<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 2000
XM SATELLITE RADIO HOLDINGS INC.
--------------------------------
(Exact name of registrant as specified in its charter)
Commission file number 000-27441
DELAWARE 54-1878819
------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 ECKINGTON PLACE NE,
WASHINGTON, DC 20002-2194
-------------------------
(Address of principal executive offices)
(Zip code)
202-380-4000
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
-------------------
XM SATELLITE RADIO INC.
----------------------
(Exact name of registrant as specified in its charter)
Commission file number 333-39178
DELAWARE 52-1805102
------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1500 ECKINGTON PLACE NE,
WASHINGTON, DC 20002-2194
-------------------------
(Address of principal executive offices)
(Zip code)
202-380-4000
------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--------------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
(Class)
(Outstanding as of September 30, 2000)
XM SATELLITE RADIO HOLDINGS INC.
--------------------------------
CLASS A COMMON STOCK, $0.01 PAR VALUE 34,034,830 SHARES
CLASS B COMMON STOCK, $0.01 PAR VALUE 16,557,262 SHARES
-------------------------------------
XM SATELLITE RADIO INC.
----------------------
COMMON STOCK, $0.10 PAR VALUE 125 SHARES
(all of which are issued to XM Satellite Radio Holdings Inc.)
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
INDEX
PART I FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Page
<S> <C>
Item 1. Financial Statements
XM SATELLITE RADIO HOLDINGS INC.
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 2000 and for the period December 15, 1992 (date of inception) to
September 30, 2000....................................................................................... 1
Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000
(unaudited).............................................................................................. 2
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 and for the period December 15, 1992 (date of inception)
to September 30, 2000.................................................................................... 3
Notes to Unaudited Condensed Consolidated Financial Statements........................................... 5
XM SATELLITE RADIO INC.
Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended
September 30, 1999 and 2000 and for the period December 15, 1992 (date of inception) to
September 30, 2000....................................................................................... 10
Condensed Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000
(unaudited).............................................................................................. 11
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 2000 and for the period December 15, 1992 (date of inception)
to September 30, 2000.................................................................................... 12
Notes to Unaudited Condensed Consolidated Financial Statements........................................... 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk .............................................. 25
</TABLE>
PART II - OTHER INFORMATION
<PAGE>
EXPLANATORY NOTE
This quarterly report is filed jointly by XM Satellite Radio Holdings Inc.
("Holdings") and XM Satellite Radio Inc. ("XM"). XM is a wholly-owned subsidiary
of Holdings. This report on Form 10-Q contains separate financial statements for
each of Holdings and XM. The management's discussion and analysis section has
been combined, focusing on the financial condition and results of operations of
Holdings but including an explanation of any differences between the companies.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Month and Nine-Month Periods ended September 30, 1999 and 2000,
and for the period from December 15, 1992 (date of inception)
to September 30, 2000
<TABLE>
<CAPTION>
Three Months ended Nine Months ended December 15, 1992
September 30, September 30, (date of inception) to
1999 2000 1999 2000 September 30, 2000
---- ---- ---- ---- ----------------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenue................................................... $ -- $ -- $ -- $ -- $ --
--------- --------- --------- --------- ---------
Operating expenses:
Research and development............................... 2,219 2,895 3,597 7,634 18,849
Professional fees...................................... 3,372 5,747 5,932 16,534 32,835
General and administrative............................. 3,783 19,467 8,286 34,766 55,244
--------- --------- --------- --------- ---------
Total operating expenses............................. 9,374 28,109 17,815 58,934 106,928
--------- --------- --------- --------- ---------
Operating loss....................................... (9,374) (28,109) (17,815) (58,934) (106,928)
Other income (expense) --interest income
(expense), net......................................... (8,028) 8,049 (7,952) 21,046 14,318
--------- --------- --------- --------- --------
Net loss............................................. $ (17,402) $ (20,060) $ (25,767) $ (37,888) $(92,610)
========= ========= ========= ========= ========
Preferred stock dividend requirement...................... -- (5,781) -- (9,424)
Series B convertible redeemable preferred
stock deemed dividend..................................... -- (11,211) -- (11,211)
Series C convertible redeemable preferred stock beneficial
conversion................................................ -- (123,043) -- (123,043)
--------- --------- ---------
Net loss attributable to common stockholders.............. $ (17,402) $(160,095) $ (25,767) $(181,566)
========= ========= ========= =========
Net loss per share:
Basic and diluted...................................... $ (2.60) $ (3.26) $ (3.85) $ (3.76)
========== ========= ========= =========
Weighted average shares used in
computing net loss per share-basic
and diluted............................................ 6,701,513 49,134,381 6,693,338 48,350,090
========= ========== ========= ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
1
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and September 30, 2000
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................... $ 50,698 $ 312,711
Short-term investments.................................................................... 69,472 --
Restricted investments.................................................................... -- 93,404
Prepaid and other current assets.......................................................... 1,077 1,424
----------- -------------
Total current assets.................................................................... 121,247 407,539
Other assets:
Restricted investments, net of current portion.............................................. -- 60,743
System under construction................................................................... 362,358 732,727
Property and equipment, net................................................................. 2,551 42,133
Goodwill and intangibles, net............................................................... 25,380 24,348
Other assets, net........................................................................... 3,653 13,655
------------ -------------
Total assets.............................................................................. $ 515,189 $ 1,281,145
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................................................ 23,338 $ 48,124
Accrued expenses............................................................................ 1,514 2,808
Due to related parties...................................................................... 62 66
Accrued interest on senior secured notes.................................................... -- 1,896
Royalty payable............................................................................. 1,646 2,528
Deferred lease benefit...................................................................... -- 441
------------ -------------
Total current liabilities................................................................. 26,560 55,863
Senior secured notes.......................................................................... -- 262,815
Royalty payable, net of current portion....................................................... 3,400 2,600
Deferred lease benefit, net of current portion................................................ -- 3,936
Capital lease, net of current portion......................................................... 212 967
------------ -------------
Total liabilities......................................................................... 30,172 326,181
------------ -------------
Stockholders' equity:
Series A convertible preferred stock, par value $0.01; 15,000,000 shares authorized,
10,786,504 shares issued and outstanding at December 31, 1999 and September 30, 2000...... 108 108
Series B convertible redeemable preferred stock, par value $0.01; 3,000,000 shares
authorized, no shares and 867,289 shares issued and outstanding at December 31, 1999
and September 30, 2000, respectively...................................................... -- 9
Series C convertible redeemable preferred stock, par value $0.01; 250,000 shares
authorized, no shares and 235,000 shares issued and outstanding at December 31, 1999
and September 30, 2000, respectively...................................................... -- 2
Class A common stock, par value $0.01; 180,000,000 shares authorized,
26,465,333 shares and 34,034,830 shares issued and outstanding at December 31, 1999,
and September 30, 2000, respectively...................................................... 265 340
Class B common stock, par value $0.01; 30,000,000 shares authorized,
17,872,176 and 16,557,262 shares issued and outstanding at December 31, 1999
and September 30, 2000, respectively...................................................... 179 166
Class C common stock, par value $0.01; 30,000,000 shares authorized, no shares
issued and outstanding at December 31, 1999 and September 30, 2000, respectively.......... -- --
Additional paid-in capital.................................................................... 539,187 1,066,949
Stock subscription, Series C convertible redeemable preferred stock........................... -- (20,000)
Deficit accumulated during development stage.................................................. (54,722) (92,610)
------------ -------------
Total stockholders' equity................................................................ 485,017 954,964
------------ -------------
Commitments and contingencies
Total liabilities and stockholders' equity.................................................. $ 515,189 $ 1,281,145
============ =============
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
2
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Month Periods ended September 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to September 30, 2000
<TABLE>
<CAPTION>
Nine Months ended December 15, 1992
September 30, (date of inception) to
1999 2000 September 30, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss...................................................................... $ (25,767) $ (37,888) $ (92,610)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization................................................ 1,469 2,004 3,571
Amortization of deferred financing fees...................................... -- -- 509
Non-cash stock compensation.................................................. 140 8,264 12,473
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............................... (645) (347) (1,424)
Increase in other assets................................................... (609) -- (640)
Increase in accounts payable and accrued expenses.......................... 1,488 13,489 30,171
Increase in accrued interest............................................... 2,829 -- --
Increase (decrease) in amounts due to related parties...................... (286) 4 67
--------- --------- ----------
Net cash used in operating activities...................................... (15,861) (14,474) (42,363)
--------- --------- ----------
Cash flows from investing activities:
Purchase of property and equipment............................................ (478) (36,651) (39,162)
Additions to system under construction........................................ (110,802) (347,134) (643,503)
Net Purchase/Maturity of short-term investments............................... -- 69,472 --
Purchase/Maturity of restricted investments................................... -- (104,637) (104,637)
Other investing activities.................................................... (6,085) (55,122) (55,122)
--------- --------- ----------
Net cash used in investing activities........................................ (117,365) (474,072) (842,424)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from sale of common stock and capital contribution................... -- 133,148 256,729
Proceeds from issuance of Series B convertible redeemable preferred stock..... -- 96,499 96,499
Proceeds from issuance of convertible notes payable to related party.......... 22,967 -- 157,866
Proceeds from issuance of options............................................. -- -- 1,500
Proceeds from issuance of Series A convertible preferred stock................ 250,000 -- 250,000
Proceeds from issuance of 14% Senior Secured Notes and Warrants............... -- 322,898 322,898
Proceeds from issuance of Series C convertible redeemable preferred stock..... -- 206,379 206,379
Repayments of loans payable to related party.................................. (75,000) -- (75,000)
Payments for deferred financing costs......................................... (10,611) (8,365) (19,373)
Other net financing activities................................................ (84) -- --
--------- --------- ----------
Net cash provided by financing activities.................................... 187,272 750,559 1,197,498
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents........................ 54,046 262,013 312,711
Cash and cash equivalents at beginning of period............................... 310 50,698 --
--------- --------- ----------
Cash and cash equivalents at end of period..................................... $ 54,356 $ 312,711 $ 312,711
========= ========= ==========
</TABLE>
3
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months ended September 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to September 30, 2000
<TABLE>
<CAPTION>
Nine Months ended December 15, 1992
September 30, (date of inception) to
1999 2000 September 30, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles.................. $ 51,624 $ -- $ 51,624
Liabilities exchanged for convertible note to related party........ 81,676 -- 81,676
Accrued expenses transferred to loan balance ...................... 7,405 -- --
Non-cash interest capitalized...................................... 14,533 6,019 35,087
Accrued system milestone payments.................................. 5,000 32,052 32,052
Property acquired through capital lease............................ 431 1,250 1,720
Conversion of debt to equity....................................... -- -- 353,315
Use of deposit for terrestrial repeater contract................... -- 3,422 --
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
4
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XM") was incorporated on December 15, 1992 in the
State of Delaware as a wholly owned subsidiary of Motient Corporation ("Motient"
or "Parent"), formerly American Mobile Satellite Corporation, for the purpose of
procuring a digital audio radio service ("DARS") license. Business activity for
the period from December 15, 1992 through December 31, 1996 was insignificant.
Pursuant to various financing agreements entered into in 1997 between Motient,
XM and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent interest in XM.
On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc.
("Holdings") as a holding company for XM in connection with the construction,
launch and operation of a domestic communications satellite system for the
provision of DARS. Motient and WSI exchanged their respective interests in XM
for equivalent interests in Holdings, which had no assets, liabilities or
operations prior to the transaction.
On July 7, 1999, Motient acquired WSI's 20 percent interest in Holdings.
(2) Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of XM
Satellite Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and
XM Radio Inc. All significant intercompany transactions and accounts have been
eliminated. Holdings' management has devoted substantially all of its time to
the planning and organization of Holdings, obtaining its DARS license, and to
the process of addressing regulatory matters, performing research and
development programs, conducting market research, constructing the satellite
system, securing content providers, and securing adequate debt and equity
capital for anticipated operations and growth. Holdings has not generated any
revenues and planned principal operations have not commenced. Accordingly,
Holdings' financial statements are presented as those of a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the consolidated
financial position of XM Satellite Radio Holdings Inc. and subsidiaries, a
development stage entity, as of September 30, 2000, and the results of
operations for the three and nine months ended September 30, 1999 and 2000 and
the period from December 15, 1992 (date of inception) through September 30, 2000
and the cash flows for the nine months ended September 30, 1999 and 2000 and the
period from December 15, 1992 (date of inception) through September 30, 2000.
The results of operations for the nine months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year.
These condensed consolidated financial statements are unaudited, and do not
include all related footnote disclosures. The interim unaudited condensed
consolidated financial statements should be read in conjunction with the audited
financial statements of Holdings included in Holdings' filings with the
Securities and Exchange Commission.
(3) Net Income (Loss) Per Share
Holdings computes net income (loss) per share in accordance with SFAS No. 128,
Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under
the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is
computed by dividing the net income (loss) available to common stockholders
(after deducting preferred dividend requirements) for the period by the weighted
average number of common shares outstanding during the period. Diluted net
income (loss) available per share is computed by dividing the net income (loss)
available to common stockholders for the period by the weighted average number
of common and dilutive common equivalent shares outstanding during the period.
Holdings has presented historical basic and diluted net income (loss) per share
in accordance with SFAS No. 128. As Holdings had a net loss in each of the
periods presented, basic and diluted net income (loss) per share is the same.
(4) Restricted Investments
Restricted investments consist of fixed income securities and are stated at
amortized costs plus accrued interest income. The securities included in
restricted investments are $104.6 million of US Treasury strips restricted to
provide for the remaining five of the first six scheduled interest payments on
XM's 14% Senior Secured Notes due
5
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2010, which are classified as held-to-maturity securities under the provisions
of SFAS No. 115, Accounting for Certain Investments in Debt and Equity
Securities, and $49.5 million in money market funds for scheduled milestone
payments under the Hughes Electronics Corporation contract. The first interest
payment on XM's 14% Senior Secured Notes of $22.75 million was due and made on
September 15, 2000.
(5) Reclassifications
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period presentation.
(6) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for Holdings to maintain its license to operate the system. Holdings
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 Holdings its
FCC license. The Application for Review alleges that WSI had effectively
taken control of Holdings 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 Holdings believes
that its right to the FCC license will withstand the challenge as WSI is no
longer a stockholder in Holdings, no prediction of the outcome of this
challenge can be made with any certainty.
(c) Technical Services
Effective January 1, 1998, Holdings entered into agreements with Motient
and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of
WSI, in which Motient and WorldSpace MC would provide technical support in
areas related to the development of a DARS system. Payments for services
provided under these agreements are made based on negotiated hourly rates.
These agreements may be terminated by the parties on or after the date of
the commencement of commercial operation following the launch of Holdings'
first satellite. There are no minimum services purchase requirements.
Holdings incurred costs of $66,000 and $172,000 under its agreement with
Motient and no costs were incurred under its agreement with WorldSpace MC
during the quarter ended September 30, 2000 and 1999, respectively.
Holdings incurred costs of $212,000 and $282,000 under its agreement with
Motient and no costs were incurred under its agreement with WorldSpace MC
during the nine months ended September 30, 2000 and 1999, respectively.
Holdings incurred costs of $849,000 under its agreement with Motient and
$4,357,000 in costs were incurred under its agreement with WorldSpace MC
from December 15, 1992 (date of inception) through September 30, 2000.
(d) Technology Licenses
Effective January 1, 1998, XM entered into a technology licensing agreement
with Motient and WorldSpace MC by which as compensation for certain
licensed technology then under development to be used in the XM Radio
system, XM will pay up to $14,300,000 to WorldSpace MC over a ten-year
period. As of September 30, 2000, XM incurred costs of $6,696,000 payable
to WorldSpace MC. Any additional amounts to be incurred under this
agreement are dependent upon further development of the technology, which
is at XM's option. No liability exists to Motient or WorldSpace MC should
such further developments prove unsuccessful. XM maintains an accrual of
$5,128,000 payable to WorldSpace MC, for quarterly royalty payments to be
made. In addition, XM agreed to pay 1.2 percent of quarterly net revenues
to WorldSpace MC and a royalty of $0.30 per chipset, payable to WorldSpace
MC, for equipment manufactured using certain source encoding and decoding
signals technology.
6
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(e) Satellite Contract
During the first half of 1999, Holdings and Boeing Satellite Systems
International, Inc ("BSS" - formerly Hughes Space and Communications, Inc.)
amended the satellite contract to construct and launch Holdings' satellites
to implement a revised work timetable, payment schedule to reflect the
timing of the receipt of additional funding, and technical modifications.
Holdings expects to incur total payment obligations under this contract of
approximately $541,300,000, which includes amounts Holdings 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. On June 27,
2000, Holdings exercised the option to build the ground spare. As of
September 30, 2000, Holdings had paid $461,146,000 under the Satellite
contract with BSS and had accrued $1,500,000.
(f) Terrestrial Repeater System Contracts
In August 1999, Holdings signed a contract with LCC International, Inc., a
related party, calling for payments of approximately $115,000,000 for
engineering and site preparation. As of September 30, 2000, Holdings has
paid $30,818,000 under this contract, and accrued an additional
$12,940,000. Holdings also entered into a contract effective October 22,
1999, with Hughes Electronics Corporation for the design, development and
manufacture of the terrestrial repeaters. Payments under this contract are
expected to be approximately $128,000,000. As of September 30, 2000,
Holdings had paid $12,858,000 under this contract.
(g) General Motors Distribution Agreement
Holdings 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 Holdings' commercial operations,
General Motors has agreed to distribute the service to the exclusion of
other S-band satellite digital radio services. Holdings 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. Holdings 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, Holdings has agreed to subsidize a portion of the
cost of XM radios, and to make incentive payments to General Motors when
the owners of General Motors vehicles with installed XM radios become
subscribers for Holdings' service. Holdings 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. Holdings will also make available to General Motors bandwidth on
XM's systems. The agreement is subject to renegotiations at any time based
upon the installation of radios that are compatible with a unified standard
or capable of receiving Sirius Satellite Radio's service. The agreement is
subject to renegotiations if, four years after the commencement of
Holdings' commercial operations and at two-year intervals thereafter, GM
does not achieve and maintain specified installation levels of General
Motors vehicles capable of receiving Holdings' 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 Holdings commences
commercial operations and at two-year intervals thereafter, Holdings fails
to achieve and maintain specified minimum market share levels in the
satellite digital radio service market.
(h) Sony Warrant
In February 2000, Holdings issued a warrant to Sony exercisable for shares
of its Class A common stock. The warrant will vest at the time that
Holdings attains its millionth customer, and the number of shares
underlying the warrant will be determined by the percentage of XM Radios
that have a Sony brand name as of the vesting date. If Sony achieves its
maximum performance target, it will receive 2% of the total number of
shares of Holdings' Class A common stock on a fully-diluted basis upon
exercise of the warrant. The exercise price of the Sony
7
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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.
(i) Prior Litigation
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against Holdings in the United States
District Court for the Southern District of New York, alleging that
Holdings was infringing or would infringe three patents assigned to Sirius
Radio. In its complaint, Sirius Radio sought money damages to the extent
Holdings 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
Holdings and Sirius Radio and both companies agreed to cross-license their
respective property. Each party is obligated to fund one half of the
development cost for 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 amounts for these fees
or credits will be determined over time by agreement of the parties or by
arbitration. However, if this agreement is terminated before the value of
the license has been determined due to Holdings' failure to perform a
material covenant or obligation, then this suit could be refiled.
(j) Series C Convertible Redeemable Preferred Stock
On July 7, 2000, Holdings reached an agreement for a private offering of
235,000 shares of its Series C convertible redeemable preferred stock for
$1,000.00 per share, which closed on August 8, 2000 and yielded net
proceeds of approximately $206,379,000 and a stock subscription of
$20,000,000, which earns interest at 7% per annum and is payable on
November 30, 2000. The Series C convertible redeemable preferred stock
provides for 8.25% cumulative dividends payable in cash. The Series C
convertible redeemable preferred stock is convertible, at the holders'
option, into Class A common stock at the conversion price then in effect.
Currently, the conversion price is $26.50, but may change upon the
occurrence of certain dilutive events. Holdings must redeem the Series C
convertible redeemable preferred stock in Class A common stock on February
1, 2012. At its option, Holdings may redeem the Series C convertible
redeemable preferred stock beginning on February 8, 2005 in cash or, at the
holder's option, in Class A Common Stock. As a result of the current
conversion price of $26.50 being less than the market value of Holdings'
Class A common stock of $40.375 on the commitment date, Holdings recorded a
$123.0 million beneficial conversion charge that reduced earnings available
to common stockholders. The issuance of the Series C preferred stock also
caused the exercise price of the warrants sold in March 2000 to be adjusted
to $47.94 and the number of warrant shares to be increased to 8.285948 per
warrant.
(k) Application for Change of Control
On July 14, 2000, Holdings filed an application with the FCC to allow
Holdings to transfer its control from Motient to a diffuse group of owners,
none of whom will have controlling interest. This application is pending
with the FCC. If the application is granted, Motient would still retain its
Board of Directors membership but would no longer have the right to elect a
majority of Holdings' Board of Directors.
(l) Stock Dividend on Series B Convertible Redeemable Preferred Stock
On August 1, 2000, Holdings paid its regular quarterly dividend on its
8.25% Series B convertible redeemable preferred stock. The dividend was
paid in shares of Class A common stock and 57,114 shares of Class A common
stock were issued to the holders of record on July 21, 2000.
(m) Series B Convertible Redeemable Preferred Stock Conversion
In August 2000, Holdings entered into agreements with certain holders of
its 8.25% Series B convertible redeemable preferred stock to exchange their
shares of 8.25% Series B convertible redeemable preferred stock for shares
of Holdings' Class A common stock. By August 31, 2000, Holdings had issued
1,700,016 shares of its Class A common stock in exchange for 1,132,711
shares of its 8.25% Series B convertible redeemable preferred stock.
Holdings recorded a $11.2 million charge to earnings attributable to common
stockholders in the third
8
<PAGE>
XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
quarter related to this transaction. This charge represents the difference
in the fair value of the stock issued upon this conversion in excess of the
stock that the holders were entitled to upon a voluntary conversion.
(n) Accounting for Repriced Stock Options
During the quarter, Holdings adopted Financial Accounting Standards Board
Interpretation No.44, Accounting for Certain Transactions Involving Stock
Compensation, (FIN 44) effective July 1, 2000 to account for all options
repriced by Holdings during the period covered by FIN 44. The application
resulted in additional compensation expense of $4,787,000 recognized during
the quarter ended September 30, 2000. Additional compensation charges may
result depending upon the market value of the common stock at each balance
sheet date.
(7) Subsequent Events
(a) Preferred Stock Dividend on Series B Convertible Redeemable Preferred
Stock
On October 5, 2000, Holdings announced its regular quarterly dividend on
its 8.25% Series B convertible redeemable preferred stock, which was paid
on November 1, 2000. The dividend was paid in shares of Class A common
stock and 25,734 shares of Class A common stock were issued to the holders
of record on October 20, 2000. The net loss attributable to common
stockholders reflects the accrual and payment of the dividends to the
preferred stockholders as of September 30, 2000.
9
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three-Month and Nine-Month Periods ended September 30, 1999 and 2000,
and for the period
from December 15, 1992 (date of inception) to September 30, 2000
<TABLE>
<CAPTION>
Three Months ended Nine Months ended December 15, 1992
September 30, September 30, (date of inception) to
1999 2000 1999 2000 September 30, 2000
---- ---- ---- ---- ----------------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Revenue........................................................... $ -- $ -- $ -- $ -- $ --
------- -------- ----- --------- ---------
Operating expenses:
Research and development........................................ 2,219 2,895 3,597 7,634 18,849
Professional fees............................................... 3,372 5,747 5,932 16,460 32,740
General and administrative...................................... 2,982 19,460 7,485 34,696 55,174
------- -------- -------- --------- ---------
Total operating expenses....................................... 8,573 28,102 17,014 58,790 106,763
------- -------- -------- --------- ---------
Operating loss................................................. (8,573) (28,102) (17,014) (58,790) (106,763)
Other income (expense) --interest income (expense), net........... (13) 7,680 63 20,664 21,095
------- -------- -------- --------- ---------
Net loss....................................................... $(8,586) $(20,422) $(16,951) $ (38,126) $ (85,668)
======= ======== ======== ========= =========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
10
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and September 30, 2000
<TABLE>
<CAPTION>
December 31, September 30,
1999 2000
---- ----
(unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................................................. $ 49,630 $ 311,302
Short-term investments................................................................. 69,472 --
Restricted investments................................................................. -- 93,404
Prepaid and other current assets....................................................... 1,077 1,424
-------- ----------
Total current assets................................................................. 120,179 406,130
Other assets:
Restricted investments, net of current portion......................................... -- 60,743
System under construction.............................................................. 333,500 703,869
Property and equipment, net............................................................ 2,551 42,133
Goodwill and intangibles, net.......................................................... 25,380 24,348
Other assets, net...................................................................... 3,524 13,655
-------- ----------
Total assets......................................................................... $485,134 $1,250,878
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable....................................................................... $ 23,258 $ 48,036
Accrued expenses....................................................................... 1,514 2,808
Accrued interest on senior secured notes............................................... -- 1,896
Royalty payable........................................................................ 1,646 2,528
Deferred lease benefit................................................................. -- 441
-------- ----------
Total current liabilities............................................................ 26,418 55,709
Senior secured notes...................................................................... -- 262,815
Royalty payable, net of current portion................................................... 3,400 2,600
Deferred lease benefit, net of current portion............................................ -- 3,936
Capital lease, net of current portion..................................................... 212 967
-------- ----------
Total liabilities.................................................................... 30,030 326,027
-------- ----------
Stockholder's equity:
Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding
at December 31, 1999 and September 30, 2000.......................................... -- --
Additional paid-in capital............................................................. 502,646 1,010,519
Deficit accumulated during development stage........................................... (47,542) (85,668)
--------- -----------
Total stockholder's equity........................................................... 455,104 924,851
-------- ----------
Commitments and contingencies
Total liabilities and stockholder's equity........................................... $485,134 $1,250,878
======== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
11
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Month Period ended September 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to September 30, 2000
<TABLE>
<CAPTION>
Nine Months ended December 15, 1992
September 30, (date of inception) to
1999 2000 September 30, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $ (16,951) $ (38,126) $ (85,668)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization..................................... 191 2,004 3,571
Amortization of deferred financing fees........................... -- -- 509
Non-cash stock compensation...................................... 140 8,264 14,732
Changes in operating assets and liabilities:
Increase in prepaid and other current assets..................... (389) (347) (1,424)
(Increase) decrease in other assets.............................. 48 (29) (640)
Increase (decrease) in accounts payable and
accrued expenses............................................... 810 13,480 27,594
--------- --------- ----------
Net cash used in operating activities.......................... (16,151) (14,754) (41,326)
--------- --------- ----------
Cash flows from investing activities:
Purchase of property and equipment................................ (478) (36,651) (39,162)
Additions to system under construction............................ (110,802) (347,134) (643,503)
Net Purchase/Maturity of short-term investments................... -- 69,472 --
Purchase/Maturity of restricted investments....................... -- (104,637) (104,637)
Other investing activities........................................ (6,085) (55,122) (55,122)
--------- --------- ----------
Net cash used in investing activities............................ (117,365) (474,072) (842,424)
--------- --------- ----------
Cash flows from financing activities:
Proceeds from sale of securities and
capital contribution from Holdings.............................. 133,959 499,609 935,186
Proceeds from issuance of options................................. -- -- 500
Proceeds from issuance of 14% Senior Secured Notes ............... -- 259,254 259,254
Proceeds from loans payable to related party...................... -- -- 8,477
Payments for deferred financing costs............................. -- (8,365) (8,365)
Other net financing activities.................................... (84) -- --
--------- --------- ----------
Net cash provided by financing activities........................ 133,875 750,498 1,195,052
--------- --------- ----------
Net increase (decrease) in cash and cash equivalents............. 359 261,672 311,302
Cash and cash equivalents at beginning of period..................... 310 49,630 --
--------- --------- ----------
Cash and cash equivalents at end of period........................... $ 669 $ 311,302 $ 311,302
========= ========= ==========
</TABLE>
12
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine-Month Period ended September 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to September 30, 2000
<TABLE>
<CAPTION>
Nine Months ended December 15, 1992
September 30, (date of inception) to
1999 2000 September 30, 2000
---- ---- ------------------
(in thousands)
<S> <C> <C> <C>
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles.................. $ 51,624 $ -- $ 51,624
Loan converted into additional paid-in capital..................... -- -- 8,477
Non-cash interest capitalized...................................... -- 6,019 6,019
Accrued system milestone payments.................................. 5,000 32,052 32,052
Property acquired through capital lease............................ 431 1,250 1,720
Use of deposit for terrestrial repeater contract................... -- 3,422 --
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
13
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XM") was incorporated on December 15, 1992 in the
State of Delaware as a wholly owned subsidiary of Motient Corporation
("Motient"), formerly American Mobile Satellite Corporation, for the purpose of
procuring a digital audio radio service ("DARS") license. Business activity for
the period from December 15, 1992 through December 31, 1996 was insignificant.
Pursuant to various financing agreements entered into in 1997 between Motient,
XM and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent interest in XM.
On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc.
("Holdings") as a holding company for XM in connection with the construction,
launch and operation of a domestic communications satellite system for the
provision of DARS. Motient and WSI exchanged their respective interests in XM
for equivalent interests in Holdings, which had no assets, liabilities or
operations prior to the transaction.
(2) Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of XM
Satellite Radio Inc. and its subsidiary, XM Radio Inc. All significant
intercompany transactions and accounts have been eliminated. XM's management has
devoted substantially all of its time to the planning and organization of XM,
obtaining its DARS license, and to the process of addressing regulatory matters,
performing research and development programs, conducting market research,
constructing the satellite system, securing content providers, and securing
adequate debt and equity capital for anticipated operations and growth. XM has
not generated any revenues and planned principal operations have not commenced.
Accordingly, XM's financial statements are presented as those of a development
stage enterprise, as prescribed by Statement of Financial Accounting Standards
("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the consolidated
financial position of XM Satellite Radio Inc. and subsidiary, a development
stage entity, as of September 30, 2000, and the results of operations for the
three and nine months ended September 30, 1999 and 2000 and the period from
December 15, 1992 (date of inception) through September 30, 2000 and the cash
flows for the nine months ended September 30, 1999 and 2000 and the period from
December 15, 1992 (date of inception) through September 30, 2000. The results of
operations for the nine months ended September 30, 2000 are not necessarily
indicative of the results that may be expected for the full year. These
condensed consolidated financial statements are unaudited, and do not include
all related footnote disclosures.
(3) Restricted Investments
Restricted investments consist of fixed income securities and are stated at
amortized costs plus accrued interest income. The securities included in
restricted investments are $104.6 million of US Treasury strips restricted to
provide for the remaining five of the first six scheduled interest payments on
XM's 14% Senior Secured Notes due 2010, which are classified as held-to-maturity
securities under the provisions of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and $49.5 million in money market
funds for scheduled milestone payments under the Hughes Electronics Corporation
contract. The first interest payment on XM's 14% Senior Secured Notes of $22.75
million was due and made on September 15, 2000.
(4) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for XM to maintain its license to operate the system. XM 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
14
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted XM its FCC
license. The Application for Review alleges that WSI had effectively taken
control of XM 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 XM believes that its right to the FCC
license will withstand the challenge as WSI is no longer a stockholder in XM,
no prediction of the outcome of this challenge can be made with any
certainty.
(c) Technical Services
Effective January 1, 1998, Holdings entered into agreements with Motient and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which Motient and WorldSpace MC would provide technical support in areas
related to the development of a DARS system. Payments for services provided
under these agreements are made based on negotiated hourly rates. These
agreements may be terminated by the parties on or after the date of the
commencement of commercial operation following the launch of XM's first
satellite. There are no minimum services purchase requirements. XM incurred
costs of $66,000 and $172,000 under its agreement with Motient and no costs
were incurred under its agreement with WorldSpace MC during the quarter ended
September 30, 2000 and 1999, respectively. XM incurred costs of $212,000 and
$282,000 under its agreement with Motient and no costs were incurred under
its agreement with WorldSpace MC during the nine months ended September 30,
2000 and 1999, respectively. XM incurred costs of $849,000 under its
agreement with Motient and $4,357,000 in costs were incurred under its
agreement with WorldSpace MC from December 15, 1992 (date of inception)
through September 30, 2000.
(d) Technology Licenses
Effective January 1, 1998, XM entered into a technology licensing agreement
with Motient and WorldSpace MC by which as compensation for certain licensed
technology then under development to be used in the XM Radio system, XM will
pay up to $14,300,000 to WorldSpace MC over a ten-year period. As of
September 30, 2000, XM incurred costs of $6,696,000 payable to WorldSpace MC.
Any additional amounts to be incurred under this agreement are dependent upon
further development of the technology, which is at XM's option. No liability
exists to Motient or WorldSpace MC should such developments prove
unsuccessful. XM maintains an accrual of $5,128,000 payable to WorldSpace MC,
for quarterly royalty payments to be made. In addition, XM agreed to pay 1.2
percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per
chipset, payable to WorldSpace MC, for equipment manufactured using certain
source encoding and decoding signals technology.
(e) Satellite Contract
During the first half of 1999, XM and Boeing Satellite Systems International,
Inc. ("BSS" - formerly Hughes Space and Communications, Inc.) amended the
satellite contract to construct and launch XM's satellites to implement a
revised work timetable, payment schedule to reflect the timing of the receipt
of additional funding, and technical modifications. XM expects to incur total
payment obligations under this contract of approximately $541,300,000, which
includes amounts XM 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. On June 27, 2000, XM exercised the option to build the
ground spare. As of September 30, 2000, XM had paid $461,146,000 under the
Satellite contract with BSS and had accrued $1,500,000.
(f) Terrestrial Repeater System Contracts
In August 1999, XM signed a contract with LCC International, Inc., a related
party, calling for payments of approximately $115,000,000 for engineering and
site preparation. As of September 30, 2000, XM has paid $30,818,000 under
this contract, and accrued an additional $12,940,000. XM also entered into a
contract effective October 22, 1999, with Hughes Electronics Corporation for
the design, development and manufacture of the terrestrial repeaters.
Payments under this contract are expected to be approximately $128,000,000.
As of September 30, 2000, XM had paid $12,858,000 under this contract.
15
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(g) General Motors Distribution Agreement
XM 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 XM's commercial operations, General Motors has agreed to
distribute the service to the exclusion of other S-band satellite digital
radio services. XM 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. XM 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, XM has agreed to subsidize a portion of
the cost of XM radios, and to make incentive payments to General Motors when
the owners of General Motors vehicles with installed XM radios become
subscribers for XM's service. XM 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. XM will
also make available to General Motors bandwidth on XM's systems. The
agreement is subject to renegotiations at any time based upon the
installation of radios that are compatible with a unified standard or capable
of receiving Sirius Satellite Radio's service. The agreement is subject to
renegotiations if, four years after the commencement of XM'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 XM'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 XM commences commercial operations and at two-year intervals
thereafter, XM fails to achieve and maintain specified minimum market share
levels in the satellite digital radio service market.
(h) Sony Warrant
In February 2000, Holdings issued a warrant to Sony exercisable for shares of
Holdings' Class A common stock. The warrant will vest at the time that XM
attains its millionth customer, and the number of shares underlying the
warrant will be determined by the percentage of XM Radios that have a Sony
brand name as of the vesting date. If Sony achieves its maximum performance
target, it will receive 2% of the total number of shares of Holdings' 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
Holdings' Class A common stock on the vesting date, determined based upon the
20-day trailing average.
(i) Prior Litigation
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite radio
license, commenced an action against XM in the United States District Court
for the Southern District of New York, alleging that XM was infringing or
would infringe three patents assigned to Sirius Radio. In its complaint,
Sirius Radio sought money damages to the extent XM 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 XM and Sirius Radio and both companies
agreed to cross-license their respective property. Each party is obligated to
fund one half of the development cost for 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 amounts for
these fees or credits will be determined over time by agreement of the
parties or by arbitration. However, if this agreement is terminated before
the value of the license has been determined due to XM's failure to perform a
material covenant or obligation, then this suit could be refiled.
16
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(j) Holdings' Issuance of Series C Convertible Redeemable Preferred Stock
On July 7, 2000, Holdings reached an agreement for a private offering
of 235,000 shares of its Series C convertible redeemable preferred stock for
$1,000.00 per share, which closed on August 8, 2000 and yielded net proceeds
of approximately $206,379,000, which were contributed to XM as additional
paid-in capital and a stock subscription of $20,000,000, which earns interest
at 7% per annum and is payable on November 30, 2000. The Series C convertible
redeemable preferred stock provides for 8.25% cumulative dividends payable in
cash. The Series C convertible redeemable preferred stock is convertible, at
the holders' option, into Holdings' Class A common stock at the conversion
price then in effect. Currently, the conversion price is $26.50, but may
change upon the occurrence of certain dilutive events. At its option,
Holdings may redeem the Series C convertible redeemable preferred stock
beginning on February 8, 2005 in cash or, at the holder's option, in Class A
common stock. Holdings must redeem the Series C convertible redeemable
preferred stock in Class A common stock on February 1, 2012.
(k) Accounting for Repriced Stock Options
During the quarter, XM adopted Financial Accounting Standards Board
Interpretation No.44, Accounting for Certain Transactions Involving Stock
Compensation, (FIN 44) effective July 1, 2000 to account for all options
repriced by XM during the period covered by FIN 44. The application resulted
in additional compensation expense of $4,787,000 recognized during the
quarter ended September 30, 2000. Additional compensation charges may result
depending upon the market value of the common stock at each balance sheet
date.
17
<PAGE>
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other sections herein,
including statements regarding the development of our business, the markets for
our services, our anticipated capital expenditures, and other similar statements
are forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) which can be identified as any
statement that does not relate strictly to historical or current facts.
Forward-looking statements use such words as "plans," "expects," "will," "will
likely result," "are expected to," "will continue," "is anticipated,"
"estimate," "project," "believes," "anticipates," "intends," "may," "should,"
"continue," "seek," "could" and other similar reasonable expressions. Although
we believe that our expectations are based on reasonable assumptions, we can
give no assurance that our expectations will be achieved. The important factors
that could cause actual results to differ materially from those in the
forward-looking statements herein (the "Cautionary Statements") include, without
limitation, the key factors that have a direct bearing on our future results of
operations. These are the potential risk of delay in implementing our business
plan; possible increased costs of construction and launch of necessary
satellites; dependence on Boeing Satellite Systems International, Inc. ("BSS" -
formerly Hughes Space and Communications, Inc.), LCC International, and consumer
electronics manufacturers; the availability of receivers and antennas; risk of
launch failure; unproven market for our proposed service; unproven application
of existing technology; difficulties in developing with Sirius Radio a unified
standard for satellite radio; our need for additional financing, as well as
other risks referenced from time to time in filings with the SEC, including XM
Satellite Radio Holdings Inc's Form S-1, filed September 7, 2000. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the Cautionary
Statements. We do not undertake any obligation to release publicly any revisions
to such forward-looking statements to reflect the occurrence of unanticipated
events.
The following discussion and analysis should be read in conjunction with our
Condensed Consolidated Financial Statements and Notes thereto included herewith,
and with our Management's Discussion and Analysis of Financial Condition and
Results of Operations and audited consolidated financial statements and notes
thereto for the three year period ended December 31, 1999, and for the period
from December 15, 1992 (date of inception) to December 31, 1999, included in our
Annual Report on Form 10-K as well as the Form S-4 filed in September, 2000 for
XM Satellite Radio Inc.
INTRODUCTION
This quarterly report is filed jointly by XM Satellite Radio Holdings Inc.
("Holdings") and XM Satellite Radio Inc. ("XM"). XM is a wholly-owned subsidiary
of Holdings. Accordingly, the management's discussion and analysis section of
this report focuses on the financial condition and results of operations of
Holdings but contains an explanation of any differences between the two
companies.
OVERVIEW
XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly-owned
subsidiary of Motient Corporation ("Motient"), formerly American Mobile
Satellite Corporation. XM Satellite Radio Holdings Inc. became a holding company
for XM Satellite Radio Inc. in early 1997.
In October 1999, Holdings completed an initial public offering which yielded net
proceeds of $114.1 million. Concurrent with the closing of its initial public
offering, $250.0 million of Holdings' Series A subordinated convertible notes,
together with associated accrued interest, converted into shares of Holdings'
Series A convertible preferred stock and shares of Holdings' Class A common
stock. The net proceeds from these offerings were contributed to XM.
Additionally, $103.1 million of convertible notes issued to Motient by Holdings,
together with associated accrued interest, converted into shares of Holdings'
Class B common stock.
18
<PAGE>
In the first three quarters of 2000:
. Holdings completed a follow-on offering of 4,370,000 shares of its
Class A common stock, which yielded net proceeds of $132.1 million
that were contributed to XM;
. Holdings completed a concurrent offering of 2,000,000 shares of Series
B convertible redeemable preferred stock, which yielded net proceeds
of $96.5 million that were contributed to XM, and
. Holdings and XM completed a private placement of 325,000 units, each
consisting of $1,000 principal amount of 14% senior secured notes due
2010 of XM and one warrant to purchase 8.024815 shares of Holdings'
Class A common stock at $49.50 per share, which yielded net proceeds
of $191.3 million excluding $123.0 million for an interest reserve,
after $65.7 million was contributed to XM by Holdings.
. Holdings completed a private placement of 235,000 shares of its Series
C convertible redeemable preferred stock for $1,000.00 per share,
which yielded net proceeds of approximately $206,379,000 that were
contributed to XM and a stock subscription of $20,000,000. The
issuance of the Series C preferred stock caused the exercise price of
the warrants sold in March 2000 to be adjusted to $47.94.
We are in the development stage. Since our inception in December 1992, we
have devoted our efforts to establishing and commercializing the XM Radio
system. Our activities were fairly limited until 1997, when we pursued and
obtained regulatory approval from the FCC to provide satellite radio service.
Our principal activities to date have included
. designing and developing the XM Radio system;
. negotiating contracts with satellite and launch vehicle operators,
specialty programmers, radio manufacturers and car manufacturers;
. developing technical standards and specifications;
. conducting market research; and
. securing financing for working capital and capital expenditures.
We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement of
commercial operations.
We intend to capitalize all costs related to our satellite contract and our FCC
license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground control
stations. Depreciation of our satellites will commence upon in-orbit delivery.
Depreciation of our satellite control facilities and terrestrial repeaters and
the amortization of our FCC license will commence upon commercial operations.
After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.
Results of Operations
Three Months Ended September 30, 2000 Compared With Three Months Ended September
30, 1999
<TABLE>
<CAPTION>
Holdings XM
------------------ ------------------
Three months ended Three months ended
------------------ ------------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Research and development..................... $ 2,895 $ 2,219 $ 2,895 $ 2,219
Professional fees............................ 5,747 3,372 5,747 3,372
General and administrative expenses.......... 19,467 3,783 19,460 2,982
Interest income.............................. 8,049 855 7,680 30
Interest expense............................. -- (8,883) -- (43)
Net loss..................................... (20,060) (17,402) (20,422) (8,586)
</TABLE>
19
<PAGE>
XM Satellite Radio Holdings Inc. and Subsidiaries
Research and Development. Research and development expenses increased to
approximately $2.9 million for the three months ended September 30, 2000,
compared with approximately $2.2 million for the three months ended September
30, 1999. The increase in the research and development expenses primarily
resulted from the increased activity relating to our system technology
development during the third quarter of 2000.
Professional Fees. Professional fees increased to approximately $5.7 million for
the three months ended September 30, 2000, compared with $3.4 million for the
three months ended September 30, 1999. The increase primarily reflects
additional legal, regulatory and marketing expenses as we engaged more
consultants, including incurring $2.8 million for enterprise information
technology consultants. We expect the professional fees to trend upward as we
continue to develop market strategies.
General and Administrative. General and administrative expenses increased to
$19.5 million for the three months ended September 30, 2000, compared with $3.8
million for the three months ended September 30, 1999. The increase reflects
increased headcount, facilities, equipment, and sales and marketing expenses. We
have granted certain key executives stock options and recorded a non-cash
compensation charge of approximately $1.2 million in the third quarter of 2000
primarily for performance-based stock options. We also recorded non-cash
compensation charges of approximately $4.8 million during the quarter as a
result of adopting the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 44, Accounting for Certain Transactions Involving
Stock Compensation ("FIN 44"). We will continue to recognize quarterly non-cash
compensation charges in accordance with FIN 44 depending on the market value of
Holdings' Class A common stock at the end of each quarter. We also continued the
amortization of goodwill and other intangibles during the third quarter of 2000.
We anticipate general and administrative expenses to continue to increase
through commercial operations.
Interest Income. Interest income increased to $8.0 million for the three months
ended September 30, 2000, compared to the three months ended September 30, 1999,
which was insignificant. The increase was the result of higher average balances
of cash and cash equivalents during the three months ended September 30, 2000,
as increased by the proceeds from the private placement of Series C convertible
redeemable preferred stock in the third quarter of 2000, which exceeded
expenditures for satellite and launch vehicle construction, other capital
expenditures and operating expenses.
Interest Expense. We capitalized interest costs of $13.3 million and $9.3
million associated with our FCC license and the XM Radio system during the three
months ended September 30, 2000 and 1999, respectively. The increase in interest
costs was the result of the incurrence of new debt during the first quarter of
2000. Further, the interest capitalization threshold was exceeded during the
quarter ended September 30, 1999.
Net Loss. The net loss for the three-month periods ended September 30, 2000 and
1999 was $20.1 million and $17.4 million, respectively. The increase in net
losses for the three months ended September 30, 2000, compared with the three
months ended September 30, 1999, reflects additional general and administration
expenses, primarily due to increased headcount, facility, equipment, and sales
and marketing expenses in preparation for commercial operations and the
amortization of goodwill and intangibles.
XM Satellite Radio Inc. and Subsidiary
The results of operations for XM and its subsidiary were substantially the same
as the results for Holdings and its subsidiaries discussed above. The results of
XM's operations were also impacted by an increase in interest income to $7.7
million as a result of higher average balances of cash and cash equivalents
exceeding the amounts of expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
20
<PAGE>
Nine Months Ended September 30, 2000 Compared With Nine Months Ended September
30, 1999
<TABLE>
<CAPTION>
Holdings XM
----------------- -----------------
Nine months ended Nine months ended
----------------- -----------------
September 30, September 30,
------------- -------------
2000 1999 2000 1999
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Research and development..................... $ 7,634 $ 3,597 $ 7,634 $ 3,597
Professional fees............................ 16,534 5,932 16,460 5,932
General and administrative expenses.......... 34,766 8,883 34,696 7,485
Interest income.............................. 21,046 931 20,664 106
Interest expense............................. -- (8,883) -- (43)
Net loss..................................... (37,888) (25,767) (38,126) (16,951)
</TABLE>
XM Satellite Radio Holdings Inc. and Subsidiaries
Research and Development. Research and development expenses increased to
approximately $7.6 million for the nine months ended September 30, 2000,
compared with approximately $3.6 million for the nine months ended September 30,
1999. The increase in the research and development expenses primarily resulted
from increased activity relating to our system technology development during the
nine months.
Professional Fees. Professional fees increased to approximately $16.5 million
for the nine months ended September 30, 2000, compared with $5.9 million for the
nine months ended September 30, 1999. The increase primarily reflects additional
legal, regulatory and marketing expenses as we engaged more consultants,
including incurring $8.4 million for enterprise information technology
consultants. We expect the professional fees to trend upward as we continue to
develop market strategies.
General and Administrative. General and administrative expenses increased to
$34.8 million for the nine months ended September 30, 2000, compared with $8.3
million for the nine months ended September 30, 1999. The increase reflects
increased headcount, facilities, equipment, and sales and marketing expenses. We
have granted certain key executives stock options and incurred a non-cash
compensation charge of approximately $3.5 million in the first nine months of
2000 primarily for performance-based stock options. We also recorded non-cash
compensation charges of approximately $4.8 million during the quarter as a
result of adopting the provisions of FIN 44. We will continue to recognize
quarterly non-cash compensation charges in accordance with FIN 44 depending on
the market value of Holdings' Class A common stock at the end of each quarter.
We also continued the amortization of goodwill and other intangibles during the
first nine months of 2000. We anticipate general and administrative expenses to
continue to increase through commercial operations.
Interest Income. Interest income increased to $21.0 million for the nine months
ended September 30, 2000, compared to the nine months ended September 30, 1999,
which was insignificant. The increase was the result of higher average balances
of cash and cash equivalents during the nine months ended September 30, 2000,
due to the proceeds from the private placement of 14% senior secured notes and
warrants, the public offerings of Class A common stock and Series B convertible
redeemable preferred stock and the private placement of Series C convertible
redeemable preferred stock, all in the first nine months of 2000, which exceeded
expenditures for satellite and launch vehicle construction, other capital
expenditures and operating expenses.
Interest Expense. We capitalized interest costs of $28.8 million and $17.6
million associated with our FCC license and the XM Radio system during the nine
months ended September 30, 2000 and 1999, respectively. The increase in interest
costs was the result of the incurrence of new debt during the first quarter of
2000. Further, the interest capitalization threshold was exceeded during the
nine months ended September 30, 1999.
Net Loss. The net loss for the nine-month periods ended September 30, 2000 and
1999 was $37.9 million and $25.8 million, respectively. The increase in net
losses for the nine months ended September 30, 2000, compared with the nine
months ended September 30, 1999, reflects increases in research and development
and professional fees expenses, and additional general and administration
expenses, primarily due to increased headcount, facility, equipment, and sales
and marketing expenses in preparation for commercial operations and the
amortization of goodwill and intangibles.
21
<PAGE>
XM Satellite Radio Inc. and Subsidiary
The results of operations for XM and its subsidiary were substantially the same
as the results for Holdings and its subsidiaries discussed above. The results of
XM's operations were also impacted by an increase in interest income to $20.7
million as a result of higher average balances of cash and cash equivalents
exceeding the amounts of expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000, we had a total of cash and cash equivalents of $312.7
million, which excludes the $154.1 million of restricted investments, and
working capital of $351.7 million, compared with cash, cash equivalents and
short-term investments of $120.2 million and working capital of $94.7 million at
December 31, 1999. The increases in the respective balances are due primarily to
the proceeds from the issuance of Holdings' Series B convertible redeemable
preferred stock, which yielded net proceeds of $96.5 million, a concurrent
follow-on offering of Holdings' Class A common stock, which yielded net proceeds
of $132.1 million, a private placement of XM's 14% senior secured notes and
Holdings' warrants, which yielded net proceeds of $191.3 million, and the
issuance of Holdings' Series C convertible redeemable preferred stock which
yielded net proceeds of $206.4 million and a stock subscription of $20.0
million, which in the aggregate, exceeded capital expenditures and operating
expenses for the nine months ended September 30, 2000.
Funds Required for XM Radio Through Commencement of Commercial Operations
We estimate that we will require approximately $1.1 billion to develop and
implement the XM Radio system from inception through the commencement of
commercial operations, targeted for the second quarter of 2001. Since inception,
we have raised an aggregate of $1.1 billion, net of expenses, interest reserve
and repayment of debt. These funds are expected to be sufficient, in the absence
of additional financing, to cover funding needs until we commence commercial
operations.
Sources of Funds
To date, we have raised principally through Holdings approximately $1.1 billion
of net proceeds, net of expenses, interest reserve and repayment of debt. These
funds have been used to acquire our FCC license, make required payments for our
system, including the satellites, terrestrial repeater system, and ground
networks, and for working capital and operating expenses.
In the first three quarters of 2000:
. Holdings completed a follow-on offering of 4,370,000 shares of Class A
common stock, yielding net proceeds of $132.1 million that were
contributed to XM;
. Holdings completed a concurrent offering of 2,000,000 shares of its
Series B convertible redeemable preferred stock, which yielded net
proceeds of $96.5 million that were contributed to XM; and
. Holdings and XM completed a private placement of 325,000 units, each
consisting of $1,000 principal amount of 14% senior secured notes due
2010 of XM, and one warrant to purchase 8.024815 shares of Holdings'
Class A common stock at $49.50 per share that provided net proceeds of
$191.3 million excluding $123.0 million for an interest reserve, after
$65.7 million was contributed to us from Holdings.
. Holdings closed a private offering of 235,000 shares of its Series C
convertible redeemable preferred stock, which yielded net proceeds of
approximately $206.4 million that were contributed to XM and a stock
subscription of $20.0 million. Holdings recorded a $123.0 million
beneficial conversion charge that reduced earnings available to common
stockholders. The issuance of the Series C preferred stock also caused
the exercise price of the warrants sold in March 2000 to be adjusted
to $47.94.
22
<PAGE>
Uses of Funds
Of the approximately $1.1 billion of funds to be used through commencement of
commercial operations, an estimated $569.4 million are expected to be incurred
under contracts presently in place and for our FCC license, which has already
been paid for in full. Total capital expenditures from inception to September
30, 2000 totaled $682.7 million.
Satellite Contract. Under our satellite contract, Boeing Satellite Systems
International, Inc. ("BSS" - formerly Hughes Space and Communications, Inc.)
will deliver two satellites in orbit and complete construction of a ground spare
satellite. BSS 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 BSS to complete the ground spare satellite. This amount does
not include incentive payments, which will depend in part on projected satellite
performance at the acceptance date. Such payments could total up to an
additional $68.7 million over the useful lives of the satellites. As of
September 30, 2000, we had paid approximately $461.1 million under our satellite
contract and have recognized an additional $1.5 million in accrued milestone
payments.
Launch Insurance. Based on current industry estimates, we expect that launch
insurance for both satellites will cost approximately $50.0 million. As of
September 30, 2000, we had paid $3.7 million with respect to launch insurance.
Terrestrial Repeater System. Based on the current design of the XM Radio system
and existing contracts, we estimate that through our expected commencement of
operations in the second quarter of 2001 we will incur aggregate costs of
approximately $263.3 million for a terrestrial repeater system. We expect these
costs to cover the capital cost of the design, development and installation of a
system of terrestrial repeaters to cover approximately 70 cities and
metropolitan areas. As of September 30, 2000, we had incurred costs with respect
to the terrestrial repeater buildout of $56.6 million. In August 1999, we signed
a contract with LCC International, Inc., a related party, calling for payments
of approximately $115.0 million for engineering and site preparation. As of
September 30, 2000, we had paid $30.8 million under this contract and accrued an
additional $12.9 million. We also entered into a contract effective October 22,
1999, with Hughes Electronics Corporation for the design, development and
manufacture of the terrestrial repeaters. Payments under this contract are
expected to be approximately $128.0 million. As of September 30, 2000, we had
paid $12.9 million under this contract.
Ground Segment. Based on the design of the XM Radio system, available research
and existing contracts, we expect to incur aggregate ground segment costs
through the expected commencement of operations in the second quarter of 2001 of
approximately $65.9 million. We expect these costs will cover the satellite
control facilities, programming production studios and various other equipment
and facilities. As of September 30, 2000, we had incurred $48.2 million with
respect to the ground segment.
FCC License. In October 1997, we received one of two satellite radio licenses
issued by the FCC. We have paid approximately $90.0 million for this license,
including the initial bid right. There are no further payments required relating
to the license.
Operating Expenses and Working Capital Requirements. In addition to the above
capital needs, we will require funds for working capital, operating expenses and
royalty payments currently estimated to be approximately $138.3 million through
targeted commercial launch in the second quarter of 2001. From inception through
September 30, 2000, we have incurred total expenses of $92.6 million.
Joint Development Agreement Funding Requirements. We may require additional
funds to pay license fees or make contributions towards the development of the
technologies used to develop a unified standard for satellite radios under our
joint development agreement with Sirius Radio. Each party is obligated to fund
one half of the development cost for such technologies. Each party will be
entitled to license fees or a credit towards its one half of the cost based upon
the validity, value, use, importance and available alternatives of the
technology it contributes. The amounts of these fees or credits will be
determined over time by agreement of the parties or by arbitration. We cannot
predict at this time the amount of license fees or contribution payable by us or
Sirius Radio or the size of the credits to us and Sirius Radio from the use of
the other's technology. This may require significant additional capital.
23
<PAGE>
Funds Required Following Commencement of Commercial Operations
Even after commencement of commercial operations, we expect to need significant
additional funds to cover our cash requirements before we generate sufficient
cash flow from operations to cover our expenses. We cannot accurately estimate
the amount of additional funds needed, since it will depend on business
decisions to be made in the future and revenues received from operations, but we
expect the amount to be substantial. Funds will be needed to cover operating
expenses, marketing and promotional expenses including an extensive marketing
campaign in connection with the launch of our service, distribution expenses,
programming costs and any further development of the XM Radio system that we may
undertake after operations commence. Marketing and distribution expenses are
expected to include joint advertising and joint development with and
manufacturing subsidies of certain costs of some of our manufacturers and
distribution partners. We cannot estimate accurately the total amount of these
operational, promotional, subscriber acquisition, joint development and
manufacturing costs and expenses, but they are expected to be substantial.
We will have significant payment obligations after commencement of operations
under our distribution agreement with General Motors. We will pay an aggregate
of approximately $35 million in the first four years following commencement of
commercial service. After that, through 2009, we will have additional fixed
annual payments ranging from less than $35 million to approximately $130
million, aggregating approximately $400 million. In order to encourage the broad
installation of XM radios, we have agreed to subsidize a portion of the cost of
XM radios and to make incentive payments to General Motors when the owners of
General Motors vehicles with installed XM radios become subscribers for the XM
Radio service. We must also share with General Motors a percentage of the
subscription revenue attributable to General Motors vehicles with installed XM
radios. This percentage increases until there are more than eight million
General Motors vehicles with installed XM radios. This agreement is subject to
renegotiation if General Motors does not achieve and maintain specified
installation levels, starting with 1.24 million units after four years and
thereafter increasing by the lesser of 600,000 units per year and amounts
proportionate to our share of the satellite digital radio market.
We currently expect to satisfy our funding requirements for the period following
commencement of commercial operations by selling debt or equity securities and
by obtaining loans or other credit lines from banks or other financial
institutions. In addition, we plan to raise funds through vendor financing
arrangements associated with our terrestrial repeater project. If we are
successful in raising additional financing, we anticipate that a significant
portion of the financing will consist of debt. We are actively considering
possible financings, and because of our substantial capital needs we may
consummate one or more financings at any time.
We may not be able to raise any funds or obtain loans on favorable terms or at
all. Our ability to obtain the required financing depends on several factors,
including future market conditions; our success or lack of success in
developing, implementing and marketing our satellite radio service; our future
creditworthiness; and restrictions contained in agreements with our investors or
lenders. If we fail to obtain any necessary financing on a timely basis, a
number of adverse effects could occur. We could default on our commitments to
creditors or others and may have to discontinue operations or seek a purchaser
for our business or assets.
Recent Accounting Pronouncement
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 further defines the accounting consequences of
various modifications to the terms of a previously fixed stock option or award
under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44
became effective on July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In July 1999, Holdings repriced 818,339 options and FIN 44 requires that these
options be accounted for as variable from July 1, 2000 until the date the award
is exercised, is forfeited, or expires unexercised. For those options that have
vested as of July 1, 2000, compensation cost is recognized only to the extent
that the exercise price exceeds the stock price on July 1, 2000. For those
options that have not vested as of July 1, 2000, the portion of the award's
intrinsic value measured at July 1, 2000 is recognized over the remaining
vesting period. Additional compensation cost is measured for the full amount of
any increases in stock price after the effective date and is recognized over the
remaining vesting period. Any adjustment to compensation cost for further
changes in the stock price after the award vests is recognized immediately. The
effects of implementing FIN 44 required Holdings to recognize additional
non-cash
24
<PAGE>
compensation of $4.8 million during the third quarter of 2000.
Item 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, we do not have any derivative financial instruments
and do not intend to use derivatives. We invest our cash in short-term
commercial paper, investment-grade corporate and government obligations and
money market funds. Our long-term debt includes a fixed interest rate and the
fair market value of the debt is sensitive to changes in interest rates. We run
the risk that market rates will decline and the required payments will exceed
those based on current market rates. Under our current policies, we do not use
interest rate derivative instruments to manage our exposure to interest rate
fluctuations. Additionally, we believe that our exposure to interest rate risk
is not material to our results of operations.
25
<PAGE>
PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against us in the United States District
Court for the Southern District of New York, alleging that we were infringing or
would infringe three patents assigned to Sirius Radio. In its complaint, Sirius
Radio sought money damages to the extent we manufactured, used or sold any
product or method claimed in their patents and injunctive relief. This suit was
dismissed without prejudice in February 2000 in accordance with the terms of a
joint development agreement between XM Satellite Radio Inc. and Sirius Radio in
which both companies agreed to develop a unified standard for satellite radios
and license our respective intellectual property, including the patents that
were the subject of the suit, for use in this joint development. If this
agreement is terminated before the value of the licenses has been determined due
to our failure to perform a material covenant or obligation, then this suit
could be refiled.
Item 2. Changes in Securities and Use of Proceeds.
On August 8, 2000, Holdings completed a private placement of 235,000
shares of 8.25% Series C convertible redeemable preferred stock, which yielded
gross proceeds of $235,000,000, or net proceeds of approximately $227,000,000
after expenses. The Series C preferred stock is convertible, at the holders'
option, into Holdings' Class A common stock at the conversion price then in
effect. Currently, the conversion price is $26.50. The Series C convertible
redeemable preferred stock may be redeemed beginning on February 8, 2005 in cash
or, at the holder's option, in Class A Common Stock. Holdings must redeem the
Series C convertible redeemable preferred stock in Class A common stock on
February 1, 2012. This sale was exempt from registration under Section 4(2) of
the Securities Act of 1933 and Regulation D thereunder.
In August 2000, Holdings issued 1,700,016 shares of its Class A common
stock in exchange for 1,132,711 shares of its outstanding 8.25% Series B
convertible redeemable preferred stock in transactions that were exempt from
registration under Section 3(a)(9) of the Securities Act of 1933. The Class A
common stock issued was previously registered in January 2000.
On October 11, 2000, XM completed its offer to holders of its 14%
Senior Secured Notes to exchange their Notes for Notes that had been registered
under the Securities Act of 1933.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) At the annual meeting of the stockholders of XM Satellite Radio
Holdings Inc., held on May 31, 2000, the matters described under (b)
and (c) below were voted upon.
(b) The following nominees, constituting all of Holdings' directors at that
time, were elected to Holdings' board of directors:
Votes for Votes Withheld
--------- --------------
Gary M. Parsons 80,214,177 15,275
Hugh Panero 80,214,177 15,275
Nathaniel A. Davis 80,217,693 11,859
Thomas J. Donohue 80,217,692 11,860
Randall T. Mays 79,974,072 255,480
Randy S. Segal 80,213,777 15,775
Jack Shaw 80,213,777 15,775
Rajendra Singh 80,214,173 15,379
Ronald L. Zarrella 79,972,582 256,970
26
<PAGE>
(c)(1) The vote on the amendment to the Holdings' 1998 Shares Award Plan to
increase the number of shares of Class A common stock that may be issued under
the plan was 72,310,929 for, 1,819,569 against, 432,089 abstaining.
(2) The vote on the ratification of KPMG LLP as the independent public
accountants of XM Satellite Radio Holdings Inc. for the 2000 fiscal year was
80,217,782 for, 7,343 against, 4,427 abstaining.
Item 5. Other information.
Motient Corporation (formerly American Mobile Satellite Corporation) is
Holdings' controlling stockholder. Motient has certain rights regarding the
election of persons to serve on Holdings' board of directors and as of the date
of this report, holds approximately 54% of the voting power of Holdings, or 46%
giving effect to the conversion of all of Holdings' outstanding common stock
equivalents. Motient cannot relinquish its position as Holdings' controlling
stockholder, its right to designate a majority of Holdings' directors or hold
less than 40% of Holdings' voting power without obtaining the prior approval of
the FCC.
On July 14, 2000, Holdings filed an application with the FCC to allow
Holdings to transfer its control from Motient to a diffuse group of owners, none
of whom will have controlling interest. This application is pending with the
FCC. If the application is granted, Motient would still retain its Board of
Directors membership but would no longer have the right to elect a majority of
Holdings' Board of Directors.
27
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit No. Description
---------- -----------
3.1/\ Restated Certificate of Incorporation of XM Satellite Radio Holdings
Inc.
3.2/\ Restated Bylaws of XM Satellite Radio Holdings Inc.
3.3 Restated Certificate of Incorporation of XM Satellite Radio Inc.
(incorporated by reference to XM's Registration Statement on Form S-4,
File No. 333-39178).
3.4 Amended and Restated Bylaws of XM Satellite Radio Inc. (incorporated
by reference to XM's Registration Statement on Form S-4, File No. 333-
39178).
4.1 Form of Certificate for Holdings' Class A common stock (incorporated
by reference to Exhibit 3 to Holdings' Registration Statement on Form
8-A, filed with the SEC on September 23, 1999).
4.2 Form of Certificate for Holdings' 8.25% Series B Convertible
Redeemable Preferred Stock (incorporated by reference to Holdings'
Registration Statement on Form S-1, File No. 333-93529).
4.3 Certificate of Designation Establishing the Voting Powers,
Designations, Preferences, Limitations, Restrictions and Relative
Rights of 8.25% Series B Convertible Redeemable Preferred Stock due
2012 (incorporated by reference to Holdings' Annual Report on Form 10-
K for the fiscal year ended December 31, 1999, filed with the SEC on
March 16, 2000).
4.4 Warrant to purchase shares of Holdings' Class A common stock, dated
February 9, 2000, issued to Sony Electronics, Inc. (incorporated by
reference to Holdings' quarterly report on Form 10-Q for the quarter
ended March 31, 2000, filed with the SEC on May 12, 2000).
4.5 Warrant Agreement, dated March 15, 2000, between XM Satellite Radio
Holdings Inc. as Issuer and United States Trust Company of New York as
Warrant Agent (incorporated by reference to Holdings' Registration
Statement on Form S-1, File No. 333-39176).
4.6 Warrant Registration Rights Agreement, dated March 15, 2000, between
XM Satellite Radio Holdings Inc. and Bear, Stearns & Co., Inc.,
Donaldson, Lufkin and Jenrette Securities Corporation, Salomon Smith
Barney Inc. and Lehman Brothers Inc. (incorporated by reference to
Holdings' Registration Statement on Form S-1, File No. 333-39176).
4.7 Form of Warrant (incorporated by reference to Holdings' Registration
Statement on Form S-1, File No. 333-39176).
4.8 Certificate of Designation Establishing the Powers, Preferences,
Rights, Qualifications, Limitations and Restrictions of the 8.25%
Series C Convertible Redeemable Preferred Stock due 2012 (incorporated
by reference to Holdings' Registration Statement on Form S-1, File No.
333-39176).
4.9 Form of Certificate for Holdings' 8.25% Series C Convertible
Redeemable Preferred Stock (incorporated by reference to the
Registrant's Registration Statement on Form S-1, File No. 333-39176).
4.10 Indenture, dated as of March 15, 2000, between XM Satellite Radio Inc.
and United States Trust Company of New York (incorporated by reference
to XM's Registration Statement on Form S-4, File No. 333-39178).
28
<PAGE>
4.11 Registration Rights Agreement, dated March 15, 2000, between XM
Satellite Radio Inc. and Bear, Stearns & Co. Inc., Donaldson, Lufkin
and Jenrette Securities Corporation, Salomon Smith Barney Inc. and
Lehman Brothers Inc. (incorporated by reference to XM's Registration
Statement on Form S-4, File No. 333-39178).
4.12 Form of 14% Senior Secured Note of XM Satellite Radio Inc.
(incorporated by reference to XM's Registration Statement on Form S-4,
File No. 333-39178).
4.13 Security Agreement, dated March 15, 2000, between XM Satellite Radio
Inc. and United States Trust Company of New York (incorporated by
reference to XM's Registration Statement on Form S-4, File No. 333-
39178).
4.14 Pledge Agreement, dated March 15, 2000, between XM Satellite Radio
Inc. and United States Trust Company of New York (incorporated by
reference to XM's Registration Statement on Form S-4, File No. 333-
39178).
10.1 Amended and Restated Shareholders' Agreement, dated as of August 8,
2000, by and among XM Satellite Radio Holdings Inc., Motient
Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital
Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio
Partners, LLC, Columbia Capital Equity Partners III (QP), L.P.,
Columbia XM Satellite Partners III, LLC, DIRECTV Enterprises, Inc.,
General Motors Corporation, Madison Dearborn Capital Partners III,
L.P., Special Advisors Fund I, LLC, Madison Dearborn Special Equity
III, L.P., American Honda Motor Co., Inc. and Telcom-XM Investors,
L.L.C. (incorporated by reference to Holdings' Registration Statement
on Form S-1, File No. 333-39176).
10.2 Amended and Restated Registration Rights Agreement, dated as of August
8, 2000, by and among XM Satellite Radio Holdings Inc., Motient
Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital
Asset Fund, Clear Channel Investments, Inc.,Columbia XM Radio
Partners, LLC, Columbia Capital Equity Partners III (QP), L.P.,
Columbia XM Satellite Partners III, LLC, DIRECTV Enterprises, Inc.,
General Motors Corporation, Madison Dearborn Capital Partners III,
L.P., Special Advisors Fund I, LLC, Madison Dearborn Special Equity
III, L.P., American Honda Motor Co., Inc. and Telcom-XM Investors,
L.L.C. (incorporated by reference to Holdings' Registration Statement
on Form S-1, File No. 333-39176).
10.3/\ Note Purchase Agreement, dated June 7, 1999, by and between XM
Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear Channel
Communications, Inc., DIRECTV Enterprises, Inc., General Motors
Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio Partners,
LLC, Madison Dearborn Capital Partners III, L.P., Madison Dearborn
Special Equity III, L.P., and Special Advisors Fund I, LLC (including
form of Series A subordinated convertible note of XM Satellite Radio
Holdings Inc. attached as Exhibit A thereto).
10.4/\* Technology Licensing Agreement by and among XM Satellite Radio Inc.,
XM Satellite Radio Holdings Inc., WorldSpace Management Corporation
and American Mobile Satellite Corporation, dated as of January 1,
1998, amended by Amendment No. 1 to Technology Licensing Agreement,
dated June 7, 1999.
10.5/\* Technical Services Agreement between XM Satellite Radio Holdings Inc.
and American Mobile Satellite Corporation, dated as of January 1,
1998, as amended by Amendment No. 1 to Technical Services Agreement,
dated June 7, 1998.
10.6/\* Satellite Purchase Contract for In-Orbit Delivery, by and between XM
Satellite Radio Inc. and Hughes Space and Communications International
Inc., dated July 21, 1999.
10.7/\* Amended and Restated Agreement by and between XM Satellite Radio Inc.
and STMicroelectronics Srl, dated September 27, 1999.
10.8/\* Distribution Agreement, dated June 7, 1999, between OnStar, a division
of General Motors Corporation, and XM Satellite Radio Inc.
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<PAGE>
10.9/\* Operational Assistance Agreement, dated as of June 7, 1999, between XM
Satellite Radio Inc. and DIRECTV, INC.
10.10/\* Operational Assistance Agreement, dated as of June 7, 1999, between XM
Satellite Radio Inc. and Clear Channel Communication, Inc.
10.11/\* Operational Assistance Agreement, dated as of June 7, 1999, between XM
Satellite Radio Inc. and TCM, LLC.
10.12/\ Agreement, dated as of July 16, 1999, between XM Satellite Radio
Holdings Inc. and Gary Parsons.
10.13/\ Employment Agreement, dated as of June 1, 1998, between XM Satellite
Radio Holdings Inc. and Hugh Panero.
10.14/\ Letter Agreement with Lee Abrams dated May 22, 1998.
10.15/\ Letter Agreement with Stelios Patsiokas dated September 14, 1998
10.16/\ Letter Agreement with Heinz Stubblefield dated May 22, 1998.
10.17/\ Form of Indemnification Agreement between XM Satellite Radio Holdings
Inc. and each of its directors and executive officers.
10.18 1998 Shares Award Plan (incorporated by reference to Holdings'
Registration Statement on Form S-8, File No. 333-42590).
10.19/\ Form of Employee Non-Qualified Stock Option Agreement.
10.20/\* Firm Fixed Price Contract #001 between XM Satellite Radio Inc. and the
Fraunhofer Gesellschaft zur Foderung Der angewandten Forschung e.V.,
dated July 16, 1999.
10.21/\* Contract for Engineering and Construction of Terrestrial Repeater
Network System by and between XM Satellite Radio Inc. and LCC
International, Inc., dated August 18, 1999.
10.22 Employee Stock Purchase Plan (incorporated by reference to Holdings'
Registration Statement on Form S-8, File No. 333-92049).
10.23/\ Non-Qualified Stock Option Agreement between Gary Parsons and XM
Satellite Radio Holdings Inc., dated July 16, 1999.
10.24/\ Non-Qualified Stock Option Agreement between Hugh Panero and XM
Satellite Radio Holdings Inc., dated July 1, 1998, as amended.
10.25/\ Form of Director Non-Qualified Stock Option Agreement.
10.26/\ Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio
Inc., dated September 29, 1999.
10.27 Letter Agreement with Stephen Cook dated January 12, 1999
(incorporated by reference to Holdings' Registration Statement on Form
S-1, File No. 333-93529).
10.28* Contract for the Design, Development and Purchase of Terrestrial
Repeater Equipment by and between XM Satellite Radio Inc. and Hughes
Electronics Corporation, dated February 14, 2000 (incorporated by
reference to Holdings' Annual Report on Form 10-K for the fiscal year
ended December 31, 1999, filed with the SEC on March 16, 2000).
30
<PAGE>
10.29* Joint Development Agreement, dated February 16, 2000, between XM
Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by
reference to the Holdings' quarterly report on Form 10-Q for the
quarter ended March 31, 2000, filed with the SEC on May 12, 2000)
21.1 Subsidiaries of XM Satellite Radio Holdings Inc. (incorporated by
reference to Holdings' Registration Statement on Form S-1, File No.
333-93529).
27.1 Financial Data Schedule of XM Satellite Radio Holdings Inc.
________________
/\ Incorporated by reference to Holdings' Registration Statement on Form S-1,
File No. 333-83619.
* Pursuant to the Commission's Orders Granting Confidential Treatment under
Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities
Exchange Act of 1934, certain confidential portions of this Exhibit were
omitted by means of redacting a portion of the text.
(b) Reports on Form 8-K.
On July 14, 2000, Holdings filed a Current Report on Form 8-K that reported
the issuance of a press release announcing Holdings' receipt of commitments
to purchase $235 million of a new series of preferred stock. Holdings filed
the press release as an exhibit.
31
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, each of
the registrants has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
XM SATELLITE RADIO HOLDINGS INC.
(Registrant)
November 13, 2000 By: /s/ Heinz Stubblefield
------------------------------------------
Heinz Stubblefield
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
XM SATELLITE RADIO INC.
(Registrant)
November 13, 2000 By: /s/ Heinz Stubblefield
------------------------------------------
Heinz Stubblefield
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer)
32