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SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
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FORM 8-K
Current Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
February 25, 2000
Date of Report (Date of earliest event reported)
Commission File Number: 0-27441
XM Satellite Radio Holdings Inc.
(Exact Name of registrant as specified in its charter)
Delaware 54-1878819
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1250 23rd Street, N.W. 20037-1100
Washington, DC
(Address of principal executive offices) (Zip Code)
(202) 969-7100
(Registrant's telephone number, including area code)
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ITEM 5. OTHER EVENTS
The information set forth on the following pages is included in a
preliminary offering memorandum of XM Satellite Radio Holdings Inc. and its
subsidiary, XM Satellite Radio Inc.., each a Delaware corporation (together,
the "Company") for a issued in connection with an offering of up to $250
million in aggregate principal amount of units consisting of debt securities
and warrants pursuant to Rule 144A under the Securities Act of 1933, as amended
(the "Act"). The units will not be registered under the Act and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Except for any historical information, the matters we discuss in this Form
8-K concerning our company contain forward-looking statements. Any statements
in this Form 8-K that are not statements of historical fact, are intended to
be, and are, "forward-looking statements" under the safe harbor provided by
Section 27(a) of the Securities Act of 1933. Without limitation, the words
"anticipates," "believes," "estimates," "expects," "intends," "plans" and
similar expressions are intended to identify forward-looking statements. The
important factors we discuss below and under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations," as
well as other factors identified in our filings with the SEC and those
presented elsewhere by its management from time to time, could cause actual
results to differ materially from those indicated by the forward-looking
statements made in this Form 8-K.
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:
^^. $674.0 million of equity proceeds raised to date, net of expenses and
repayment of debt, including an initial public offering; an offering of
subordinated convertible notes to several strategic and financial
investors, including General Motors, Clear Channel Communications,
DIRECTV, Telcom Ventures, Columbia Capital and Madison Dearborn Partners,
which converted into equity at the time of our initial public offering;
and concurrent follow-on offerings of Class A common stock and Series B
convertible redeemable preferred stock;
^^. Contract with Hughes for construction and in-orbit delivery of two high-
powered satellites and long lead items for a ground spare;
. Contracts with LCC International for design of our international repeater
network and Hughes for the design and manufacture of the terrestrial
repeaters;
. Long-term agreement with the OnStar division of General Motors covering
the installation and exclusive marketing and distribution of XM Radio
service in General Motors vehicles;
. Contracts with Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM
radios;
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. Agreement with STMicroelectronics, a leading digital audio chipset
manufacturer, for the design and production of chipsets for XM radios;
. Agreement with Lucent Digital Radio to provide coding technology for our
audio signals;
. Agreements with leading specialty programmers, for many of which we will
be the exclusive satellite radio platform, covering at least 24 channels,
including AsiaOne, Black Entertainment Television (BET), BBC World
Service, Bloomberg News Radio, Clear Channel, CNN en Espanol, CNNfn, CNN
Sports Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting Corporation
(formerly Heftel), NASCAR, One-on-One Sports, Radio One, Salem
Communications, Sporting News, Weather Channel and USA Today;
. Engaged Premiere Radio Networks to be our advertising sales
representative;
. Entered into marketing arrangements with SFX Entertainment and NASCAR; and
. Agreement with Sirius Radio to develop a unified standard for satellite
radios, which will facilitate the ability of consumers to purchase an
interoperable radio capable of receiving both our and Sirius Radio's
service.
Market Opportunity
We believe that there is a significant market for our satellite radio
service. Market studies show strong demand for radio service, as evidenced by
radio listening trends, data relating to sales and distribution of radios and
the general growth in radio advertising. In addition, we note that in many
markets audio programming choices are limited to mass appeal formats. We
believe our national subscription service will complement traditional local
radio. Moreover, the success of subscription entertainment services in other
media such as cable television and market research further indicate potential
for significant consumer demand for satellite radio services.
Radio Listening
On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that
over 75% of the entire United States population age 12 and older listen to the
radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and
Factbook for Advertisers, Radio Advertising Bureau, Fall 1999 to Spring 2000).
In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting our service
initially. An estimated 69% of consumers chose radio as their most listened to
format in the car as compared to 15% for cassettes and 9% for CDs (Radio
Listening Habits, CEMA 1999).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis.
In 1999, radio manufacturers sold over 29 million car radios, including 17
million original equipment automobile radios and 11 million aftermarket
automobile radios, as well as 1.2 million aftermarket automobile CD changers.
Original equipment radios are installed in new cars; aftermarket radios are
installed in the automobile after purchase. Based on these statistics, each
additional one million subscribers would represent less than 3.5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.
Radio Advertising
The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1999 climbed to $17.7 billion, an increase of 14% over 1998.
Veronis, Suhler & Associates projects a compound annual increase of 9.7%
through 2003. This growth rate exceeds the projected increase in advertising
spending for television, newspapers, magazines, yellow pages and outdoor
advertising (Communications Industry Forecast, 1999).
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Current Limitations on Programming Choice
Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.
Limited Number of Radio Stations. The number of radio stations available to
many consumers in their local market is limited in comparison to the up to 100
channels we expect to offer on a nationwide basis. In 1998, there were only 47
AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Spring 1999 Ratings Report, Duncan's American Radio, 1999).
We estimate that our coast-to-coast service will reach over 98 million
listeners age 12 and over who are beyond the range of the largest 50 markets as
measured by Arbitron. Of these listeners, 36 million live beyond the largest
276 markets (Census data and Fall 1999 Market Rankings, The Arbitron Company).
In addition, there are 22 million people age 12 and above who receive five or
fewer stations (The Satellite Report 1999, C. E. Unterberg, Towbin).
Limited Programming Formats. We believe that there is significant demand for
a satellite radio service that expands the current programming choices
available to these potential listeners. Over 52% of all commercial radio
stations use one of only three general programming formats--country, adult
contemporary and news/talk/sports (Veronis, Schuler & Associates Communications
Industry Forecast 1999). Over 71% of all commercial radio stations use one of
only five general formats--the same three, plus oldies and religion. The small
number of available programming choices means that artists representing niche
music formats likely receive little or no airtime in many markets. Radio
stations prefer featuring artists they believe appeal to the broadest market.
However, according to the Recording Industry Association of America, recorded
music sales of niche music formats such as classical, jazz, movie and Broadway
soundtracks, new age, children's programming and others comprised up to 21% of
total recorded music sales in 1998 (1998 Consumer Profile).
Demand for Subscription Services and Products
Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1999, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $29, and over 11% of TV households subscribe to satellite television at an
average monthly cost of $51 (National Cable Television Association website and
DBSdish.com website). Also in 1999, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 75 million
premium channel units, such as HBO, Showtime, and Cinemax, for which they paid
an extra monthly charge on top of the basic monthly fee.
Demand for Satellite Radio Services
Several studies have been conducted demonstrating the demand for satellite
radio service.
In June 1999, we commissioned Strategic Marketing And Research Techniques,
(SMART), a leading market research company and Dr. Frank M. Bass, a leading
authority on the diffusion of new products and inventor of the Bass curve, to
estimate the demand for satellite radio based on survey data and historical
information. SMART surveyed 1,800 people ages 16 and over. The study concluded
that as many as 49 million people may subscribe to satellite radio by 2012,
assuming $9.95 as a monthly subscription fee and a radio price point of $150-
$399, depending upon the type of car or home unit chosen. The study also
anticipated that satellite radio will grow even faster than DBS.
In December 1998, we commissioned SMART to conduct a study based on one-on-
one interviews with over 1,000 licensed drivers ages 16 to 64 in ten
geographically dispersed markets. The study concluded that approximately 50% of
aftermarket radio purchases would be for AM/FM/satellite radio units with a
single-disc
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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.
The XM Radio Service
We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout
the continental United States, will position us to become the leading provider
of the next generation in radio.
We Will Differentiate XM Radio from Traditional AM/FM Radio
Local radio stations, even those which are part of national networks, focus
on maximizing listener share within local markets. This limits the types of
programming they can profitably provide to mass appeal formats. In contrast,
our nationwide reach and ability to provide up to 100 channels in each radio
market will allow us to aggregate listeners from markets across the country,
expanding the types of programming we can provide. The following chart
indicates differences between XM Radio and traditional AM/FM radio.
<TABLE>
<CAPTION>
XM Radio Traditional AM/FM Radio
<S> <C> <C>
Convenience: go anywhere Virtually seamless signal 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 52% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; adult contemporary; or
news/talk/sports. There are many types of music with significant popularity, as
measured by recorded music sales and concert revenues, that are unavailable in
many traditional AM/FM radio markets. Such music could include classical
recordings or popular blues and rap music that have retail appeal but are not
commonly played on traditional AM/FM radio. This music also includes special
recordings such as the Irish dance soundtrack "Riverdance" and the "Three
Tenors" concerts which generate millions of CD sales, yet are not typically
played on today's AM/FM stations. Additionally, heavy metal and dance are two
of the more popular musical styles not currently broadcast in many small and
medium sized markets. Even major markets do not always offer a full complement
of formats.
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Superserve popular music formats. We will be able to offer more specific
programming choices than traditional AM/FM radio generally offers for even the
most popular listening formats. For example, on traditional AM/FM radio oldies
music is often generalized on a single format. We will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.
Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on specific
formats, we have the ability to provide more variety to attract listeners
dissatisfied with repetitive and/or limited playlist selection offered by
traditional radio.
Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using
our national platform to aggregate geographically disparate groups through
affinity programming, we will provide advertisers a valuable way to market
products and services to these groups by advertising on our affinity channels.
Develop promotional opportunities with record companies, recording artists
and radio personalities. Because of our nationwide coverage and resulting
economies of scale, we will be able to deliver a variety of national promotions
and events that would not be cost effective or efficient on a market-by-market
basis through traditional AM/FM radio distribution. Also, we will seek to hire
and develop high profile talk and disc jockey talent capable of becoming the
next generation of national radio stars with an influence on radio similar to
the impact that the new breed of cable TV talk hosts have had on the television
industry.
Respond quickly when major music and cultural events occur. XM Radio
programmers will respond quickly to changing musical tastes, seasonal music and
emerging popular cultural events, 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, Sporting News) Classic Soul (BET/Radio Senior Citizen Talk
Sportsman Channel One) Rock Talk
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
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<S> <C>
-- Bloomberg News Radio -- Hispanic Broadcasting Corporation (formerly Heftel)
-- USA Today -- Clear Channel Communications
-- CNNfn -- Radio One
-- CNN en Espanol -- Salem Communications
-- CNN Sports
Illustrated -- AsiaOne
-- C-SPAN Radio -- One-On-One Sports
-- Black Entertainment
Television -- BBC World Service
-- DIRECTV -- NASCAR
-- Weather Channel
-- Sporting News
</TABLE>
Availability of Commercial-Free and Limited-Advertising Channels. We will
provide a number of commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels will carry less than
half the advertising of a typical AM/FM radio station. We expect the diversity
of our programming line-up will appeal to a large audience, including urban and
rural listeners of all ages, ethnicities, economic groups and specialty
interests. We expect to tailor our programming and marketing to appeal to
specific groups within those audiences that research has shown are most likely
to subscribe to our satellite radio service. Initially, we plan to concentrate
our programming efforts on listeners who are most receptive to innovative
entertainment services, so-called early adopters, and new car buyers. According
to our research, 16-34 years old adults will compose a high percentage of our
early adopters; we will therefore focus a significant portion of our
programming and marketing efforts to appeal to them. In addition, we will
develop programming and marketing specifically to appeal to other market
segments such as baby boomers who are 35-53 years old, seniors who are 54 years
old and older, African-Americans, Asian-Americans and Hispanics.
Future Content Arrangements. Under our agreement with Sirius Radio, all new
arrangements with providers of programming or content, including celebrity
talent, must be non-exclusive and may not reward any provider for not providing
content to the other party.
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Marketing and Distribution
Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.
Establish Broad Distribution Channels for XM Radios
We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.
Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold over 4.9 million automobiles in 1999, which represented more than 29% of
the United States automobile market. Under the agreement, we have substantial
payment obligations to General Motors, including among others, certain
guaranteed, annual, fixed payment obligations. While we have discussed with
General Motors certain installation projections, General Motors is not required
to meet any minimum targets for installing XM radios in General Motors
vehicles. In addition, certain of the payments to be made by us under this
agreement will not be directly related to the number of XM radios installed in
General Motors vehicles. Our contract with General Motors is described in more
detail under the caption "Certain Relationships and Related 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 and
a contract with Sony Electronics to design, manufacture and market XM radios
for the portable, home, aftermarket and original equipment manufacture car
stereo markets. One of these manufacturers, Delco Electronics Corporation, a
subsidiary of Delphi Automotive Systems, is the leading original equipment
manufacturer of radios for the automobile industry, producing more than 33% of
car radios manufactured for installation in new automobiles in the United
States in 1997. Delphi-Delco is also the leading manufacturer of car radios
sold in General Motors vehicles and has signed a contract to build our radios
for General Motors. Sony is the leader in sales of portable CD players by a
large margin and one of the top three sellers of shelf systems. Sony has agreed
to assist with marketing XM Radios and has agreed to incentive arrangements
that condition its compensation on use of XM Radios manufactured by Sony or
containing Sony hardware. Motorola is a leading supplier of integrated
electronics systems to automobile manufacturers. Mitsubishi 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 sold over 31% of aftermarket car radios sold in
the United States in 1999. We have also signed a contract with SHARP to
manufacture and distribute XM radios for home and portable use. We are pursuing
additional agreements for the manufacture and distribution of XM radios,
subject to contract limitations on the number of manufacturer distributors
during the early years of service. We also plan to meet with automobile dealers
to educate them about XM Radio and develop sales and promotional campaigns to
promote XM radios to new car buyers.
These leading radio manufacturers have strong retail and dealer distribution
networks in the United States. We expect to have access to the distribution
channels and direct sales relationships of these distributors, including
national electronics retailers, car audio dealers and mass retailers.
We do not intend to manufacture or hold inventory of XM radios. Radio
distribution likely would be handled by fulfillment centers, which hold
inventory for the radio manufacturers and ship products directly to listeners
at the manufacturers' request.
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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.
Future Distribution Arrangements. We have signed an agreement with Sirius
Radio to develop a unified standard for satellite radios to facilitate the
ability of consumers to purchase one radio capable of receiving both our and
Sirius Radio's services. Both companies expect to work with their automobile
and radio manufacturing partners to integrate the new standard. Future
agreements with automakers and radio manufacturers will specify the unified
satellite radio standard. Furthermore, future agreements with retail and
automotive distribution partners and content providers will be on a non-
exclusive basis and may not reward any distribution partner for not
distributing the satellite radio system of the other party.
Maximize Revenue Through Dual Sources
As with other subscription-based entertainment media such as cable
television, we expect to generate revenue by charging a monthly subscription
fee and selling limited advertising time. We will earn all of the revenue from
advertising on our own programming and a portion of the revenues from
advertising on third party programming. XM Radio offers a new national radio
platform for advertisers that solves many of the problems associated with
buying radio advertising nationally on a spot or syndicated basis. We believe
the attractiveness of one-stop national radio advertising buys will provide a
significant source of income as our subscriber base grows.
Subscriber Development and Expansion
We expect to promote XM Radio as a national brand name with an exciting
image. Several months prior to service commencement, we will launch an
advertising campaign in several United States markets to test and generate
early feedback on the product offerings and stimulate early demand. Promotional
activities currently under consideration include distributing sample
programming at retail outlets, concert venues and on the Internet to generate
initial interest. For instance, we have entered into an agreement with SFX
Entertainment to be the exclusive satellite radio advertiser at live concerts
and sporting events presented by, and live entertainment venues managed by,
SFX.
Although XM Radio will be available nationwide upon commencement of
operations, we will initially concentrate promotional activities in several key
markets and rapidly expand to other large markets. This phased roll-out
strategy, similar to that employed by consumer electronics manufacturers and
special services such as DIRECTV and Web TV, will enable us to refine our
launch implementation throughout the roll-out period. The advertising will
consist of both branding and promotion efforts for XM Radio, as well as
separate campaigns to promote and brand individual channels. Initially, we will
focus marketing efforts on the various channels targeting young adults, who we
believe are more likely to drive early penetration. We also expect to benefit
from free local media coverage as XM Radio is first offered in each new market.
XM Radio will promote subscriber acquisition activities with both original
equipment and aftermarket radio manufacturers. This might include
. promotional campaigns directed towards automobile manufacturers and
dealers;
. promotional campaigns for free months of service with purchase of an XM
radio or free installations for aftermarket car radios;
. incentive programs for retailer sales forces;
. in-store promotional campaigns, including displays located in
electronics, music and other retail stores, rental car agencies and
automobile dealerships; and
. jointly funded local advertising campaigns with retailers.
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Advertiser Development and Acquisition
Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups
and have engaged Premiere Radio Networks to be our advertising sales
representative. We will also work with ratings agencies in our advertising-
supported business. Statistical Research, Inc., which produces Radar reports,
has agreed to work with us to develop other ratings methodologies for satellite
radio.
During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.
Charter Advertising Agreements. We have contracts with several advertisers,
advertising agencies and media buying companies offering charter advertising
packages at reduced rates for a limited time. Each charter advertiser will
purchase a minimum amount of advertising from us during the period that the
reduced rates are in effect. We intend to sign additional contracts on similar
terms.
Foreign Language Advertising. We and our programmers plan to offer foreign
language advertising on specific foreign language-based channels. Several major
national advertisers have expressed strong interest in the ability to advertise
to these hard-to-reach customer segments.
The XM Radio System
We are designing our system to provide satellite radio to the continental
United States and coastal waters using radio frequencies allocated by the FCC
for satellite radio. These radio frequencies are within a range of frequencies
called the S-Band. The XM Radio system will be capable of providing high
quality satellite services to XM radios in automobiles, trucks, recreation
vehicles and pleasure craft, as well as to fixed or portable XM radios in the
home, office or other fixed locations. The XM Radio system design uses a
network consisting of an uplink facility, two high-power satellites and, where
necessary, ground-based repeaters to provide digital audio service to XM
radios.
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.
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.
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The transmission coverage areas, or footprints, of our satellites encompass
the 48 contiguous states and nearby coastal waters. We have tailored these
footprints to provide nearly uniform availability over the United States and to
minimize transmission spillage across the United States borders into Canada and
Mexico. However, because coverage does extend to the Gulf of Mexico, the
California coast and the Atlantic coast, we also expect to be able to provide
XM Radio to the cruise ships, cargo vessels and leisure boats which frequent
these waters.
Our satellites will transmit audio programming within a 12.5 MHz range of S-
Band radio frequencies that have been allocated by the FCC for our exclusive
use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth
will be subdivided to carry the transmission of six signals, two signals to be
transmitted from each of our two satellites and two signals to be transmitted
by the terrestrial repeater network. The audio programming for XM Radio will be
carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals will repeat the audio programming to enhance
overall signal reception. The transmission of higher quality sound requires the
use of more kilobits per second than the transmission of lesser quality sound.
In order to provide high-quality digital sound, we expect that music channels
will require approximately 56 to 64 kilobits per second depending on the type
of compression technology used, whereas talk channels will require
significantly less band width. We expect to use our allocated bandwidth in such
a way as to provide up to 100 channels of programming, with our music channels
having a high bandwidth allocation so as to provide high-quality digital sound.
Launch Services. Hughes has signed an agreement with Sea Launch Limited
Partnership, a joint venture in which Boeing Commercial Space Company has a
controlling 40% interest, to provide the launch services for our satellites.
The launch vehicle uses a new rocket called the Zenit-3SL, which is based on a
flight-proven two-stage rocket called the Zenit-2, plus a stage which is the
flight-proven upper stage of a Russian-developed rocket called the Proton
rocket. The Zenit-2 vehicle has been successfully launched 30 times in 35
attempts, for an 86% success rate. The upper stage has successfully flown in
186 flights on various rockets with five failures, for a 97% success rate.
Sea Launch has developed a new launch system to launch rockets from an
ocean-based platform. Sea Launch will perform all rocket and satellite
processing at the Sea Launch home port in Long Beach, California. Sea Launch
will move the platform to its launch position in the South Pacific Ocean near
the equator, where the satellites can be launched more efficiently by avoiding
the requirement to conduct an orbital plane change. In March 1999, Sea Launch
successfully launched a rocket carrying an inert payload into geo-stationary
orbit. Sea Launch also successfully launched its first commerical satellite,
DIRECTV 1-R, in October 1999. As of December 31, 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.
Ground Segment
Satellite Control. Each of our satellites will be monitored by a telemetry,
tracking and control station, and both satellites will be controlled by a
satellite control station. Each of the stations will have a backup station. We
have a contract with an experienced satellite operator to perform the
telemetry, tracking and control functions.
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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 Transactions--Engineering Contract
with LCC International." We have entered into a contract with Hughes
Electronics Corporation for the design, development and manufacture of the
terrestrial repeaters. The contract is described in greater detail under the
caption "Certain Relationships and Related Party Transactions-Contracts with
Hughes."
In some areas, satellite signals may be subject to blockages from tall
buildings and other obstructions. Due to the satellites' longitudinal
separation, in most circumstances where reception is obscured from one
satellite, XM Radio will still be available from the other satellite. In some
urban areas with a high concentration of tall buildings, however, line-of-sight
obstructions to both satellites may be more frequent. In such areas, we will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do
not expect this to present a serious problem to our construction of a
terrestrial repeater network.
The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.
We have contracted to purchase 1,550 terrestrial repeaters and may install
as many as 1,700 terrestrial repeaters to cover urban areas in approximately 70
markets. We expect that this system will be operational by the second quarter
of 2001. We estimate that the largest urban markets may require in excess of
100 repeaters, while smaller cities with fewer tall buildings may require as
few as one to three repeaters. We also intend to use additional small repeaters
in areas such as tunnels, where reception would otherwise be severely
restricted. Our placement of terrestrial repeaters will be guided by a newly
developed radio frequency analysis technique which, employing technology
similar to that used in certain cellular telephone systems, analyzes the
satellite footprint to discover areas likely to have impaired reception of XM
Radio.
We expect to benefit from the expertise gained by 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.
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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 and we have signed a contract with Sony Electronics to
design, manufacture and market XM radios for the portable, home, aftermarket
and original equipment manufacture car stereo markets. We have also signed a
contract with SHARP to manufacture XM radios for home and portable use.
Unified Standard for Satellite Radio. On February 16, 2000, we signed an
agreement with Sirius Radio to develop a unified standard for satellite radios
to facilitate the ability of consumers to purchase one radio capable of
receiving both our and Sirius Radio's services. The technology relating to this
unified standard will be jointly developed, funded and owned by the two
companies. In addition, we will work together with Sirius Radio to proliferate
the new standard by creating a service mark for satellite radio. This unified
standard is intended to meet FCC rules that require interoperability with both
licensed satellite radio systems.
As part of the agreements, each company has licensed to the other its
intellectual property relating to its system; the value of this license will be
considered part of each company's contribution toward the joint development. In
addition, each company has agreed to license its non-core technology, including
non-essential features of its system, to the other at commercially reasonable
rates. In connection with this agreement, the pending patent litigation against
XM Radio has been resolved.
We anticipate that it will take several years to develop radios capable of
receiving both services. At the commercial launch of our service, we anticipate
that consumers will be able to purchase radios only capable of receiving our
service.
Both companies expect to work with their automobile and radio manufacturing
partners to integrate the new standard. Future agreements with automakers and
radio manufacturers will specify the unified satellite radio standard.
Furthermore, future agreements with retail and automotive distribution partners
and content providers will be on a non-exclusive basis.
We and Sirius Radio have also agreed to negotiate in good faith to provide
service to each other's subscribers in the event of a catastrophic failure of
the XM Radio system or the Sirius Radio system.
Competition
We expect to face competition for both listeners and advertising dollars.
Sirius Satellite Radio
Our direct competitor in satellite radio service is likely to be Sirius
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
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. program content;
. air talent;
. transmitter power;
. source frequency;
. audience characteristics;
. local program acceptance; and
. the number and characteristics of other radio stations in the market.
Currently, traditional AM/FM radio stations broadcast by means of analog
signals, not digital transmission. We believe, however, that in the future
traditional AM/FM radio broadcasters may be able to transmit digitally into the
bandwidth occupied by current AM/FM stations.
Internet Radio
There are a growing number of Internet radio broadcasts which provide
listeners with radio programming from around the country and the world.
Internet radio can be heard through a personal computer equipped with a modem,
sound card and speakers. One of the largest Internet radio providers,
Broadcast.com 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. Announcements have been made about plans by
one or more companies to deliver Internet radio to cars or portable radios
using satellites. Although we believe that the current sound quality of
Internet radio is below standard and may vary depending on factors such as
network traffic, which can distort or interrupt the broadcast, we expect that
improvements from higher bandwidths, faster modems and wider programming
selection may make Internet radio a more significant competitor in the future.
There are a number of Internet-based audio formats in existence or in
development which could compete directly with XM Radio. For example, Internet
users with the appropriate hardware and software can download sound files for
free or for a nominal charge and play them from their personal computers or
from specialized portable players. In addition, prominent members of the music
and computer industry have supported an initiative known as the Secure Digital
Music Initiative to become a standard for fee-based electronic distribution of
copyrighted sound recordings. Although presently available formats have
drawbacks such as hardware requirements and download bandwidth constraints,
which we believe would make XM Radio a more attractive option to consumers,
Internet-based audio formats may become increasingly competitive as quality
improves and costs are reduced.
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.
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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.
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 face difficulties initially in meeting this interoperability
requirement. We have signed an agreement with Sirius Radio to develop a unified
standard for satellite radios, but we anticipate that it will take serveral
years to develop the technologies necessary for radios that will be capable of
receiving both our service and Sirius Radio's service. Accordingly, we may not
be able to meet the FCC's interoperability requirements by the time we launch
our commercial operations and may need to obtain an extension of time or
modification of this requirement from the FCC. Furthermore, complying with the
interoperability requirement could make the radios more difficult and costly to
manufacture.
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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.
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.
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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, Sony, Motorola, Pioneer, Alpine, Mitsubishi,
Audiovox, Clarion and SHARP (car and home radios); STMicroelectronics
(chipsets); Lucent Digital Radio (audio coding technology); Fraunhofer
Institute (various technologies) and LCC International (design of repeater
network). We will not acquire any intellectual property rights in the
satellites. We will have joint ownership of or a license to use the technology
developed by the radio and chipset manufacturers. We will own the design of our
system, including aspects of the technology used in communicating from the
satellites and the design of the repeater network.
Our system design, our repeater system design and the specifications we
supplied to our radio and chipset manufacturers incorporates or may in the
future incorporate some intellectual property licensed to us on a non-exclusive
basis by WorldSpace Management. WorldSpace Management has used this technology
in its own non-United States satellite radio system. We also have the right to
sublicense the licensed technology to any third party, including chipset
manufacturers, terrestrial repeater manufacturers and receiver manufacturers in
connection with the XM Radio system. Under our agreement with WorldSpace
Management we must pay one time, annual or percentage royalty fees or reimburse
WorldSpace Management for various costs for various elements of the licensed
technology that we decide to use in the XM Radio system. We have incurred costs
of $6.7 million to WorldSpace Management under this agreement through December
31, 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.
We have signed an agreement with Sirius Radio to develop a unified standard
for satellite radios, which will facilitate the ability of consumers to
purchase one radio capable of receiving both our and Sirius Radio's services.
This technology will be jointly developed, funded and owned by the two
companies. As part of the agreement, each company will license to the other its
intellectual property relating to the unified standard and to its system; the
value of this license will be considered part of its contribution toward the
joint project. In addition, each company agrees to license its non-core
technology, including non-essential features of its system, to the other at
commercially reasonable rates. Each party will be entitled to license fees or a
credit towards its obligation to fund one half of the development cost of the
technologies used to develop a unified standard for satellite radios. The
amount of the fees or credit will be based upon the validity, value, use,
importance and
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available alternatives of the technology each contributes and will be
determined over time by agreement of the parties or by arbitration. We cannot
predict at this time the amount of license fees, if any, payable by or to XM or
Sirius Radio or the size of the credits to XM and Sirius Radio from the use of
their technology. This may require additional capital, which could be
significant.
Prior Litigation with Sirius Satellite Radio; Technology License
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 were
infringing or would infringe three patents assigned to Sirius Satellite Radio.
In its complaint, Sirius Radio sought money damages to the extent we
manufactured, used or sold any product or method claimed in their patents and
injunctive relief. This suit was withdrawn in February 2000 by Sirius Radio in
accordance with the terms of a joint development agreement between us and
Sirius Radio in which both companies to develop a unified standard for
satellite radios and license our respective intellectual property, including
the patents that were the subject of the suit, for use in this joint
initiative. There is no assurance, however, that this suit would not be refiled
if arrangements contemplated by the joint agreement are not consummated or if
the agreement is terminated. In addition, the applicability or validity of
Sirius Radio's claims could affect the determination of the amount of license
fees or credits relating to contributed or licensed technology under our joint
development agreement with Sirius Radio.
If this litigation were recommenced, we believe based on the planned design
of our system, our knowledge of the differences between our system and the
claims of the Sirius Satellite Radio patents and on advice we have previously
received from our patent counsel, that a court would find that we have not and
will not infringe any Sirius Satellite Radio patents. However, the litigation
could harm our company, even if we were successful. It would divert our
management's attention and might make it more difficult for us to raise
financing or enter into other agreements with third parties. In addition, even
if we prevailed, the Sirius Satellite Radio litigation might prevent us from
moving forward with the development of the XM Radio system in a timely manner.
The Sirius Radio patents involved in the litigation relate to certain aspects
of signal and reception methodologies that may be employed by a satellite radio
system. If the suit were refiled and we lost 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.
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The XMTM 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 January 31, 1999, we had 67 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.
Risk Factors
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. 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 December 31, 1999, we had incurred significant costs, aggregating
approximately $362.4 million, in connection with the development of the XM
Radio system. We incurred net aggregate losses approximating $54.7 million from
our inception through December 31, 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 $426.0 million to meet our needs
until we begin commercial operation of our services. 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 Transactions--Distribution
Agreement with General Motors and OnStar." Our actual funding requirements
could vary materially from our current estimates. We may have to raise more
funds than expected to remain in business and to continue to develop and market
the XM Radio system.
We plan to raise future funds by selling debt or equity securities, or both,
publicly and/or privately and by 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
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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.
American Mobile is our controlling stockholder. American Mobile has certain
rights regarding the election of persons to serve on our board of directors and
holds 61.0% of the voting power of Holdings, or 51.9% giving effect to the
conversion of all of Holdings' outstanding common stock equivalents but not to
the warrants being sold in the units offering. American Mobile cannot
relinquish its position as our controlling shareholder without obtaining the
prior approval of the FCC. Accordingly, prior to our obtaining FCC approval of
the transfer of control from American Mobile, we will be effectively precluded
from most issuances of voting securities or securities convertible into voting
securities unless certain of our stockholders holding nonvoting convertible
securities agree not to convert them into voting securities or we take other
steps to permit voting securities on a basis consistent with FCC rules. We
intend to seek appropriate FCC approvals in the near future. We may not be able
to obtain FCC approval or it may take a long period of time to obtain such
approval and there may be conditions imposed in connection with such approval
which may be may be unfavorable to us. The inability to raise capital
opportunistically could adversely affect our business plan.
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 launch
vehicle 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.
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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 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.
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Failure of third party vendors to supply radios to customers in a timely manner
would delay our revenues.
We will rely on third party manufacturers and their distributors to
manufacture and distribute XM radios. If one or more manufacturers fails to
develop XM radios for timely commercial sale, at an affordable price and with
mass market nationwide distribution, the launch of our service would be
delayed, our revenues would be less than expected and our business would
suffer. We will rely on Delphi-Delco, Sony, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox and Clarion to develop, manufacture and market XM radios
for use in the car, and on Sony and SHARP to develop, manufacture and market XM
radios for home and portable use. XM radios are not yet available, and our
agreements with third party vendors may not result in the timely production of
enough affordable XM radios to permit the widespread introduction of our
service.
Competition from Sirius Satellite Radio and traditional and emerging audio
entertainment providers could adversely affect our revenues.
In seeking market acceptance, we will encounter competition for distribution
channels, 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
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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 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 Transactions--
Distribution Agreement with General Motors and OnStar."
Joint development agreement funding requirements could be significant.
Under our agreement with Sirius Radio, each party is obligated to fund one
half of the development cost of the technologies used to develop a unified
standard for satellite radios. Each party will be entitled to license fees or a
credit towards its one half of the cost based upon the validity, value, use,
importance and available alternatives of the technology it contributes. The
applicability or validity of Sirius Radio's claims in their former patent suit
against us could affect the determination of the amount of license fees or
credits relating to contributed or licensed technology under the agreement. The
amounts of these fees or credits will be determined over time by agreement of
the parties or by arbitration. We cannot predict at this time the amount of
license fees or contribution payable by XM or Sirus Radio or the size of the
credits to XM and Sirius Radio from the use of their technology. This may
require significant additional capital.
If we default under our joint development agreement, Sirius Satellite Radio's
patent infringement lawsuit against us could be refiled.
Under our agreement with Sirius Radio for the development of a unified
standard for satellite radios, the lawsuit Sirius Satellite Radio brought
against us in January 1999 alleging our infringement of three Sirius Satellite
Radio patents was withdrawn. We and Sirius Satellite Radio have agreed to
cross-license our respective intellectual property. However, if this agreement
is terminated before the value of the licenses has been determined due to our
failure to perform a material covenant or obligation, then this suit could be
refiled.
Our business may be impaired by third party intellectual property rights.
Development of the XM Radio system will depend largely upon the intellectual
property that we will develop and license from third parties. If the
intellectual property that we may develop or use is not adequately protected,
others will be permitted to and may duplicate the XM Radio system or service
without liability. In addition, others may challenge, invalidate or circumvent
our intellectual property rights, patents or existing sublicenses. Some of the
know-how and technology we have developed and plan to develop will not be
covered by United States patents. Trade secret protection and contractual
agreements may not provide adequate protection if there is any unauthorized use
or disclosure. The loss of necessary technologies could require us to obtain
substitute technology of lower quality performance standards, at greater cost
or on a delayed basis, which could harm our business.
Other parties may have patents or pending patent applications which will
later mature into patents or inventions which may block our ability to operate
our system or license our technology. We may have to resort to litigation to
enforce our rights under license agreements or to determine the scope and
validity of other parties' proprietary rights in the subject matter of those
licenses. This may be expensive. Also, we may not succeed in any such
litigation.
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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.
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.
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We need to obtain rights to programming, which could be more costly than
anticipated.
We must negotiate and enter into music programming royalty arrangements with
performing rights societies such as the American Society of Composers, Authors
and Publishers, Broadcast Music, Inc. and SESAC, Inc. Radio broadcasters
currently pay a combined total of approximately 3-4% of their revenues to these
performing rights societies. We expect to negotiate or establish by arbitration
royalty arrangements with these organizations, but such royalty arrangements
may be more costly than anticipated or unavailable. We must also enter into
royalty arrangements with the owners of the sound recordings. Cable audio
services currently pay a royalty rate of 6.5% of gross subscriber revenue set
by the Librarian of Congress. Although we believe we can distinguish XM Radio
sufficiently from the cable audio services in order to negotiate a lower
statutory rate, we may not be able to do so.
Rapid technological and industry changes could make our service obsolete.
The satellite industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations, and evolving industry
standards. If we are unable to keep pace with these changes, our business may
be unsuccessful. Products using new technologies, or emerging industry
standards, could make our technologies obsolete. In addition, we may face
unforeseen problems when developing the XM Radio system which could harm our
business. Because we will depend on third parties to develop technologies used
in key elements of the XM Radio system, more advanced technologies which we may
wish to use may not be available to us on reasonable terms or in a timely
manner. Further, our competitors may have access to technologies not available
to us, which may enable them to produce entertainment products of greater
interest to consumers, or at a more competitive cost.
A small number of stockholders own approximately 71% of our stock on a fully
diluted basis and effectively control us. Their interests may conflict with
yours as a stockholder.
As of February 15, 2000, our current principal stockholders owned
approximately 71% of our common stock on a fully diluted basis with total
voting power of approximately 81%. 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 the interests of our other stockholders.
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.
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;
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. 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.
As of February 15, 2000, we had 30,841,824 shares of Class A common stock
outstanding, or 61,500,504 shares assuming conversion of all 17,872,176 shares
of Class B common stock, 10,786,504 shares of Series A convertible preferred
stock and 2,000,000 shares of Series B convertible redeemable preferred stock
outstanding, which may be converted into Class A Common Stock on a one-for-one
basis. 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.
Approximately 17.2 million 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 on April 3, 2000. American Mobile, which owns
200,000 shares of Class A common stock and an additional 16,557,262 shares of
Class B common stock, is prohibited from selling any of these shares, other
than to affiliates, until October 8, 2000 or when we commence commercial
operations, whichever comes first. At 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, which would adversely
affect the value of the warrants.
On December 3, 1999, we filed a registration statement under the Securities
Act covering all 2,975,700 shares of our Class A common stock subject to
outstanding stock options or reserved for issuance under its stock plans. The
registration statement became effective upon filing. Accordingly, shares
registered under the registration statement are, subject to vesting provisions
and Rule 144 volume limitations applicable to our affiliates, available for
sale in the open market, and in the case of our officers, directors and
stockholders who have entered into lock-up agreements, available for sale after
lock-up agreements expire. As of December 31, 1999, options to purchase
2,099,089 shares of Class A common stock were outstanding.
The holders of approximately 16 million shares of our Class A common stock,
all of our Series A convertible preferred stock and all of our Class B common
stock have the right to request registration of their shares in future public
offerings of our equity securities. Sony Electronics owns a warrant that may in
the future be exercisable for up to 2% of our Class A common stock on a fully-
diluted basis depending on Sony's success in achieving certain sales targets.
Sony will also have the right to request registration of these shares in future
public offerings.
Properties
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 proceeding described under the caption "Business--Regulatory
Matters," we are not a party to any material litigation or other proceedings.
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MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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.
High Low
------ -------
1999:
Fourth Quarter (beginning October 5, 1999)..... $44.75 $11.625
On February 22, 2000, the last reported bid price for our Class A common
stock on the Nasdaq National Market was $38.78. As of February 22, 2000, there
were 71 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.
RECENT SALES OF UNREGISTERED SECURITIES
None.
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SELECTED CONSOLIDATED FINANCIAL DATA
In considering the following selected consolidated financial data, you
should also read our consolidated financial statements and notes and the
section captioned "Management's Discussion and Analysis of Financial Condition
and Results of Operations." The consolidated statements of operations data for
the three-year period ended December 31, 1999, and for the period from December
15, 1992 (date of inception) to December 31, 1999, and the consolidated balance
sheets data as of December 31, 1997, 1998 and 1999 are derived from our
consolidated financial statements. These statements have been audited by KPMG
LLP, independent certified public accountants. KPMG's report contains a
paragraph stating that we have not begun operations, 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.
<TABLE>
<CAPTION>
December 15,
1992 (Date of
Years Ended December 31, Inception)
-------------------------------- to December 31,
1997 1998 1999 1999 (1)
--------- --------- ---------- ---------------
(In thousands, except share
data)
<S> <C> <C> <C> <C>
Consolidated Statements of
Operations Data:
Revenue...................... $ -- $ -- $ -- $ --
--------- --------- ---------- --------
Operating expenses:
Research and development.... -- 6,941 4,274 11,215
Professional fees........... 1,090 5,242 9,969 16,280
General and administrative.. 20 4,010 16,448 20,478
--------- --------- ---------- --------
Total operating expenses.... 1,110 16,193 30,691 47,973
--------- --------- ---------- --------
Operating loss............... (1,110) (16,193) (30,691) (47,973)
Other expense--interest
income (expense), net....... (85) 26 490 431
--------- --------- ---------- --------
Net loss..................... $ (1,659) $ (16,167) $ (30,180) $(47,542)
========= ========= ========== ========
Net loss per share--basic and
diluted..................... $(0.26) $(2.42) $(2.40)
========= ========= ==========
Weighted average shares used
in computing net loss per
share--basic and diluted.... 6,368,166 6,689,250 15,344,102
</TABLE>
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998 1999
------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term
investments........................... $ 1 $ 310 $120,170
System under construction.............. 91,932 169,029 362,358
Total assets........................... 91,933 170,485 515,189
Total debt............................. 82,504 140,332 212
Total liabilities...................... 82,949 177,668 30,172
Stockholders' equity (deficit)......... 8,984 (7,183) 485,017
</TABLE>
- --------
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
28
<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 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. In January 2000, we completed a
follow-on offering of 4,370,000 shares of Class A common stock, yielding net
proceeds of $132.2 million, and a concurrent offering of 2,000,000 shares of
our Series B convertible redeemable preferred stock, which yielded net proceeds
of $96.3 million.
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.
29
<PAGE>
Results of Operations
1999 Compared to 1998
Research and Development. Research and development expenses decreased to
$4.3 million in 1999, compared with $6.9 million in 1998. The decrease in
research and development expenses resulted from the completion of the
development of some of our system technology during 1998.
Professional Fees. Professional fees increased to approximately $10.0
million in 1999, compared with $5.2 million in 1998. The increase primarily
reflects additional legal, regulatory and marketing expenses.
General and Administrative. General and administrative expenses increased to
$16.4 million in 1999, compared with $4.0 million in 1998. The increase
primarily reflects increased headcount and facility expenses to begin program
management and operations. We also commenced the amortization of our goodwill
and intangibles resulting from American Mobile's acquisition of a former
investor's interest in us during 1999. We have granted certain key executives
stock options and incurred a non-cash compensation charge of approximately $4.1
million in the fourth quarter of 1999 primarily for performance-based stock
options. We will continue to incur quarterly non-cash compensation charges over
the vesting period depending on the market value of our Class A common stock.
Interest Income. Interest income increased to $2.9 million in 1999, compared
with 1998, which was insignificant. The increase was the result of higher
average balances of cash and short-term investments during 1999 due to the
proceeds from the issuance of Series A convertible notes in the third quarter
of 1999 exceeding the amounts of expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
Interest Expense. As of December 31, 1999 and 1998, we owed $0 and $140.2
million, respectively, including accrued interest, under various debt
agreements which we entered into for the purpose of financing the XM Radio
system. Our capitalized interest costs were $15.3 million and $11.8 million
associated with our FCC license and the XM Radio system during 1999 and 1998,
respectively. We expensed interest costs of $9.1 million and $0 during 1999 and
1998, respectively. We incurred a one-time $5.5 million charge to interest due
to the beneficial conversion feature of the new American Mobile note. We also
exceeded our interest capitalization threshold by $3.6 million.
Net Loss. The net loss for 1999 and 1998 was $36.9 million and $16.2
million, respectively. The increase in net losses for 1999, compared with 1998,
primarily reflects an increase in net interest expense as discussed above and
additional general and administration expenses, primarily due to increased
headcount and facility expenses, in preparation for commercial operations and
the commencement of amortization of goodwill and intangibles.
Year Ended December 31, 1998 Compared with Year Ended December 31, 1997
Research and Development. Research and development expenses amounted to
approximately $6.9 million for the year ended December 31, 1998. Research and
development expenses for the year ended December 31, 1997 were insignificant.
The increase in research and development expenses resulted from the development
of some of our system technology during 1998.
Professional Fees. Professional fees increased to approximately $5.2 million
for the year ended December 31, 1998, compared with $1.1 million for the year
ended December 31, 1997. The increase primarily reflects legal, regulatory and
marketing expenses.
General and Administrative. General and administrative expenses increased to
$4.0 million for the year ended December 31, 1998, compared with $20,000 for
the year ended December 31, 1997. The increase primarily reflects increased
headcount and facility expenses to begin program management and operations.
Interest Expense. As of December 31, 1998 and 1997, we owed $140.2 million
and $82.5 million, respectively, including accrued interest, under various debt
agreements which we entered into for the purpose of
30
<PAGE>
financing the XM Radio system. We capitalized interest costs of $11.8 million
and $1.9 million associated with our FCC license and the XM Radio system during
the year ended December 31, 1998 and 1997, respectively. We expensed interest
costs of $0.5 million during the year ended December 31, 1997.
Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.7 million, respectively, primarily reflecting research and
development activities, professional fees and general and administrative
expenses.
Liquidity and Capital Resources
At December 31, 1999, we had a total of cash, cash equivalents and short-
term investments of $120.2 million and working capital of $94.7 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 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. In October 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.
We will have raised an aggregate of $674.0 million since our inception net of
expense and repayment of debt. We will require substantial additional funding,
approximately $406.8 million, to finish building the XM Radio system, to
provide working capital and fund operating losses until we commence commercial
operations. The funds raised to date are expected to be sufficient in the
absence of additional financing to cover our funding needs into the third
quarter of 2000.
We currently expect to satisfy our funding requirements by selling debt or
equity securities and by obtaining loans or other credit lines from banks or
other financial institutions. In addition, we plan to raise funds through
vendor financing arrangements associated with our terrestrial repeater project.
If we are successful in raising additional financing, we anticipate that a
significant portion of 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. 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.
American Mobile is our controlling stockholder. American Mobile has certain
rights regarding the election of persons to serve on our board of directors and
holds % of the voting power of Holdings, or % giving effect to the conversion
of all of Holdings' outstanding common stock equivalents but not to the
warrants being sold in the units offering. American Mobile cannot relinquish
its position as our controlling shareholder without obtaining the prior
approval of the FCC. Accordingly, prior to our obtaining FCC approval of the
transfer of control from American Mobile, we will be effectively precluded from
most issuances of voting securities or securities convertible into voting
securities unless certain of our stockholders holding nonvoting convertible
securities agree not to convert them into voting securities or we take other
steps to permit voting securities on a basis consistent with FCC rules. We
intend to seek appropriate FCC approvals in the near future. We may not be able
to obtain FCC approval or it may take a long period of time to obtain such
approval and there may be conditions imposed in connection with such approval
which may be may be unfavorable to us. The inability to raise capital
opportunistically could adversely affect our business plan.
31
<PAGE>
We may not be able to raise any funds or obtain loans on favorable terms or
at all. Our ability to obtain the required financing depends on several
factors, including future market conditions; our success or lack of success in
developing, implementing and marketing our satellite radio service; our future
creditworthiness; and restrictions contained in agreements with our investors
or lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or
their costs could materially increase. We could default on our commitments to
our satellite construction or launch contractors, creditors or others, leading
to termination of construction or inability to launch our satellites. Finally,
we may not be able to launch our satellite radio service as planned and may
have to discontinue operations or seek a purchaser for our business or assets.
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
Sources of Funds
<TABLE>
<S> <C>
Total funds raised to date.......................................... $ 674.0
Future capital requirements......................................... 426.0
--------
Total sources..................................................... $1,100.0
========
Uses of Funds
Satellites and launch............................................... $ 472.6
Launch insurance.................................................... 50.0
Terrestrial repeater system......................................... 263.3
Ground segment...................................................... 65.9
--------
Total system...................................................... 851.8
FCC license......................................................... 90.0
Operating expenses and working capital requirements................. 158.2
--------
Total uses........................................................ $1,100.0
========
</TABLE>
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.
. $132.2 million in net proceeds from a Class A common stock offering in
January 2000.
. $96.3 million in net proceeds from a Series B convertible preferred
stock offering in January 2000.
. $0.4 million in proceeds from the sale of stock under the employee stock
purchase plan and the exercise of stock options.
The use of funds for satellites and launch in the chart above includes
$472.6 million for satellites, launch and long-lead items, including certain
financing costs associated with the satellites, and for an option to
32
<PAGE>
complete the ground spare satellite under our satellite contract with Hughes.
As of December 31, 1999, $183.9 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 December 31, 1999, we had
incurred 7.6 million in costs in deploying the ground segment.
Other operating expenses and working capital requirements in the chart above
include cumulative historical operating losses through December 31, 1999 of
$54.7 million.
Sources of Funds. To date, we have raised approximately $674.0 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
$674.0 million raised to date, approximately $167.0 million, excluding the
Class A common stock acquired as part of our initial public offering, has been
raised through the issuance of equity to, and receipt of loans from, our
current stockholder, 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.
In the first quarter of 2000, we completed a follow-on offering of 4,370,000
shares of Class A common stock, yielding net proceeds of $132.2 million. At the
same time, we completed an offering of 2,000,000 shares of our Series B
convertible redeemable preferred stock, which yielded net proceeds of $96.3
million.
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 December 31, 1999, totaled $295.5 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 December 31, 1999, we had paid approximately $183.9
million under our satellite contract and recognized an additional $15.5 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 December 31, 1999, we had not incurred any costs with respect to
launch insurance.
33
<PAGE>
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 December 31, 1999, we had incurred costs with respect
to the terrestrial repeater buildout of $10.1 million which we paid. In August
1999, we signed a contract calling for payments of approximately $115.0 million
for engineering and site preparation. We entered into a contract effective
October 22, 1999, with Hughes Electronics Corporation for the design,
development and manufacture of the terrestrial repeaters. Payments under this
contract are expected to be approximately $128.0 million. As of December 31,
1999, we have paid $3.5 million under this contract.
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 December 31, 1999, we
had incurred $5.6 million in 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.
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 $158.2
million through our targeted commercial launch in the second quarter of 2001.
From our inception through December 31, 1999, we have incurred total expenses
of $36.9 million. Total cash used in operating activities was $18.8 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, $12.5 million
in amounts due to related parties and $3.6 million in accrued interest.
Joint Development Agreement Funding Requirements. In addition to the above
capital needs, we may require funds to pay license fees or make contributions
towards the development of the technologies used to develop a unified standard
for satellite radios under our joint development agreement with Sirius Radio.
Each party is obligated to fund one half of the development cost for such
technologies. Each party will be entitled to license fees or a credit towards
its one half of the cost based upon the validity, value, use, importance and
available alternatives of the technology it contributes. The amounts of these
fees or credits will be determined over time by agreement of the parties or by
arbitration. We cannot predict at this time the amount of license fees or
contribution payable by XM or the size of the credits to XM and Sirius Radio
from the use of their technology. This may require additional capital, which
could be significant.
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.
34
<PAGE>
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 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.
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 report, 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.
Quantitative and Qualitative Disclosures About 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 investment-grade corporate and government obligations 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.
35
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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).. 46 Member, Board of Directors
Thomas J. Donohue (2)... 61 Member, Board of Directors
Randall T. Mays (1)(2).. 34 Member, Board of Directors
Randy S. Segal (1)...... 43 Member, Board of Directors
Jack Shaw (2)........... 61 Member, Board of Directors
Dr. Rajendra Singh (2).. 45 Member, Board of Directors
Ronald L. Zarrella...... 50 Member, Board of Directors
Lee Abrams.............. 47 Senior Vice President, Chief of 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 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
36
<PAGE>
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 Corporate Senior Executive Vice President-Enterprise Sector of
Hughes Electronics Corporation and served as Chief Executive Officer and
Chairman of Hughes Network Systems, Inc. from 1987 and 1988, respectively,
through January 2000. Mr. Shaw is a member of the Hughes Electronics
Corporation Executive Committee. Mr. Shaw has been a director of 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, Chief of 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.
37
<PAGE>
Stephen Cook has served as Senior Vice President, Sales and Marketing since
February 1999. Previously, Mr. Cook was Chief Operating Officer for Conxus
Communications, where he successfully launched its portable voice messaging
product, Pocketalk, in the top 12 United States markets. From 1990 to 1997, Mr.
Cook held key management positions with GTE's cellular operations, including VP
of Marketing and President of the Southeast region. Prior to that time, Mr.
Cook also spent five years in brand management with 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
38
<PAGE>
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."
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.
39
<PAGE>
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
-------------------------- -------------------
Name and Principal Class A Shares
Position(s) Year Salary Bonus Other Underlying Options
- ------------------ ---- -------- -------- -------- -------------------
<S> <C> <C> <C> <C> <C>
Hugh Panero
President and Chief
Executive Officer..... 1998 $163,333 $ 65,333 $293,060(1) 267,570
1999 286,533 125,000 1,354 100,000
Lee Abrams
Senior Vice President,
Content and
Programming........... 1998 125,417 27,413 30,989(2) 53,514
1999 220,000 56,100 47,900 50,000
Stelios Patsiokas
Senior Vice President,
Technology............ 1998 43,077 16,710 59,966(3) 53,514
1999 211,700 84,680 213 50,000
Heinz Stubblefield
Senior Vice President,
Chief Financial
Officer............... 1998 116,667 60,000 -- 53,514
1999 208,000 62,400 1,589 50,000
Stephen Cook
Senior Vice President,
Sales and Marketing... 1998 -- -- -- --
1999 205,960 70,082 51,927(4) 103,514
</TABLE>
- --------
(1) Includes a signing bonus of $200,000.
(2) Includes a signing bonus of $28,000.
(3) Includes a signing bonus of $59,966.
(4) Includes a signing bonus of $50,000.
Employment Agreements
Hugh Panero is employed as our President, Chief Executive Officer and member
of the board of directors for a term of three years under an employment
agreement effective June 1, 1998. His employment agreement provides for an
annual base salary of $280,000, subject to increase from time to time by the
board of directors. Mr. Panero is also eligible for a pro-rata annual bonus to
be determined by 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;
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<PAGE>
. 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, Chief of Programming June 8, 1998
Stephen Cook............ Senior Vice President, Sales and Marketing February 22, 1999
Stelios Patsiokas....... Senior Vice President, Technology October 19, 1998
Heinz Stubblefield...... Senior Vice President, Chief Financial Officer June 1, 1998
</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.
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 exercisability. 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
41
<PAGE>
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
Shares Total Exercise Potential Realizable Value
Underlying Options Price at Assumed Annual Rates
Options Granted to Per of Stock Price
Name Granted Employees Share Expiration Date Appreciation for Stock 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
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
$38.13.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Securities Underlying
Unexercised Options at Value of Unexercised In-the-
December 31, 1999 Money Options December 31, 1999
------------------------------- -------------------------------
Number of Shares
Acquired on Value
Name Exercise Realized Exercisable(#) Unexercisable(#) Exercisable($) 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.
42
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 February 15, 2000, there were 30,835,333 shares of Class A common
stock outstanding, and 17,872,176 shares of Class B common stock outstanding,
of which 16,557,262 shares were owned by American Mobile, and 1,314,914 shares
were owned by Baron Asset Fund. Baron has agreed to convert all of its shares
of Class B common stock into shares of Class A common stock before the closing
of this offering. Also, as of February 15, 2000, there were 10,786,504 shares
of Series A convertible preferred stock outstanding, all of which was owned
between General Motors and DIRECTV. The Class B common stock and the Series A
convertible preferred stock are 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 February 15,
2000.
<TABLE>
<CAPTION>
Number of
Class A Shares Percentage of Total
Name and Address of Beneficial Owner Beneficially Owned Class A Shares
------------------------------------ ------------------ -------------------
<S> <C> <C>
Beneficial Owners of More Than 5%:
American Mobile Satellite Corporation.. 16,757,262(1) 35.4%
10802 Parkridge Boulevard
Reston, VA 20191-5416
General Motors Corporation............. 11,106,504(2) 26.7%
100 Renaissance Center
3031 West Grand Boulevard
PO Box 100
Detroit, MI 48265-1000
DIRECTV Enterprises, Inc............... 5,553,252(3) 15.3%
2230 E. Imperial Highway
El Segundo, CA 90245
Clear Channel Investments, Inc......... 8,329,877 27.0%
200 Concord Plaza, Suite 600
San Antonio, TX 78216
Columbia XM Radio Partners, L.L.C...... 2,776,626 9.0%
201 N. Union Street, Suite 300
Alexandria, VA 22314
Telcom-XM Investors, L.L.C............. 2,776,626(4) 9.0%
211 North Union Street, Suite 300
Alexandria, VA 22314
Madison Dearborn Capital Partners III,
L.P................................... 2,702,222 8.8%
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>
43
<PAGE>
<TABLE>
<CAPTION>
Number of
Class A Shares Percentage of Total
Name and Address of Beneficial Owner Beneficially Owned Class A Shares
------------------------------------ ------------------ -------------------
<S> <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........................... 2,000(8) *
Stelios Patsiokas...................... 17,838(7) *
Heinz Stubblefield..................... 17,838(7) *
All directors and executive officers as
a group (16 persons).................. 366,438(9) 1.2%
</TABLE>
- --------
* Less than 1%.
(1) Includes 16,557,262 shares issuable upon conversion of Class B common
stock. On January 18, 2000, an exchangeable note issued by American Mobile
to Baron Asset Fund was exchanged for 1,314,914 shares of Class B common
stock, which shares are owned by Baron Asset Fund as of the date of this
prospectus. Baron has agreed to convert these shares into shares of Class
A common stock before the closing of this offering.
(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 103,514 shares issuable upon exercise of options which
are not exercisable within 60 days.
(9) Does not include 1,131,344 shares issuable upon exercise of options which
are not exercisable within 60 days.
44
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Contracts with Hughes
Our Satellite Purchase Contract for In-Orbit Delivery, dated March 20, 1998,
and amended and restated on July 21, 1999, with Hughes Space and Communications
calls for Hughes to deliver
. in-orbit, two high-power satellites;
. an optional ground spare satellite upon exercise of XM Radio's option;
and
. satellite launch services.
We expect to incur total payment obligations under this contract of
approximately $541.3 million, which includes amounts we expect to pay pursuant
to the exercise of the option to build the ground spare satellite and certain
financing costs and in-orbit incentive payments. Payments are to be made to
Hughes upon certain calendar dates and completion of discrete milestones and
other events. As of December 31, 1999, we have paid $183.9 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 have entered into a contract with Hughes Electronics Corporation for the
design, development and manufacture of the terrestrial repeaters, which will
supplement our high-powered satellite signals. Production of the repeaters is
expected to begin in July 2000 and be completed in February 2001. Payments
under this contract are expected to be approximately $128.0 million. As of
December 31, 1999, we have paid $3.5 million under this contract.
The contract provides that we may reduce the number of repeaters ordered
under the contract to a specified minimum order or terminate the terrestrial
repeater contract altogether, in which case we are required to pay certain
amounts to Hughes Electronics depending on the date of the reduction or
termination and other factors. We have agreed to make certain incentive
payments to Hughes Electronics for timely delivery of the terrestrial
repeaters. In the event of late delivery of the terrestrial repeaters, we are
entitled to specified liquidated damages. In certain events of default by
Hughes Electronics, we may terminate the contract and would be entitled to have
the work completed by a third party plus certain costs resulting from the
termination.
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<PAGE>
Hughes Space and Communications is owned by Hughes Electronics Corporation.
On January 13, 2000, Hughes Electronics announced its intention to sell Hughes
Space and Communications to Boeing. We believe this sale, if consummated, would
not have any material effect on us. American Mobile, whose single largest
stockholder on a fully diluted basis is Hughes Communications, owns
approximately 26% of the outstanding shares of our common stock, or 33%
assuming no conversion of preferred stock. General Motors, which owns Hughes
Electronics and with whom we have a distribution agreement as described below,
owns a 9% equity interest in our company and an additional 9% equity interest
in our company is held by DIRECTV, a direct subsidiary of Hughes Electronics
and an indirect subsidiary of General Motors.
Distribution Agreement with General Motors and OnStar
We have signed a long-term distribution agreement with the OnStar division
of General Motors providing for the installation of XM radios in General Motors
vehicles. During the term of the agreement, which expires 12 years from the
commencement date of our commercial operations, General Motors has agreed to
distribute our service to the exclusion of other satellite digital radio
services that broadcast in the S-Band. General Motors will factory-install XM
radios, purchased exclusively from our authorized manufacturers, in certain new
General Motors vehicles and not install any radios which receive Sirius
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.
In February 2000, we signed an agreement with Sirius Radio to develop a
unified standard for satellite radios, which will facilitate the ability of
consumers to purchase one radio capable of receiving both our and Sirius
Radio's services. In accordance with the terms of the agreement, we expect to
work with General Motors to integrate the new standard under the terms of our
distribution agreement with General Motors. Our agreement with General Motors
provides that if General Motors elects to install radios which are capable of
receiving broadcasts from other satellite radio providers, in the absence of
any regulatory requirements to do so, we may seek to renegotiate the
distribution agreement. If the FCC requires the installation of interoperable
radios, we will renegotiate the distribution agreement on mutually acceptable
terms.
46
<PAGE>
Engineering Contract with LCC International
We have signed a contract with LCC International for the engineering of and
site preparation of our terrestrial repeater network. The repeater network will
supplement our high-powered satellite signals. Payments by XM Radio under this
contract are expected to approximate $115.0 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor. As
of December 31, 1999, we have paid $6.6 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.
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 "Security Ownership; Certain Beneficial Owners and
Management."
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.
47
<PAGE>
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 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.
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 is convertible into our Class A common stock, on a
one-for-one basis, following this offering at any time at the holder'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 of the Class B common stock held 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,
which are currently owned by American Mobile and Baron Asset Fund, are
transferable only upon conversion into shares of Class A common stock. Baron
has agreed to convert all of its shares of Class B common stock into shares of
Class A common stock before the closing of the units offering.
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.
48
<PAGE>
Investor Operational Agreements
We have agreements with Clear Channel, DIRECTV and the TCM Group, which is
owned by Columbia Capital, Telcom Ventures and Madison Dearborn Partners, under
which we will make available to them up to 406.6 kilobits per second, 204.8
kilobits per second, and 64.0 kilobits per second each, respectively, of our
bandwidth, for them to supply programming to us with content reasonably
acceptable to us, on terms (including revenue sharing) no less favorable than
those offered to similar commercial programmers who provide similar
programming. Until these options are exercised and this bandwidth is actually
used by them, we can use the bandwidth. Any use of our bandwidth by these
companies must be in compliance with applicable laws, must not interfere with
our business or our obligations to other content providers, and must meet our
quality standards.
The agreements call for us to have a technology advisory committee on which
Clear Channel, DIRECTV and the TCM Group have representatives. The committee
will direct the selection of appropriate billing, customer service and
conditional access systems for us, as well as our overall system integration
effort. We have granted to Clear Channel, DIRECTV, and TCM Group under these
agreements a royalty-free, non-transferable, non-exclusive license to use,
sell, manufacture and have manufactured any and all technology we develop
relating to the XM Radio system worldwide for any purpose other than one
related to digital audio radio service.
We have entered into a technical services agreement with DIRECTV with
respect to customer service, billing and conditional access capabilities, and
we will use DIRECTV's customer service, billing and conditional access
capabilities if made available to us on competitive terms and conditions.
DIRECTV is to make good faith efforts to represent us in obtaining distribution
of XM Radio service through DIRECTV's existing retail distribution network. We
will provide Clear Channel and DIRECTV with access to our advertising at the
lowest available commercial rates. Clear Channel must make good faith efforts
to give us access to its advertising at the lowest available commercial rates.
The agreements provide for further good faith negotiations with respect to
other arrangements, including advertising barter arrangements, marketing of XM
Radio service by Clear Channel and DIRECTV, and technology cooperation.
These agreements remain in effect so long as Clear Channel, DIRECTV, and
Columbia Capital, Telcom Ventures and Madison Dearborn Partners hold at least
5% of our fully diluted ownership or the full amount of their original
investments in us.
Advertising Representation Agreement
We have entered into an advertising sales representation agreement with
Premiere Radio Networks, a subsidiary of Clear Channel. Premiere will serve as
our advertising sales representative and will receive commissions at agreed
rates.
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.
49
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Historical Consolidated Financial Statements
Historical consolidated financial statements of XM Satellite Radio Holdings
Inc. and Subsidiaries are set forth beginning on page F-1 of this report on
Form 8-K.
(b) Exhibits
The following documents are filed as exhibits to this report:
23.1 Consent of KPMG LLP.
50
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
XM Satellite Radio Holdings Inc.
Date: February 25, 2000 /s/ Joseph M. Titlebaum
By:
Joseph M. Titlebaum
Senior Vice President, General
Counsel and Secretary
51
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
INDEX TO CONSOLIDATED 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-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Holdings Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of XM Satellite
Radio Holdings Inc. and subsidiaries (a development stage company) as of
December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity (deficit), and cash flows for each of the
years in the three-year period ended December 31, 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM
Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as
of December 31, 1998 and 1999, and the results of their operations and their
cash flows for each of the years in the three-year period ended December 31,
1999 and for the period from December 15, 1992 (date of inception) to December
31, 1999, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
note 11 to the consolidated financial statements, the Company has not commenced
operations and is dependent upon additional debt or equity financing, which
raises substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also described in note 11. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
McLean, VA
February 16, 2000
F-2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(in thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 310 $ 50,698
Short-term investments................................. -- 69,472
Prepaid and other current assets....................... 172 1,077
---------- ----------
Total current assets................................. 482 121,247
Other assets:
System under construction.............................. 169,029 362,358
Property and equipment, net of accumulated depreciation
and amortization of $57 and $347...................... 449 2,551
Goodwill and intangibles, net of accumulated
amortization of $0 and $1,220......................... -- 25,380
Other assets........................................... 525 3,653
---------- ----------
Total assets......................................... $ 170,485 $ 515,189
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $ 23,125 $ 23,338
Accrued expenses......................................... 444 1,514
Due to related parties................................... 13,767 62
Accrued interest on loans payable........................ 1,907 --
Loans payable due to related parties..................... 91,546 --
Royalty payable.......................................... -- 1,646
Term loan................................................ 34 --
-------- --------
Total current liabilities.............................. 130,823 26,560
Term loan, net of current portion.......................... 53 --
Subordinated convertible notes payable due to related
party..................................................... 45,583 --
Accrued interest on subordinated convertible notes payable
due to related party...................................... 1,209 --
Royalty payable, net of current portion.................... -- 3,400
Capital lease, net of current portion...................... -- 212
-------- --------
Total liabilities...................................... 177,668 30,172
-------- --------
Stockholders' equity (deficit):
Preferred stock, par value $0.01; 60,000,000 shares
authorized, 15,000,000 shares designated Series A, no
shares and 10,786,504 issued and outstanding at December
31, 1998 and 1999....................................... -- 108
Class A common stock, par value $0.01; 180,000,000 shares
authorized, no and 26,465,333 shares issued and
outstanding at December 31, 1998 and 1999............... -- 265
Class B common stock, par value $0.01; 30,000,000 shares
authorized, 125 (6,689,250 post split) and 17,872,176
shares issued and outstanding at........................ -- 179
December 31, 1998 and 1999
Class C common stock, par value $0.01; 30,000,000 shares
authorized, no shares issued and outstanding at
December 31, 1998 and 1999............................. -- --
Additional paid-in capital............................... 10,643 539,187
Deficit accumulated during development stage............. (17,826) (54,722)
-------- --------
Total stockholders' equity (deficit)................... (7,183) 485,017
-------- --------
Commitments and contingencies (notes 11 and 12)
Total liabilities and stockholders' equity (deficit)... $170,485 $515,189
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 1999 to December 31, 1999
--------- --------- ----------- --------------------
(in thousands, except share data)
<S> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $ --
--------- --------- ----------- --------
Operating expenses:
Research and
development.......... -- 6,941 4,274 11,215
Professional fees..... 1,090 5,242 9,969 16,301
General and
administrative....... 20 4,010 16,448 20,478
--------- --------- ----------- --------
Total operating
expenses........... 1,110 16,193 30,691 47,994
--------- --------- ----------- --------
Operating loss...... (1,110) (16,193) (30,691) (47,994)
Other income (expense):
Interest income....... -- 26 2,916 2,942
Interest expense...... (549) -- (9,121) (9,670)
--------- --------- ----------- --------
Net loss............ $ (1,659) $ (16,167) $ (36,896) $(54,722)
========= ========= =========== ========
Net loss per share:
Basic and diluted..... $ (0.26) $ (2.42) $ (2.40)
========= ========= ===========
Weighted average shares
used in computing net
loss per share-basic
and diluted............ 6,368,166 6,689,250 $15,344,102
========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
Deficit
Series A Class A Class B Class C Accumulated
Preferred Stock Common Stock Common Stock Common Stock Additional During Total
----------------- ----------------- ----------------- ------------- Paid-in Development Stockholders'
Shares Amount Shares Amount Shares Amount Shares Amount Capital Stage Equity (Deficit)
---------- ------ ---------- ------ ---------- ------ ------ ------ ---------- ----------- ----------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of
common stock
(December 15,
1992)........... -- $ -- -- $ -- 100 $ -- -- $-- $ -- $ -- $ --
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1992............ -- -- -- -- 100 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1993............ -- -- -- -- 100 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1994............ -- -- -- -- 100 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1995............ -- -- -- -- 100 -- -- -- -- -- --
Net loss........ -- -- -- -- -- -- -- -- -- -- --
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1996............ -- -- -- -- 100 -- -- -- -- -- --
Contributions to
paid-in
capital......... -- -- -- -- -- -- -- -- 143 -- 143
Issuance of
common stock and
capital
contributions... -- -- -- -- 25 -- -- -- 9,000 -- 9,000
Issuance of
options......... -- -- -- -- -- -- -- -- 1,500 -- 1,500
Net loss........ -- -- -- -- -- -- -- -- -- (1,659) (1,659)
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1997............ -- -- -- -- 125 -- -- -- 10,643 (1,659) 8,984
Net loss........ -- -- -- -- -- -- -- -- -- (16,167) (16,167)
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1998............ -- -- -- -- 125 -- -- -- 10,643 (17,826) (7,183)
53,514-for-one
stock split..... -- -- -- -- 6,689,125 67 -- -- (67) -- --
Initial public
offering........ -- -- 10,241,000 102 -- -- -- -- 114,032 -- 114,134
Conversion of
Series A
convertible
debt............ 10,786,504 108 16,179,755 162 -- -- -- -- 246,079 -- 246,349
Conversion of
subordinated
convertible
notes payable to
related party... -- -- -- -- 11,182,926 112 -- -- 106,843 -- 106,955
Issuance of
shares to key
executive....... -- -- 14,716 -- -- -- -- -- 140 -- 140
Issuance of
shares through
exercise of
stock options... -- -- 1,071 -- -- -- -- -- 10 -- 10
Issuance of
shares through
the employee
stock purchase
plan............ -- -- 28,791 1 -- -- -- -- 293 -- 294
Increase in FCC
license,
goodwill and
intangibles from
WorldSpace
Transaction..... -- -- -- -- -- -- -- -- 51,624 -- 51,624
Charge for
beneficial
conversion
feature of note
issued to
Parent.......... -- -- -- -- -- -- -- -- 5,520 -- 5,520
Non-cash stock
compensation.... -- -- -- -- -- -- -- -- 4,070 -- 4,070
Net loss........ -- -- -- -- -- -- -- -- -- (36,896) (36,896)
---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- --------
Balance at
December 31,
1999............ 10,786,504 $108 26,465,333 $265 17,872,176 $179 -- $-- $539,187 $(54,722) $485,017
========== ==== ========== ==== ========== ==== === === ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 1999 December 31, 1999
-------- -------- --------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss..................... $ (1,659) $(16,167) $ (36,896) $ (54,722)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization............... 33 57 1,987 2,077
Non-cash stock
compensation............... -- -- 4,210 4,210
Non-cash charge for
beneficial conversion
feature of note issued to
Parent..................... -- -- 5,520 5,520
Changes in operating assets
and liabilities:
Increase in prepaid and
other current assets...... -- (212) (905) (1,117)
Decrease in other assets... -- -- 43 43
Increase in accounts
payable and accrued
expenses.................. -- 1,701 7,519 9,220
Increase (decrease) in
amounts due to related
parties................... 445 13,322 (1,316) 12,451
Increase (decrease) in
accrued interest.......... 517 (2) 3,053 3,568
-------- -------- --------- ---------
Net cash used in operating
activities............... (664) (1,301) (16,785) (18,750)
-------- -------- --------- ---------
Cash flows from investing
activities:
Purchase of property and
equipment................... -- (506) (2,008) (2,514)
Additions to system under
construction................ (90,031) (43,406) (159,510) (292,947)
Purchase of short-term
investments................. -- -- (69,472) (69,472)
Other investing activities... -- -- (3,422) (3,422)
-------- -------- --------- ---------
Net cash used in investing
activities............... (90,031) (43,912) (234,412) (368,355)
-------- -------- --------- ---------
Cash flows from financing
activities:
Proceeds from sale of common
stock and capital
contribution................ 9,143 -- 114,428 123,571
Proceeds from issuance of
loan payable to related
party....................... 80,053 337 -- 80,390
Proceeds from issuance of
options..................... 1,500 -- -- 1,500
Proceeds from issuance of
subordinated convertible
notes to related parties.... -- 45,583 22,966 68,549
Proceeds from issuance of
convertible notes........... -- -- 250,000 250,000
Repayment of loan payable.... -- -- (75,000) (75,000)
Payments for deferred
financing costs............. -- (393) (10,725) (11,118)
Other investing activities... -- (5) (84) (89)
-------- -------- --------- ---------
Net cash provided by
financing activities..... 90,696 45,522 301,585 437,803
-------- -------- --------- ---------
Net increase in cash and cash
equivalents.................. 1 309 50,388 50,698
Cash and cash equivalents at
beginning of period.......... -- 1 310 --
-------- -------- --------- ---------
Cash and cash equivalents at
end of period................ $ 1 $ 310 $ 50,698 $ 50,698
======== ======== ========= =========
</TABLE>
(Continued)
F-6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 1999 December 31, 1999
------ ------- -------- -----------------
(in thousands)
<S> <C> <C> <C> <C>
Supplemental cash flow disclosure:
Increase in FCC license, goodwill
and intangibles from WorldSpace
Transaction........................ $ -- $ -- $ 51,624 $ 51,624
Liabilities exchanged for new
convertible note to Parent......... -- -- 81,676 81,676
Non-cash interest capitalized....... 1,901 11,824 15,162 28,887
Interest converted into principal
note balance....................... 501 9,157 4,601 14,259
Accrued expenses transferred to loan
balance............................ -- -- 7,405 7,405
Accrued system milestone payments... -- 21,867 15,500 15,500
Property acquired through capital
leases............................. -- -- 470 470
Conversion of debt to equity........ -- -- 353,315 353,315
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio
Corporation, was incorporated on December 15, 1992 in the State of Delaware as
a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC" or
"Parent") for the purpose of procuring a digital audio radio service ("DARS")
license. Business activity for the period from December 15, 1992 through
December 31, 1996 was insignificant. Pursuant to various financing agreements
entered into in 1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI
acquired a 20 percent interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
On July 7, 1999, AMSC acquired WSI's 20 percent interest in the Company,
which is discussed in note 4.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM Satellite
Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and XM Radio
Inc. All significant intercompany transactions and accounts have been
eliminated. The Company's management has devoted substantially all of its time
to the planning and organization of the Company, obtaining its DARS license,
and to the process of addressing regulatory matters, initiating research and
development programs, conducting market research, initiating construction of
the satellite system, securing content providers, and securing adequate debt
and equity capital for anticipated operations and growth. The Company has not
generated any revenues and planned principal operations have not commenced.
Accordingly, the Company's financial statements are presented as those of a
development stage enterprise, as prescribed by Statement of Financial
Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development
Stage Enterprises.
As discussed in Note 6, on September 9, 1999, the Company effected a
53,514-for-1 stock split. The effect of the stock split has been reflected as
of December 31, 1999 in the consolidated balance sheet and consolidated
statement of stockholders' equity (deficit); however, the activity in prior
periods was not restated in those statements. All references to the number of
common shares and per share amounts in the consolidated financial statements
and notes thereto have been restated to reflect the effect of the split for
all periods presented.
(c) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
had the following cash and cash equivalents balances (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
---- -------
<S> <C> <C>
Cash on deposit.............................................. $ 28 $ 66
Money market funds........................................... 282 10,620
Commercial paper............................................. -- 40,012
---- -------
$310 $50,698
==== =======
</TABLE>
F-8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(d) Short-term Investments
The Company holds commercial paper with maturity dates of less than one year
that is stated at amortized cost, which approximates fair value.
(e) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation and
amortization. Depreciation and amortization is calculated using the straight-
line method over the following estimated useful lives:
<TABLE>
<S> <C>
Furniture, fixtures and computer equipment................ 3 years
Machinery and equipment................................... 7 years
Leasehold improvements.................................... Remaining lease
</TABLE>
(f) System Under Construction
The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1999, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC license
will be amortized using the straight line method over an estimated useful life
of fifteen years. Amortization of the license will begin on commercial launch.
Depreciation of the Company's satellites will commence upon in-orbit delivery.
Depreciation of the Company's ground stations will commence upon commercial
launch. The satellites and the ground stations will be depreciated over their
estimated useful lives.
On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. The FCC has the authority to revoke the
authorizations and in connection with such revocation could exercise its
authority to rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
System under construction consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
License................................................ $ 90,031 $115,055
Satellite system....................................... 63,273 204,083
Terrestrial system..................................... -- 6,578
Spacecraft control facilities.......................... 2,000 2,000
Broadcast facilities and other......................... -- 5,574
Capitalized interest................................... 13,725 29,068
-------- --------
$169,029 $362,358
======== ========
</TABLE>
F-9
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
The Company's policy is to review its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value less costs to
sell.
(g)Goodwill and Intangible Assets
Goodwill and intangible assets, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally 15 years. The
Company assesses the recoverability of its intangible assets by determining
whether the amortization of the goodwill and intangible assets balance over its
remaining life can be recovered through undiscounted future operating cash
flows. The amount of goodwill and intangible assets impairment, if any, is
measured based on projected discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds. The assessment of
the recoverability of goodwill will be impacted if estimated future operating
cash flows are not achieved.
(h)Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in accordance
with the provisions of Accounting Principle Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25), and related interpretations,
and complies with the disclosure provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Under APB 25, compensation expense is based upon the
difference, if any, on the date of grant, between the fair value of the
Company's stock and the exercise price. All stock-based awards to non-employees
are accounted for at their fair value in accordance with SFAS No. 123.
(i) Research and Development
Research and development costs are expensed as incurred.
(j) Net Income (Loss) Per Share
The Company computes net income (loss) per share in accordance with SFAS No.
128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98").
Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per
share is computer by dividing the net income (loss) available to common
stockholders (after deducting preferred dividend requirements) for the period
by the weighted average number of common shares outstanding during the period.
Diluted net income (loss) available per share is computed by dividing the net
income (loss) available to common stockholders for the period by the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. The Company has presented historical basic and diluted net
income (loss) per share in accordance with SFAS No. 128. As the Company had a
net loss in each of the periods presented, basic and diluted net income (loss)
per share is the same.
(k) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and the financial reporting amounts at each year-end, based on
enacted tax laws
F-10
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
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.
(l) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997, 1998 and 1999 that would be classified as
other comprehensive income.
(m) Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses
during the reporting period. The estimates involve judgments with respect to,
among other things, various future factors which are difficult to predict and
are beyond the control of the Company. Significant estimates include valuation
of the Company's investment in the DARS license, goodwill and intangible
assets, and the valuation allowances against deferred tax assets. Accordingly,
actual amounts could differ from these estimates.
(n)Reclassifications
Certain fiscal year 1997 and 1998 amounts have been reclassified to conform
to the fiscal 1999 consolidated financial statement presentation.
(o)Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement, as amended, is effective for all fiscal
quarters beginning after June 15, 2000. The Company does not expect SFAS No.
133 to have a material affect on its financial position or results of
operations.
(2) Related Party Transactions
The Company had related party transactions with the following shareholders:
(a)AMSC
In 1997, AMSC contributed $143,000 for the Company to establish the original
application for the FCC license. On March 28, 1997, the Company received
$1,500,000 as a capital contribution from AMSC. During 1998 and 1999, AMSC
incurred general and administrative costs and professional fees for the Company
and established an intercompany balance of $458,000 and $62,000, respectively,
(see note 3). Effective January 15, 1999, the Company issued a convertible note
maturing on September 30, 2006 to AMSC for $21,419,000. (See note 4(d)).
F-11
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(b)WSI
On March 28, 1997, the Company received $1,500,000 as a capital contribution
from WSI. The Company issued WSI 25 (6,689,250 post split) shares of common
stock for this consideration.
On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as
a six-month bridge loan (see note 4).
On May 16, 1997, the Company obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 4).
On October 16, 1997, the Company received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 4).
On April 1, 1998, the Company entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998 and 1999, the
Company drew down $45,583,000 and $8,953,000, respectively, under the agreement
(see note 4).
As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 9, 1999.
In July 1998, the Company acquired furniture and equipment from WSI for
$104,000 and established a due to WSI for the balance (see note 3).
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-----------------------------
WSI AMSC Total
---------- ------------------
<S> <C> <C> <C>
Professional fees.......................... $ 960 $ 130 $ 1,090
General and administrative................. -- 20 20
---------- ------- ----------
Total.................................... $ 960 $ 150 $ 1,110
========== ======= ==========
<CAPTION>
Year Ended December 31, 1998
-----------------------------
WSI AMSC Total
---------- ------------------
<S> <C> <C> <C>
Research and development................... $ 6,624 $ -- $ 6,624
Professional fees.......................... 2,529 353 2,882
General and administrative................. 903 60 963
---------- ------- ----------
Total.................................... $ 10,056 $ 413 $ 10,469
========== ======= ==========
<CAPTION>
Year Ended December 31, 1999
-----------------------------
WSI AMSC Total
---------- ------------------
<S> <C> <C> <C>
Research and development................... $ 50 $ -- $ 50
Professional fees.......................... -- 219 219
General and administrative................. -- 5 5
---------- ------- ----------
Total.................................... $ 50 $ 224 $ 274
========== ======= ==========
</TABLE>
F-12
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
Additionally, during 1998 and 1999 the Company incurred $925,000 and $0,
respectively, of WSI project management costs that were capitalized to the
satellite system. With the WorldSpace Transaction, which is discussed in note
4, on July 7, 1999, WSI ceased to be a related party; therefore, the expenses
reflected for WSI are representative of the period from January 1, 1999 through
July 7, 1999.
(3) Due to Related Parties
Due to related parties included the following amounts (in thousands):
<TABLE>
<CAPTION>
December 31,
------------
1998 1999
------- ----
<S> <C> <C>
Advances from WSI............................................ $ 7,405 $--
Due to WSI................................................... 5,904 --
Due to AMSC.................................................. 458 62
------- ----
$13,767 $ 62
======= ====
</TABLE>
Advances represented funding provided by WSI for 30 days. If amounts were
not repaid within this time period, additional subordinated convertible notes
were issued.
(4) Debt
(a)Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements (the "Participation
Agreement") with AMSC and WSI in which both companies provided various equity
and debt funding commitments to XMSR for the purpose of financing the
activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997, certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement").
The Company had loans payable of $91,546,000 at December 31, 1998
outstanding with WSI as follows (in thousands):
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Bridge loan...................................................... $25,556
Additional amounts loan.......................................... 64,875
Working capital loan............................................. 1,115
-------
$91,546
=======
</TABLE>
As discussed in note 4(c) all amounts due to WSI under the debt agreements
were acquired by AMSC or repaid on July 7, 1999.
Bridge Loan
The Company executed the bridge loan with WSI in two tranches. On April 16,
1997, the Company received proceeds of $8,479,000 for a loan with a face amount
of $9,000,000. On October 16, 1997, the
F-13
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
Company received proceeds of $12,771,000 for a loan with a face amount of
$13,522,000. The first tranche was a six-month loan at LIBOR plus five percent
per annum, equaling 11.03 percent. The first tranche was rolled over with the
establishment of the second tranche, which is a six-month loan at LIBOR plus
five percent per annum, equaling 9.94 percent at December 31, 1998. Interest of
$3,034,000 had been converted into additional loan balance through December 31,
1998.
Additional Amounts Loan
On October 16, 1997, the Company executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. This loan is a six-month loan at LIBOR plus five percent per
annum, equaling 9.94 percent at December 31, 1998. Interest of $6,486,000 had
been converted into additional loan balance through December 31, 1998.
Working Capital Loan
On May 16, 1997, the Company executed the working capital loan with WSI
whereby the Company would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Company drew down $663,000 and $337,000 against the
line of credit through December 31, 1997 and 1998, respectively. This loan is a
six-month loan at LIBOR plus five percent per annum, with an interest rate of
10.19 percent at December 31, 1998. Interest of $115,000 had been converted
into additional loan balance through December 31, 1998.
(b)Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Company entered into a convertible note
agreement maturing on September 30, 2006 with WSI that provided for a maximum
of $54,536,000 through the issuance of subordinated convertible notes. The
notes carried an interest rate of LIBOR plus five percent per annum, which was
10.15 percent as of December 31, 1998. Under the terms of the note agreement,
WSI shall have the right to convert all or a portion of the aggregate principal
amount of the notes into shares of common stock at a conversion price of $16.35
per share. As of December 31, 1998 and July 7, 1999, $45,583,000 and
$54,536,000, respectively, had been drawn through the issuance of subordinated
convertible notes. As discussed in note 4(c), all amounts due to WSI under the
debt agreements were acquired by AMSC or repaid on July 7, 1999.
(c)Exchange of WSI's Interest in the Company (WorldSpace Transaction)
On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Company in exchange for approximately 8.6 million shares of AMSC's common
stock. Additionally, the Company issued an aggregate $250.0 million of Series A
subordinated convertible notes (see note 4(e)) to several new investors and
used $75.0 million of the proceeds it received from the issuance of these notes
to redeem certain outstanding loan obligations owed to WSI. As a result of
these transactions, as of July 7, 1999, AMSC owned all of the issued and
outstanding stock of the Company. Concurrent with AMSC's acquisition of the
remaining interest in the Company, the Company recognized goodwill and
intangibles of $51,624,000, which has been allocated as follows (in thousands):
<TABLE>
<S> <C>
FCC license...................................................... $25,024
Goodwill......................................................... 13,738
Programming agreements........................................... 8,000
Receiver agreements.............................................. 4,600
Other intangibles................................................ 262
-------
$51,624
=======
</TABLE>
F-14
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(d)Notes to Related Party
On January 15, 1999, the Company issued a convertible note maturing on
September 30, 2006 to AMSC for $21,419,000. This note carried an interest rate
of LIBOR plus five percent per annum and was convertible at a price of $16.35
per share. On July 7, 1999 the Company amended the convertible note agreement
with AMSC to change the maturity date to December 31, 2004, modified the
conversion provisions to Class B common stock at a price of $16.35 per share
and the conversion of the accrued interest in Class B common stock at a price
of $9.52 per share.
Following the WorldSpace Transaction, the Company issued a convertible note
maturing December 31, 2004 to AMSC for $81,676,000 in exchange for the
$54,536,000 subordinated convertible notes payable, $6,889,000 in demand notes,
$20,251,000 in accrued interest and all of WSI's outstanding options to acquire
the Company's common stock. This note bore interest at LIBOR plus five percent
per annum. The note was convertible at AMSC's option at $8.65 per Class B
common share. The Company took a one-time $5,520,000 charge to interest due to
the beneficial conversion feature of the new AMSC note.
These notes, along with $3,870,000 of accrued interest were converted into
11,182,926 shares of Class B common stock upon the initial public offering.
(e)Issuance of Series A Subordinated Convertible Notes of the Company to New
Investors
At the closing of the WorldSpace Transaction, the Company issued an
aggregate $250.0 million of Series A subordinated convertible notes to six new
investors--General Motors Corporation, $50.0 million; Clear Channel
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. The Series A subordinated convertible notes issued by the Company are
convertible into shares of the Company's Series A convertible preferred stock
(in the case of notes held by General Motors Corporation and DIRECTV) or Class
A common stock (in the case of notes held by the other investors) at the
election of the holders or upon the occurrence of certain events, including an
initial public offering of a prescribed size. The conversion price is $9.52
aggregate principal amount of notes for each share of the Company's stock.
These notes, along with $6,849,000 of accrued interest, were converted into
16,179,755 shares of Class A common stock and 10,786,504 shares of Series A
preferred stock upon the initial public offering.
(5) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
receivables, accounts payable, accrued expenses, royalty payable and the term
loan approximate their fair market value because of the relatively short
duration of these instruments as of December 31, 1998 and 1999, in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The fair value of the loans and subordinated convertible notes due to
related party at December 31, 1998 could not be estimated as such amounts are
due to the Company's stockholders.
(6) Equity
(a)Recapitalization
Concurrent with the WorldSpace Transaction discussed in note 4, the
Company's capital structure was reorganized. The Company's common stock was
converted into the newly authorized Class B common stock,
F-15
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
which has three votes per share. The Company also has authorized Class A common
stock, which is entitled to one vote per share and non-voting Class C common
stock. The Class B common stock is convertible into Class A common stock on a
one for one basis, as follows: (1) at any time at the discretion of AMSC, (2)
following the Company's initial public offering, at the direction of the
holders of a majority of the then outstanding shares of Class A common stock
(which majority must include at least 20 percent of the public holders of Class
A common stock), and (3) on or after January 1, 2002, at the direction of the
holders of a majority of the then outstanding shares of the Company's Class A
common stock. Such conversion will be effected only upon receipt of FCC
approval of AMSC's transfer of control of the Company to a diffuse group of
shareholders.
The Company also authorized 60,000,000 shares of preferred stock, of which
15,000,000 shares are designated Series A convertible preferred stock, par
value $0.01 per share. The Series A convertible preferred stock is convertible
into Class A common stock at the option of the holder. The Series A preferred
stock is non-voting and receives dividends, if declared, ratably with the
common stock.
On September 9, 1999, the board of directors of the Company effected a stock
split providing 53,514 shares of stock for each share owned.
(b)Initial Public Offering
On October 8, 1999, the Company completed an initial public offering of
10,000,000 shares of Class A common stock at $12.00 per share. The offering
yielded net proceeds of $111,437,000.
On October 17, 1999, the underwriters of the Company's initial public
offering exercised the over-allotment option for an additional 241,000 shares
of Class A common stock at $12.00 per share. This exercise yielded net proceeds
of $2,697,000.
F-16
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(c)Stock-Based Compensation
The Company operates two separate stock option plans, the details of which
are described below.
1998 Shares Award Plan
On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan")
under which employees, consultants, and non-employee directors may be granted
options to purchase shares of Class A common stock of the Company. The Company
initially authorized 1,337,850 shares of common stock under the Plan, which was
increased to 2,675,700 in July 1999. The options are exercisable in
installments determined by the compensation committee of the Company's board of
directors. The options expire as determined by the committee, but no later than
ten years from the date of grant. On July 8, 1999, the Company's board of
directors voted to reduce the exercise price of the options outstanding in the
shares award plan from $16.35 to $9.52 per share, which represented the fair
value of the stock on the date of repricing. Transactions and other information
relating to the Plan for the year ended December 31, 1998 and 1999 are
summarized below:
<TABLE>
<CAPTION>
Outstanding Options
-------------------
Weighted-
Average
Number of Exercise
Shares Price
--------- ---------
<S> <C> <C>
Balance, January 1, 1998.................................... -- --
Options granted........................................... 787,297 $16.35
Options canceled or expired............................... -- --
Options exercised......................................... -- --
--------- ------
Balance, December 31, 1998.................................. 787,297 $16.35
Options granted........................................... 2,188,988 10.50
Option repricing.......................................... 818,339 16.35
Options canceled or expired............................... 57,786 13.91
Options exercised......................................... 1,071 9.52
--------- ------
Balance, December 31, 1999.................................. 2,099,089 $10.32
========= ======
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------ --------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
------------ ----------- ----------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1998....... $16.35 787,297 9.5 years $16.35 -- $16.35
1999....... $9.52-$12.00 2,099,089 9.24 years $10.32 416,294 $ 9.52
</TABLE>
There were no and 416,294 stock options exercisable at December 31, 1998 and
1999, respectively. There were 575,540 shares available under the plan for
future grants at December 31, 1999. At December 31, 1999, all options have been
issued to employees, officers and directors.
F-17
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
The per share weighted-average fair value of employee options granted during
the year ended December 31, 1998 and 1999 was $10.54 and $6.21, respectively,
on the date of grant using the Black-Scholes Option Pricing Model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Expected dividend yield........................... 0% 0%
Volatility........................................ 56.23% 63.92%
Risk-free interest rate range..................... 4.53% to 5.57% 5.47% to 5.97%
Expected life..................................... 7.5 years 5 years
</TABLE>
Employee Stock Purchase Plan
In 1999, the Company established an employee stock purchase plan that
provides for the issuance of 300,000 shares of Class A common stock. All
employees whose customary employment is more than 20 hours per week and for
more than five months in any calendar year are eligible to participate in the
stock purchase plan, provided that any employee who would own five percent or
more of the Company's total combined voting power immediately after an offering
date under the plan is not eligible to participate. Eligible employees must
authorize the Company to deduct an amount from their pay during offering
periods established by the compensation committee. The purchase price for
shares under the plan will be determined by the compensation committee but may
not be less than 85 percent of the lesser of the market price of the common
stock on the first or last business day of each offering period. As of December
31, 1999, 28,791 shares had been issued by the Company under this plan.
The per share weighted-average fair value of purchase rights granted during
the year was $3.30 for the year ended December 31, 1999. The estimates were
calculated at the grant date using the Black-Scholes Option Pricing Model with
the following assumptions at December 31, 1999:
<TABLE>
<S> <C>
Expected dividend yield.............................................. 0%
Volatility........................................................... 63.92%
Risk-free interest rate range........................................ 4.73%
Expected life........................................................ 0.23 years
</TABLE>
The Company applies APB 25 in accounting for stock-based compensation for
both plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements other than for performance based
stock options and for options granted with exercise prices below fair value on
the date of grant. During 1999, the Company incurred $4,070,000 in compensation
cost for these options. Had the Company determined compensation cost based on
the fair value at the grant date for its stock options under SFAS 123, the
Company's net loss and net loss per share would have been increased to the pro
forma amounts indicated below (in thousands):
<TABLE>
<CAPTION>
Year ended December 31,
------------------------
1998 1999
----------- -----------
<S> <C> <C>
Net loss;
As reported............. $ 16,167 $ 36,896
Pro forma............... 17,508 37,706
As reported--net loss
per share--basic and
diluted................ (2.42) (2.40)
Pro forma--net loss per
share--basic and
diluted................ (2.62) (2.46)
</TABLE>
F-18
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(7) WSI Options
In 1997, the Company issued WSI three options. Under the first option, WSI
could have purchased 5,202,748 shares of common stock at $4.52 per share to
acquire common stock. The option could have been exercised in whole or in
incremental amounts between April 16, 1998 and October 16, 2002. Under certain
circumstances, AMSC could have required WSI to exercise the option in whole.
The Company allocated $1,250,000 to the option. Under the second option, WSI
could have purchased 6,897,291 shares at $8.91 per share. The option could have
been exercised between October 16, 1997 and October 16, 2003. The Company
allocated $170,000 to the option. Under the third option, WSI could have
purchased 187,893 shares of common stock at $5.32 per share. The option could
have been exercised between October 16, 1997 and October 17, 2002. The Company
allocated $80,000 to the option.
The options were acquired by AMSC and exchanged for the $81,676,000 note to
AMSC as part of the WorldSpace Transaction (see note 4(d)).
(8) Profit Sharing and Employee Savings Plan
On July 1, 1998, the Company adopted a profit sharing and employee savings
plan under Section 401(k) of the Internal Revenue Code. This plan allows
eligible employees to defer up to 15 percent of their compensation on a pre-tax
basis through contributions to the savings plan. The Company contributed $0.50
in 1998 and 1999 for every dollar the employees contributed up to 6 percent of
compensation, which amounted to $14,000 and $164,000, respectively.
(9) Interest Cost
The Company capitalizes a portion of interest cost as a component of the
cost of the FCC license and satellite system under construction. The following
is a summary of interest cost incurred during December 31, 1997, 1998 and 1999,
and for the period from December 15, 1992 (date of inception) to December 31,
1998 (in thousands):
<TABLE>
<CAPTION>
December 15, 1992
(date of inception) to
1997 1998 1999 December 31, 1999
------ ------- ------- ----------------------
<S> <C> <C> <C> <C>
Interest cost capitalization.... $1,901 $11,824 $15,343 $29,068
Interest cost charged to
expense........................ 549 -- 9,120 9,669
------ ------- ------- -------
Total interest cost incurred.. $2,450 $11,824 $24,463 $38,737
====== ======= ======= =======
</TABLE>
Interest costs incurred prior to the award of the license were expensed in
1997. During 1999, the Company exceeded its capitalization threshold by
$3,600,000 and incurred a charge to interest of $5,520,000 for the beneficial
conversion feature of the new AMSC note.
(10) Income Taxes
For the period from December 15, 1992 (date of inception) to December 31,
1999, the Company filed consolidated federal and state tax returns with its
majority stockholder AMSC. The Company generated net operating losses and other
deferred tax benefits that were not utilized by AMSC. As no formal tax sharing
agreement has been finalized, the Company was not compensated for the net
operating losses. Had the Company filed on a stand-alone basis, the Company's
tax provision would be as follows:
F-19
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
Taxes on income included in the statements of operations consists of the
following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current taxes:
Federal................................................. $ -- $ -- $ --
State................................................... -- -- --
------ ------ ------
Total current taxes................................... -- -- --
------ ------ ------
Deferred taxes:
Federal................................................. -- -- --
State................................................... -- -- --
------ ------ ------
Total deferred taxes.................................. -- -- --
------ ------ ------
Total tax expense (benefit)........................... $ -- $ -- $ --
====== ====== ======
</TABLE>
A reconciliation of the statutory tax expense, assuming all income is taxed
at the statutory rate applicable to the income and the actual tax expense is as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Income before taxes on income, as reported in the
statements of income............................ $(1,659) $(16,167) $(36,896)
======= ======== ========
Theoretical tax on the above amount at 35%....... (581) (5,658) (12,914)
State tax, net of federal benefit................ (165) (1,605) 701
Increase in taxes resulting from permanent
differences, net................................ -- 31 2,120
Adjustments arising from differences in the basis
of measurement for tax purposes and financial
reporting purposes and other.................... -- -- 13,252
Change in valuation allowance.................... 746 7,232 (3,159)
------- -------- --------
Taxes on income for the reported year............ $ -- $ -- $ --
======= ======== ========
At December 31, 1997, 1998 and 1999, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):
<CAPTION>
December 31,
---------------------------
1997 1998 1999
------- -------- --------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss/other tax attribute
carryovers.................................... $ 36 $ 477 $ 2,650
Start-up costs................................. 710 7,501 17,605
------- -------- --------
Gross total deferred tax assets.............. 746 7,978 20,255
Valuation allowance for deferred tax assets...... (746) (7,978) (4,819)
------- -------- --------
Net deferred assets.......................... -- -- 15,436
------- -------- --------
Deferred tax liabilities:
Fixed assets................................... -- -- (51)
FCC license.................................... -- -- (10,160)
Other intangible assets........................ -- -- (5,225)
------- -------- --------
Net deferred tax liabilities................. -- -- (15,436)
------- -------- --------
Deferred income tax, net..................... $ -- $ -- $ --
======= ======== ========
</TABLE>
F-20
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(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 the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required
long-term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and
equity securities through public and private sources. There are no assurances,
however, that such financing will be obtained.
(12) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WSI had effectively taken
control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Company entered into agreements with AMSC and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which AMSC and WorldSpace MC would provide technical support in areas related
to the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be
terminated by the parties on or after the date of the commencement of
commercial operation following the launch of the Company's first
F-21
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
satellite. There are no minimum services purchase requirements. The Company
incurred costs of $413,000 and $224,000 under its agreement with AMSC during
1998 and 1999, respectively. The Company incurred costs of $4,357,000 and $0
under its agreement with WorldSpace MC during 1998 and 1999, respectively.
(d) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing
agreement with AMSC and WorldSpace MC by which as compensation for certain
licensed technology currently under development to be used in the XM Radio
system, XMSR will pay up to $14,300,000 over a ten-year period. XMSR incurred
costs of $6,624,000 and $50,000 under the agreement during 1998 and 1999,
respectively. 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. The Company maintains an accrual of $5,046,000 for
quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2
percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per
chipset for equipment manufactured using certain source encoding and decoding
signals technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to construct and
launch the Company's satellites to implement a revised work timetable, payment
schedule to reflect the timing of the receipt of additional funding, and
technical modifications. The Company expects to incur total payment obligations
under this contract of approximately $541,300,000, which includes amounts the
Company expects to pay pursuant to the exercise of the option to build the
ground spare satellite and certain financing costs and in- orbit incentive
payments. As of December 31, 1998 and 1999, the Company had paid $40,481,250
and $183,918,000, respectively, under this contract.
(f) LCC International Services Contract
In August 1999, the Company signed a contract with LCC International, Inc.,
a related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the
Company has paid $6,578,000 under this contract.
(g) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors has agreed to distribute the service to the exclusion of other
S-band satellite digital radio services. The Company will also have a non-
exclusive right to arrange for the installation of XM radios included in OnStar
systems in non-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35,000,000 in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35,000,000 to approximately
$130,000,000 through 2009, aggregating approximately $400,000,000. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors
F-22
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
vehicles with installed XM radios become subscribers for the Company's service.
The Company must also share with General Motors a percentage of the
subscription revenue attributable to General Motors vehicles with installed XM
radios, which percentage increases until there are more than 8 million General
Motors vehicles with installed XM radios. The Company will also make available
to General Motors bandwidth on the Company's systems. The agreement is subject
to renegotiations at any time based upon the installation of radios that are
compatible with a unified standard or capable of receiving Sirius Satellite
Radio's (formerly known as CD Radio) service. The agreement is subject to
renegotiations if, four years after the commencement of XM Radio's commercial
operations and at two-year intervals thereafter GM does not achieve and
maintain specified installation levels of General Motors vehicles capable of
receiving the Company's service, starting with 1,240,000 units after four
years, and thereafter increasing by the lesser of 600,000 units per year and
amounts proportionate to target market shares in the satellite digital radio
service market. There can be no assurances as to the outcome of any such
renegotiations. General Motors' exclusivity obligations will discontinue if,
four years after the Company commences commercial operations and at two-year
intervals thereafter, the Company fails to achieve and maintain specified
minimum market share levels in the satellite digital radio service market.
(h) Terrestrial Repeater Contract
In February 2000, the Company entered into a contract with Hughes
Electronics Corporation, a related party, for the design, development and
purchase of terrestrial repeater equipment. The total contract value is
$128,000,000 and the Company incurred and paid $3,500,000 under a letter
agreement in anticipation of this contract through December 31, 1999.
(i) Joint Development Agreement
On February 16, 2000, the Company signed an agreement with Sirius Satellite
Radio ("Sirius Radio"), a competitor of the Company, to develop a unified
standard for satellite radios, to facilitate the ability of consumers to
purchase one radio capable of receiving both the Company's and Sirius Radio's
services. The technology relating to the unified standard will be jointly
developed, funded and owned by the two companies. As part of the agreement,
each company will license to the other its intellectual property relating to
its system; the value of this license will be considered part of its
contribution toward the joint development. In addition, each company has agreed
to license its non-core technology, including non-essential features of its
system, to the other at commercially reasonable rates.
(j) Sony Warrant
In February 2000, the Company issued a warrant to Sony exercisable for
shares of the Company's Class A common stock. The warrant will vest at the time
that we attain our millionth customer, and the number of shares underlying the
warrant will be determined by the percentage of XM Radios that have a Sony
brand name as of the vesting date. If Sony achieves its maximum performance
target, it will receive 2% of the total number of shares of the Company's Class
A common stock on a fully-diluted basis upon exercise of the warrant. The
exercise price of the Sony warrant will equal 105% of fair market value of the
Class A common stock on the vesting date, determined based upon the 20-day
trailing average.
F-23
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
(k) Leases
The Company has three noncancelable operating leases for office space and
two noncancelable capital leases for equipment that expire over the next ten
years. The future minimum lease payments under noncancelable leases as of
December 31, 1999 are (in thousands):
<TABLE>
<CAPTION>
Operating Capital
leases leases
--------- -------
<S> <C> <C>
Year ending December 31:
2000....................................................... $ 755 $172
2001....................................................... 2,113 172
2002....................................................... 2,180 86
2003....................................................... 2,248 --
2004....................................................... 2,281 --
Thereafter................................................. 14,354 --
------- ----
Total.................................................... $23,931 $430
=======
Less amount representing interest.......................... (52)
----
Present value of net minimum lease payments.............. 378
Less current maturities.................................... (139)
----
Long-term obligations.................................... $239
====
</TABLE>
Rent expense for 1997, 1998 and 1999 was $0, $231,000 and $649,000,
respectively.
In January 2000, the Company established a $3,400,000 letter of credit as a
security deposit for one of its leases for office space.
(l) Prior Litigation
On January 12, 1999, Sirius Satellite Radio, the other holder of an FCC
satellite radio license, commenced an action against the Company in the United
States District Court for the Southern District of New York, alleging that the
Company was infringing or would infringe three patents assigned to Sirius
Satellite Radio. In its complaint, Sirius Radio sought money damages to the
extent the Company manufactured, used or sold any product or method claimed in
their patents and injunctive relief. On February 16, 2000, this suit was
resolved in accordance with the terms of a joint development agreement between
the Company and Sirius Radio and both companies agreed to cross-license their
respective property (see note 12(i)). However, if this agreement is terminated
before the value of the license has been determined due to the Company's
failure to perform a material covenant or obligation, then this suit could be
refiled.
(13) Secondary Offering and Sale of Series B Convertible Redeemable Preferred
Stock
On January 31, 2000, the Company closed on a secondary offering of its Class
A common stock and newly designated Series B convertible redeemable preferred
stock. The Company sold 4,000,000 shares of its Class A common stock for $32.00
per share, which yielded net proceeds of approximately $121,000,000. The
Company concurrently sold 2,000,000 shares of its Series B convertible
redeemable preferred stock for $50.00 per share, which yielded net proceeds of
approximately $96,300,000. The Series B convertible redeemable preferred stock
F-24
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
For the period from December 15, 1992 (date of inception) to December 31, 1999
provides for 8.25% cumulative dividends that may be paid in Class A common
stock or cash. The Series B convertible redeemable preferred stock is
convertible into Class A common stock at a conversion price of $40 per share
and is redeemable in Class A common stock on February 3, 2003.
On February 9, 2000, the underwriters exercised a portion of the over-
allotment option for 370,000 shares of Class A common stock, which yielded net
proceeds of approximately $11,233,000.
(14)Quarterly Data (Unaudited)
<TABLE>
<CAPTION>
1997
----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except for per
share data)
<S> <C> <C> <C> <C>
Revenues....................................... $ -- $ -- $ -- $ --
Operating loss................................. -- 51 185 874
Loss before income taxes....................... -- 270 459 930
Net loss....................................... -- 270 459 930
------ ------ ------ ------
Net loss per share--basis and diluted........ $ -- $(0.04) $(0.07) $(0.14)
====== ====== ====== ======
<CAPTION>
1998
----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues....................................... $ -- $ -- $ -- $ --
Operating loss................................. 3,100 5,032 3,865 4,196
Loss before income taxes....................... 3,100 5,032 3,857 4,178
Net loss....................................... 3,100 5,032 3,857 4,178
------ ------ ------ ------
Net loss per share--basis and diluted........ $(0.46) $(0.75) $(0.58) $(0.62)
====== ====== ====== ======
<CAPTION>
1999
----------------------------------
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues....................................... $ -- $ -- $ -- $ --
Operating loss................................. 4,421 4,020 9,374 12,876
Loss before income taxes....................... 4,367 3,999 17,402 11,128
Net loss....................................... 4,367 3,999 17,402 11,128
------ ------ ------ ------
Net loss per share--basis and diluted........ $(0.65) $(0.60) $(2.60) $(0.27)
====== ====== ====== ======
</TABLE>
The sum of quarterly per share net losses do not necessarily agree to the
net loss per share for the year due to the timing of stock issuances.
F-25
<PAGE>
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
XM Satellite Radio Holdings Inc. and Subsidiaries:
We consent to the incorporation by reference in the registration statement No.
333-92049 on Form S-8 of XM Satellite Radio Holdings Inc. and Subsidiaries of
our report dated February 16, 2000, with respect to the consolidated balance
sheets of XM Satellite Radio Holdings Inc. and Subsidiary (a development stage
company) as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for the
years ended December 31, 1998 and 1999 and for the period from December 15, 1992
(date of inception) to December 31, 1999, which report appears in this Form 8-K
of XM Satellite Radio Holdings Inc. and Subsidiaries.
Our report, dated February 16, 2000, contains an explanatory paragraph that
states that the Company has not commenced operations, and is dependent upon
additional debt or equity financings, which raises 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
February 25, 2000
12
