redeemed by us on , 2012, at a
redemption price equal to 100% of the liquidation preference, together with
accumulated and unpaid dividends to the mandatory redemption date.
Procedure for Redemption
On and after a redemption date, unless we default in the payment of the
applicable redemption price, dividends will cease to accrue on shares of Series
B preferred stock called for redemption and all rights of holders of such
shares will terminate except for the right to receive the redemption price,
without interest. However, if we shall not have previously given a notice of
redemption and not have segregated and irrevocably set apart an amount in cash
equal to the full redemption price in trust for the benefit of holders of the
Series B preferred stock called for redemption, then at the close of business
on the day on which such funds are so segregated and set apart, the holder of
the shares to be redeemed shall cease to be our stockholders and shall be
entitled, subject to the rights of conversion, to receive only the redemption
price for their shares on the redemption date.
We will make a public announcement of the redemption (including a statement
of the form of consideration we will use to effect the same) and send a written
notice thereof by first class mail to each holder of record of shares of Series
B preferred stock not fewer than 30 days nor more than 60 days prior to the
date fixed for such redemption.
Shares of Series B preferred stock issued and reacquired will, upon
compliance with the applicable requirements of law, have the status of
authorized but unissued shares of our preferred stock undesignated as to series
and may with any and all other authorized but unissued shares of our preferred
stock be designated or redesignated and issued, as part of any series of our
preferred stock.
Conversion Rights
Each share of Series B preferred stock will be convertible at any time,
unless previously redeemed, at the option of the holder thereof into Class A
common stock at a conversion rate equal to $50 (the liquidation preference per
share of Series B preferred stock) divided by the conversion price then
applicable, except that the right to convert shares of Series B preferred stock
called for redemption will terminate at the close of business on the business
day preceding the redemption date and will be lost if not exercised prior to
that time, unless we default in making the payment due upon redemption. The
initial conversion price is $ per share.
The conversion price will be subject to adjustment from time to time as
follows:
(1) Stock split and combinations. In case we, at any time or from time
to time after the issuance date of the shares of preferred stock (a)
subdivide or split the outstanding shares of our Class A common stock, (b)
combine or reclassify the outstanding shares of our Class A common stock
into a smaller number of shares or (c) issue by reclassification of the
shares of our Class A common stock any shares of our capital stock, then
the conversion price in effect immediately prior to that event or the
record date for that event, whichever is earlier, will be adjusted so that
the holder of any shares of Series B preferred stock thereafter surrendered
for conversion will be entitled to receive the number of shares of our
Class A common stock or of our other securities which the holder would have
owned or have been entitled to receive after the occurrence of any of the
events described above, had those shares of Series B preferred stock been
surrendered for conversion immediately before the occurrence of that event
or the record date for that event, whichever is earlier.
(2) Stock Dividends in common stock. In case we, at any time or from
time to time after the issuance date of the shares of preferred stock, pay
a dividend or make a distribution in shares of our Class A common stock on
any class of our capital stock other than dividends or distributions of
shares of Class A
common stock or other securities with respect to which adjustments are
provided in paragraph (1) above,
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the conversion price will be adjusted so that the holder of each share of
Series B preferred stock will be entitled to receive, upon conversion of
that share, the number of shares of our Class A common stock determined by
multiplying (a) the conversion price by (b) a fraction, the numerator of
which will be the number of shares of Class A common stock outstanding and
the denominator of which will be the sum of that number of shares and the
total number of shares issued in that dividend or distribution.
(3) Issuance of rights or warrants. In case we issue to all holders of
our Class A common stock rights or warrants entitling those holders to
subscribe for or purchase our Class A common stock at a price per share
less than the current market price, the conversion price in effect
immediately before the close of business on the record date fixed for
determination of shareholders entitled to receive those rights or warrants
will be reduced by multiplying the conversion price by a fraction, the
numerator of which is the sum of the number of shares of our Class A common
stock outstanding at the close of business on that record date and the
number of shares of Class A common stock that the aggregate offering price
of the total number of shares of our Class A common stock so offered for
subscription or purchase would purchase at the current market price and the
denominator of which is the sum of the number of shares of Class A common
stock outstanding at the close of business on that record date and the
number of additional shares of our Class A common stock so offered for
subscription or purchase. For purposes of this paragraph (3), the issuance
of rights or warrants to subscribe for or purchase securities convertible
into shares of our Class A common stock will be deemed to be the issuance
of rights or warrants to purchase shares of our Class A common stock into
which those securities are convertible at an aggregate offering price equal
to the sum of the aggregate offering price of those securities and the
minimum aggregate amount, if any, payable upon conversion of those
securities into shares of our Class A common stock. This adjustment will be
made successively whenever any such event occurs. For purposes of this
paragraph and paragraph (4), "current market price" means the average of
the daily closing prices for the five consecutive trading days selected by
our board of directors beginning not more than 20 trading days before, and
ending not later than the date of the applicable event described in this
paragraph and the date immediately preceding the record date fixed in
connection with that event.
(4) Distribution of indebtedness, securities or assets. In case we
distribute to all holders of our Class A common stock, whether by dividend
or in a merger, amalgamation or consolidation or otherwise, evidences of
indebtedness, share of capital stock of any class or series, other
securities, cash or assets, other than Class A common stock, rights or
warrants referred to in paragraph (3) above or an ordinary dividend payable
exclusively in cash and other than as a result of a fundamental change
described in paragraph (5) below, the conversion price in effect
immediately before the close of business on the record date fixed for
determination of shareholders entitled to receive that distribution will be
reduced by multiplying the conversion price by a fraction, the numerator of
which is the current market price on that record date less the fair market
value, as determined by our board of directors, of the portion of those
evidences of indebtedness, shares of capital stock, other securities, cash
and assets so distributed applicable to one share of Class A common stock
and the denominator of which is the current market price. This adjustment
will be made successively wherever any such event occurs.
(5) Fundamental changes. For purposes of this paragraph (5),
"fundamental change" means any transaction or event, including any merger,
consolidation, sale of assets, tender or exchange offer, reclassification,
compulsory share exchange or liquidation, in which all or substantially all
outstanding shares of our Class A common stock are converted into or
exchanged for stock, other securities, cash or assets. If a fundamental
change occurs, the holder of each share of Series B preferred stock
outstanding immediately before that fundamental change occurred, will have
the right upon any subsequent conversion to receive, but only our of
legally available funds, to the extent required by applicable law, the kind
and amount of stock other securities, cash and assets that that holder
would have received if that share had been converted immediately prior to
the fundamental change.
We will not, however, be required to give effect to any adjustment in the
conversion price unless and until the net effect of one or more adjustments,
each of which will be carried forward until counted toward
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adjustment, will have resulted in a change of the conversion price by at least
1%, and when the cumulative net effect of more than one adjustment so
determined will be to change the conversion price by at least 1%, that change
in the conversion price will be given effect. In the event that, at any time as
a result of the provisions of this section, the holder of shares of Series B
preferred stock upon subsequent conversion become entitled to receive any
shares of our capital stock other than Class A common stock, the number of
those other shares so receivable upon conversion of shares of preferred stock
will thereafter be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions contained in this
section.
There will be no adjustment to the conversion price in case of the issuance
of any shares of our stock in a merger, reorganization, acquisition,
reclassification, recapitalization or other similar transaction except as
provided in this section.
If we take a record of the holders of our Class A common stock for the
purpose of entitling them to receive a dividend or other distribution, and
after this and before the distribution to our shareholders legally abandon our
plan to pay or deliver that dividend or distribution, then no adjustment in the
number of shares of our Class A common stock issuable upon conversion of shares
of Series B preferred stock or in the conversion price then in effect will be
required by reason of the taking of that record.
The holder of record of a share of Series B preferred stock at the close of
business on a record date with respect to the payment of dividends on the
Series B preferred stock will be entitled to receive such dividends with
respect to such share of Series B preferred stock on the corresponding dividend
payment date, notwithstanding the conversion of such share after such record
date and prior to such dividend payment date. A share of Series B preferred
stock surrendered for conversion during the period from the close of business
on any record date for the payment of dividends to the opening of business of
the corresponding dividend payment date must be accompanied by a payment in
cash, Class A common stock or a combination thereof, depending on the method of
payment that we have chosen to pay the dividend, in an amount equal to the
dividend payable on such dividend payment date, unless such share of Series B
preferred stock has been called for redemption on a redemption date occurring
during the period from the close of business on any record date for the payment
of dividends to the close of business on the business day immediately following
the corresponding dividend payment date. The dividend payment with respect to a
share of Series B preferred stock called for redemption on a date during the
period from the close of business on any record date for the payment of
dividends to the close of business on the business day immediately following
the corresponding dividend payment date will be payable on such dividend
payment date to the record holder of such share on such record date,
notwithstanding the conversion of such share after such record date and prior
to such dividend payment date. No payment or adjustment will be made upon
conversion of shares of Series B preferred stock for accumulated and unpaid
dividends or for dividends with respect to the Class A common stock issued upon
such conversion.
Special Conversion Rights upon a Change of Control
Upon the occurrence of a change of control (as defined below), each holder
of shares of Series B preferred stock will have the option, during the period
commencing on the date that the applicable change of control notice (as defined
below) is mailed to holders of the Series B preferred stock and ending at the
close of business on the 45th day thereafter (the "Special Conversion Date"),
to convert all, but not less than all, of such holder's shares of Series B
preferred stock into Class A common stock at a conversion rate equal to $50
(the liquidation preference per share of Series B preferred stock) divided by
the Special Conversion Price (as defined below).
By a "change in control" we mean:
. any person or group, other than a permitted owner, acquires direct or
indirect beneficial ownership of shares of our capital stock (by means
of an exchange offer, liquidation, tender offer, consolidation, merger,
combination, reclassification, recapitalization or otherwise) sufficient
to entitle such person to exercise more than 50% of the total voting
power of all classes of our capital stock entitled to vote generally in
elections of directors, unless (i) the closing price per share of Common
Stock for any
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five trading days within the period of ten consecutive trading days
ending immediately after the announcement of such change of control
equals or exceeds 105% of the conversion price of the Series B preferred
stock in effect on each such trading day or (ii) at least 90% of the
consideration in the transaction or transactions constituting a change
of control pursuant to this clause consists of shares of common stock
traded or to be traded immediately following such change of control on a
national securities exchange or the Nasdaq National Market and, as a
result of such transaction or transactions, the Series B preferred stock
become convertible solely into such common stock (and any rights
attached thereto), or
. we sell, lease, exchange or otherwise transfer, in one transaction or a
series of related transactions, all or substantially all of our assets
to any person or group, other than to a permitted owner.
However, a transaction of a type described above that results in the Class A
common stock no longer being listed on a stock exchange or traded on the Nasdaq
National Market would also be treated as a change in control even if a
permitted owner were involved.
We use a "permitted owner" to mean American Mobile Satellite Corporation,
General Motors Corporation, DIRECTV and Clear Channel Communications, Inc. and
their respective affiliates. We use the terms "person" and "group" as those
terms are used in Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended.
"Special Conversion Price" means the higher of (a) the Market Value of the
Class A common stock and (b) $ per share (which is equal to 66 2/3% of
the last reported sale price of the Class A common stock on the date of this
prospectus), which amount, in the case of this clause (b), shall be adjusted
each time that the conversion price is adjusted so that the ratio of such
amount (as so adjusted) to the conversion price (as so adjusted) equals the
ratio of $ to the initial conversion price.
"Market Value" with respect to the Class A common stock, means the average
of the Closing Prices (as defined herein) of the Class A common stock for the
five trading days ending on the last trading day preceding the date of
occurrence of the change of control.
"Closing Price", with respect to the Class A common stock on any trading
day, means the last reported regular-way sale price of the Class A common stock
on the NYSE, or if the Class A common stock is not then listed on the NYSE, the
last reported regular-way sale price of the Class A common stock on the
principal stock exchange or market of the Nasdaq Stock Market on which the
Class A common stock is then listed or traded, or if the Class A common stock
is not then listed or traded on any such stock exchange or market, the average
of the closing bid and asked prices in the over-the-counter market as furnished
by any NYSE member firm selected from time to time by us for that purpose.
Within 15 days after a change of control, we will mail to each holder of
shares of the Series B preferred stock a notice (a "change of control notice")
setting forth the details of the change of control and the special conversion
rights occasioned thereby, together with all information required by federal
and state securities laws to permit such holder to determine whether or not to
convert such holder's shares of Series B preferred stock. Exercise by a holder
of such holder's special conversion right following a change of control is
irrevocable, except that a holder may withdraw its election to exercise such
holder's special conversion right at any time prior to the close of business on
the Special Conversion Date by delivering a written or facsimile transmission
notice to the transfer agent at the address or facsimile number specified in
the change of control notice. Such notice, to be effective, must be received by
the transfer agent prior to the close of business on the Special Conversion
Date. All shares of Series B preferred stock tendered for conversion pursuant
to holders' special conversion rights as described herein and not withdrawn
will be converted at the close of business on the Special Conversion Date.
Except as described herein, the certificate of designation will not provide
the holders of the Series B preferred stock with any special protection in the
event of a takeover, recapitalization or similar transaction. In
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addition, we could enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that could affect our capital
structure of the value of the Series B preferred stock or the Class A common
stock, but that would not constitute a change of control.
Voting Rights
Holders of record of shares of the Series B preferred stock will have no
voting rights, except as required by law and as provided in the certificate of
designation. The certificate of designation will provide that upon the
accumulation of accrued and unpaid dividends on the outstanding Series B
preferred stock in an amount equal to six quarterly dividends, whether or not
consecutive, the holders of a majority of the outstanding shares of Series B
preferred stock voting together with any other subsequently issued parity
securities then entitled to voting rights will be entitled to elect such number
of members to the board of directors constituting at least 20% of the then
existing board of directors before such election, rounded to the nearest whole
number, provided, however, that such number shall be no less than one nor
greater than two, and the number of members of the board of directors will be
immediately and automatically increased by one or two, as the case may be.
Voting rights arising as a result of dividend arrearages will continue until
such time as all dividends in arrears on the Series B preferred stock are paid
in full and all other dividend arrearages that trigger voting rights have been
cured or waived, at which time the term of office of any such members of the
board of directors so elected shall terminate and such directors shall be
deemed to have resigned.
In addition, the certificate of designation provides that the Company will
not authorize any class of senior securities or any obligation or security
convertible or exchangeable into or evidencing a right to purchase shares of
any class or series of senior securities, without the approval of holders of at
least a majority of the shares of Series B preferred stock then outstanding,
voting or consenting, as the case may be, as one class. The certificate of
designation also provides that we may not amend the certificate of designation
so as to affect adversely the specified rights, preferences, privileges or
voting rights of holders of shares of the Series B preferred stock or authorize
the issuance of any additional shares of Series B preferred stock, without the
approval of the holders of at least a majority of the then outstanding shares
of Series B preferred stock voting or consenting, as the case may be, as one
class; provided, however, that the Company may not amend the change of control
provisions of the certificate of designation (including the related
definitions) without the approval of the holders of at least 66 2/3% of the
then outstanding shares of Series B preferred stock voting or consenting, as
the case may be, as one class. The certificate of designation also provides
that, except as set forth above with respect to senior securities, (a) the
creation, authorization or issuance of any shares of junior securities, parity
securities or senior securities or (b) the increase or decrease in the amount
of authorized capital stock of any class, including any preferred stock, shall
not require the consent of the holders of Series B preferred stock and shall
not be deemed to affect adversely the rights, preferences, privileges, special
rights or voting rights of holders of shares of Series B preferred stock. The
consent of the holders of Series B preferred stock will not be required for us
to authorize, create (by way of reclassification or otherwise) or issue any
parity securities or any obligation or security convertible or exchangeable
into or evidencing a right to purchase, shares of any class or series of parity
securities.
Merger, Consolidation and Sale of Assets
Without the vote or consent of the holders of a majority of the then
outstanding shares of Series B preferred stock, we may not consolidate or merge
with or into, or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of its assets to, any person unless (a) the entity
formed by such consolidation or merger (if other than us) or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made (in any such case, the "resulting entity") is a corporation organized
and existing under the laws of the United States or any State thereof or the
District of Columbia; (b) if we are not the resulting entity, the Series B
preferred stock is converted into or exchanged for and becomes shares of such
resulting entity, having in respect of such resulting entity the same (or more
favorable) powers, preferences and relative, participating, optional or other
special rights thereof that the Series B preferred stock had immediately
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prior to such transaction; and (c) immediately after giving effect to such
transaction, no dividend arrearages which trigger voting rights have occurred
and are continuing. The resulting entity of such transaction shall thereafter
be deemed to be the issuer of the Series B preferred stock or securities into
which it is converted for all purposes of the certificate of designation.
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding-up of
XM Radio or reduction or decrease in its capital stock resulting in a
distribution of assets to the holders of any class or series of our capital
stock, each holder of shares of the Series B preferred stock will be entitled
to payment out of the assets of XM Radio available for distribution of an
amount equal to the liquidation preference per share of Series B preferred
stock held by such holder, plus accrued and unpaid dividends and preferred
stock liquidated damages (as defined), if any, to the date fixed for
liquidation, dissolution, winding-up or reduction or decrease in capital stock,
before any distribution is made on any junior securities, including, without
limitation, Class A common stock. After payment in full of the liquidation
preference and all accrued dividends and preferred stock liquidated damages, if
any, to which holders of Series B preferred stock are entitled, such holders
will not be entitled to any further participation in any distribution of assets
of XM Radio. If, upon any voluntary or involuntary liquidation, dissolution or
winding-up of XM Radio, the amounts payable with respect to the Series B
preferred stock and all other parity securities are not paid in full, the
holders of the Series B preferred stock and the parity securities will share
equally and ratably in any distribution of assets of XM Radio in proportion to
the full liquidation preference and accumulated and unpaid dividends and
preferred stock liquidated damages, if any, to which each is entitled. However,
neither the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of the
property or assets of XM Radio nor the consolidation or merger of XM Radio with
or into one or more entities will be deemed to be a voluntary or involuntary
liquidation, dissolution or winding-up of XM Radio or reduction or decrease in
capital stock, unless such sale, conveyance, exchange or transfer shall be in
connection with a liquidation, dissolution or winding-up of the business of XM
Radio or reduction or decrease in capital stock.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following is a summary of certain material U.S. federal tax
considerations relevant to the purchase, ownership and disposition of our
Series B preferred stock and Class A common stock. This summary is based on the
current provisions of the Internal Revenue Code of 1986, as amended, Treasury
regulations and judicial and administrative authority, all of which are subject
to change, possibly on a retroactive basis. This summary applies only to
investors who hold our Series B preferred stock or Class A common stock as
capital assets, within the meaning of section 1221 of the Internal Revenue
Code, and does not discuss the tax consequences to special classes of
investors, such as brokers or dealers in securities or currencies, financial
institutions, tax-exempt entities, life insurance companies, persons holding
our Series B preferred stock or Class A common stock as a part of a hedging,
short sale or conversion transaction or a straddle, investors whose functional
currency is not the United States dollar, persons who hold our Series B
preferred stock or Class A common stock through partnerships or other pass-
through entities, or, except as specifically noted, foreign holders and certain
U.S. expatriates. State, local and foreign tax consequences of ownership of our
Series B preferred stock and Class A common stock are not summarized.
We have not requested, and do not intend to request, any rulings from the
Internal Revenue Service concerning the federal tax consequences of an
investment in our Series B preferred stock or Class A common stock. You are
advised to consult with your own tax advisor regarding the consequences of
acquiring, holding or disposing of our Series B preferred stock or Class A
common stock in light of current tax laws, your particular investment
circumstances, and the application of state, local and foreign tax laws.
When we refer in the summary to a "United States Holder," we mean a
beneficial owner of Series B preferred stock or Class A common stock that is:
. a citizen or resident of the United States for United States federal
income tax purposes
. a corporation, partnership, or other entity created or organized in the
United States or under the laws of the United States or of any political
subdivision thereof
. an estate whose income is includible in gross income for United States
federal income tax purposes regardless of its source, or
. a trust if a court within the United States is able to exercise primary
supervision of the administration of the trust and one or more United
States persons has the authority to control all substantial decisions of
the trust
When we refer in the summary to a "Non-United States Holder," we mean a
beneficial owner of Series B preferred stock or Class A common stock that is
not a United States Holder.
United States Holders
Distributions
We have the right to pay distributions on the Series B preferred stock and
the Class A common stock in cash or in shares of our Class A common stock. If
we distribute our Class A common stock, the amount of the distribution for
federal income tax purposes will be the fair market value of the Class A common
stock on the date the distribution is paid, and the distribution will be
subject to federal income tax to the same extent as a cash distribution.
A distribution on the Series B preferred stock or Class A common stock will
be treated as a dividend to the extent of our current or accumulated earnings
and profits attributable to the distribution as determined under U.S. federal
income tax principles. The amount of our earnings and profits at any time will
depend upon our future actions and financial performance. If the amount of the
distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, the distribution will be treated as a
nontaxable return of
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capital and will be applied against and reduce your adjusted tax basis in the
stock, but not below zero. The reduction in tax basis will increase the amount
of any gain, or reduce the amount of any loss, which you would otherwise
realize on the sale or other taxable disposition of the stock. If the
distribution exceeds both our current and accumulated earnings and profits
attributable to the distribution and your adjusted tax basis in your stock, the
excess will be treated as capital gain and will be either long-term or short-
term capital gain depending on your holding period for the stock.
Corporate investors in our Series B preferred stock or Class A common stock
generally should be eligible for the 70% dividends-received deduction with
respect to the portion of any distribution on the stock taxable as a dividend.
However, corporate investors should consider certain provisions that may limit
the availability of a dividend received deduction, including the 46-day holding
period required by section 246(c) of the Internal Revenue Code, the rules of
section 246A which reduce the dividends-received deduction of dividends on
certain debt-financed stock, and the rules in section 1059 of the Internal
Revenue Code that reduce the basis of stock in respect of certain extraordinary
dividends, as well as the effect of the dividends-received deduction on the
determination of alternative minimum tax liability.
Optional redemption for Class A common stock or cash
If we redeem our Series B preferred stock for Class A common stock, the
exchange should constitute a recapitalization within the meaning of Section
368(a)(1)(E) of the Internal Revenue Code. You will not recognize gain or loss
on the exchange unless some of the Class A common stock is received in
discharge of dividend arrearages, in which case the redemption will be treated
as a distribution on the Series B preferred stock to the extent of the
dividends in arrears. The amount constituting a distribution will be taxed as a
dividend to the extent of our current or accumulated earnings and profits
attributable to the distribution at the time, in accordance with the treatment
described above for distributions. Your tax basis in our Class A common stock
received pursuant to the redemption generally will equal your tax basis in the
Series B preferred stock surrendered in exchange, and your holding period for
the Class A common stock generally will include the period you held your Series
B preferred stock. However, the tax basis of Class A common stock received in
discharge of dividend arrearages will be its fair market value on the date
received and the holding period of that stock will commence on the day after
its receipt.
If we redeem our Series B preferred stock for cash, the redemption will be
taxable to you. The redemption generally will be treated as a sale or exchange
if you do not own, actually or constructively within the meaning of section 318
of the Internal Revenue Code, any stock of XM Radio other than the redeemed
Series B preferred stock. If you do own, actually or constructively, other
stock of XM Radio, a cash redemption of your Series B preferred stock may be
taxable in accordance with the treatment described above for distributions.
Such treatment as a distribution will not apply if the redemption (1) is
"substantially disproportionate" with respect to you under section 302(b)(2) of
the Internal Revenue Code, or (2) is "not essentially equivalent to a dividend"
under section 302(b)(1) of the Internal Revenue Code. A distribution to you
will be "not essentially equivalent to a dividend" if it results in a
meaningful reduction in your stock interest in us, which should be the case if
your proportionate ownership interest, taking into account any actual ownership
of Class A common stock and any stock constructively owned, is reduced, your
relative stock interest in XM Radio is minimal, and you exercise no control
over our business affairs.
If a cash redemption of your Series B preferred stock is treated as a sale
or exchange, it will result in capital gains or losses equal to the difference
between the amount of cash received and the adjusted tax basis in the Series B
preferred stock redeemed, except to the extent that the redemption price
includes unpaid dividends which we declare prior to the redemption. The capital
gain or loss will be long term if you have held the Series B preferred stock
for more than one year. Any cash you receive in discharge of dividend
arrearages on the Series B preferred stock will be treated as a distribution on
the Series B preferred stock to the extent of the dividends in arrears, taxable
in accordance with the treatment described above for distributions.
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If the cash you receive on redemption of your Series B preferred stock is
taxed as a dividend, your tax basis (reduced for amounts, if any, treated as
return of capital) in the redeemed Series B preferred stock will be transferred
to any remaining other XM Radio stock you own, subject, in the case of a
corporate taxpayer, to reduction of possible gain recognition under section
1059 of the Internal Revenue Code in an amount equal to the nontaxed portion of
such dividend. If you do not actually own any other XM Radio stock, having a
remaining stock interest only constructively, you may lose the benefit of your
tax basis in the Series B preferred stock but the tax basis may be shifted to
the stock of the related person whose stock you constructively own.
Under certain circumstances, section 305(c) of the Internal Revenue Code
requires that any excess of the redemption price of preferred stock over its
issue price be treated as constructively distributed on a periodic basis prior
to actual receipt. However, these rules do not apply if you and XM Radio are
not "related" within the meaning of Treasury regulations under section 305(c),
there are no plans, arrangements or agreements that effectively require or are
intended to compel us to redeem the Series B preferred stock, and our exercise
of the right to redeem would not reduce the yield of the Series B preferred
stock, as determined under the regulations. We intend to take the position that
the existence of our optional redemption rights does not result in a
constructive distribution under section 305(c).
Conversion
You generally will not recognize gain or loss on conversion of shares of
Series B preferred stock into our Class A common stock, except with respect to
any cash paid in lieu of fractional shares of Class A common stock. However,
you may recognize gain or dividend income to the extent there are dividends in
arrears on such stock at the time of conversion into Class A common stock. Your
tax basis in the Class A common stock received upon conversion of Series B
preferred stock generally will be equal to your tax basis in the Series B
preferred stock and the holding period of the Class A common stock generally
will include your holding period for the Series B preferred stock. However, the
tax basis of any Class A common stock received on conversion which is treated
as a dividend will be equal to its fair market value on the date of the
distribution and the holding period of that Class A common stock will commence
on the day after its receipt.
You may be deemed to have received a constructive distribution of stock
taxable as a dividend if the conversion ratio of the Series B preferred stock
is adjusted to reflect a cash or property distribution on our Class A common
stock or to prevent dilution in the case of certain issuances of rights or
warrants to purchase Class A common stock at below market prices. Although an
adjustment to the conversion price made pursuant to a bona fide reasonable
adjustment formula which has the effect of preventing the dilution of your
interest in XM Radio generally will not be considered to result in a
constructive distribution of stock, certain of the possible adjustments may
trigger this rule. If a nonqualifying adjustment is made, or if we fail to make
an adjustment in certain cases, you might be deemed to have received a taxable
stock dividend. If so, the amount of the dividend to be included in income
would be the fair market value of the additional Class A common stock to which
you would be entitled by reason of the increase in your proportionate equity
interest in XM Radio.
Sale or other taxable disposition
If you sell or dispose of your Series B preferred stock or Class A common
stock in a taxable transaction other than a redemption or conversion by us, you
will recognize capital gain or loss equal to the difference between the amount
of cash and the fair market value of property received and your tax basis in
the Series B preferred stock or Class A common stock. The gain or loss will be
long-term capital gain or loss if your holding period for the stock exceeds one
year. For corporate taxpayers, long-term capital gains are taxed at the same
rate as ordinary income. For individual taxpayers, net capital gains--the
excess of the taxpayer's net
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long-term capital gains over their net short-term capital losses--are subject
to a maximum tax rate of 20% if the stock is held for more than one year.
Non-United States Holders
Distributions
Distributions received by you as a Non-United States Holder in respect of
the Series B preferred stock, whether in cash or shares of Class A common
stock, and distributions in respect of Class A common stock, to the extent
considered dividends for U.S. federal income tax purposes, generally will be
subject to withholding of United States federal income tax at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty, unless
the dividend is effectively connected with your conduct of a trade or business
within the United States or, where a tax treaty applies, is attributable to a
United States permanent establishment you maintain. For distributions of Class
A common stock, any amounts we withhold will reduce the value of the Class A
common stock distributed to you. If the dividend is effectively connected with
your conduct of a trade or business within the United States or, where a tax
treaty applies, is attributable to your United States permanent establishment,
the dividend will be subject to federal income tax on a net income basis at
applicable graduated individual or corporate rates and will be exempt from the
30% withholding tax.
In addition to the graduated rate described above, dividends received by a
corporate Non-United States Holder that are effectively connected with a United
States trade or business or, where a tax treaty applies, is attributable to
your United States permanent establishment, may, under certain circumstances,
be subject to an additional "branch profits tax" at a 30% rate or at a lower
rate specified by an applicable income tax treaty.
For purposes of obtaining a reduced rate of withholding under an income tax
treaty, you will be required to provide certain information concerning your
country of residence and entitlement to tax treaty benefits. If you claim
exemption from withholding with respect to dividends effectively connected with
your conduct of a business within the United States, you must provide
appropriate certification, currently, Internal Revenue Service Form 4224, to XM
Radio or its paying agent. If you are eligible for a reduced rate of U.S.
federal withholding tax you may obtain a refund of any excess withheld amounts
by timely filing an appropriate claim for refund.
If a distribution exceeds our current and accumulated earnings and profits
attributable to the distribution, it will be treated first as a return of your
tax basis in the stock to the extent of your basis and then as gain from the
sale of a capital asset which would be taxable as described below. Any
withholding tax on distributions in excess of our current and accumulated
earnings and profits is refundable to you upon the timely filing of an
appropriate claim for refund with the Internal Revenue Service.
Under currently applicable Treasury regulations, dividends paid to an
address outside the United States are presumed to be paid to a resident of such
country, unless the payor has knowledge to the contrary, for purposes of the
withholding discussed above, and, under the current interpretation of these
Treasury regulations, for purposes of determining the applicability of a tax
treaty rate. Under Treasury regulations currently scheduled to be effective
with respect to dividends paid after December 31, 2000, a Non-United States
Holder of XM Radio stock who wishes to claim the benefit of an applicable
treaty rate, and to avoid backup withholding as discussed below, will be
required to satisfy applicable certification and other requirements. However,
under either set of regulations, some payments to foreign partnership and
fiscally transparent entities may not be eligible for a reduced rate of
withholding tax under an applicable income tax treaty.
Disposition of Series B preferred stock or Class A common stock
Generally, you will not be subject to United States federal income tax on
any gain recognized upon the sale or other disposition of Series B preferred
stock or Class A common stock. However, you will be subject to federal income
tax on the gain if:
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(1) the gain is effectively connected with your United States trade or
business or, if a tax treaty applies, attributable to your United States
permanent establishment;
(2) you are an individual who is a former citizen of the United States who
lost such citizenship within the preceding ten-year period, or former long-term
resident of the United States who relinquished United States residency on or
after February 6, 1995, and the loss of citizenship or permanent residency had
as one of its principal purposes the avoidance of United States tax; or
(3) you are a non-resident alien individual, are present in the United
States for 183 days or more days in the taxable year of disposition and either
(a) have a "tax home" in the United States for United States federal income tax
purposes or (b) the gain is attributable to an office or other fixed place of
business you maintain in the United States.
You will also be subject to federal income tax on the gain from the sale of
our Series B preferred stock or Class A common stock if we are or have been a
"United States real property holding corporation"--which we refer to in this
prospectus supplement as USRPHC--within the meaning of section 897(c)(2) of the
Internal Revenue Code at any time you held the stock, or within the five-year
period preceding the sale of the stock if you hold the stock for more than five
years. We believe we are not now a USRPHC, that we have not been an USRPHC at
any time since we were formed, and that it is unlikely we will become a USRPHC.
If we were a USRPHC or were to become a USRPHC, you would be subject to U.S.
income tax on any gain from your sale of Series B preferred stock or from your
sale of Class A common stock if you beneficially own, or owned at any time
during a specified 5-year period, more than 5 percent of the total fair market
value of the class of stock you sold.
Redemption and conversion of Series B preferred stock
As a Non-United States Holder, you generally will not recognize any gain or
loss for United States federal income tax purposes upon conversion of Series B
preferred stock into Class A common stock, except with respect to any cash paid
in lieu of fractional shares of Class A common stock, which would be subject to
the rules described under "Disposition of Series B preferred stock or Class A
common stock." However, you may recognize gain or dividend income to the extent
there are dividends in arrears on the Series B preferred stock at the time of
conversion into Class A common stock.
A redemption of Series B preferred stock for cash will be an event which
will constitute either a dividend to the extent of our current and accumulated
earnings and profits or a sale or exchange. See "United States Holders--
Optional redemption for Class A common stock or cash." To the extent the
redemption is treated as a dividend, the tax consequences are described in
"Non-United States Holders--Distributions," and to the extent the redemption is
treated as a sale or exchange, the tax consequences are described in "Non-
United States Holders--Disposition of Series B preferred stock or Class A
common stock."
Federal estate taxes
If you are an individual Non-United States Holder, Series B preferred stock
or Class A common stock you hold or are treated as owning at the time of your
death will be included in your United States gross estate for United States
federal estate tax purposes and may be subject to United States federal estate
tax, unless an applicable estate tax treaty provides otherwise.
Information Reporting And Backup Withholding
We generally will be required to report to certain holders of our Series B
preferred stock or Class A common stock and to the Internal Revenue Service the
amount of any dividends paid to the holder in each calendar year and the
amounts of tax withheld, if any, with respect to such payments. Copies of the
information returns reporting such dividends and withholding may also be made
available to the tax authorities in the country in which a Non-United States
Holder resides under the provisions of an applicable income tax treaty.
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Each holder of Series B preferred stock or Class A common stock--other than
an exempt holder such as a corporation, tax-exempt organization, qualified
pension or profit-sharing trust, individual retirement account, or a
nonresident alien individual who provides certification as to his or her status
as a nonresident--will be required to provide, under penalties of perjury, a
certification setting forth the holder's name, address, correct federal
taxpayer identification number and a statement that the holder is not subject
to backup withholding. If a nonexempt holder fails to provide the required
certification, we will be required to withhold 31% of the amount otherwise
payable to the holder, and remit the withheld amount to the Internal Revenue
Service as a credit against the holder's federal income tax liability. However,
no backup withholding will be required with respect to any payment subject to
the 30% United States withholding tax discussed above. You should consult your
own tax advisor regarding your qualification for exemption from backup
withholding and the procedure for obtaining any applicable exemption.
The Internal Revenue Service has finalized Treasury regulations regarding
the backup withholding and information rules which are effective for payments
made after December 31, 2000 subject to certain transition rules. In general,
these regulations unify certification procedures and forms and clarify and
modify reliance standards. Among other provisions, these regulations also
include the new provisions discussed below regarding sales of stock outside the
United States by or for a broker. A Non-United States Holder should consult its
own tax advisor regarding the application of the new regulations.
Payment of the proceeds of a sale of Series B preferred stock or Class A
common stock by or through a United States office of a broker is subject to
both backup withholding and information reporting unless the beneficial owner
certifies under penalties of perjury that it is a Non-United States Holder or
otherwise establishes an exemption. In general, backup withholding and
information reporting will not apply to a payment of the proceeds of a sale of
Series B preferred stock or Class A common stock by or through a foreign office
of a broker. If, however, such broker is, for United States federal income tax
purposes a United States person, a "controlled foreign corporation" for U.S.
federal tax purposes, or a foreign person that derives 50% or more of its gross
income for a certain period from the conduct of a trade or business in the
United States, or, for taxable years beginning after December 31, 2000, a
foreign partnership in which one or more United States persons, in the
aggregate, own more than 50% of the income or capital interests in the
partnership or if the partnership is engaged in a trade or business in the
United States, such payments will be subject to information reporting, but not
backup withholding, unless (1) such broker has documentary evidence in its
records that the beneficial owner is a Non-United States Holder and certain
other conditions are met, or (2) the beneficial owner otherwise establishes an
exemption.
For payments after December 31, 2000, certification will be required in the
case of the disposition of shares of Series B preferred stock or Class A common
stock held in an offshore account if the disposition is made through a foreign
broker described in the immediately preceding paragraph. Any amounts withheld
under the backup withholding rules may be allowed as a refund or a credit
against the holder's United States federal income tax liability provided the
required information is furnished to the Internal Revenue Service.
The foregoing discussion is for general information and is not tax advice.
Accordingly, each prospective holder of Series B preferred stock or Class A
common stock should consult its tax advisor as to the particular tax
consequences to it of the Series B preferred stock and Class A common stock,
including the applicability and effect of any state, local or foreign income
tax laws, and any recent or prospective changes in applicable tax laws.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities Corporation in
their capacity as Joint Book Running Managers, the underwriters have severally
agreed to purchase from us the following respective numbers of shares of
preferred stock at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Underwriter Number of Shares
----------- ----------------
<S> <C>
Bear, Stearns & Co. Inc. ...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Banc of America Securities LLC..............................
Salomon Smith Barney Inc. ..................................
---------
Total...................................................... 2,000,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a comfort letter from our accountants and no occurrence of an event
that would have a material adverse effect on our business. The underwriters are
obligated to purchase and accept delivery of all the shares, other than those
covered by the over-allotment option described below, if they purchase any of
the shares.
We have granted to the underwriters an option, exercisable for 30 days from
the date of the underwriting agreement, to purchase up to 300,000 additional
shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on sales
to other dealers. After the initial offering of the shares to the public, the
representatives of the underwriters may change the public offering price and
such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the Series B preferred stock.
<TABLE>
<CAPTION>
No Full
Exercise Exercise
--------- ---------
<S> <C> <C>
Per share................................................ $ $
Total.................................................... $ $
</TABLE>
In order to facilitate this offering of the Series B preferred stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Series B preferred stock. Specifically, the
underwriters may over-allot shares of the Series B preferred stock in
connection with this offering, thereby creating a short position in the Series
B preferred stock for their own account. Additionally, to cover such over-
allotments or to stabilize the market price of the Series B preferred stock,
the underwriters may bid for, and purchase, shares of the Series B preferred
stock or Class A common stock in the open market. Finally, the representatives,
on behalf of the underwriters, also may reclaim selling concessions allowed to
an underwriter or dealer if the underwriting syndicate repurchases shares
distributed by that underwriter or dealer.
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Any of these activities may maintain the market price of our Series B preferred
stock or Class A common stock at a level above that which might otherwise
prevail in the open market. The underwriters are not required to engage in
these activities and, if commenced, may end any of these activities at any
time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
Bear, Stearns & Co. Inc. and Donaldson, Lufkin & Jenrette Securities
Corporation are acting as Joint Book Running Managers of the concurrent
offering of our Class A common stock, and acted as such for our initial public
offering and as our financial advisors in connection with our issuance of
$250.0 million of subordinated convertible notes, for which they received
customary compensation. Salomon Smith Barney is acting as a co-underwriter of
the concurrent offering of our Class A common stock. Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, the other underwriters or
their affiliates have also provided and may in the future provide investment
banking or other financial services to us and American Mobile and its
affiliates in the ordinary course of business, for which they have received and
are expected to receive customary fees and expenses. To date, Bear, Stearns &
Co. Inc. has served American Mobile as an initial purchaser for its issuance of
units in March 1998, as an underwriter in its sale of common stock in July
1999, and as financial advisor in several of its acquisition and financing
transactions.
LEGAL MATTERS
Certain legal matters with respect to the shares of Series B preferred stock
offered by this prospectus will be passed upon for XM Radio by Hogan & Hartson
L.L.P., Washington, D.C. Certain legal matters with respect to communications
regulatory issues will be passed upon for XM Radio by Fisher Wayland Cooper
Leader & Zaragoza L.L.P., Washington, D.C. Certain legal matters in connection
with this offering will be passed upon for the underwriters by Latham &
Watkins, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997 and 1998, and
for the years ended December 31, 1997 and 1998 and for the period from December
15, 1992 (date of inception) through December 31, 1998, have been included
herein and in the registration statement, in reliance upon the report of KPMG
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG LLP contains an explanatory paragraph that states that we have
not commenced operations, have negative working capital and are dependent upon
additional debt and equity financings, which raise substantial doubt about our
ability to continue as a going concern. Our consolidated financial statements
do not include any adjustments that might result from the outcome of that
uncertainty.
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CERTAIN INFORMATION ABOUT THIS PROSPECTUS
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933 covering the Series B preferred stock being offered by
this prospectus. As permitted by SEC rules, this prospectus omits certain
information that is included in the registration statement. For further
information about us and our Series B preferred stock, you should refer to the
registration statement and its exhibits. Since the prospectus may not contain
all the information that you may find important, you should review the full
text of these documents. If we have filed a contract, agreement or other
document as an exhibit to the registration statement, you should read the
exhibit for a more complete understanding of the document or matter involved.
Each statement in this prospectus, including statements incorporated by
reference as discussed below, regarding a contract, agreement or other document
is qualified in its entirety by reference to the actual document. You may read
and copy any document we file with the SEC at the SEC's public reference rooms
located at Room 1024, 450 Fifth Street, N.W., Washington, DC 20549, at 7 World
Trade Center, 13th Floor, New York, NY 10048, and at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, IL 60661. You can also obtain copies of
filed documents by mail from the Public Reference Section of the SEC at Room
1024, 450 Fifth Street, NW, Washington, DC 20549. Please call the SEC at 1-800-
SEC-0330 for further information on the public reference rooms. Our SEC filings
are also available to the public at the SEC's website at www.sec.gov. You can
also inspect such reports, proxy and information statements and other
information at the office of Nasdaq Operations, 1735 K Street, N.W.,
Washington, DC. 20006.
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XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report............................................... F-2
Consolidated Balance Sheets................................................ F-3
Consolidated Statements of Operations...................................... F-4
Consolidated Statements of Stockholders' Equity (Deficit).................. F-5
Consolidated Statements of Cash Flows...................................... F-6
Notes to Consolidated Financial Statements................................. F-7
Unaudited Condensed Consolidated Balance Sheet............................. F-18
Unaudited Condensed Consolidated Statements of Operations.................. F-19
Unaudited Condensed Consolidated Statements of Cash Flows.................. F-20
Notes to Unaudited Condensed Consolidated Financial Statements............. F-21
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiary (a development stage company) as of December
31, 1997 and 1998, and the related consolidated statements of operations,
stockholders' equity (deficit), and cash flows for the years ended December 31,
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM
Satellite Radio Holdings Inc. and subsidiary (a development stage company) as
of December 31, 1997 and 1998, and the results of their operations and their
cash flows for the years then ended and for the period from December 15, 1992
(date of inception) to December 31, 1998, in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, the Company has not commenced
operations, has negative working capital of $130,341,000, and is dependent upon
additional debt and equity financings, which raises substantial doubt about its
ability to continue as a going concern. Management's plan in regard to these
matters is also described in note 11. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
/s/ KPMG LLP
McLean, VA
February 12, 1999, except for note 14, which is as of September 9, 1999
F-2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1998
<TABLE>
<CAPTION>
1997 1998
---------- -----------
(in thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 1 $ 310
Prepaid and other current assets...................... -- 172
---------- -----------
Total current assets................................ 1 482
Other assets:
System under construction............................. 91,932 169,029
Property and equipment, net of accumulated
depreciation and amortization of $0 and $57.......... -- 449
Other assets.......................................... -- 525
---------- -----------
Total assets........................................ $ 91,933 $ 170,485
========== ===========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable.......................................... $ -- $ 23,125
Due to related parties.................................... 445 13,767
Accrued interest on loans payable......................... 1,886 1,907
Loans payable due to related parties...................... 80,618 91,546
Term loan................................................. -- 34
Accrued expenses.......................................... -- 444
------- --------
Total current liabilities............................... 82,949 130,823
Term loan, net of current portion........................... -- 53
Subordinated convertible notes payable due to related
party...................................................... -- 45,583
Accrued interest on subordinated convertible notes payable
due to related party....................................... -- 1,209
------- --------
Total liabilities....................................... 82,949 177,668
------- --------
Common stock--$0.10 par value; authorized 3,000 and
160,542,000 shares; 125 and 6,689,250 shares issued and
outstanding at December 31, 1997 and 1998 (note 14)........ -- 669
Additional paid-in capital (note 14)........................ 10,643 9,974
Deficit accumulated during development stage................ (1,659) (17,826)
------- --------
Total stockholders' equity (deficit).................... 8,984 (7,183)
------- --------
Commitments and contingencies (notes 4, 7, 8, 11, 12, and
13)
Total liabilities and stockholders' equity (deficit).... $91,933 $170,485
======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 to December 31, 1998
--------- --------- --------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue............................ $ -- $ -- $ --
--------- --------- --------
Operating expenses:
Research and development......... -- 6,941 6,941
Professional fees................ 1,090 5,242 6,332
General and administrative....... 20 4,010 4,030
--------- --------- --------
Total operating expenses....... 1,110 16,193 17,303
--------- --------- --------
Operating loss................. (1,110) (16,193) (17,303)
Other expense--interest income
(expense), net.................... (549) 26 (523)
--------- --------- --------
Net loss....................... $ (1,659) $ (16,167) $(17,826)
========= ========= ========
Net loss per share:
Basic and diluted................ $ (0.26) $ (2.42)
========= =========
Weighted average shares used in
computing net loss per share-basic
and diluted....................... 6,368,166 6,689,250
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During Total
----------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity (Deficit)
---------- ------ ---------- ----------- ----------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Issuance of common stock
(December 15, 1992).... 100 $ -- $ -- $ -- $ --
---------- ---- ------ -------- --------
Balance at December 31,
1992................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1993................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1994................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1995................... 100 -- -- -- --
Net loss................ -- -- -- -- --
---------- ---- ------ -------- --------
Balance at December 31,
1996................... 100 -- -- -- --
Contributions to paid-in
capital................ -- -- 143 -- 143
Issuance of common stock
and capital
contributions.......... 25 -- 9,000 -- 9,000
Issuance of options..... -- -- 1,500 -- 1,500
Net loss................ -- -- -- (1,659) (1,659)
---------- ---- ------ -------- --------
Balance at December 31,
1997................... 125 -- 10,643 (1,659) 8,984
Net loss................ -- -- -- (16,167) (16,167)
53,514-for-one stock
split (note 14)........ 6,689,125 669 (669) -- --
---------- ---- ------ -------- --------
Balance at December 31,
1998................... 6,689,250 $669 $9,974 $(17,826) $ (7,183)
========== ==== ====== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 December 31, 1998
------- -------- -----------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss................................. $(1,659) $(16,167) $(17,826)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation............................ -- 57 57
Note discount amortization.............. 33 -- 33
Changes in operating assets and
liabilities:
Increase in prepaid and other current
assets................................ -- (212) (212)
Increase in accounts payable and
accrued expenses...................... -- 1,701 1,701
Increase in amounts due to related
parties............................... 445 13,322 13,767
Increase (decrease) in accrued
interest.............................. 517 (2) 515
------- -------- --------
Net cash provided by (used in)
operating activities................. (664) (1,301) (1,965)
------- -------- --------
Cash flows from investing activities:
Purchase of property and equipment....... -- (506) (506)
Additions to system under construction... (90,031) (43,406) (133,437)
------- -------- --------
Net cash used in investing
activities........................... (90,031) (43,912) (133,943)
------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock and
capital contribution.................... 9,143 -- 9,143
Proceeds from issuance of loan payable to
related party........................... 80,053 337 80,390
Proceeds from issuance of options........ 1,500 -- 1,500
Proceeds from issuance of subordinated
convertible notes to related party...... -- 45,583 45,583
Payment to establish collateral for term
loan.................................... -- (92) (92)
Proceeds from term loan.................. -- 92 92
Repayments of term loan.................. -- (5) (5)
Payments for deferred financing costs.... -- (393) (393)
------- -------- --------
Net cash provided by financing
activities........................... 90,696 45,522 136,218
------- -------- --------
Net increase in cash and cash
equivalents.......................... 1 309 310
------- -------- --------
Cash and cash equivalents at beginning of
year..................................... -- 1 --
Cash and cash equivalents at end of year.. $ 1 $ 310 $ 310
======= ======== ========
Supplemental cash flow disclosure:
Interest capitalized..................... $ 1,901 $ 11,824 $ 13,725
Interest converted into principal note
balance................................. $ 501 $ 9,157 $ 9,658
Accrued system milestone payments........ $ -- $ 21,867 $ 21,867
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1998
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC") for
the purpose of procuring a digital audio radio service ("DARS") license.
Business activity for the period December 15, 1992 through December 31, 1996
was insignificant. Pursuant to various financing agreements entered into in
1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiary, XM Satellite Radio Inc. All significant
intercompany transactions and accounts have been eliminated. The Company's
management has devoted substantially all of its time to the planning and
organization of the Company and to the process of addressing regulatory
matters, initiating research and development programs, conducting market
research, initiating construction of the satellite system, securing content
providers, and securing adequate debt and equity capital for anticipated
operations and growth. Accordingly, the Company's financial statements are
presented as those of a development stage enterprise, as prescribed by
Statement of Financial Accounting Standards No. 7, Accounting and Reporting by
Development Stage Enterprises.
As discussed in Note 14, on September 9, 1999, the Company determined to
effect a 53,514-for-1 stock split. The effect of the stock split has been
retroactively reflected as of December 31, 1998 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 elsewhere 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.
(d) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and computer equipment........... 3 years
Machinery and equipment.............................. 7 years
Leasehold improvements............................... Remaining lease term
</TABLE>
F-7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) System Under Construction
The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1998, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC license
will be amortized using the straight line method over an estimated useful life
of fifteen years. Amortization of the license will begin on commercial launch.
On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. The FCC has the authority to revoke the
authorizations and in connection with such revocation could exercise its
authority to rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
The license asset value consists of the total payments made to the FCC for
the license of $90,031,000. Associated with this license is capitalized
interest of $1,901,000 and $10,991,000 as of December 31, 1997 and 1998,
respectively. Costs incurred for system development were $65,273,000.
Associated with the system development costs is capitalized interest of
$2,734,000 at December 31, 1998.
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of (SFAS 121), during fiscal year
1997. SFAS 121 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount of fair value less costs to
sell. Adoption of SFAS 121 did not have a material impact on the Company's
financial position, results of operations, or liquidity during 1997 or 1998.
(f) Stock-Based Compensation
During fiscal year 1997, the Financial Accounting Standards Board issued
SFAS No. 123, Accounting for Stock-based Compensation (SFAS 123), which
encourages, but does not require, the recognition of stock-based employee
compensation at fair value. SFAS 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees,
and related interpretations, and to provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made during the
year of adoption and in future years as if the fair-value-based method defined
in SFAS 123 had been applied. The Company has elected to continue to apply the
provisions of APB Opinion No. 25 and provide the pro forma disclosure
provisions of SFAS 123. Accordingly, compensation cost for options to purchase
common stock granted to employees is measured as the excess, if any, of the
fair value of common stock at the date of the grant over the exercise price an
employee must pay to acquire the common stock.
Warrants to purchase common stock granted to other than employees as
consideration for goods or services rendered are recognized at fair market
value.
F-8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(g) Research and Development
Research and development costs are expensed as incurred.
(h) Net Loss Per Share
In December 1997, the Company adopted the provisions of SFAS No. 128,
Earnings per Share, (SFAS 128). SFAS 128 supersedes APB Opinion No. 15,
Earnings per Share and its related interpretations, and promulgates new
accounting standards for the computation and manner of presentation of the
Company's loss per share. SFAS 128 requires the presentation of basic and
diluted loss per share. Basic earnings per share is calculated by dividing net
income by the weighted-average number of common shares outstanding during the
period. The computation of diluted earnings per share includes all common stock
options and warrants and other common stock, to the extent dilutive, that
potentially may be issued as a result of conversion privileges, including the
subordinated convertible notes payable due to related party. Due to losses
incurred during 1997 and 1998, the impact of other potentially dilutive
securities is anti-dilutive and is not included in the diluted loss per share
calculation.
(i) Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Deferred
income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and the financial
reporting amounts at each year-end, based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is the sum of tax payable for the period and the change during the period in
deferred tax assets and liabilities.
(j) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997 and 1998 that would be classified as other
comprehensive income.
(k) Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses
during the reporting period. The estimates involve judgments with respect to,
among other things, various future factors which are difficult to predict and
are beyond the control of the Company. Significant estimates include valuation
of the Company's investment in the DARS license and the benefit for income
taxes and related valuation allowances. Accordingly, actual amounts could
differ from these estimates.
(l) Reclassifications
Certain fiscal year 1997 amounts have been reclassified to conform to the
fiscal 1998 consolidated financial statement presentation.
F-9
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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, AMSC incurred
general and administrative costs and professional fees for the Company and
established an intercompany balance of $458,000 (see note 3).
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital contribution
from WSI. The Company issued WSI 25 shares of common stock for this
consideration.
On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as
a six-month bridge loan (see note 4).
On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 4).
On October 16, 1997, the Company received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 4).
On April 1, 1998, the Company entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998, the Company drew
down $45,583,000 under the agreement (see note 4).
In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and has established a due to WSI for the balance (see note 3).
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Professional fees......................... $ 960 130 1,090
General and administrative................ -- 20 20
----------- ------- ----------
Total................................... $ 960 150 1,110
=========== ======= ==========
<CAPTION>
Year Ended December 31, 1998
-------------------------------
WSI AMSC Total
----------- -------------------
<S> <C> <C> <C>
Research and development.................. $ 6,624 -- 6,624
Professional fees......................... 2,529 353 2,882
General and administrative................ 903 60 963
----------- ------- ----------
Total................................... $ 10,056 413 10,469
=========== ======= ==========
</TABLE>
Additionally, during 1998 the Company incurred $925,000 of WSI project
management costs that were capitalized to the satellite system.
F-10
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(3) Due to Related Parties
Due to related parties included the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
-------------
<S> <C> <C>
Advances from WSI........................................... $ -- 7,405
Due to WSI.................................................. 390 5,904
Due to AMSC................................................. 55 458
----- -------
$ 445 13,767
===== =======
</TABLE>
Advances represent funding provided by WSI for 30 days. If amounts are not
repaid within this time period, additional subordinated convertible notes will
be issued.
(4) Debt
(a) Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements (the "Participation
Agreement") with AMSC and WSI in which both companies provided various equity
and debt funding commitments to XMSR for the purpose of financing the
activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997 certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement").
The Company has loans payable with a face amount of $82,053,000 and
$91,546,000 with a carrying amount of $80,618,000 and $91,546,000 at December
31, 1997 and 1998, respectively, outstanding with WSI as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1998
------- ------
<S> <C> <C>
Bridge loan............................................. $23,001 25,556
Additional amounts loan................................. 58,389 64,875
Working capital loan.................................... 663 1,115
------- ------
82,053 91,546
Discount arising from concurrent issuance of options
(note 7), net.......................................... (1,435) --
------- ------
$80,618 91,546
======= ======
</TABLE>
Bridge Loan
The Company executed the bridge loan with WSI in two tranches. On April 16,
1997, the Company received proceeds of $8,479,000 for a loan with a face amount
of $9,000,000. On October 16, 1997, the Company received proceeds of
$12,771,000 for a loan with a face amount of $13,522,000. The first tranche was
a six-month loan at LIBOR plus five percent per annum, equaling 11.03 percent.
The first tranche was rolled over with the establishment of the second tranche,
which is a six-month loan at LIBOR plus five percent per annum, equaling 9.94
percent at December 31, 1998 and due in April 1999. The accrued interest under
the bridge loan is compounded to the loan balance each April and October.
F-11
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional Amounts Loan
On October 16, 1997, the Company executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. This loan is a six-month loan at LIBOR plus five percent per
annum, equaling 9.94 percent at December 31, 1998 and due in April 1999. The
accrued interest under the additional amounts loan is compounded to the loan
balance each April and October.
Working Capital Loan
On May 16, 1997, the Company executed the working capital loan with WSI
whereby the Company would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Company drew down $663,000 against the line of credit
through December 31, 1997. This loan is a six-month loan at LIBOR plus five
percent per annum, with an interest rate of 10.19 percent at December 31, 1998
and due in May 1999. The accrued interest on the loan is compounded to the
balance in May and November.
Restrictive Covenants
The financing agreements contain restrictive covenants which include a
prohibition of the Company or its subsidiary to merge or consolidate, or sell,
transfer, or otherwise dispose of substantially all of its assets. The Company
or the subsidiary may not incur additional indebtedness in excess of $1,000,000
without prior written consent of WSI. Additionally, the financing agreements
provide for other restrictive covenants including a restriction on the payment
of dividends.
The Company has pledged 64.7511 percent of its share of the issued and
outstanding common stock of the subsidiary to WSI as collateral for the
financings.
(b) Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible note
agreement with WSI that provides for a maximum of $54,536,000 through the
issuance of subordinated convertible notes. The notes mature on September 30,
2006 and carry an interest rate of LIBOR plus five percent per annum, which was
10.15 percent as of December 31, 1998. Under the terms of the note agreement,
WSI shall have the right to convert all or a portion of the aggregate principal
amount of the notes into shares of common stock at a conversion price of
$875,000 per share. As of December 31, 1998, $45,583,000 had been drawn through
the issuance of subordinated convertible notes. Interest is payable upon
maturity.
(c) Term Loan
On November 1, 1998, the Company reached an agreement with a commercial bank
for a $92,000 installment loan with a 36 month term at 7 percent interest per
annum. The Company pledged $92,000 as collateral for the loan and placed this
balance on deposit at the commercial bank. At December 31, 1998, the Company's
outstanding balance was $87,000.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, receivables, accounts
payable, accrued expenses, and the term loan approximate their fair market
value because of the relatively short duration of these instruments as of
December 31, 1997 and 1998, in accordance with SFAS No. 107, Disclosures about
Fair Value of Financial Instruments.
F-12
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fair value of the loans and subordinated convertible notes due to
related party could not be estimated as such amounts are due to the Company's
stockholders.
(6) Common Stock
(a) 1998 Shares Award Plan
On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan")
under which employees, consultants, and non-employee directors may be granted
options to purchase shares of common stock of the Company. The Company has
authorized 1,337,850 shares of common stock under the Plan. The options are
exercisable in installments determined by the compensation committee of the
Company's board of directors. The options expire as determined by the
committee, but no later than ten years from the date of grant. Transactions and
other information relating to the Plan for the year ended December 31, 1998 are
summarized below:
<TABLE>
<CAPTION>
Outstanding Options
------------------------
Weighted-
Number of Average
Shares Exercise Price
--------- --------------
<S> <C> <C>
Balance, January 1, 1998......................... -- --
Options granted................................ 787,297 $16.35
Options canceled or expired.................... -- --
Options exercised.............................. -- --
------- ------
Balance, December 31, 1998....................... 787,297 $16.35
======= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ---------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Exercise Outstanding at Contractual Exercise Exercisable at Exercise
Price December 31, 1998 Life Price December 31, 1998 Price
- -------- ----------------- ----------- --------- ----------------- ---------
<S> <C> <C> <C> <C> <C>
$16.35 787,297 9.5 years $16.35 -- $16.35
====== ======= ========= ====== === ======
</TABLE>
There were no stock options exercisable at December 31, 1998. There were
550,552 shares available under the plan for future grants at December 31, 1998.
At December 31, 1998, all options have been issued to employees.
The per share weighted-average fair value of employee options granted during
the year ended December 31, 1998 was $10.54 on the date of grant using the
Black-Scholes Option Pricing Model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Expected dividend yield.... 0%
Volatility................. 56.23%
Risk-free interest rate
range..................... 4.53% to 5.67%
Expected life.............. 7.5 years
=============
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plan and,
accordingly, no compensation cost has been recognized for its stock options in
the financial statements. Had the Company determined
F-13
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
compensation cost based on the fair value at the grant date for its stock
options under SFAS 123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31, 1998
-----------------
<S> <C>
Net loss:
As reported............................................ $16,167
Pro forma.............................................. 17,508
As reported--net loss per share--basic and diluted..... (2.42)
Pro forma--net loss per share--basic and diluted....... (2.62)
=======
</TABLE>
(b) Restrictive Covenants
Certain actions require the unanimous affirmative vote of the board of
directors of the Company. Such actions include the entry into, or the
amendment, modification, extension or termination of any agreements for amounts
in excess of $40,000,000 or with AMSC or WSI; the entry into any agreements
outside of the ordinary course of business; merger or consolidation; issuance
of additional shares of capital stock; and the declaration and payment of
dividends. If WSI holds more than 50 percent of the shares of common stock,
this provision requiring the unanimous affirmative vote of the board of
directors will be of no further force and effect. Additionally, an affirmative
vote of 81 percent of all the issued and outstanding shares of common stock
shall be required to approve any voluntary filing of a bankruptcy petition by
the Company or its subsidiary.
(7) WSI Options
The Company issued WSI three options. Under the first option, WSI may
purchase 5,202,748 shares of common stock at $4.52 per share to acquire common
stock. The option may be exercised in whole or in incremental amounts between
April 16, 1998 and October 16, 2002. Under certain circumstances, AMSC may
require WSI to exercise the option in whole. The Company allocated $1,250,000
to the option. Under the second option, WSI may purchase 6,897,291 shares at
$8.91 per share. The option may be exercised between October 16, 1997 and
October 16, 2003. The Company allocated $170,000 to the option. Under the third
option, WSI may purchase 187,893 shares of common stock at $5.32 per share. The
option may be exercised between October 16, 1997 and October 17, 2002. The
Company allocated $80,000 to the option.
The exercise of these options is subject to prior approval of the FCC to the
extent that such exercise would constitute transfer of control. The allocation
was based upon independent valuation.
(8) Employee Benefit Plan
On July 1, 1998, the Company has adopted a profit sharing and employee
savings plan under Section 401(k) of the Internal Revenue Code. This plan
allows eligible employees to defer up to 15 percent of their compensation on a
pre-tax basis through contributions to the savings plan. The Company
contributed $0.50 in 1998 for every dollar the employees contributed up to 6
percent of compensation, which amounted to $14,000.
(9) Interest Cost
The Company capitalizes a portion of interest cost as a component of the
cost of the FCC license and satellite system under construction. The following
is a summary of interest cost incurred during December 31,
F-14
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1997 and 1998, and for the period from December 15, 1992 (date of inception) to
December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
December 15, 1992
(date of inception) to
1997 1998 December 31, 1998
------ ------ ----------------------
<S> <C> <C> <C>
Interest cost capitalized........... $1,901 11,824 13,725
Interest cost charged to expense.... 549 -- 549
------ ------ ------
Total interest cost incurred...... $2,450 11,824 14,274
====== ====== ======
</TABLE>
Interest costs incurred prior to the award of the license were expensed in
1997.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to December 31,
1998, the Company filed consolidated federal and state tax returns with its
majority stockholder AMSC. The Company generated net operating losses and other
deferred tax benefits which were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the net
operating losses. Had the Company filed on a stand-alone basis, it would have
had no tax provision as the deferred tax benefit of approximately $650,000 and
$7,164,000 for 1997 and 1998, respectively, would have been fully offset by a
valuation allowance.
(11) Accumulated Deficit
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and future
operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies. These
factors individually or in the aggregate could have an adverse effect on the
Company's financial condition and future operating results and create an
uncertainty as to the Company's ability to continue as a going concern. The
financial statements do not include any adjustments that might be necessary
should the Company be unable to continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the DARS
system, develop and launch radio communications satellites, retire debt
incurred in connection with the acquisition of the DARS license and to sustain
operations until it generates positive cash flow. At December 31, 1998, the
Company has negative working capital of $130,341,000.
At the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required
long-term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and
equity securities through public and private sources. There are no assurances,
however, that such financing will be obtained.
(12) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
F-15
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WorldSpace has effectively
taken control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge, no prediction of the
outcome of this challenge can be made with any certainty.
(c) Satellite Purchase Contract
On March 20, 1998, as amended on June 5, 1998, the Company entered into an
agreement for the construction of two satellites, two launch vehicles, and
related equipment, services and spare parts, including launch services. The
total commitment under the amended agreement, excluding financing fees, is
approximately $438,013,000 as of December 31, 1998. These amounts are due upon
the completion of certain milestones. The Company has incurred costs of
$64,348,000 as of December 31, 1998. One of the members of the board of
directors is an executive of an affiliate of the Contractor.
Under the terms of this agreement, the Contractor shall invest $15,000,000
in a private or public equity offering of the Company, should it be consummated
prior to March 20, 1999.
(d) Technical Services and Technology Licenses
Effective January 1, 1998, the Company entered into an agreement with AMSC
and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI,
in which WorldSpace MC provides technical support in areas related to the
development of a DARS system. Payments for services provided under this
agreement are made based on negotiated hourly rates. This agreement may be
terminated by either party on or after the date of the commencement of
commercial operation following the launch of the Company's first satellite.
There is no minimum services purchase requirement. The Company incurred costs
of $4,770,000 under the agreement during 1998.
Effective January 1, 1998, XMSR entered into a technology licensing
agreement with AMSC and WorldSpace MC by which as compensation for certain
licensed technology currently under development to be used in the XM Radio
system, XMSR will pay up to $14,300,000 over a ten-year period. XMSR incurred
costs of $6,624,000 under the agreement during 1998. Any additional amounts to
be incurred under this agreement are dependent upon further development of the
technology, which is at XMSR's option. No liability exists to AMSC or
WorldSpace MC should such developments prove unsuccessful. In addition, XMSR
agreed to pay 1.2 percent of quarterly net revenues to WorldSpace MC and a
royalty of $0.30 per chipset for equipment manufactured using certain source
encoding and decoding signals technology.
(e) FCC Occurrences
On October 30, 1998, AMSC and WSI submitted an application for Consent and
Transfer Control with the FCC. These entities have requested the FCC's consent
to WSI's exercise of certain options that would increase its shareholding
interest in the Company. There have been challenges filed against the
application.
F-16
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(f) Leases
The Company has two noncancelable operating leases for office space that
expire over the next four years. The future minimum lease payments under
noncancelable leases as of December 31, 1998 are (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999.................................... $ 42
2000.................................... 44
2001.................................... 46
2002.................................... 48
2003.................................... --
----
$180
====
</TABLE>
Rent expense for 1997 and 1998 was $0 and $231,000, respectively.
(13) Subsequent Events
On January 12, 1999, a competitor of the Company commenced action against
the Company for patent infringement and for a declaratory judgment of future
patent infringement by the Company. There have been no damages specified in the
action and the Company is in the process of responding to the complaint. Should
it be unsuccessful in its defense, the Company could be liable for monetary
damages, and could be forced to engineer alternative technologies related to
signal reception or seek a license from, or pay royalties to, the competitor.
The Company intends to vigorously defend against the suit; however, the outcome
is uncertain at this time.
Effective January 15, 1999, the Company issued a convertible note to AMSC
for $21,419,000. This note matures on September 30, 2006 and carries an
interest rate of LIBOR plus five percent per annum. Under the terms of this
note, AMSC shall have the right to convert all or a portion of the aggregate
principal amount of the note into shares of common stock at a conversion price
of $16.35 per share. Interest is payable upon maturity.
(14) Stock Split
On September 9, 1999, the board of directors of the Company determined to
effect a stock split providing 53,514 shares of stock for each share owned.
(15) Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997
-------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................. $-- -- -- --
Operating loss........................... -- 51 185 874
Loss before income taxes................. -- 270 459 930
Net loss................................. -- 270 459 930
==== ===== ===== =====
Net loss per share--basic and diluted.... $-- (0.04) (0.07) (0.14)
==== ===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
1998
--------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Revenues................................ $ -- -- -- --
Operating loss.......................... 3,100 5,032 3,865 4,204
Loss before income taxes................ 3,100 5,032 3,857 4,178
Net loss................................ 3,100 5,032 3,857 4,178
====== ===== ===== =====
Net loss per share--basic and diluted... $(0.46) (0.75) (0.58) (0.62)
====== ===== ===== =====
</TABLE>
The sum of quarterly per share net losses for 1997 do not necessarily agree
to the net loss per share for the year due to the timing of stock issuances.
F-17
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999
<TABLE>
<CAPTION>
Pro Forma
September 30, September 30,
1999 1999
------------- -------------
(in thousands,
except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 54,356 168,490
Prepaid and other current assets................. 579 579
-------- -------
Total current assets........................... 54,935 169,069
Other assets:
System under construction........................ 282,316 282,316
Property and equipment, net of accumulated
depreciation and amortization................... 1,153 1,153
Goodwill and intangibles, net of accumulated
amortization.................................... 50,823 50,823
Other assets, net of accumulated amortization.... 17,590 6,826
-------- -------
Total assets................................... $406,817 510,187
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expense............. $19,051 19,051
Due to related parties........................... 172 172
-------- -------
Total current liabilities...................... 19,223 19,223
Subordinated convertible notes payable to related
party............................................. 103,094 --
Series A convertible notes payable................. 250,000 --
Accrued interest on notes payable.................. 9,856 --
Capital lease, net of current portion.............. 310 310
-------- -------
Total liabilities.............................. 382,483 19,533
-------- -------
Preferred stock, par value $0.01; 60,000,000 shares
authorized, no shares issued and outstanding at
September 30, 1999 and 10,761,677 shares issued
and outstanding pro forma September 30, 1999...... -- 108
Class A common stock, par value $0.01; 180,000,000
shares authorized, 14,716 shares issued and
outstanding at September 30, 1999 and 26,004,049
shares issued and outstanding pro forma September
30, 1999.......................................... -- 260
Class B common stock, par value $0.01; 30,000,000
shares authorized, 6,689,250 shares issued and
outstanding at September 30, 1999 and 17,822,808
shares issued and outstanding pro forma September
30, 1999.......................................... 67 178
Class C common stock, par value $0.01; 30,000,000
shares authorized, no shares issued and
outstanding at September 30, 1999 and pro forma
September 30, 1999................................ -- --
Additional paid-in capital......................... 67,860 533,701
Deficit accumulated during development stage....... (43,593) (43,593)
-------- -------
Total stockholders' equity..................... 24,334 490,654
-------- -------
Commitments and contingencies .....................
Total liabilities and stockholders' equity..... $406,817 510,187
======== =======
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-18
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Nine-Month Periods ended September 30, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) to September 30, 1999
<TABLE>
<CAPTION>
Nine Months Ended December 15, 1992
September 30, (date of inception)
---------------------------------- to September 30,
1998 1999 1999
---------------- ---------------- -------------------------
(in thousands, except share and per share data)
<S> <C> <C> <C>
Revenue................. $ -- $ -- $ --
---------------- ---------------- ---------------
Operating expenses:
Research and
development.......... 5,834 3,597 10,538
Professional fees..... 4,260 5,932 12,264
General and
administrative....... 1,903 8,286 12,316
---------------- ---------------- ---------------
Total operating
expenses........... 11,997 17,815 35,118
---------------- ---------------- ---------------
Operating loss.......... (11,997) (17,815) (35,118)
Other expense--interest
income (expense), net.. 8 (7,952) (8,475)
---------------- ---------------- ---------------
Net loss................ $ (11,989) $ (25,767) $ (43,593)
================ ================ ===============
Net loss per share:
Basic and diluted..... $ (1.79) $ (3.85)
================ ================
Weighted average shares
used in computing net
loss per share:
Basic and diluted..... 6,689,250 6,693,338
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-19
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to September 30, 1999
<TABLE>
<CAPTION>
Nine Months December 15,
Ended September 30, 1992 (date of
--------------------- inception) to
1998 1999 September 30, 1999
--------- ---------- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................... $ (11,989) $ (25,767) $ (43,593)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation and amortization.... 16 1,469 1,559
Beneficial conversion charge..... -- 5,520 5,520
Stock compensation............... -- 140 140
Changes in operating assets and
liabilities:
Increase in prepaid and other
currrent assets............... (100) (407) (619)
Increase in other assets....... -- (609) (609)
Increase in accounts payable
and accrued expenses.......... 464 1,488 3,189
Increase (decrease) in amounts
due to related parties........ 29,449 (286) 13,481
Increase in accrued interest... -- 2,829 3,344
--------- ---------- ---------
Net cash provided by (used
in) operating activities.... 17,840 (15,623) (17,588)
--------- ---------- ---------
Cash flows from investing activities:
Purchase of property and
equipment......................... (279) (478) (984)
Additions to system under
construction...................... (40,746) (110,802) (244,239)
Other investing activities......... -- (6,085) (6,085)
--------- ---------- ---------
Net cash used in investing
activities.................. (41,025) (117,365) (251,308)
--------- ---------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock
and capital contribution.......... -- -- 9,143
Proceeds from issuance of loan
payable to related party.......... 336 1,548 81,938
Proceeds from issuance of options.. -- -- 1,500
Proceeds from issuance of
subordinated convertible notes to
related party..................... 21,999 21,419 67,002
Proceeds from issuance of Series A
convertible notes................. -- 250,000 250,000
Repayments of loans payable to
related party..................... -- (75,000) (75,000)
Payment for deferred financing
costs............................. -- (10,849) (11,242)
Other net financing activities..... 849 (84) (89)
--------- ---------- ---------
Net cash provided by
financing activities........ 23,184 187,034 323,252
--------- ---------- ---------
Net increase in cash and cash
equivalents................. (1) 54,046 54,356
Cash and cash equivalents at
beginning of year .................. 1 310 --
--------- ---------- ---------
Cash and cash equivalents at end of
period ............................. $ 0 $ 54,356 $ 54,356
========= ========== =========
Supplemental cash flow disclosure:
Liabilities exchanged for new
debt.............................. $ -- $ 81,676 $ 81,676
Interest capitalized............... $ 7,311 $ 14,533 $ 28,258
Interest converted into principal
note balance...................... $ 4,582 $ 4,601 $ 14,259
Acquisition of goodwill............ $ -- $ 51,624 $ 51,624
Accrued system milestone payments.. $ -- $ 5,000 $ 5,000
Accrued expenses transferred to
loan balance...................... $ -- $ 7,405 $ 7,405
Property acquired through capital
lease............................. $ -- $ 431 $ 431
</TABLE>
See accompanying notes to unaudited condensed consolidated financial
statements.
F-20
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC") for
the purpose of procuring a digital audio radio service ("DARS") license.
Business activity for the period December 15, 1992 through December 31, 1996
was insignificant. Pursuant to various financing agreements entered into in
1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
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 (see Note 4).
(2) Basis of Presentation
In the opinion of management, the accompanying unaudited condensed financial
statements reflect all adjustments, consisting of only normal recurring
accruals, necessary for a fair presentation of the consolidated financial
position of XM Satellite Radio Holdings Inc. and subsidiary, a development
stage entity, as of September 30, 1999, and the results of operations and cash
flows for the three and nine months ended September 30, 1998 and 1999, and the
period from December 15, 1992 (date of inception) through September 30, 1999.
The results of operations for the three and nine months ended September 30,
1998 and 1999 are not necessarily indicative of the results that may be
expected for the full year. These condensed financial statements are unaudited,
and do not include all related footnote disclosures. The interim unaudited
condensed financial statements should be read in conjunction with the audited
financial statements of the Company included in the Company's filings with the
Securities and Exchange Commission.
On September 9, 1999, the board of directors of the Company determined to
effect a stock split providing 53,514 shares of stock for each share owned. All
references to the number of common shares and per share amounts in the
unaudited condensed consolidated financial statements and notes thereto have
been restated to reflect the effect of the split for all periods presented.
The pro forma September 30, 1999 condensed consolidated balance sheet gives
effect to (i) the conversion of the $250 million Series A convertible debt,
together with associated accrued interest of $6.3 million, into 10,761,677
shares of Series A convertible preferred stock and 15,748,333 shares of Class A
common stock; (ii) the conversion of the $21.4 million and $81.7 million of
notes issued to AMSC, together with associated accrued interest of $3.6
million, into 11,133,558 shares of Class B common stock; and (iii) the sale of
10,241,000 shares of Class A common stock through an initial public offering at
$12 per share, which yielded net proceeds of $114.1 million, as if these
transactions had occurred on September 30, 1999 (see Note 11 -- Subsequent
Events).
(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
F-21
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(4) Exchange of WSI's Interest in XM Radio (WorldSpace Transaction)
On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Company in exchange for approximately 8.6 million shares of AMSC's common
stock. Additionally, the Company issued an aggregate $250.0 million of Series A
subordinated convertible notes (see Note 6) 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 of $51.6 million,
which is being amortized over 15 years.
(5) Recapitalization
Concurrently with the transaction discussed in Note 4, the Company's capital
structure was reorganized. As a result, AMSC held 6,689,250 shares of Class B
common stock. The Class B common stock 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. As of September 30, 1999, there
were 14,716 shares of Class A common stock issued and outstanding. The Class B
common stock is convertible into Class A common stock on a one for one basis,
as follows: (1) at any time at the discretion of AMSC, (2) following the
Company's initial public offering, at the direction of the holders of a
majority of the then outstanding shares of Class A common stock (which majority
must include at least 20% of the public holders of Class A common stock), and
(3) on or after January 1, 2002, at the direction of the holders of a majority
of the then outstanding shares of the Company's Class A common stock. Such
conversion will be effected only upon receipt of FCC approval of AMSC's
transfer of control of the Company to a diffuse group of shareholders.
The Company also authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated 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. No such shares had been issued as of September 30, 1999 (see Note
11--Subsequent Events).
(6) Issuance of Series A Subordinated Convertible Notes of XM Radio to New
Investors
At the closing of the transaction described in Note (4) above, the Company
issued an aggregate $250.0 million of Series A subordinated convertible notes
to six new investors--General Motors Corporation, $50.0 million; Clear Channel
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. The Series A subordinated convertible notes issued by the Company are
convertible into shares of the Company's 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 (see Note 11--Subsequent
F-22
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Events). The conversion price is $9.52 aggregate principal amount of notes for
each share of the Company's stock. The notes mature on December 31, 2004, or,
if the Company issues at least $50.0 million aggregate such high yield debt
securities. The notes are senior to all existing Company indebtedness,
including certain notes held by AMSC that are convertible into the Company's
stock, but will be subordinate to any future high yield debt securities issued
by the Company.
(7) Repayment and Conversion of Notes
Using part of the proceeds from the issuance of its Series A subordinated
convertible notes, described in Note 6, on July 7, 1999, the Company paid WSI
$75.0 million to repay an outstanding portion of notes payable to WSI. The
Company then exchanged the $54.5 million of the subordinated convertible notes
payable, $6.9 million in demand notes, $20.3 million in accrued interest and
all of the outstanding options to acquire the Company's common stock for an
$81.7 million note to AMSC.
(8) Notes to Related Party
On January 15, 1999, the Company issued a convertible note to AMSC for $21.4
million . This note matures on September 30, 2006 and carries an interest rate
of LIBOR plus five percent per annum. Interest is payable upon maturity. AMSC
shall have a right to convert all or a portion of the aggregate principal
amount of the note into shares of common stock at a conversion price of $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, unless extended in
certain circumstances if the Company issues high yield debt securities,
modified the conversion provisions to Class B common stock. It also provided
for the conversion of the aggregate principal into 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.
Following the Worldspace Transaction described in Notes (4) and (7) above,
the Company issued a convertible note to AMSC for $81.7 million. This note
bears interest at LIBOR plus five percent per annum and is due December 31,
2004, unless extended in certain circumstances if the Company issues high yield
debt securities. The note is convertible at AMSC's option at $8.65 per Class B
common share. The Company took a one-time $5.5 million charge to interest due
to the beneficial conversion feature of the new AMSC note (see Note 11--
Subsequent Events).
(9) 1998 Shares Award Plan
On June 6, 1999, the Company's board of directors defined shares under the
1998 Shares Award Plan as referring to the Company's Class A common stock. On
July 8, 1999, the Company's board of directors voted to reduce the exercise
price of the options outstanding under the Shares Award Plan from $16.35 to
$9.52 per share, which represented the fair value of the stock on the date of
the repricing. Additionally, the total number of shares reserved for the Plan
was increased from 1,337,850 to 2,675,700.
(10) Commitments and Contingencies
(a) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to implement a
revised work 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 $541.3
million, which includes amounts the Company expects to pay pursuant to the
exercise
F-23
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of the option to build the ground spare satellite and certain financing costs
and in- orbit incentive payments. As of September 30, 1999, the Company had
paid $147.9 million under this contract.
(b) Technology Licenses Agreement
During the nine months ended September 30, 1999, the Company incurred
additional costs of $100,000 under the technology licenses agreement with AMSC
and Worldspace Management Corporation, giving a cumulative total from inception
of $6,724,000. The Company does not currently anticipate incurring any further
costs under this agreement.
(c) LCC International Services Contract
In August 1999, the Company signed a contract with LLC International, a
related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115 million, through April 15, 2001. As of September 30, 1999,
the Company has paid $3.9 million under this contract.
(d) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors has agreed to distribute the service to the exclusion of other
S-band satellite digital radio services. The Company will also have a non-
exclusive right to arrange for the installation of XM radios included in OnStar
systems in non-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35 million in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35 million to approximately $130
million through 2009, aggregating approximately $400 million. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors vehicles
with installed XM radios become subscribers for the Company's service. The
Company must also share with General Motors a percentage of the subscription
revenue attributable to General Motors vehicles with installed XM radios, which
percentage increases until there are more than 8 million General Motors
vehicles with installed XM radios. The Company will also make available to
General Motors bandwidth on the Company's system. The agreement is subject to
renegotiation at any time based upon the installation of radios that are
interoperable or capable of receiving Sirius Satellite Radio's (formerly known
as CD Radio) service. The agreement is subject to renegotiation if, four years
after the commencement of XM Radio's commercial operations and at two-year
intervals thereafter GM does not achieve and maintain specified installation
levels of General Motors vehicles capable of receiving the Company's service,
starting with 1.24 million units after four years, and 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-24
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(e) Office Lease
On September 29, 1999, XMSR entered into a noncancelable operating lease for
office space that will expire in 2010. The future minimum lease payments under
the noncancelable lease will be as follows (in thousands):
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
1999........................................... $ --
2000........................................... 667
2001........................................... 2,021
2002........................................... 2,085
2003........................................... 2,149
Thereafter..................................... 16,566
-------
$23,488
=======
</TABLE>
Concurrent with the execution of the lease agreement, XMSR established a $3.4
million letter of credit as a security deposit for the office space.
(f) Patent Infringement Action
In January, 1999, a competitor of XMSR commenced an action against XMSR for
patent infringement. In February, 1999, XMSR filed an answer to the action.
XMSR does not believe that it has infringed and will not infringe any of the
competitor's patents and intends to vigorously defend against the suit;
however, the outcome is uncertain at this time.
(g) FCC Occurrences
AMSC and WSI had previously submitted an application for Consent and
Transfer of Control with the FCC. Challenges have been filed against the
application. The application was withdrawn on July 7, 1999 based upon the
WorldSpace Transaction.
(11) Subsequent Events
(a) 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 $111.4 million.
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 $2.7 million.
(b) Conversion of Series A Subordinated Convertible Notes
Concurrent with the closing of the Company's initial public offering, the
$250 million of Series A subordinated convertible notes together with
associated accrued interest of $6.8 million were converted into 10,786,504
shares of Series A convertible preferred stock and 16,179,755 shares of Class A
common stock.
(c) Conversion of Notes to Related Party
Concurrent with the closing of the Company's initial public offering, the
$21.4 million and $81.7 million notes issued to AMSC together with associated
accrued interest of $3.8 million were converted into 11,182,926 shares of Class
B common stock.
F-25
<PAGE>
Credits for certain photographs on the inside front cover:
Barenaked Ladies courtesy of Reprise Records and Jay Blakesberg Photography;
Ricky Martin courtesy of Mark Harlan/Star File; Reba McIntyre courtesy of MCA
Records and Starstruck Entertainment; Sarah McLachlan courtesy of Arista
Records and Nettwerk Management; Tom Petty & The Heartbreakers courtesy of
Warner Bros. Records and Martin Atkins/Photographer; Santana courtesy of Arista
Records and Jay Blakesberg Photography; Britney Spears courtesy of Jive Records
and the Wright Entertainment Group; and George Strait courtesy of MCA Records
and The Erv Woolsey Company.
[On the inside back cover of the prospectus are titles of a number of the "XM
Originals", which are radio channels being developed by XM Radio, each
accompanied by the XM Radio logo. The text and logos appear to be emanating from
a satellite and broadcast to a car. At the top of the page is the phrase "RADIO
WILL NEVER BE THE SAME!", and the text at the bottom reads "Up TO 100 CHANNELS
COAST-TO-COAST DIGITAL QUALITY".]
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as
to matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicition of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the
Company have not changed since the date hereof.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 16
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........................................................... 20
Business................................................................. 27
Management............................................................... 46
Certain Relationships and Related Party Transactions..................... 53
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 60
Description of Series B Preferred Stock.................................. 64
Certain United States Federal Tax Consequences........................... 73
Underwriting............................................................. 79
Legal Matters............................................................ 80
Experts.................................................................. 80
Certain Information About This Prospectus................................ 81
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,000,000 Shares
[LOGO OF XM SATELLITE RADIO]
XM Satellite Radio
Holdings Inc.
% Series B Convertible Redeemable Preferred Stock
------------------------------
PRELIMINARY PROSPECTUS
------------------------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
Banc of America Securities LLC
Salomon Smith Barney
, 2000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following are the estimated expenses to be incurred in connection with
the issuance and distribution of the securities being registered.
<TABLE>
<S> <C>
SEC registration fee............................................. $ 68,007
Printing and engraving expenses.................................. 400,000
Legal fees and expenses.......................................... 400,000
Blue Sky fees and expenses....................................... 15,000
NASD filing fees................................................. 26,260
Accounting fees and expenses..................................... 200,000
Transfer agent fees.............................................. 40,000
Listing fees..................................................... 15,450
Miscellaneous.................................................... 297,783
----------
Total.......................................................... $1,462,500
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of Delaware General Corporation Law permits indemnification of
officers and directors of our company under certain conditions and subject to
certain limitations. Section 145 of the Delaware General Corporation Law also
provides that a corporation has the power to purchase and maintain insurance on
behalf of its officers and directors against any liability asserted against
such person and incurred by him or her in such capacity, or arising out of his
or her status as such, whether or not the corporation would have the power to
indemnify him or her against such liability under the provisions of Section 145
of the Delaware General Corporation law.
Article Ninth of our Restated Certificate of Incorporation and Article VI,
Section 1 of our Bylaws provides that we shall indemnify our directors and
officers and any such directors and officers serving at our request as a
director, officer, employee or agent of another entity to the fullest extent
not prohibited by the Delaware General Corporation Law. The Bylaws also provide
that we may, but shall not be obligated to, maintain insurance, at our expense,
for the benefit of our company and of any person to be indemnified. In
addition, we have entered or will enter into indemnification agreements with
our directors and officers that provide for indemnification in addition to the
indemnification provided in our Bylaws. The indemnification agreements contain
provisions that may require our company, among other things, to indemnify our
directors and executive officers against certain liabilities (other than
liabilities arising from intentional or knowing and culpable violations of law)
that may arise by reason of their status or service as directors or executive
officers of our company or other entities to which they provide service at the
request of our company and to advance expenses they may incur as a result of
any proceeding against them as to which they could be indemnified. We believe
that these provisions and agreements are necessary to attract and retain
qualified directors and officers. We have obtained an insurance policy covering
directors and officers for claims that such directors and officers may
otherwise be required to pay or for which we are required to indemnify them,
subject to certain exclusions.
As permitted by Section 102(b)(7) of the Delaware General Corporation Law,
Article Eighth of our Restated Certificate of Incorporation provides that a
director shall not be personally liable for monetary damages or breach of
fiduciary duty as a director, except for liability
. for any breach of the director's duty of loyalty to our company or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
II-1
<PAGE>
. under Section 174 of the Delaware General Corporation Law; or
. for any transaction from which the director derived any improper
personal benefit.
The Underwriting Agreement (Exhibit 1.1 hereto) contains provisions by which
the underwriters have agreed to indemnify our company, each person, if any, who
controls our company within the meaning of Section 15 of the Securities Act,
each director of our company, and each officer of our company who signs this
Registration Statement, with respect to information furnished in writing by or
on behalf of the underwriters specifically for use in the Registration
Statement.
Item 15. Recent Sales of Unregistered Securities.
In the last three years we have sold the following unregistered securities:
(1) In April 1997, XM Satellite Radio Inc. (formerly American Mobile Radio
Corporation) issued 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 American Mobile.
(6) In June 1999, we issued a $1.0 million promissory note for cash to
American Mobile.
(7) In July 1999, we issued $250.0 million aggregate principal amount of
our Series A subordinated convertible notes for cash to institutional
investors.
(8) In July 1999, we issued $81.7 million aggregate principal amount of
convertible notes for existing debt, accrued interest and options to
American Mobile, convertible into our Class B common stock.
(9) In July 1999, we issued 14,716 shares of Class A common stock to Gary
Parsons, the chairman of our board of directors, pursuant to the terms
of his employment agreement.
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
American Mobile in exchange for the cancellation of 6,689,250 shares of our
common stock held by American Mobile. This transaction was exempt from
registration under Section 3(a)(9) of the Securities Act.
From June 1998 through 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.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
1.1+ Underwriting Agreement.
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).
5.1+ Opinion of Hogan & Hartson L.L.P. with respect to the common stock
being registered.
10.1++ Shareholders' Agreement, dated as of July 7, 1999, by and among XM
Satellite Radio Holdings Inc., American Mobile Satellite
Corporation, Baron Asset Fund, Clear Channel Investments, Inc.,
Columbia XM Radio Partners, LLC, DIRECTV Enterprises, Inc., General
Motors Corporation, Madison Dearborn Capital Partners III, L.P.,
Special Advisors Fund I, LLC, Madison Dearborn Special Equity III,
L.P., and Telcom-XM Investors, L.L.C.
10.2++ Registration Rights Agreement, dated July 7, 1999, by and among XM
Satellite Radio Holdings Inc., American Mobile Satellite
Corporation, the Baron Asset Fund series of Baron Asset Fund, and
the holders of Series A subordinated convertible notes of XM
Satellite Radio Holdings Inc.
10.3++ Note Purchase Agreement, dated June 7, 1999, by and between XM
Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear
Channel Communications, Inc., DIRECTV Enterprises, Inc., General
Motors Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio
Partners, LLC, Madison Dearborn Capital Partners III, L.P., Madison
Dearborn Special Equity III, L.P., and Special Advisors Fund I, LLC
(including form of Series A subordinated convertible note of XM
Satellite Radio Holdings Inc. attached as Exhibit A thereto).
10.4++* Technology Licensing Agreement by and among XM Satellite Radio Inc.,
XM Satellite Radio Holdings Inc., WorldSpace Management Corporation
and American Mobile Satellite Corporation, dated as of January 1,
1998, amended by Amendment No. 1 to Technology Licensing Agreement,
dated June 7, 1999.
10.5++* Technical Services Agreement between XM Satellite Radio Holdings Inc.
and American Mobile Satellite Corporation, dated as of January 1,
1998, as amended by Amendment No. 1 to Technical Services Agreement,
dated June 7, 1998.
10.6++* Satellite Purchase Contract for In-Orbit Delivery, by and between XM
Satellite Radio Inc. and Hughes Space and Communications
International, Inc., dated 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 Communications, Inc.
10.11++* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and TCM, LLC.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Description
------- -----------
<C> <S>
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 date May 22, 1998.
10.15++ Letter Agreement with Stelios Patsiokas dated September 14, 1998.
10.16++ Letter Agreement with Heinz Stubblefield dated May 22, 1998.
10.17++ Form of Indemnification Agreement between XM Satellite Radio Holdings
Inc. and each of its directors and executive officers.
10.18 1998 Shares Award Plan (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.
10.25++ Form of Director Non-Qualified Stock Option Agreement.
10.26++ Form of 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.
12.1+ Statement on Computation of Ratios.
21.1+++ Subsidiaries of XM Satellite Radio Holdings Inc.
23.1+ Consent of Hogan & Hartson L.L.P. (contained in their opinion filed
as Exhibit 5.1).
23.2 Consent of KPMG LLP.
24.1+++ Powers of Attorney.
27.1+++ Financial Data Schedule.
</TABLE>
- --------
+ To be filed by amendment.
++ Incorporated by reference to the Registrant's Registration Statement on Form
S-1, File No. 333-83619.
+++ Previously filed.
* Pursuant to the Commission's Order Granting Confidential Treatment under
Rule 406 of the Securities Act, certain confidential portions of this
Exhibit were omitted by means of redacting a portion of the text.
(b) Financial Statement Schedules included separately in the Registration
Statement.
II-4
<PAGE>
Item 17. Undertakings.
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 this registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this registration
statement or any material change to such information in this
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 herein,
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.
The undersigned registrant hereby undertakes that
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the General Corporation Law of the State of Delaware,
the Restated Certificate of Incorporation, or the Restated Bylaws of
registrant, indemnification agreements entered into between registrant and its
officers and directors, or otherwise, the registrant has been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the registrant of expenses incurred or paid by a director,
officer, or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-1 and has duly caused this Amended
Registration Statement to be signed on its behalf by the undersigned, thereunto
duly authorized in the District of Columbia, on the 6th day of January, 2000.
XM Satellite Radio Holdings Inc.
*
By:
____________________________
Name: Hugh Panero
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive January 6, 2000
______________________________________ Officer, and Director
Hugh Panero (Principal Executive
Officer)
* Senior Vice President and January 6, 2000
______________________________________ Chief Financial Officer
Heinz Stubblefield (Principal Financial and
Accounting Officer)
</TABLE>
<TABLE>
<S> <C> <C>
* Chairman of the Board of January 6, 2000
______________________________________ Directors
Gary M. Parsons
</TABLE>
<TABLE>
<S> <C> <C>
* Director January 6, 2000
______________________________________
Nathaniel A. Davis
</TABLE>
<TABLE>
<S> <C> <C>
* Director January 6, 2000
______________________________________
Thomas J. Donahue
</TABLE>
<TABLE>
<S> <C> <C>
* Director January 6, 2000
______________________________________
Randall T. Mays
* Director January 6, 2000
______________________________________
Randy S. Segal
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director January 6, 2000
______________________________________
Jack Shaw
* Director January 6, 2000
______________________________________
Rajendra Singh
Director January , 2000
______________________________________
</TABLE> Ronald L. Zarrella
/s/ Joseph M. Titlebaum
*By:
Joseph M. Titlebaum
Attorney-in-Fact
II-7
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
XM Satellite Radio Holdings Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
Our report, dated February 12, 1999, except for Note 14 which is as of
September 9, 1999, contains an explanatory paragraph that states that the
Company has not commenced operations, has negative working capital and is
dependent upon additional debt and equity financings, which raise substantial
doubt about its ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of that uncertainty.
/s/ KPMG LLP
McLean, Virginia
January 7, 2000
