<PAGE>
As filed with the Securities and Exchange Commission on September 1, 2000
Registration No. 333-39178
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
AMENDMENT NO. 1 TO FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
XM Satellite Radio Inc.
(Exact name of registrant as specified in its charter)
Delaware 4899 52-1805102
(State of Incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
1500 Eckington Place, NE
Washington, DC 20002
(202) 380-4000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
________________
Joseph M. Titlebaum
Senior Vice President, General Counsel
and Secretary
XM Satellite Radio Inc.
1500 Eckington Place, NE
Washington, DC 20002
(202) 380-4000
(Name, address, including zip code, and telephone number,
including area code, of registrant's agent for service)
________________
Copies to:
Steven M. Kaufman, Esq.
Hogan & Hartson L.L.P.
555 Thirteenth Street, N.W.
Washington, D.C. 20004
(202) 637-5600
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act of 1933 registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act of 1933, check the following box and list the Securities Act
of 1933 registration statement number of the earlier effective registration
statement for the same offering. [_]
The registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
<PAGE>
Subject to Completion
Prospectus
$325,000,000
XM SATELLITE RADIO INC.
OFFER TO EXCHANGE ALL OUTSTANDING
14% SENIOR SECURED NOTES DUE MARCH 15, 2010
FOR 14% SENIOR SECURED NOTES DUE MARCH 15, 2010
___________________
Interest Payable March 15 and September 15,
Commencing September 15, 2000.
___________________
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON ________, 2000 UNLESS EXTENDED.
. We hereby offer to exchange all outstanding notes that are validly tendered
and not withdrawn for an equal amount of a new series of notes which are
registered under the Securities Act of 1933.
. The exchange offer will expire at 5:00 P.M., New York City time, on
________, 2000, unless extended.
. The exchange is subject to customary conditions, including that the
exchange offer not violate applicable law or any applicable interpretation
of the Staff of the Securities and Exchange Commission.
. You may withdraw your tender of your outstanding notes at any time before
the expiration of the exchange offer .
. We will not receive any proceeds from the exchange offer.
. The terms of the exchange notes to be issued are substantially identical to
the outstanding notes, except for the transfer restrictions and
registration rights relating to the outstanding notes.
. You may only tender your outstanding notes in denominations of $1,000 and
multiples of $1,000.
. The exchange of notes will not be a taxable exchange for U.S. federal
income tax purposes.
Please see "Risk Factors" beginning on page 12 for a discussion of certain
factors you should consider in connection with the exchange offer.
Neither the Securities and Exchange Commission nor any state securities
commission has approved the notes to be distributed in the exchange offer, nor
have any of these organizations determined that this prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
___________________
The date of this prospectus is September ___, 2000.
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TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
Summary ................................................................. 1
Risk Factors.............................................................. 10
The Exchange Offer........................................................ 22
Use of Proceeds........................................................... 31
Capitalization............................................................ 32
Selected Consolidated Financial Data...................................... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................................................. 35
Business.................................................................. 43
Management................................................................ 63
Certain Relationships and Related
Transactions........................................................... 71
Principal Stockholders.................................................... 77
Description of Capital Stock.............................................. 80
Description of Exchange Notes............................................. 88
Book Entry, Delivery and Form............................................. 124
Certain United States Federal Income Tax
Considerations......................................................... 127
Plan of Distribution...................................................... 132
Legal Matters............................................................. 132
Experts................................................................... 132
Available Information..................................................... 133
Index to Consolidated Financial
Statements............................................................. F-1
</TABLE>
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SUMMARY
The following summary highlights selected information from this prospectus.
It does not contain all of the information that is important to you. You should
carefully read this entire prospectus and the other documents to which this
document refers you, including the Letter of Transmittal. In addition, you
should carefully consider the factors set forth under the caption "Risk
Factors." Unless the context otherwise requires, the terms "we," "our," and
"us" refer to XM Satellite Radio Inc. ("XM"), the issuer of the notes, and its
subsidiary. The term "Holdings" refers to our parent company, XM Satellite
Radio Holdings Inc.
Our Business
We seek to become a premier nationwide provider of audio entertainment and
information programming. We will transmit our service, which we will call "XM
Radio," from our satellites to vehicle, home and portable radios. XM Radio plans
to offer up to 100 channels of music, news, talk, sports and children's
programming developed by us or third parties for a monthly subscription price of
$9.95. We believe XM Radio will appeal to consumers because of our clear sound
quality from digital signal radios, variety of programming and nationwide
coverage. We will build a subscriber base for XM Radio through multiple
distribution channels, including an exclusive distribution arrangement with
General Motors, other automotive manufacturers, car audio dealers and national
electronics retailers. We are presently a development stage company with no
revenue-generating operations, and we expect to commence commercial operation of
our service in the second quarter of 2001.
We hold one of only two licenses issued by the Federal Communications
Commission to provide satellite digital audio radio service in the United
States. We will broadcast XM Radio throughout the continental United States from
two of the most powerful commercial satellites available and will have a ground
spare in reserve. A network of terrestrial repeaters, which are ground-based
electronics equipment, will receive and re-transmit the satellite signals to
augment our satellite signal coverage.
We have contracts to develop, manufacture and distribute XM automobile
radios with Delco Electronics Corporation, Sony Electronics, Motorola Inc.,
Pioneer Electronics Corporation, Alpine Electronics, Mitsubishi Electric
Automotive America, Inc., Audiovox and Clarion Co. Ltd.; XM home and portable
radios with Sony Electronics and SHARP Corporation; and chipsets for XM radios
with STMicroelectronics. General Motors has signed a contract with Delphi
Automotive Systems Corp., the parent company of Delco Electronics, to
manufacture our radios for GM. Our radios will be capable of receiving both XM
Radio and traditional AM/FM stations.
We will offer our consumers a unique listening experience by providing up
to 100 channels of programming, coast-to-coast coverage and clear sound with our
digital signals. We will have original music and talk channels created by XM
Originals, our in-house programming unit, and channels created by well-known
providers of brand name programming. We have a team of programming professionals
with a proven record of introducing new radio formats and building local and
national listenership. Our programming providers will include the
following:
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<CAPTION>
Media Radio
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- Bloomberg News Radio - Hispanic Broadcasting Corporation (formerly Heftel)
- USA Today - Clear Channel Communications
- CNNfn, CNN en Espanol, CNN Sports Illustrated - Radio One
- C-SPAN Radio - Salem Communications
- Black Entertainment Television - AsiaOne
- DIRECTV - One-On-One Sports
- Weather Channel - BBC World Service
- Sporting News - NASCAR
</TABLE>
In addition to our subscription fee, we expect revenues from sales of
limited advertising time on a number of
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channels. XM Radio offers a new national radio platform for advertisers that
solves many of the problems associated with buying radio advertising nationally
on a spot or syndicated basis. Through affinity and niche programming, we will
give advertisers an effective way to market products and services to
geographically disparate groups.
As of August 8, 2000, we have raised $1.1 billion in debt and equity
proceeds, net of expenses and repayment of debt, from investors and strategic
partners, including $235 million from a Series C preferred stock financing in
August 2000. Our strategic investor companies include General Motors, DIRECTV,
Clear Channel Communications, American Honda, and our parent company, Motient
Corporation.
We believe that there is a significant market for XM Radio. Market data
show strong demand for radio service. Over 75% of the entire United States
population age 12 and older listens to the radio daily, and over 95% listens to
the radio weekly. A market study conducted for us projects that as many as 49
million people may subscribe to satellite radio by 2012.
Our strategy includes offering diverse programming designed to appeal to a
large audience, including urban and rural listeners of virtually all ages,
ethnicities, economic groups and specialty interests. We will tailor our
programming and marketing to appeal to specific groups that our research has
shown are most likely to subscribe to our service. We have several planned
distribution channels, including through major car and radio manufacturers.
Our executive offices are at 1500 Eckington Place, NE, Washington, D.C.
20002, and our telephone number is (202) 380-4000. We maintain an Internet site
on the World Wide Web at www.xmradio.com. Information at our web site is not,
and should not be deemed to be, part of this prospectus.
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SUMMARY OF THE EXCHANGE OFFER
The Exchange Offer..................... We are offering to exchange $1,000
principal amount of our 14% Senior
Secured Notes due 2010 which have been
registered under the Securities Act of
1933, and which we refer to as the
exchange notes, for each $1,000
principal amount of our outstanding
unregistered 14% Senior Secured Notes
due 2010 which were issued by us on
March 15, 2000 in a private offering,
and which we refer to as the
outstanding notes. We refer to the
exchange notes and the outstanding
notes together as the March 2000 senior
secured notes.
In order for your outstanding notes to
be exchanged, you must properly tender
them before the exchange offer expires.
All outstanding notes that are validly
tendered and not validly withdrawn will
be exchanged. We will issue the
exchange notes promptly after the
exchange offer expires.
You may tender your outstanding notes
for exchange in whole or in part in
integral multiples of $1,000 principal
amount.
Registration Rights Agreement.......... We sold the outstanding notes on March
15, 2000 to Bear, Stearns & Co. Inc.,
Donaldson, Lufkin and Jenrette
Securities Corporation, Salomon Smith
Barney Inc. and Lehman Brothers Inc.,
which we refer to as the initial
purchasers. Simultaneously with that
sale we signed a registration rights
agreement with the initial purchasers
that requires us to conduct this
exchange offer.
After the exchange offer is complete,
you will no longer be entitled to any
exchange or registration rights with
respect to your outstanding notes.
For a description of the procedures for
tendering outstanding notes, see "The
Exchange Offer--Procedures for
Tendering Outstanding Notes."
Expiration Date........................ The exchange offer will expire at 5:00
p.m., New York City time, on ________,
2000 unless extended by us, in which
case the expiration date will mean the
latest date and time to which the
exchange offer is extended. See "The
Exchange Offer - Expiration Date;
Extensions; Amendments."
Consequences of Failure to
Exchange Your Outstanding
Notes.................................. If you do not exchange your outstanding
notes for exchange notes in the
exchange offer, you will continue to be
subject to the restrictions on transfer
provided in the outstanding notes and
the indenture governing the March 2000
senior secured notes. In general, the
outstanding notes may not be offered or
sold, unless registered under the
Securities Act, except pursuant to an
exemption from, or in a transaction not
subject to, the Securities Act and
applicable state securities laws. We do
not plan to register the outstanding
notes under the Securities Act.
Conditions to the Exchange Offer....... The exchange offer is subject to
certain conditions which we may
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waive at our sole discretion. The
exchange offer is not conditioned upon
any minimum aggregate principal amount
at maturity of senior secured notes
being tendered. See "The Exchange Offer-
Conditions to the Exchange Offer."
We reserve the right, in our sole and
absolute discretion, subject to
applicable law, at any time and from
time to time:
. to delay acceptance of the senior
secured notes
. to terminate the exchange if certain
specified conditions have not been
satisfied
. to extend the expiration date of the
exchange offer and retain all senior
secured notes tendered pursuant to
the exchange offer, subject, however,
to the right of the holders of senior
secured notes to withdraw their
tendered senior secured notes
. to waive any condition or otherwise
amend the terms of the exchange offer
in any respect
See "The Exchange Offer - Expiration
Date; Extensions; Amendments."
Withdrawal Rights................... You may withdraw the tender of your
outstanding notes at any time before the
expiration date by delivering a written
notice of your withdrawal to the
exchange agent according to the
withdrawal procedures described under
the heading "The Exchange Offer -
Withdrawal Rights."
Procedures for Tendering
Outstanding Notes................... If you wish to tender your outstanding
notes for exchange, you must:
. complete and sign a letter of
transmittal according to the
instructions contained in the Letter
of Transmittal
. forward the Letter of Transmittal by
mail, facsimile transmission or hand
delivery, together with any other
required documents, to the exchange
agent, either with the outstanding
notes that you tender or in
compliance with the specified
procedures for guaranteed delivery of
your outstanding notes.
Some brokers, dealers, commercial banks,
trust companies and other nominees may
also effect tenders by book-entry
transfer.
Please do not send your Letter of
Transmittal or certificates representing
your outstanding notes to us. You should
send those documents only to the
exchange agent. You should direct any
information requests or questions
regarding how to tender your outstanding
notes to the exchange agent. See "The
Exchange Offer -Exchange Agent."
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Special Procedures for Beneficial
Owners.............................. If your outstanding notes are registered
in the name of a broker, dealer,
commercial bank, trust company or other
nominee, we urge you to contact such
person promptly if you wish to tender
your outstanding notes pursuant to the
exchange offer. See "The Exchange
Offer -Procedures for Tendering
Outstanding Notes."
Resales of Exchange Notes........... We believe that you will be able to
offer for resale, resell and otherwise
transfer exchange notes without
compliance with the registration and
prospectus delivery provisions of the
Securities Act, provided that:
. you are acquiring the exchange notes
in the ordinary course of your
business
. you are not participating, and have
no arrangement or understanding with
any person to participate, in the
distribution of the exchange notes
. you are not an "affiliate" of
Holdings or XM within the meaning of
Rule 405 under the Securities Act
Our belief is based on the
interpretations by the Staff of the SEC,
as set forth in no-action letters issued
to third parties unrelated to us. The
Staff of the SEC has not considered the
exchange offer in the context of a no-
action letter, and we cannot assure you
that the Staff of the SEC would make a
similar determination with respect to
this exchange offer.
If our belief is not accurate and you
transfer an exchange note without
delivering a prospectus meeting the
requirements of the Securities Act or
without an exemption from such
requirements, you may incur liability
under the Securities Act. We do not and
will not assume or indemnify you against
such liability.
Each broker-dealer that receives
exchange notes for its own account in
exchange for outstanding notes which
were acquired by such broker-dealer as a
result of market-making activities or
other trading activities, must
acknowledge that it will deliver a
prospectus meeting the requirements of
the Securities Act in connection with
any resale of these exchange notes. A
broker-dealer may use this prospectus
for an offer to sell, resale or other
transfer of exchange notes. See "Plan of
Distribution."
Exchange Agent...................... The exchange agent for the exchange
offer is United States Trust Company of
New York. The address, telephone number
and facsimile number of the exchange
agent are set forth in "The Exchange
Offer - Exchange Agent" and in the
Letter of Transmittal.
Use of Proceeds..................... We will not receive any cash proceeds
from the issuance of the exchange notes
offered by this prospectus. The net
proceeds from the offering of the senior
secured notes have been and will be used
to further develop the satellite and
terrestrial repeater systems and for
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general corporate purposes. See "Use of
Proceeds."
United States Federal Income
Tax Consequences ................... Your acceptance of the exchange offer
and the related exchange of your
outstanding notes for exchange notes
will not be a taxable exchange for
United States federal income tax
purposes. You should not recognize any
taxable gain or loss or any interest
income as a result of the exchange. See
"The Exchange Offer--United States
Federal Income Tax Consequences."
See "The Exchange Offer" for more detailed information concerning the terms of
the exchange offer.
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SUMMARY OF TERMS OF THE EXCHANGE NOTES
The exchange offer relates to the exchange of up to $325,000,000 principal
amount of exchange notes for up to an equal principal amount of outstanding
notes. The form and terms of the exchange notes are substantially identical to
the form and terms of the outstanding notes, except the exchange notes will be
registered under the Securities Act. Therefore, the exchange notes will not bear
legends restricting their transfer and will not be entitled to registration
under the Securities Act. The exchange notes will evidence the same debt as the
outstanding notes, which they replace. Both the outstanding notes and the
exchange notes are governed by the same indenture, which we refer to as the
March 2000 indenture.
Securities Offered.................... $325,000,000 million aggregate principal
amount at maturity of 14% senior secured
notes due March 15, 2010.
Interest.............................. Interest on the exchange notes will
accrue from March 15, 2000, the date of
issuance of the outstanding notes, at
the rate of 14% per year and will be
payable in cash semi-annually on March
15 and September 15, commencing
September 15, 2000.
Security.............................. The exchange notes will be secured with
a first priority security interest in
all of the capital stock of XM's
subsidiary that owns our FCC license,
subject to certain permitted liens.
Interest Reserve...................... At the closing of the private placement
of the senior secured notes, we used
$123.0 million of the net proceeds of
that offering to purchase a portfolio of
U.S. government securities which is
sufficient to provide for payment in
full of interest on the senior secured
notes for the first six scheduled
interest payments. Upon the closing of
the exchange offer, these government
securities will be pledged to secure our
obligations under the exchange notes.
Redemption............................ We may redeem the exchange notes, in
whole or in part, at any time on or
after March 15, 2005, at the declining
redemption prices set forth in this
prospectus plus accrued interest.
Optional Redemption................... On or prior to March 15, 2003, we may
redeem up to 35% of the exchange notes
with the net proceeds of certain equity
offerings at a redemption price of 114%
of the principal amount of the exchange
notes, plus accrued interest, provided
that at least 65% of the aggregate
principal amount of the exchange notes
remains outstanding. See "Description of
Exchange Notes--Optional Redemption."
Change of Control..................... Upon certain change of control events,
if we do not redeem the exchange notes,
you may require us to repurchase all or
a portion of your exchange notes at a
purchase price equal to 101% of their
principal amount, plus accrued interest.
We cannot assure you that we will have
the financial resources to repurchase
the exchange notes. See "Description of
Exchange Notes--Repurchase at the Option
of Holders--Change of Control."
Ranking............................... The exchange notes will be our senior
secured obligations. They will rank
equally in right of payment with the
senior secured notes and all
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of our other existing and future senior
indebtedness and senior in right of
payment to all of our existing and
future subordinated indebtedness.
Certain Covenants..................... The March 2000 indenture contains
covenants that, among other things,
limit our ability and the ability of
certain of our subsidiaries to:
. incur additional indebtedness
. pay dividends on, redeem or
repurchase our capital stock
. make investments
. engage in transactions with
affiliates
. create certain liens
. consolidate, merge or transfer all or
substantially all our assets and the
assets of our subsidiaries on a
consolidated basis
These covenants are subject to important
exceptions and qualifications, which are
described under "Description of Exchange
Notes."
RISK FACTORS
You should carefully consider the information under the caption "Risk
Factors" before tendering your outstanding notes for exchange notes.
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Summary Consolidated Financial Data
<TABLE>
<CAPTION>
Dec. 15, 1992
(Date of
Six Months Ended Inception)
Years Ended December 31, June 30, to June 30,
-----------------------------
1997 1998 1999 1999 2000 2000(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements Of Operations Data: (In thousands)
Revenue............................................ $ -- $ -- $ -- $ -- $ -- $ --
Operating expenses:
Research and development........................ -- 6,941 4,274 1,378 4,738 15,953
Professional fees............................... 1,090 5,242 9,948 2,560 10,713 26,994
General and administrative...................... 20 4,010 16,448 4,503 15,237 35,715
------- ------- -------- ------- ------- -------
Total operating expenses........................ 1,110 16,193 30,670 8,441 30,688 78,662
------- ------- -------- ------- ------- -------
Operating loss..................................... (1,110) (16,193) (30,670) (8,441) (30,688) (78,662)
Other income--interest income (expense), net....... (85) 26 490 76 12,983 13,415
------- ------- -------- ------- ------- -------
Net loss........................................... $(1,195) $(16,167) $(30,180) $(8,365) $(17,705) $(65,247)
======= ======= ======== ======= ======= =======
Other Data(2):
Ratio of earnings to fixed charges(3).............. -- -- -- -- --
======= ======= ======== ======= =======
Deficiency of earnings to cover fixed charges...... $ 1,195 $ 16,196 $ 29,921 $ 8,725 $ 33,309
======= ======= ======== ======= =======
Pro forma deficiency of earnings to cover fixed
charges(4)...................................... $ 83,274 $ 48,027
======== =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
June 30,
1997 1998 1999 2000
---------- ---------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments..... $ 1 $ 310 $119,102 $ 266,331
Restricted investments (5) ........................... -- -- -- 174,623
System under construction............................. 90,030 155,334 333,500 551,123
Total assets.......................................... 90,031 156,397 485,134 1,056,706
Total debt............................................ -- 87 212 261,340
Total liabilities..................................... -- 28,941 30,030 324,219
Stockholder's equity.................................. 90,031 127,456 455,104 732,487
</TABLE>
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) For purposes of determining the ratio of earnings to fixed charges, and the
deficiency of earnings to cover fixed charges, "earnings" includes pre-tax
income (loss) adjusted for fixed charges. "Fixed charges" consists of
interest expensed and capitalized, amortized deferred financing charges,
and that portion of operating lease rental expense (deemed to be one-third
of rental expense) representative of interest.
(3) The ratios of earnings to fixed charges are not presented for the years
ended 1997, 1998, 1999, and for the six months ended June 30, 1999 and
2000, because earnings were inadequate to cover fixed charges.
(4) Pro forma deficiency of earnings to fixed charges is calculated based upon
the annual interest rate on the notes plus the amortization of deferred
financing fees and the debt discount as of the beginning of the period.
(5) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
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RISK FACTORS
You should carefully consider the following risk factors and the other
information in this prospectus before tendering your outstanding notes for
exchange notes.
Some of the information in this prospectus may contain forward
looking statements. Such statements can be identified by the use of forward
looking terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. These statements discuss future expectations,
contain projections of results of operations or of financial condition or state
other "forward looking" information. When considering such forward looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus. The risk factors noted in this section and other
factors noted throughout this prospectus, including certain risks and
uncertainties, could cause our actual results to differ materially from those
contained in any forward looking statement.
You could lose money on your investment because we have not started operations
or generated any revenues.
We are a development stage company and still need to develop the planned XM
Radio service significantly before we can offer it to consumers. We have not yet
generated any revenues and will not do so until we can start commercial
operation of our service. Unless we generate significant revenues, we will not
become profitable, and you could lose money on your investment. Our ability to
generate revenues and ultimately to become profitable will depend upon several
factors, including
. whether we create and implement the XM Radio system in a timely fashion;
. whether consumer electronics manufacturers successfully develop and
manufacture XM radios;
. whether we can attract and retain enough subscribers and advertisers to
XM Radio;
. whether we compete successfully; and
. whether the FCC grants us all additional necessary authorizations in a
timely manner.
Our expenditures and losses have been significant and are expected to grow.
As of June 30, 2000, we had incurred significant costs, aggregating
approximately $551.1 million, in connection with the development of the XM Radio
system. We incurred net aggregate losses approximating $65.2 million from our
inception through June 30, 2000. We expect our net losses and negative cash flow
to grow as we build the XM Radio system, make payments under our various
contracts and begin to incur marketing costs.
We need substantial further financing but such financing might not be available
and the terms of our FCC license may restrict our ability to raise funding.
The funds we have raised as of August 8, 2000 are expected to be sufficient
in the absence of additional financing to cover our funding needs through
commencement of commercial operation of our services in the second quarter of
2001. However, if we need to significantly alter our system before commercial
operation, or our schedule is materially delayed, we may need additional
funding. After we commence commercial service, we will require significant
additional funds before we generate positive cash flow. In addition, we have
substantial payment obligations under a distribution agreement with General
Motors, as described under the caption "Certain
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Relationships and Related Party Transactions--Distribution Agreement with
General Motors and OnStar." Our actual funding requirements could vary
materially from our current estimates. We may have to raise more funds than
expected to remain in business and to continue to develop and market the XM
Radio system.
We plan, together with Holdings, our parent company and the holder of 100%
of our equity securities, to raise future funds by selling debt or equity
securities, or both, publicly and/or privately and by obtaining loans or other
credit lines from banks or other financial institutions. We may not be able to
raise sufficient funds on favorable terms or at all. If we fail to obtain any
necessary financing on a timely basis, then
. our satellite construction, launch, or other events necessary to our
business could be materially delayed, or their costs could materially
increase;
. we could default on our commitments to our satellite construction or
launch contractors, creditors or others, leading to termination of
construction or inability to launch our satellites;
. we may not be able to launch our satellite radio service as planned and
may have to discontinue operations or seek a purchaser for our business
or assets; and
. we may not be able to meet our obligations under the notes.
Motient Corporation is the controlling stockholder of Holdings, our parent
company, and controls us under applicable FCC rules. Motient has certain rights
regarding the election of persons to serve on Holdings' board of directors and
as of August 15, 2000 holds 54.4% of the voting power of Holdings, or 46.6%
giving effect to the conversion of all of Holdings' outstanding common stock
equivalents. Motient cannot relinquish its controlling position, its right to
designate a majority of our directors, or hold less than 40% of the voting stock
without obtaining the prior approval of the FCC. Accordingly, prior to our
obtaining FCC approval of the transfer of control from Motient, Holdings will
only be able to issue a limited amount of voting securities or securities
convertible into voting securities unless certain of Holdings' stockholders
holding nonvoting convertible securities agree not to convert them into voting
securities or Holdings takes other steps to permit voting securities on a basis
consistent with FCC rules. Certain holders of Holdings' nonvoting securities
have agreed not to convert their securities if it would cause Motient not to
hold at least 40% of Holdings' voting stock, until we obtain approval by the FCC
of a change in control. In return, Holdings has agreed not to issue new voting
securities, other than the units sold in March 2000 and other than up to
2,000,000 shares of Class A common stock (except upon conversion or exercise of
existing securities or under our employee stock plans), if it would make these
holders unable to convert any of their nonvoting securities. We have filed an
application with the FCC to permit Motient to relinquish control of Holdings. We
may not be able to obtain FCC approval or it may take a long period of time to
obtain such approval and there may be conditions imposed in connection with such
approval that may be unfavorable to us. The inability to raise capital
opportunistically, or at all, could adversely affect our business plan.
Adverse effects on Holdings' stock price could reduce our ability to raise
funds.
Holdings is our only source of equity funding. Accordingly, adverse effects
on the market price of Holdings' Class A common stock could impair our ability
to raise funds through additional stock offerings and could reduce our ability
to meet our obligations under the exchange notes.
The market price of Holdings' Class A common stock could fluctuate
substantially due to
. future announcements concerning us or our competitors;
. quarterly fluctuations in operating results;
. announcements of acquisitions or technological innovations; or
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. changes in earnings estimates or recommendations by analysts.
In addition, the stock prices of many technology companies fluctuate widely
for reasons that may be unrelated to operating results. This market volatility
could depress the price of Holdings' Class A common stock without regard to our
operating performance.
Future sales of Holdings' Class A common stock in the public market could
also affect its stock price.
Certain tax considerations.
The notes will be issued with original issue discount ("OID") for United
States federal income tax purposes in an amount equal to the excess of the
principal amount due at maturity on the notes over their "issue price" (as
described in "Certain United States Federal Income Tax Consequences--U.S.
Holders--The Notes--Original Issue Discount"). Each United States holder of a
note will be required to include in taxable income for any particular taxable
year a portion of such OID in advance of the receipt of the cash to which such
OID is attributable. For additional information regarding the OID associated
with the notes, as well as certain other federal income tax considerations
relevant to the purchase, ownership and disposition of the notes, see "Certain
United States Federal Income Tax Consequences."
The security for the notes may not be sufficient to make payments on the
exchange notes.
XM's obligations under the indenture and the exchange notes are secured by
collateral which currently consists of the stock of a subsidiary of XM which
conducts no business activities and holds as its only asset XM's FCC license. We
cannot assure you that proceeds from the sale of this pledged stock will be
sufficient to satisfy amounts due on the exchange notes. The exchange notes are
not secured by any lien on, or other security interest in, any of XM's other
properties or assets or any properties or assets of Holdings, except that during
the first three years after the date the exchange notes are issued, the exchange
notes will be secured by a portfolio of U.S. government securities in an amount
sufficient to pay the first six payments of interest on the exchange notes. In
addition, the indenture permits us to incur other secured indebtedness which
may, in the future, be secured on an equal basis with the exchange notes with
respect to the pledged stock.
If, upon a foreclosure on the pledged stock, the proceeds from the pledged
stock are insufficient to satisfy the entire amount due on the exchange notes,
the claim by the holders of the exchange notes against us for this deficiency
would rank equally with the claims of the other general, unsubordinated
creditors of XM. The remaining assets of XM may not be sufficient to satisfy
this deficiency.
The trustee under the indenture may not exercise any rights with respect to
the pledged stock upon the occurrence of an event of default (as defined in the
indenture) if this action would constitute, or result in any, assignment of XM's
FCC license or any change of our control unless the prior approval of the FCC is
first obtained. Any required FCC approval may not be obtained on a timely basis,
or at all.
Our substantial indebtedness could adversely affect our financial health and
prevent XM from fulfilling its obligation under the exchange notes.
As of June 30, 2000, we had total indebtedness of $261.3 million and
stockholder's equity of $732.5 million.
Our substantial indebtedness could have important consequences to you. For
example, it could:
. make it more difficult for XM to satisfy its obligations with respect to
the exchange notes;
. increase our vulnerability to general adverse economic and industry
conditions;
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. limit our ability to fund future working capital, capital expenditures,
research and development costs and other general corporate requirements;
. require us to dedicate a substantial portion of our cash flow from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other general
corporate purposes;
. limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
. place us at a competitive disadvantage compared to our competitors that
have less debt; and
. limit, along with the financial and other restrictive covenants in our
indebtedness, among other things, our ability to borrow additional
funds. And, failing to comply with those covenants could result in an
event of default which, if not cured or waived, could have a material
adverse effect on us.
Despite current indebtedness levels, we and our subsidiary may still be able
to incur substantially more debt. This could further exacerbate the risks
described above.
We and our subsidiary will be able to incur substantial additional
indebtedness in the future. The terms of the indenture do not prohibit us or our
subsidiary from doing so. As new debt is added to our and our subsidiary's
current debt levels, the related risks that we and they now face could
intensify.
XM may not have the ability to fund a change of control offer if required by the
indenture.
Upon a change of control, XM will be required to offer to repurchase all
outstanding exchange notes at 101% of the principal amount thereof plus accrued
and unpaid interest to the date of repurchase, and may also be required to
repurchase certain of our other indebtedness. However, we cannot assure you that
XM will have sufficient funds at the time of such event to make any required
repurchase of the exchange notes or any such other indebtedness.
The change of control provisions contained in the indenture may not protect
holders of exchange notes in the event of certain highly leveraged transactions
including certain reorganizations, restructuring or mergers, because these
transactions may not involve a change in voting power or beneficial interest of
the magnitude required to trigger the change of control provisions.
Our satellites could be damaged or destroyed during launch.
A significant percentage of satellites never become operational because of
launch failure, satellite destruction or damage during launch, and improper
orbital placement. Launch failure rates vary depending on the particular launch
vehicle and contractor. There is a limited track record for the specific launch
vehicle that will be used for the launch of our satellites, and even launch
vehicles with good track records experience some launch failures. Three of the
four satellite launches from the Sea Launch platform, our intended means of
launch, have been successful, including the most recent launch. If one or more
of our launches fail, we will suffer significant delay that will be very
damaging to our business, and we will incur significant additional costs
associated with the delay in revenue generating activities.
Premature failure of our satellites would damage our business.
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If one of our satellites were to fail prematurely, it likely would affect
the quality of our service, substantially delay the commencement or interrupt
the continuation of our service and harm our business. This harm to our business
would continue until we either launched our ground spare satellite or had
additional satellites built or launched. A number of factors may decrease the
useful lives of our satellites to less than the expected approximately 15 years,
including
. defects in construction;
. faster than expected degradation of solar panels;
. loss of fuel on board;
. random failure of satellite components that are not protected by back-
up units;
. electrostatic storms; and
. collisions with other objects in space.
In addition, our network of terrestrial repeaters will communicate principally
with one satellite. If the satellite communicating with the repeater network
fails, we would have to repoint all of the repeaters to communicate with the
other satellite. This would result in an interruption of service that could last
from a few hours to several days and could harm our business.
Damage to our satellites will not be fully covered by insurance.
We intend to purchase standard launch and in-orbit insurance policies from
global space insurance underwriters. Any adverse change in insurance market
conditions may substantially increase the premiums we would have to pay for such
insurance. If the launch of either satellite is a total or partial failure, our
insurance may not fully cover our losses. We do not expect to buy insurance to
cover and would not have protection against business interruption, loss of
business or similar losses. Also, any insurance we obtain will likely contain
certain customary exclusions and material change conditions which would limit
our coverage.
Our system depends on development and integration of complex technologies in a
novel configuration that might not work.
Our system will involve new applications of existing technology and the
complex integration of different technologies, which may not work as planned. In
addition, we may not be able to successfully develop the new technologies
required for our planned XM Radio system.
The use of terrestrial repeaters with a satellite system is untested and
may not provide the expected transmission quality. Our system will rely on a
network of terrestrial repeaters to retransmit satellite signals in areas where
blockages occur from high concentrations of tall buildings and other
obstructions. Satellites and terrestrial repeater networks have not been
integrated and used together on the scale we contemplate. We cannot be certain
that what we plan will work. Failure to integrate these technologies may result
in areas with impediments to satellite line of sight experiencing dead zones
where our signals cannot be received clearly or are of low quality.
Our business plan relies on the timely development of XM radios. Our
service is to be received by specially designed receivers that have not yet been
developed. They will require a unique integration of existing technologies,
which may take longer than expected.
Integration of components of our system may encounter technical
difficulties. We will have to integrate a number of sophisticated satellite and
other wireless technologies never integrated in the past before we can begin
offering our service. If the technological integration of the XM Radio system is
not completed in a timely and effective manner, our business will be harmed. We
cannot ultimately confirm the ability of the system to function until we have
actually deployed and tested a substantial portion of the system. Hardware or
software errors in space or on the ground may limit or delay the XM Radio
service and therefore reduce anticipated revenues.
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Performance failures by our satellite and launch contractors would damage our
business, and we may not have adequate remedies.
We will rely on Hughes Space and Communications International, Inc., our
satellite manufacturer, to build and deliver our satellites in a timely manner.
If Hughes Space and Communications fails to deliver functioning satellites in a
timely manner, the introduction of our service would likely be delayed. If
Hughes Space and Communications were to deliver a satellite late or otherwise
default, the remedies we have will not adequately compensate us for any damage
caused to our business. Hughes Space and Communications will not be liable for
indirect or consequential damages, or lost revenues or profits, from late
delivery or other defaults. Also, our satellite contract entitles Hughes Space
and Communications to certain excusable delays for which we have no remedy. If
Hughes Space and Communications breaches its performance warranty, our only
remedy is not to pay Hughes in-orbit performance incentive payments of up to a
total of $12.5 million for each satellite. This remedy likely will not
adequately compensate us for the damage such breach would cause to our
business.
We are depending on our satellite launch services provider, to build our
launch vehicles and to launch the satellites. If the satellite launch services
provider fails to launch the satellites in a timely manner, we may be unable to
meet our business plan timetable. Neither Hughes Space and Communications nor
the satellite launch services provider will be liable to us for any delay in
delivery of the satellites up to 180 days caused by our scheduled launch
services provider. A delay of more than six months beyond the launch period for
either satellite may allow us to select an alternative launch system. This
remedy, however, likely would not adequately compensate us for the damage such
delay would cause to our business. Although we may be able to use another
satellite launch services provider, switching to another provider could involve
significant delay and a significant increase in cost.
Failure of third party vendors to supply radios to customers in a timely manner
would delay our revenues.
We will rely on third party manufacturers and their distributors to
manufacture and distribute XM radios. If one or more manufacturers fails to
develop XM radios for timely commercial sale, at an affordable price and with
mass market nationwide distribution, the launch of our service would be delayed,
our revenues would be less than expected and our business would suffer. We will
rely on Delphi-Delco, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and
Clarion to develop, manufacture and market XM radios for use in the car, and on
Sony and SHARP to develop, manufacture and market XM radios for home and
portable use. XM radios are not yet available, and our agreements with third
party vendors may not result in the timely production of enough affordable XM
radios to permit the widespread introduction of our service.
Competition from Sirius Satellite Radio and traditional and emerging audio
entertainment providers could adversely affect our revenues.
In seeking market acceptance, we will encounter competition for both
listeners and advertising revenues from many sources, including
. Sirius Satellite Radio, the other satellite radio licensee;
. traditional and, when available, digital AM/FM radio;
. Internet based audio providers;
. direct broadcast satellite television audio service; and
. cable systems that carry audio service.
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Sirius Satellite Radio (formerly named CD Radio) has announced that it has
arrangements for the construction, implementation and distribution of its
service and that it expects to begin receiving revenue from commercial
operations in the first quarter of 2001, which is slightly ahead of our
timetable. If Sirius Satellite Radio begins commercial operations significantly
before we do, it may gain a competitive advantage over us.
Unlike XM Radio, traditional AM/FM radio already has a well established
market for its services and generally offers free broadcast reception supported
by commercial advertising rather than by a subscription fee. Also, many radio
stations offer information programming of a local nature, such as traffic and
weather reports, which XM Radio is not expected to offer as effectively as local
radio, or at all. To the extent that consumers place a high value on these
features of traditional AM/FM radio, we will be at a competitive disadvantage.
Demand for our service may be insufficient for us to become profitable.
There is currently no mobile satellite digital audio radio service in
commercial operation in the United States. As a result, we cannot estimate with
any certainty the potential consumer demand for such a service or the degree to
which we will meet that demand. Among other things, consumer acceptance of XM
Radio will depend upon
. whether we obtain, produce and market high quality programming
consistent with consumers' tastes;
. the willingness of consumers to pay subscription fees to obtain
satellite radio service;
. the cost and availability of XM radios; and
. XM Radio's and our competitors' marketing and pricing strategy.
If demand for our service does not develop as expected, we may not be able
to generate enough revenues to become profitable. Although we have commissioned
market studies which attempt to measure market demand, these studies are based
upon statistical sampling methods and reflect responses to hypothetical
questions. Consequently, the data may not be accurate. We caution you not to
place undue reliance on this data.
Because we expect to derive a significant part of our revenues from
advertisers as well as subscription revenues, advertiser acceptance also will be
critical to the success of our business. Our ability to generate revenues from
advertisers will depend on several factors, including the level and type of
market penetration of our service, competition for advertising dollars from
other media, and changes in the advertising industry. FCC regulations limit our
ability to offer our radio service other than to subscribers on a pay-for-
service basis. These factors may reduce our potential revenue from advertising.
Large payment obligations under our distribution agreement with General Motors
may prevent us from becoming profitable.
We have significant payment obligations under our long-term agreement with
General Motors for the installation of XM radios in General Motors vehicles and
the distribution of our service to the exclusion of other satellite radio
services. These payment obligations, which could total several hundred million
dollars over the life of the contract, may prevent us from becoming profitable.
A significant portion of these payments are fixed in amount, and we must pay
these amounts even if General Motors does not meet performance targets in the
contract. Although this agreement is subject to renegotiation if General Motors
does not achieve and maintain specified installation levels we cannot predict
the outcome of any such renegotiation. This agreement is described more fully
under the caption "Certain Relationships and Related Party Transactions--
Distribution Agreement with General Motors and OnStar."
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Joint development agreement funding requirements could be significant.
Under our agreement with Sirius Radio, each party is obligated to fund one
half of the development cost of the technologies used to develop a unified
standard for satellite radios. Each party will be entitled to license fees or a
credit towards its one half of the cost based upon the validity, value, use,
importance and available alternatives of the technology it contributes. The
applicability or validity of Sirius Radio's claims in their former patent suit
against us could affect the determination of the amount of license fees or
credits relating to contributed or licensed technology under the agreement. The
amounts of these fees or credits will be determined over time by agreement of
the parties or by arbitration. We cannot predict at this time the amount of
license fees or contribution payable by XM or Sirius Radio or the size of the
credits to XM and Sirius Radio from the use of their technology. This may
require significant additional capital.
If we default under our joint development agreement, Sirius Satellite Radio's
patent infringement lawsuit against us could be refiled.
Under our agreement with Sirius Radio for the development of a unified
standard for satellite radios, the lawsuit Sirius Radio brought against us in
January 1999 alleging our infringement of three Sirius Radio patents was
withdrawn. We and Sirius Radio have agreed to cross-license our respective
intellectual property. However, if this agreement is terminated before the value
of the licenses has been determined due to our failure to perform a material
covenant or obligation, then this suit could be refiled.
Our business may be impaired by third party intellectual property rights.
Development of the XM Radio system will depend largely upon the
intellectual property that we will develop and license from third parties. If
the intellectual property that we may develop or use is not adequately
protected, others will be permitted to and may duplicate the XM Radio system or
service without liability. In addition, others may challenge, invalidate or
circumvent our intellectual property rights, patents or existing sublicenses.
Some of the know-how and technology we have developed and plan to develop will
not be covered by United States patents. Trade secret protection and contractual
agreements may not provide adequate protection if there is any unauthorized use
or disclosure. The loss of necessary technologies could require us to obtain
substitute technology of lower quality performance standards, at greater cost or
on a delayed basis, which could harm our business.
Other parties may have patents or pending patent applications which will
later mature into patents or inventions which may block our ability to operate
our system or license our technology. We may have to resort to litigation to
enforce our rights under license agreements or to determine the scope and
validity of other parties' proprietary rights in the subject matter of those
licenses. This may be expensive. Also, we may not succeed in any such
litigation.
Third parties may bring suit against us for patent or other infringement of
intellectual property rights. Any such litigation could result in substantial
cost to, and diversion of effort by, our company, and adverse findings in any
proceeding could
. subject us to significant liabilities to third parties;
. require us to seek licenses from third parties;
. block our ability to operate the XM Radio system or license its
technology; or
. otherwise adversely affect our ability to successfully develop and
market the XM Radio system.
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Failure to comply with FCC requirements could damage our business.
As an owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we are subject to FCC rules and regulations,
and the terms of our license, which require us to meet certain conditions such
as
. milestone dates, including the requirement that we begin full
operation of our system by October 2003;
. interoperability of our system with the other licensed satellite radio
system;
. coordination of our satellite radio service with radio systems
operating in the same range of frequencies in neighboring countries;
and
. coordination of our communications links to our satellites with other
systems that operate in the same frequency band.
Non-compliance by us with these conditions could result in fines, additional
license conditions, license revocation or other detrimental FCC actions. We may
also be subject to interference from adjacent radio frequency users if the FCC
does not adequately protect us against such interference in its rulemaking
process. In addition, the FCC has not yet issued rules permitting us to deploy
terrestrial repeaters to fill gaps in satellite coverage. Our plans to deploy
terrestrial repeaters may be impacted by the FCC's rules, when issued.
Some of our vendors are subject to United States export regulations and
will need approval from the State Department under technology export statutes
and regulations for the launch of our satellites. Failure to receive such
approval or any change in applicable law or policy may delay our satellite
launch.
If the challenge to our FCC license is successful, our business could be harmed.
The award of our FCC license was challenged by one of the losing bidders in
the initial FCC licensing procedure. The challenge was denied by the FCC, but
the losing bidder filed with the FCC for reconsideration of the license award.
If this challenge is successful, the FCC could take a range of actions, any of
which could harm our ability to proceed with our planned satellite radio
service.
Our service network or other ground facilities could be damaged by natural
catastrophes.
Since our ground-based network will be attached to buildings, towers, and
other structures around the country, an earthquake, tornado, flood or other
catastrophic event anywhere in the United States could damage our network,
interrupt our service and harm our business in the affected area. We will not
have replacement or redundant facilities that can be used to assume the
functions of our repeater network or of our planned central production and
broadcast facility in the event of a catastrophic event. Any damage to our
repeater network would likely result in degradation of our service for some
subscribers and could result in complete loss of service in affected areas.
Damage to our central production and broadcast facility would restrict our
production of programming and require us to obtain programming from third
parties to continue our service.
Consumers could steal our service.
Like all radio transmissions, the XM Radio signal will be subject to
interception. Pirates may be able to obtain or rebroadcast XM Radio without
paying the subscription fee. Although we plan to use encryption technology to
mitigate the risk of signal theft, such technology may not be adequate to
prevent theft of the XM Radio signal. If widespread, signal theft could harm our
business.
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We need to obtain rights to programming, which could be more costly than
anticipated.
We must negotiate and enter into music programming royalty arrangements
with performing rights societies such as the American Society of Composers,
Authors and Publishers, Broadcast Music, Inc. and SESAC, Inc. Radio broadcasters
currently pay a combined total of approximately 4% of their revenues to these
performing rights societies. We expect to negotiate or establish license fees
through a rate court proceeding in the U.S. District Court for the Southern
District of New York, but such royalty arrangements may be more costly than
anticipated. We must also enter into royalty arrangements with the owners of the
sound recordings. Cable audio services currently pay a royalty rate of 6.5% of
gross subscriber revenue set by the Librarian of Congress. Although we believe
we can distinguish XM Radio sufficiently from the cable audio services in order
to negotiate a lower statutory rate, we may not be able to do so.
Rapid technological and industry changes could make our service obsolete.
The satellite industry and the audio entertainment industry are both
characterized by rapid technological change, frequent new product innovations,
changes in customer requirements and expectations, and evolving industry
standards. If we are unable to keep pace with these changes, our business may be
unsuccessful. Products using new technologies, or emerging industry standards,
could make our technologies obsolete. In addition, we may face unforeseen
problems when developing the XM Radio system which could harm our business.
Because we will depend on third parties to develop technologies used in key
elements of the XM Radio system, more advanced technologies which we may wish to
use may not be available to us on reasonable terms or in a timely manner.
Further, our competitors may have access to technologies not available to us,
which may enable them to produce entertainment products of greater interest to
consumers, or at a more competitive cost.
A small number of stockholders own approximately 71.4% of Holdings' stock on a
fully diluted basis and effectively control us. Their interests may conflict
with Holdings' interests and yours.
As of August 15, 2000, Holdings' principal stockholders own approximately
71.4% of Holdings' common stock on a fully diluted basis with total voting power
of approximately 82.1%. We have entered into material contracts and transactions
with Holdings' principal stockholders and their affiliates, and we may enter
into additional contracts in the future. The composition of Holdings' board of
directors is governed by a shareholders' agreement among Holdings' principal
stockholders, which grants them effective management control of Holdings. These
stockholders could use their position as principal stockholders and their
management control to cause Holdings to take actions that might not be in
Holdings' interests or yours.
We need people with special skills to develop, launch and maintain our new
service. If we cannot find and keep these people, our business could suffer.
We depend on the continued efforts of our executive officers and key
employees who have specialized technical knowledge regarding our satellite and
radio systems and business knowledge regarding the radio industry and
subscription services. If we lose the services of one or more of these
employees, or fail to attract qualified replacement personnel, it could harm our
business and our future prospects.
Some holders of exchange notes may still be subject to various transfer
restrictions.
You may generally sell exchange notes without complying with the
registration requirements of the Securities Act, unless you are:
. an "affiliate" of XM within the meaning of Rule 405 under the
Securities Act
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. a broker-dealer that acquired outstanding notes as a result of market-
making or other trading activities
. a broker-dealer that acquired outstanding notes directly from us for
resale pursuant to Rule 144A or another available exemption under the
Securities Act
"Affiliates" of XM may sell exchange notes only in compliance with the
provisions of Rule 144 under the Securities Act or another available exemption.
The broker-dealers described above must deliver a prospectus in connection with
any resale of exchange notes.
There is no established trading market for the exchange notes, which could make
it more difficult for you to sell exchange notes and could adversely affect
their price.
The exchange notes constitute a new issue of securities for which no
established trading market exists. Consequently, it may be more difficult for
you to sell exchange notes. If exchange notes are traded after their initial
issuance, they may trade at a discount, depending upon:
. our financial condition
. prevailing interest rates
. the market for similar securities
. other factors beyond our control, including general economic
conditions.
We do not intend to apply for a listing or quotation of the exchange notes
on any securities exchange. The initial purchasers have informed us that they
intend to make a market in the exchange notes. However, the initial purchasers
have no obligation to do so, and may discontinue any market-making activities at
any time without notice. We cannot assure you of the development or liquidity of
any trading market for the exchange notes following the exchange offer.
Holder of outstanding notes who fail to tender may experience diminished
liquidity after the exchange offer.
We have not registered nor do we intend to register the outstanding notes
under the Securities Act. Consequently, outstanding notes that remain
outstanding after consummation of the exchange offer will remain subject to
transfer restrictions under applicable securities laws. Unexchanged outstanding
notes will continue to bear a legend reflecting these restrictions on transfer.
Furthermore, we have not conditioned the exchange offer on receipt of any
minimum or maximum principal amount of outstanding notes. As outstanding notes
are tendered and accepted in the exchange offer, the principal amount of
remaining outstanding notes will decrease. This decrease will reduce the
liquidity of the trading market for the outstanding notes, which will make it
more difficult for you to sell them. We cannot assure of the liquidity, or even
the continuation, of the trading market for the outstanding notes following the
exchange offer.
Holders of outstanding notes must ensure compliance with exchange offer
procedures.
You are responsible for complying with all exchange offer procedures. You
will receive exchange notes in exchange for your outstanding notes only if,
before the expiration date, you deliver the following to the exchange agent:
. certificates for the outstanding notes or a book-entry confirmation of
a book-entry transfer of the outstanding notes into the exchange
agent's account at the Depository Trust Company, or DTC
. the Letter of Transmittal (or a facsimile thereof), properly competed
and duly executed by you, together with any required signature
guarantees
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. any other documents required by the Letter of Transmittal
You should allow sufficient time to ensure that the exchange agent receives
all required documents before the exchange offer expires. Neither we nor the
exchange agent has any duty to inform you of defects or irregularities with
respect to the tender of your outstanding notes for exchange. See "The Exchange
Offer."
Our forward-looking statements are speculative and may prove to be wrong.
Much of the information in this prospectus consists of forward-looking
statements based on our current expectations. These statements are inherently
predictive and speculative, and you must not assume that they will prove to be
correct. You can often identify these statements by forward-looking words such
as
. "may";
. "will," "intend," "plan to";
. "expect," "anticipate," "project, "believe," "estimate";
. "continue" or similar words.
You should read such statements very carefully because they
. discuss our future plans or expectations;
. contain projections of our future financial condition or results of
operations; or
. state other forward-looking information.
When you consider such forward-looking statements, you should keep in mind
the risk factors above and the other cautionary statements in this prospectus
because they provide examples of risks, uncertainties and events that may cause
our actual results to differ materially from the expectations we describe in our
forward-looking statements.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the outstanding notes, we entered into the
registration rights agreement with the initial purchasers by which we agreed to
file and to use our best efforts to cause to become effective with the SEC a
registration statement with respect to the exchange of the outstanding notes for
exchange notes with terms identical in all material respects to the terms of the
outstanding notes. A copy of the registration rights agreement has been filed
as an exhibit to the registration statement of which this prospectus is a part.
We are making the exchange offer to satisfy our contractual obligations under
the registration rights agreement.
If you tender your outstanding notes in exchange for exchange notes you
will represent to us that:
. any exchange notes you receive are being acquired in the ordinary
course of your business;
. you have no arrangement or understanding with any person to
participate in a distribution, within the meaning of the Securities
Act, of exchange notes;
. you are not an "affiliate" of XM within the meaning of Rule 405 under
the Securities Act or, if you are an affiliate, you will comply with
the registration and prospectus delivery requirements of the
Securities Act to the extent applicable;
. you have full power and authority to tender, exchange, sell, assign
and transfer the tendered outstanding notes;
. XM will acquire good, marketable and unencumbered title to the
outstanding notes you tender, free and clear of all liens,
restrictions, charges and encumbrances; and
. the outstanding notes you tender for exchange are not subject to any
adverse claims or proxies.
You also will warrant and agree that you will, upon request, execute and
deliver any additional documents deemed by us or the exchange agent to be
necessary or desirable to complete the exchange, sale, assignment, and transfer
of the outstanding notes you tender in the exchange offer. Each broker-dealer
that receives exchange notes for its own account in exchange for outstanding
notes in the exchange offer, where such outstanding notes were acquired by such
broker-dealer as a result of market-making or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such exchange notes. See "Plan of Distribution."
The exchange offer is not being made to, nor will we accept tenders for
exchange from, holders of outstanding notes in any jurisdiction in which the
exchange offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the exchange offer means any person in whose name the outstanding notes are
registered on our books or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC whose
name appears on a security position listing as a holder of outstanding notes,
which, for purposes of the exchange offer, include beneficial interests in the
outstanding notes held by direct or indirect participants in DTC and outstanding
notes held in definitive form.
Terms of the Exchange Offer
We hereby offer, upon the terms and subject to the conditions set forth in
this prospectus and in the accompanying Letter of Transmittal, to exchange
$1,000 principal amount of exchange notes for each $1,000 principal amount of
outstanding notes properly tendered prior to the expiration date and not
properly withdrawn according to the procedures described below. Holders may
tender their outstanding notes in whole or in part in integral multiples of
$1,000 principal amount.
22
<PAGE>
The form and terms of the exchange notes are the same as the form and terms
of the outstanding notes except that:
. the exchange notes have been registered under the Securities Act and
therefore, will not be subject to some restrictions on transfer
applicable to the outstanding notes and
. holders of the exchange notes will not be entitled to the rights of
holders of the outstanding notes under the registration rights
agreement.
The exchange notes evidence the same indebtedness as the outstanding notes,
which they replace, and will be issued pursuant to, and entitled to the benefits
of, the March 2000 indenture.
The exchange offer is not conditioned upon any minimum principal amount of
outstanding notes being tendered for exchange. We reserve the tight in our sole
discretion to purchase or make offers for any outstanding notes that remain
outstanding after the expiration date or, as set forth under "--Conditions to
the Exchange Offer," to terminate the exchange offer and, to the extent
permitted by applicable law, purchase outstanding notes in the open market, in
privately negotiated transactions or otherwise. The terms of any such purchases
or offers could differ from the terms of the exchange offer. As of the date of
this prospectus, $325 million principal amount of outstanding notes is
outstanding.
Holders of outstanding notes do not have any appraisal or dissenters'
rights in connection with the exchange offer. Outstanding notes which are not
tendered for, or are tendered but not accepted in connection with, the exchange
offer will remain outstanding. For a description of the consequences of not
tendering outstanding notes for exchange see "Risk Factors--Holders of
outstanding notes who fail to tender may experience diminished liquidity after
the exchange offer."
If any tendered outstanding notes are not accepted for exchange because of
an invalid tender, the occurrence of other events set forth in this prospectus
or otherwise, certificates for the unaccepted outstanding notes will be
returned, without expense, to the tendering holder of those notes promptly after
the expiration date.
Holders who tender outstanding notes in connection with the exchange offer
will not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of outstanding notes in connection with the exchange offer. We will pay
all charges and expenses, other than applicable taxes described below, in
connection with the exchange offer. See "--Fees and Expenses" for a description
of the fees and expenses that we will pay in connection with the exchange offer.
Our board of directors makes no recommendation to holders of outstanding
notes as to whether to tender or refrain from tendering all or any portion of
their outstanding notes in the exchange offer. In addition, no one has been
authorized to make any similar recommendation. Holders of outstanding notes must
make their own decision whether to tender in the exchange offer and, if so, the
aggregate amount of outstanding notes to tender after reading this prospectus
and the Letter of Transmittal and consulting with their advisers, if any, based
on their financial position and requirements.
Expiration Date; Extensions; Amendments
The term "expiration date" means 5:00 p.m., New York City time, on
_________, 2000 unless we extend the exchange offer, in which case the term
"expiration date" shall mean the latest date and time to which the exchange
offer is extended.
We expressly reserve the right in our sole and absolute discretion, subject
to applicable law, at any time and from time to time,
. to delay the acceptance of the outstanding notes for exchange
. to terminate the exchange offer, whether or not any outstanding notes
have been accepted for exchange, if we determine, in our sole and
absolute discretion, that any of the events or conditions referred to
under "--
23
<PAGE>
Conditions to the Exchange Offer" has occurred or exists or has not
been satisfied
. to extend the expiration date of the exchange offer and retain all
outstanding notes tendered in the exchange offer, subject, however, to
the right of holders of outstanding notes to withdraw their tendered
outstanding notes as described under "--Withdrawal Rights"
. to waive any condition or otherwise amend the terms of the exchange
offer in any respect
If the exchange offer is amended in a manner that we determine to constitute a
material change, or if we waive a material condition of the exchange offer, we
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered holders of the outstanding notes, and we
will extend the exchange offer to the extent required by Rule 14e-1 under the
Securities Exchange Act.
Any delay in acceptance, termination, extension or amendment will be
followed promptly by:
. oral or written notice of the change to the exchange agent, with any
such oral notice to be promptly confirmed in writing
. a public announcement of the change, which announcement, in the case
of an extension, will be made no later than 9:00 a.m., New York City
time, on the next business day after the previously scheduled
expiration date
Without limiting the manner in which we may choose to make any public
announcement, and subject to applicable laws, we shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to an appropriate news agency.
Acceptance for Exchange and Issuance of Exchange Notes
Upon the terms and subject to the conditions of the exchange offer,
promptly after the expiration date we will exchange, and will issue to the
exchange agent, exchange notes for outstanding notes validly tendered and not
withdrawn as described under "--Withdrawal Rights."
In all cases, delivery of exchange notes in exchange for outstanding notes
tendered and accepted for exchange in the exchange offer will be made only after
timely receipt by the exchange agent of:
. outstanding notes or a book-entry confirmation of a book-entry
transfer of outstanding notes into the exchange agent's account at DTC
. the Letter of Transmittal, or a facsimile of the letter, properly
completed and duly executed, with any required signature guarantees
. any other documents required by the Letter of Transmittal
Accordingly, the delivery of exchange notes might not be made to all
tendering holders at the same time, and will depend upon when outstanding notes,
book-entry confirmations with respect to outstanding notes and other required
documents are received by the exchange agent.
The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of outstanding notes into the exchange agent's account at DTC.
Subject to the terms and conditions of the exchange offer, we will be
deemed to have accepted for exchange, and thereby exchanged, outstanding notes
validly tendered and not withdrawn as, if and when we give oral or written
notice to the exchange agent of our acceptance of those outstanding notes for
exchange in the exchange offer. Any such oral notice shall be promptly confirmed
in writing. Our acceptance for exchange of outstanding notes tendered through
any of the procedures described above will constitute a binding agreement
between the tendering holder and XM upon the terms and subject to the conditions
of the exchange offer. The exchange agent
24
<PAGE>
will act as agent for XM for the purpose of receiving tenders of outstanding
notes, letters of transmittal and related documents, and as agent for tendering
holders for the purpose of receiving outstanding notes, letters of transmittal
and related documents and transmitting exchange notes to holders who validly
tendered outstanding notes. The exchange will be made promptly after the
expiration date. If for any reason whatsoever the acceptance for exchange or the
exchange of any outstanding notes tendered in the exchange offer is delayed,
whether before or after our acceptance for exchange of outstanding notes, or we
extend the exchange offer or are unable to accept for exchange or exchange
outstanding notes tendered in the exchange offer, then, without prejudice to our
rights set forth in this prospectus, the exchange agent may, nevertheless, on
our behalf and subject to Rule 14e-l(c) under the Securities Exchange Act of
1934, retain tendered outstanding notes and such outstanding notes may not be
withdrawn except to the extent tendering holders are entitled to withdrawal
rights as described under "--Withdrawal Rights."
Procedures for Tendering Outstanding Notes
Valid Tender. Except as set forth below, in order for outstanding notes to
be validly tendered in the exchange offer, either:
1. before the expiration date,
. a properly completed and duly executed Letter of Transmittal, or
facsimile of the letter with any required signature guarantees and any
other required documents, must be received by the exchange agent at
the address set forth under "--Exchange Agent," and
. tendered outstanding notes must be received by the exchange agent, or
such outstanding notes must be tendered according to the procedures
for book-entry transfer described below and a book-entry confirmation
must be received by the exchange agent, or
2. the guaranteed delivery procedures set forth below must be complied
with.
If less than all of the outstanding notes are tendered, a tendering holder
should fill in the amount of outstanding notes being tendered in the appropriate
box on the Letter of Transmittal. The entire amount of outstanding notes
delivered to the exchange agent will be deemed to have been tendered unless
otherwise indicated.
If any letter of transmittal, endorsement, bond power, power of attorney,
or any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by us, evidence
satisfactory to us, in our sole discretion, of such person's authority to so act
must be submitted.
Any beneficial owner of outstanding notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial owner
wishes to participate in the exchange offer.
The method of delivery of outstanding notes, the Letter of Transmittal and
all other required documents is at the option and sole risk of the tendering
holder, and delivery will be deemed made only when actually received by the
exchange agent. Instead of delivery by mail, we recommend that holders use an
overnight or hand delivery service. In all cases, holders should allow
sufficient time to assure timely delivery and should obtain proper insurance. No
Letter of Transmittal or outstanding notes should be sent to XM. Holders may
request that their respective brokers, dealers, commercial banks, trust
companies or nominees effect these transactions for them.
Book-Entry Transfer. The exchange agent will make a request to establish an
account with respect to the outstanding notes at DTC for purposes of the
exchange offer within two business days after the date of this prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the outstanding notes by
causing DTC to transfer those outstanding notes into the exchange agent's
account at DTC according to DTC's procedures for transfers. However, although
delivery of outstanding notes may be effected through book-entry transfer into
the exchange agent's account at DTC, the Letter of Transmittal, or facsimile of
the letter, properly completed and duly executed, with any required signature
guarantees
25
<PAGE>
and any other required documents, must in any case be delivered to and received
by the exchange agent at its address set forth under "--Exchange Agent" before
the expiration date, or the guaranteed delivery procedure set forth below must
be complied with.
Delivery of documents to DTC does not constitute delivery to the Exchange Agent.
Signature Guarantees. Tendering holders do not need to endorse their
certificates for outstanding notes and signature guarantees on a letter of
transmittal or a notice of withdrawal, as the case may be, are unnecessary
unless:
1. a certificate for outstanding notes is registered in a name other than
that of the person surrendering the certificate, or
2. a registered holder completes the box entitled "Special Issuance
Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal
In either of these cases, the certificates for outstanding notes must be
duly endorsed or accompanied by a properly executed bond power, with the
endorsement or signature on the bond power and on the Letter of Transmittal or
the notice of withdrawal, as the case may be, guaranteed by a firm or other
entity identified in Rule 17Ad -15 under the Securities Exchange Act as an
"eligible guarantor institution," including, as such terms are defined in that
rule:
. a bank
. a broker, dealer, municipal securities broker or dealer or government
securities broker or dealer
. a credit union;
. a national securities exchange, registered securities association or
clearing agency
. a savings association that is a participant in a Securities Transfer
Association
unless surrendered on behalf of such eligible institution. See Instruction 1 to
the Letter of Transmittal.
Guaranteed Delivery. If a holder desires to tender outstanding notes in the
exchange offer and the certificates for the outstanding notes are not
immediately available or time will not permit all required documents to reach
the exchange agent before the expiration date, or the procedures for book-entry
transfer cannot be completed on a timely basis, the outstanding notes may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:
. the tenders are made by or through an eligible institution
. before the expiration date, the exchange agent receives from the
eligible institution a properly completed and duly executed Notice of
Guaranteed Delivery, substantially in the form accompanying the Letter
of Transmittal, stating the name and address of the holder of
outstanding notes and the amount of outstanding notes tendered,
stating that the tender is being made by the notice and guaranteeing
that within three New York Stock Exchange trading days after the date
of execution of the Notice of Guaranteed Delivery, the certificates
for all physically tendered outstanding notes, in proper form for
transfer, or a book-entry confirmation, as the case may be, and any
other documents required by the Letter of Transmittal will be
deposited by the eligible institution with the exchange agent. The
Notice of Guaranteed Delivery may be delivered by hand, or transmitted
by facsimile or mail to the exchange agent and must include a
guarantee by an eligible institution in the form set forth in the
Notice of Guaranteed Delivery
. the certificates (or book-entry confirmation) representing all
tendered outstanding notes, in proper form for transfer, together with
a properly completed and duly executed Letter of Transmittal, with any
required signature guarantees and any other documents required by the
Letter of Transmittal, are received by the exchange agent within three
New York Stock Exchange trading days after the date of execution of
the
26
<PAGE>
Notice of Guaranteed Delivery
Determination of Validity. All questions as to the form of documents,
validity, eligibility, including time of receipt, and acceptance for exchange of
any tendered outstanding notes will be determined by us, in our sole discretion,
and that determination shall be final and binding on all parties. We reserve
the absolute right, in our sole and absolute discretion, to reject any and all
tenders that we determine are not in proper form or the acceptance for exchange
of which may, in the view of our counsel, be unlawful. We also reserve the
absolute right, subject to applicable law, to waive any of the conditions of the
exchange offer as set forth under "--Conditions to the Exchange Offer" or any
defect or irregularity in any tender of outstanding notes of any particular
holder whether or not we waive similar defects or irregularities in the case of
other holders.
Our interpretation of the terms and conditions of the exchange offer,
including the Letter of Transmittal and its instructions, will be final and
binding on all parties. No tender of outstanding notes will be deemed to have
been validly made until all defects or irregularities with respect to such
tender have been cured or waived. Neither XM, any affiliates of XM, the
exchange agent or any other person shall be under any duty to give any
notification of any defects or irregularities in tenders or incur any liability
for failure to give any such notification.
Resales of Exchange Notes
Based on interpretations by the staff of the SEC, as set forth in no-action
letters issued to third parties unrelated to us, we believe that holders of
outstanding notes, other than any holder that is (1) a broker-dealer that
acquired outstanding notes as a result of market-making activities or other
trading activities or (2) a broker-dealer that acquired outstanding notes
directly from us for resale in Rule 144A or another available exemption under
the Securities Act, who exchange their outstanding notes for exchange notes in
the exchange offer may offer for resale, resell and otherwise transfer such
exchange notes without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that:
. such exchange notes are acquired in the ordinary course of such
holders' business
. such holders have no arrangement or understanding with any person to
participate in the distribution of such exchange notes
. such holders are not "affiliates" of XM within the meaning of Rule 405
under the Securities Act
However, the staff of the SEC has not considered the exchange offer in the
context of a no-action letter, and we cannot assure you that the staff of the
SEC would make a similar determination with respect to the exchange offer. Each
broker-dealer that receives exchange notes for its own account in exchange for
outstanding notes in the exchange offer, where such outstanding notes were
acquired by such broker-dealer as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. See "Plan of Distribution."
Withdrawal Rights
Except as otherwise provided herein, tenders of outstanding notes may be
withdrawn at any time before the expiration date.
In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the exchange agent at its address set forth under "--Exchange Agent" before the
expiration date. Any notice of withdrawal must specify the name of the person
who tendered the outstanding notes to be withdrawn, the principal amount of
outstanding notes to be withdrawn and, if certificates for such outstanding
notes have been tendered, the name of the registered holder of the outstanding
notes as set forth on the outstanding notes, if different from that of the
person who tendered the outstanding notes.
If certificates for outstanding notes have been delivered or otherwise
identified to the exchange agent, the notice of withdrawal must specify the
serial numbers on the particular certificates for the outstanding notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
eligible institution, except in the
27
<PAGE>
case of outstanding notes tendered for the account of an eligible institution.
If outstanding notes have been tendered by the procedures for book-entry
transfer set forth in "--Procedures for Tendering Outstanding Notes," the notice
of withdrawal must specify the name and number of the account at DTC to be
credited with the withdrawal of outstanding notes and must otherwise comply with
the procedures of DTC. Withdrawals of tenders of outstanding notes may not be
rescinded. Outstanding notes properly withdrawn will not be deemed validly
tendered for purposes of the exchange offer, but may be retendered at any
subsequent time before the expiration date by following any of the procedures
described above under "--Procedures for Tendering Outstanding Notes."
All questions as to the validity, form and eligibility, including time of
receipt, of such withdrawal will be determined by us, in our sole discretion,
which determination shall be final and binding on all parties. Neither XM, any
affiliates of XM, the exchange agent or any other person shall be under any duty
to give any notification of any defects or irregularities in any notice of
withdrawal or incur any liability for failure to give any such notification. Any
outstanding notes which have been tendered but which are withdrawn will be
returned to the holder of those notes promptly after withdrawal.
Interest on the Exchange Notes
Interest on the outstanding notes and the exchange notes will accrue from
March 15, 2000, the date of issuance of the outstanding notes, and will be
payable semi-annually on March 15 and September 15 of each year at a rate of 14%
per annum, commencing September 15, 2000.
Conditions to the Exchange Offer
Notwithstanding any other provisions of the exchange offer or any extension
of the exchange offer, we will not be required to accept for exchange, or to
exchange, any outstanding notes for any exchange notes and will not be required
to issue exchange notes in exchange for any outstanding notes, and, as described
below, may, at any time and from time to time, terminate or amend the exchange
offer, whether or not any outstanding notes have been accepted for exchange, or
may waive any conditions to or amend the exchange offer, if any of the following
conditions or exists or have not been satisfied before the expiration date:
. there shall occur a change in the current interpretation by the staff
of the SEC which permits the exchange notes issued in exchange for
outstanding notes in the exchange offer to be offered for resale,
resold and otherwise transferred by their holders, other than broker-
dealers that acquired outstanding notes as a result of market-making
or other trading activities or broker-dealers that acquired
outstanding notes directly from XM for resale under Rule 144A or
another available exemption under the Securities Act, without
compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that the exchange notes are acquired in
the ordinary course of the holders' business, the holders have no
arrangement or understanding with any person to participate in the
distribution of the exchange notes and such holders are not
"affiliates" of XM within the meaning of Rule 405 under the Securities
Act
. any action or proceeding shall have been instituted or threatened in
any court or by or before any governmental agency or body with respect
to the exchange offer which, in our judgment, would reasonably be
expected to impair our ability to proceed with the exchange offer
. any law, statute, rule or regulation shall have been adopted or
enacted which, in our judgment, would reasonably be expected to impair
our ability to proceed with the exchange offer
. a stop order shall have been issued by the SEC or any state securities
authority suspending the effectiveness of the registration statement,
or proceedings shall have been initiated or, to our knowledge,
threatened for that purpose
. any governmental approval has not been obtained, which approval we
shall, in our sole discretion, deem necessary for the consummation of
the exchange offer as contemplated hereby
28
<PAGE>
. any change, or any development involving a prospective change, in our
business or financial affairs has occurred which, in our sole
judgment, might materially impair our ability to proceed with the
exchange offer
If we determine in our sole and absolute discretion that any of the
foregoing events or conditions has occurred or exists or has not been satisfied
at any time prior to the expiration date, we may, subject to applicable law,
terminate the exchange offer, whether or not any outstanding notes have been
accepted for exchange, or may waive any such condition or otherwise amend the
terms of the exchange offer in any respect. If such waiver or amendment
constitutes a material change to the exchange offer, we will promptly disclose
such waiver or amendment by means of a prospectus supplement that will be
distributed to the registered holders of the outstanding notes, and we will
extend the exchange offer to the extent required by Rule 14e-1 under the
Securities Exchange Act.
United States Federal Income Tax Consequences
The exchange of the outstanding notes for the exchange notes will not be a
taxable exchange for federal income tax purposes, and holders of outstanding
notes should not recognize any taxable gain or loss or any interest income as a
result of such exchange.
Exchange Agent
We have appointed United States Trust Company of New York as exchange agent
for the exchange offer. Delivery of the letters of transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this prospectus or of the Letter of Transmittal should be
directed to the exchange agent as follows:
By Mail
United States Trust Company of New York
P.O. Box 84
Bowling Green Station
New York, New York 10274
By Hand before 4:30 p.m.
United States Trust Company of New York
30 Broad Street, B-Level
New York, New York 10004
By Overnight Courier and By Hand after 4:30 p.m.
United States Trust Company of New York
30 Broad Street, 14th Floor
New York, New York 10004
By Facsimile
(646) 458-8111
Attention: Customer Service
Confirm by telephone: (800) 548-6565
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
Fees and Expenses
We will bear the expenses of soliciting tenders. The principal solicitation
is being made by mail. Additional solicitation may be made personally or by
telephone or other means by officers, directors or employees of XM.
We have not retained any dealer-manager or similar agent in connection with
the exchange offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the exchange offer. We have agreed to
29
<PAGE>
pay the exchange agent reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses. We will also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this prospectus
and related documents to the beneficial owners of outstanding notes, and in
handling or tendering for their customers.
Holders who tender their outstanding notes for exchange will not be
obligated to pay any transfer taxes in connection with the tender, except that
if exchange notes are to be delivered to, or are to be issued in the name of,
any person other than the registered holder of the outstanding notes tendered,
or if a transfer tax is imposed for any reason other than the exchange of
outstanding notes in connection with the exchange offer, then the amount of any
such transfer tax, whether imposed on the registered holder or any other
persons, will be payable by the tendering holder. If satisfactory evidence of
payment of such transfer tax or exemption therefrom is not submitted with the
Letter of Transmittal, the amount of such transfer tax will be billed directly
to such tendering holder.
30
<PAGE>
USE OF PROCEEDS
The exchange offer is to satisfy certain of our obligations under the
registration rights agreement covering the senior secured notes. We will not
receive any proceeds from the issuance of the exchange notes. In consideration
for issuing the exchange notes as contemplated in this prospectus, we will
receive, in exchange, an equal number of senior secured notes in like principal
amount. The form and terms of the exchange notes will be identical in all
material respects to the form and terms of the senior secured notes, except as
otherwise described under "The Exchange Offer - Terms of the Exchange Offer."
The net proceeds to us from the sale of the senior secured notes (and
warrants sold in connection therewith) were approximately $191.3 million, after
excluding $123.0 million for an interest reserve and approximately $10.7 million
for underwriting fees and expenses. The net proceeds have been and will be used
as set forth below.
<TABLE>
<CAPTION>
Amount
--------------
(In thousands)
<S> <C>
Payments under satellite contract.................................. $ 98.7
Payments under terrestrial repeater contracts...................... 68.0
Payments under ground segment contracts............................ 11.2
Working capital, operating losses and general corporate expenses... 13.4
------
Total uses...................................................... $191.3
======
</TABLE>
We may re-allocate the proceeds among these categories depending upon the
timing of our funding requirements. In addition, these uses assume that the net
proceeds are the first funds used. To the extent we use cash on hand or from
other financings to meet these funding needs, we may reallocate the proceeds to
other matters. Pending these uses, the net proceeds from the offering of the
outstanding notes may be temporarily invested in short-term, interest-bearing,
investment grade securities.
31
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 2000 XM's capitalization on
an actual basis.
<TABLE>
<CAPTION>
June 30, 2000
-------------
<S> <C>
Cash and cash equivalents........................................... $266,331
Restricted investments (1).......................................... 93,415
--------
Total cash, cash equivalents and investments................... $359,746
========
Senior secured notes................................................ 261,172
Capital lease....................................................... 168
--------
Total debt..................................................... $261,340
========
Stockholder's equity
Common stock, par value $0.10; 3,000 shares authorized, 125
shares issued and outstanding................................... --
Additional paid-in capital.......................................... 797,734
Accumulated deficit................................................. (65,247)
--------
Total stockholder's equity..................................... 732,487
--------
Total capitalization................................................ $993,827
========
</TABLE>
(1) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
In considering the following XM selected financial data, you should also
read our consolidated financial statements and notes and the section captioned
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The consolidated statements of operations data for the three-year
period ended December 31, 1999, and for the period from December 15, 1992 (date
of inception) to December 31, 1999, and the consolidated balance sheets data as
of December 31, 1997, 1998 and 1999, are derived from our consolidated financial
statements. These statements have been audited by KPMG LLP, independent
certified public accountants. KPMG's report contains a paragraph stating that we
have not begun operations and are dependent upon additional debt or equity
financings, and that these factors raise substantial doubt about our ability to
continue as a going concern. The selected consolidated financial data do not
include any adjustments that might result from the outcome of that uncertainty.
The unaudited consolidated financial statements have been prepared on the same
basis as the audited consolidated financial statements and, in the opinion of
our management, include all adjustments consisting only of normal recurring
adjustments, necessary for a fair presentation of the information. You should
not assume that our results of operations for the six months ended June 30, 1999
and 2000 indicate what our results will be for the full year.
<TABLE>
<CAPTION>
Dec 15, 1992
(Date of
Six Months Ended Inception
Years Ended December 31, June 30, June 30,
------------------------------- -------------------- -----------
1997 1998 1999 1999 2000 2000(1)
------- -------- -------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Consolidated Statements Of Operations Data:
Revenue............................................ $ -- $ -- $ -- $ -- $ -- $ --
------- -------- -------- ------- -------- --------
Operating expenses:
Research and development.......................... -- 6,941 4,274 1,378 4,738 15,953
Professional fees................................. 1,090 5,242 9,948 2,560 10,713 26,994
General and administrative........................ 20 4,010 16,448 4,503 15,237 35,715
------- -------- -------- ------- -------- --------
Total operating expenses.......................... 1,110 16,193 30,670 8,441 30,688 78,662
------- -------- -------- ------- -------- --------
Operating loss..................................... (1,110) (16,193) (30,670) (8,441) (30,688) (78,662)
Other income interest income (expense), net........ (85) 26 490 76 12,983 13,415
------- -------- -------- ------- -------- --------
Net loss........................................... $(1,195) $(16,167) $(30,180) $(8,365) $(17,705) $(65,247)
======= ======== ======== ======= ======== ========
Other Data(2):
Ratio of earnings to fixed charges(3).............. -- -- -- -- --
======= ======== ======== ======= ========
Deficiency of earnings to cover fixed charges...... $ 1,195 $ 16,196 $ 29,921 $ 8,725 $ 33,309
======= ======== ======== ======= ========
Pro forma deficiency of earnings to cover fixed
charges(4)........................................ $ 83,274 $ 48,027
======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
---------------------------------
June 30,
1997 1998 1999 2000
--------- -------- ---------- ----------
(In thousands)
<S> <C> <C> <C> <C>
Consolidated Balance Sheets Data:
Cash, cash equivalents and short-term investments....... $ 1 $ 310 $ 119,102 $ 266,331
Restricted investments (5).............................. -- -- -- 174,623
System under construction............................... 90,030 155,334 333,500 551,123
Total assets............................................ 90,031 156,397 485,134 1,056,706
Total debt.............................................. -- 87 212 261,340
Total liabilities....................................... -- 28,941 30,030 324,219
Stockholder's equity.................................... 90,031 127,456 455,104 732,487
</TABLE>
33
<PAGE>
(1) Business activity for the period from December 15, 1992, which was our date
of inception, through December 31, 1996 was insignificant.
(2) For purposes of determining the ratio of earnings to fixed charges, and the
deficiency of earnings to cover fixed charges, "earnings" includes pre-tax
income (loss) adjusted for fixed charges. "Fixed charges" consists of
interest expensed and capitalized, amortized deferred financing charges, and
that portion of operating lease rental expense (deemed to be one-third of
rental expense) representative of interest.
(3) The ratios of earnings to fixed charges are not presented for the years
ended 1997, 1998, 1999, and for the six months ended June 30, 1999 and
2000, because earnings were inadequate to cover fixed charges.
(4) Pro forma deficiency of earnings to fixed charges is calculated based upon
the annual interest rate on the notes plus the amortization of deferred
financing fees and the debt discount as of the beginning of the period.
(5) Consists of a portfolio of U.S. government securities held by the trustee
for the benefit of the holders of the notes and a money market fund
associated with a contract.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following and analysis provides information that we believe is relevant
to an assessment and understanding of our financial condition and consolidated
results of operations. This discussion should be read together with our
consolidated financial statements and related notes beginning on page F-1 of
this registration statement.
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. ("Holdings") became a
holding company for XM Satellite Radio Inc. ("XM") 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 Holdings'
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.
In the first and second quarters of 2000:
. Holdings completed a follow-on offering of 4,370,000 shares of 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 XM's $1,000 principal amount of 14% senior secured notes
due 2010 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 from Holdings.
Subsequent to the second quarter of 2000, 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
$227,000,000 that were contributed to XM.
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.
35
<PAGE>
We have incurred substantial losses to date and expect to continue to incur
significant losses for the foreseeable future as we continue to design, develop
and deploy the XM Radio system and for some period following our commencement of
commercial operations.
We intend to capitalize all costs related to our satellite contract and our
FCC license, including all applicable interest. These capitalized costs will be
depreciated over the estimated useful lives of the satellites and ground control
stations. Depreciation of our satellites will commence upon in-orbit delivery.
Depreciation of our satellite control facilities and terrestrial repeaters and
the amortization of our FCC license will commence upon commercial operations.
After we begin commercial operations, which we are targeting for the second
quarter of 2001, we anticipate that our revenues will consist primarily of
customers' subscription fees and advertising revenues.
Results Of Operations
Six Months Ended June 30, 2000 Compared With Six Months Ended June 30, 1999
Research and Development. Research and development expenses increased
to approximately $4.7 million for the six months ended June 30, 2000, compared
with approximately $1.4 million for the six months ended June 30, 1999. The
increase in the research and development expenses primarily resulted from the
accelerated development of some of our system technology during the first half
of 2000.
Professional Fees. Professional fees increased to approximately $10.7
million for the six months ended June 30, 2000, compared with $2.6 million for
the six months ended June 30, 1999. The increase primarily reflects additional
legal, regulatory and marketing expenses as we engaged more consultants,
including incurring $5.6 million for enterprise information technology
consultants. We expect the professional fees to trend upward as we continue to
evaluate the system alternatives and develop market strategies.
General and Administrative. General and administrative expenses
increased to $15.2 million for the six months ended June 30, 2000, compared with
$4.5 million for the six months ended June 30, 1999. The increase reflects
increased headcount and facilities expenses. We have granted certain key
executives stock options in Holdings' Class A common stock and incurred a non-
cash compensation charge of approximately $2.3 million in first half of 2000
primarily for performance-based stock options. We will continue to incur
quarterly non-cash compensation charges over the vesting period depending on the
market value of Holdings' Class A common stock at the end of the quarter. We
also continued the amortization of goodwill and other intangibles during the
first half of 2000. We anticipate general and administrative expenses to
continue to increase through commercial operations.
Interest Income. Interest income increased to $13.0 million for the
six months ended June 30, 2000, compared with $0.1 million for the six months
ended June 30, 1999. The increase was the result of higher average balances of
cash and cash equivalents during the six months ended June 30, 2000, due to the
proceeds from the private placement of 14% senior secured notes and warrants and
the public offering of shares of Holdings' Class A common stock and shares of
Holdings' Series B convertible redeemable preferred stock, both in the first
half of 2000, which exceeded expenditures for satellite and launch vehicle
construction, other capital expenditures and operating expenses.
Interest Expense. We capitalized interest costs of $15.4 million and
$0.3 million associated with our FCC license and the XM Radio system during the
six months ended June 30, 2000 and 1999, respectively. The increase was the
result of incurrence of new debt during the first half of 2000.
Net Loss. The net loss for the six-month periods ended June 30, 2000
and 1999 was $17.7 million and $8.4 million, respectively. The increase in net
losses for the six months ended June 30, 2000, compared with the six months
ended June 30 , 1999, reflects an increase in research and development expenses
and additional general and administration expenses, primarily due to increased
headcount and facility expenses in preparation for commercial operations and the
amortization of goodwill and intangibles.
Year Ended December 31, 1999 Compared With Year Ended December 31, 1998
36
<PAGE>
Research and Development. Research and development expenses decreased to
$4.3 million in 1999, compared with $6.9 million in 1998. The decrease in
research and development expenses resulted from the completion of the
development of some of XM's system technology during 1998.
Professional Fees. Professional fees increased to approximately $10.0
million in 1999, compared with $5.2 million in 1998. The increase primarily
reflects additional legal, regulatory and marketing expenses.
General and Administrative. General and administrative expenses
increased to $16.4 million in 1999, compared with $4.0 million in 1998. The
increase primarily reflects increased headcount and facility expenses to begin
program management and operations. We also commenced the amortization of our
goodwill and intangibles resulting from Motient's acquisition of a former
investor's interest in us during 1999. We have granted certain key executives
stock options and incurred a non-cash compensation charge of approximately $4.1
million in the fourth quarter of 1999 primarily for performance-based stock
options. We will continue to incur quarterly non-cash compensation charges over
the vesting period depending on the market value of Holdings' Class A common
stock.
Interest Income. Interest income increased to $0.5 million in 1999,
compared with 1998, which was insignificant. The increase was the result of
higher average balances of cash and short-term investments during 1999 due to
the proceeds from capital contributions from Holdings exceeding the amounts of
expenditures for satellite and launch vehicle construction, other capital
expenditures and operating expenses.
Net Loss. The net loss for 1999 and 1998 was $30.2 million and $16.2
million, respectively. The increase in net losses for 1999, compared with 1998,
primarily reflects an increase in net interest expense as discussed above and
additional general and administration expenses, primarily due to increased
headcount and facility expenses, in preparation for commercial operations and
the commencement of amortization of goodwill and intangibles.
Year Ended December 31, 1998 Compared With Year Ended December 31, 1997
Research and Development. Research and development expenses amounted to
approximately $6.9 million for the year ended December 31, 1998. Research and
development expenses for the year ended December 31, 1997 were insignificant.
The increase in research and development expenses resulted from the development
of some of our system technology during 1998.
Professional Fees. Professional fees increased to approximately $5.2
million for the year ended December 31, 1998, compared with $1.1 million for the
year ended December 31, 1997. The increase primarily reflects legal, regulatory
and marketing expenses.
General and Administrative. General and administrative expenses increased
to $4.0 million for the year ended December 31, 1998, compared with $20,000 for
the year ended December 31, 1997. The increase primarily reflects increased
headcount and facility expenses to begin program management and operations.
Net Loss. The net loss for the years ended December 31, 1998 and 1997 was
$16.2 million and $1.2 million, respectively, primarily reflecting research and
development activities, professional fees and general and administrative
expenses.
Liquidity and Capital Resources
At June 30, 2000, we had a total of cash and cash equivalents of $266.3 million,
which excludes the $174.6 million of restricted investments, and working capital
of $304.1 million, compared with cash, cash equivalents and short-term
investments of $119.1 million and working capital of $93.8 million at December
31, 1999. The increases in the respective balances are due primarily to the
proceeds from Holdings' issuance of Series B convertible redeemable preferred
stock, which yielded net proceeds of $96.5 million, a concurrent follow-on
offering of Holdings' Class A
37
<PAGE>
common stock, which yielded net proceeds of $132.1 million, and a private
placement of 14% senior secured notes and warrants, which yielded net proceeds
of $191.3 million, which in the aggregate, exceeded capital expenditures and
operating expenses for the six months ended June 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.
Our expected sources and uses of funds through commencement of commercial
operations are as follows:
Inception Through Commercial Launch
(in millions)
<TABLE>
<CAPTION>
Sources of Funds
----------------
<S> <C>
Total funds raised to date............ $1,100
------
Total sources....................... $1,100
======
Uses of Funds
-------------
Satellites and launch................. $ 473
Launch insurance...................... 50
Terrestrial repeater system........... 263
Ground segment........................ 66
------
Total system........................ 852
FCC license........................... 90
Operating expenses and working
capital requirements................. 158
------
$1,100
======
</TABLE>
The sources and uses chart for inception through commercial launch assumes
that we will commence full commercial operations in the second quarter of 2001
and does not include net interest income or expense of any future offerings or
other financings. We anticipate that we will need substantial further funding
after commencement of operations to cover our cash requirements before we
generate positive cash flow from operations. Many factors, including our ability
to generate significant revenues, could affect this estimate. See "Risk
Factors" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Total funds raised to date in the chart above include proceeds received
principally by Holdings of
. $9.2 million in equity contributions and an additional $157.8 million in
equity from converted debt instruments funded by Motient and by a former
investor who sold its investment to Motient.
. $239.0 million in net proceeds from convertible notes which were converted
to shares of Holdings' Class A common stock and shares of Holdings' Series
A convertible preferred stock on October 8, 1999 as a result of Holdings'
initial public offering. $75 million of these proceeds were used to repay
outstanding debt.
. $114.1 million in net proceeds from Holdings' initial public offering.
. $132.1 million in net proceeds from Holdings' Class A common stock offering
in the first quarter of 2000.
38
<PAGE>
. $96.5 million in net proceeds from Holdings' Series B convertible
redeemable preferred stock offering in the first quarter of 2000.
. $191.3 million in net proceeds from Holdings' and XM's unit offering.
. $227.0 million in net proceeds from a private placement on August 8, 2000
of 235,000 shares of Holdings' Series C convertible preferred stock.
. Other proceeds, including interest income and proceeds from the sale of
stock under the employee stock purchase plan and the exercise of stock
options.
The use of funds for satellites and launch in the chart above includes
$472.6 million for satellites, launch and long-lead items, including certain
financing costs associated with the satellites, and for an option to complete
the ground spare satellite under our satellite contract with Hughes Space and
Communications, which was exercised. As of June 30, 2000, $350.8 million had
been paid under the satellite contract and an additional $2.0 million in accrued
milestone payments had been recognized.
The anticipated $65.9 million in costs for ground segment are intended to
cover the satellite control facilities, programming production studios and
various other equipment and facilities. As of June 30, 2000, we had incurred
costs of $21.9 million in deploying the ground segment.
Other operating expenses and working capital requirements in the chart
above include cumulative historical losses through June 30, 2000 of $65.2
million.
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 July 1999, Holdings issued $250.0 million of Series A subordinated
convertible notes to six strategic and financial investors--General Motors,
$50.0 million; Clear Channel Communications, $75.0 million; DIRECTV, $50.0
million; and Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn
Partners, $75.0 million in the aggregate. Using part of the proceeds from the
issuance of the Series A subordinated convertible notes, we paid a former
investor $75.0 million in July 1999 to redeem an outstanding loan. We incurred
fees and expenses totaling $11.3 million in connection with these transactions.
In October 1999, we raised net proceeds of $114.1 million from the issuance
of 10.2 million shares of Holdings' Class A common stock at a price of $12 per
share less $8.8 million in underwriting discounts and commissions and estimated
expenses. The Series A convertible notes, together with related accrued
interest, automatically converted into 16,179,755 shares of Holdings' Class A
common stock and 10,786,504 shares of Holdings' Series A preferred stock. Also,
the Motient notes, together with related accrued interest, automatically
converted into 11,182,926 shares of Holdings' Class B common stock. As a result
of these transactions, substantially all of Holdings' indebtedness converted
into equity.
In the first and second 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
39
<PAGE>
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 shares of Holdings' Class A
common stock that provided net proceeds of $191.3 million excluding
$123.0 million for an interest reserve, after $65.7 million was
contributed to XM from Holdings.
Subsequent to the second quarter of 2000, Holdings closed a private offering of
235,000 shares of its Series C convertible redeemable preferred stock, which
yielded net proceeds of approximately $227.0 million that were contributed to
XM. Holdings expects to record a $123.0 million beneficial conversion charge
that will reduce earnings available to common stockholders.
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 June
30, 2000 totaled $509.0 million.
Satellite Contract. Under our satellite contract, Hughes Space and
Communications will deliver two satellites in orbit and complete construction of
a ground spare satellite. Hughes will also provide ground equipment and software
to be used in the XM Radio system and certain launch and operations support
services. We expect that by commencement of commercial operations in the second
quarter of 2001, we will have had to pay an aggregate amount of approximately
$472.6 million for these items and for Hughes to complete the ground spare
satellite. This amount does not include incentive payments, which will depend in
part on projected satellite performance at the acceptance date. Such payments
could total up to an additional $68.7 million over the useful lives of the
satellites. As of June 30, 2000, we have paid approximately $350.8 million under
our satellite contract and have recognized an additional $2.0 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 June 30, 2000, we had not incurred any costs with respect to launch
insurance.
Terrestrial Repeater System. Based on the current design of the XM Radio
system and 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 June 30, 2000, we had incurred costs with
respect to the terrestrial repeater buildout of $40.2 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 June 30, 2000, we had paid $13.9 million under this contract and accrued
an additional $13.7 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 June 30, 2000, we had paid
$12.5 million under this contract, and accrued an additional $0.1 million.
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 June 30, 2000, we had incurred $21.9 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.
40
<PAGE>
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 June 30, 2000, we have incurred total expenses of $78.7
million. Total cash used in operating activities was $35.1 million. The
difference between the loss incurred to date and cash used in operations is
principally due to a $6.5 million non-cash stock compensation charge and $22.7
million in accounts payable and accrued expenses.
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.
Funds Required for XM Radio Following Commencement of Commercial Operations
Even after commencement of commercial operations, we expect to need
significant additional funds to cover our cash requirements before we generate
sufficient cash flow from operations to cover our expenses. We cannot accurately
estimate the amount of additional funds needed, since it will depend on business
decisions to be made in the future and revenues received from operations, but we
expect the amount to be substantial. Funds will be needed to cover operating
expenses, marketing and promotional expenses including an extensive marketing
campaign in connection with the launch of our service, distribution and
subscriber acquisition expenses, programming costs and any further development
of the XM Radio system that we may undertake after operations commence.
Marketing and distribution expenses are expected to include joint advertising
and joint development with and manufacturing subsidies of certain costs of some
of our manufacturers and distribution partners. We cannot estimate accurately
the total amount of these operational, promotional, subscriber acquisition,
joint development and manufacturing costs and expenses, but they are expected to
be substantial.
We will have significant payment obligations after commencement of
operations under our distribution agreement with General Motors. We will pay an
aggregate of approximately $35 million in the first four years following
commencement of commercial service. After that, through 2009, we will have
additional fixed annual payments ranging from less than $35 million to
approximately $130 million, aggregating approximately $400 million. In order to
encourage the broad installation of XM radios, we have agreed to subsidize a
portion of the cost of XM radios and to make incentive payments to General
Motors when the owners of General Motors vehicles with installed XM radios
become subscribers for the XM Radio service. We must also share with General
Motors a percentage of the subscription revenue attributable to General Motors
vehicles with installed XM radios. This percentage increases until there are
more than eight million General Motors vehicles with installed XM radios. This
agreement is subject to renegotiation if General Motors does not achieve and
maintain specified installation levels, starting with 1.24 million units after
four years and thereafter increasing by the lesser of 600,000 units per year and
amounts proportionate to our share of the satellite digital radio market. The
distribution agreement is described in more detail under the caption "Certain
Relationships and Related Party Transactions--Distribution Agreement with
General Motors and OnStar."
We currently expect to satisfy our funding requirements for the period
following commencement of commercial operations 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,
41
<PAGE>
a number of adverse effects could occur. Our satellite construction and launch
and other events necessary to our business could be materially delayed or their
costs could materially increase. We could default on our commitments to our
satellite construction or launch contractors, creditors or others, leading to
termination of construction or inability to launch our satellites. Finally, we
may not be able to launch our satellite radio service as planned and may have to
discontinue operations or seek a purchaser for our business or assets.
Motient Corporation is the controlling stockholder of Holdings, our parent
company, and controls us under applicable FCC rules. Motient has certain rights
regarding the election of persons to serve on Holdings' board of directors and
holds 54.4% of the voting power of Holdings, or 46.6% giving effect to the
conversion of all of Holdings' outstanding common stock equivalents. Motient
cannot relinquish its controlling position as without obtaining the prior
approval of the FCC. Accordingly, prior to our obtaining FCC approval of the
transfer of control from Motient, Holdings will only be able to issue a limited
amount of voting securities or securities convertible into voting securities
unless certain of Holdings' stockholders holding nonvoting convertible
securities agree not to convert them into voting securities or Holdings takes
other steps to permit voting securities on a basis consistent with FCC rules.
Certain holders of Holdings' nonvoting securities have agreed not to convert
their securities if it would cause Motient not to hold at least 40% of Holdings'
voting stock, until we obtain approval by the FCC of a change in control. In
return, Holdings has agreed not to issue new voting securities, other than the
units and other than up to 2,000,000 shares of Class A common stock (except upon
conversion or exercise of existing securities or under our employee stock
plans), if it would make these holders unable to convert any of their nonvoting
securities. We have filed an application with the FCC to permit Motient to
relinquish control of Holdings. We may not be able to obtain FCC approval or it
may take a long period of time to obtain such approval and there may be
conditions imposed in connection with such approval that may be unfavorable to
us. The inability to raise capital opportunistically, or at all, could adversely
affect our business plan.
Our 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.
Recent Accounting Pronouncement
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44
becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In July 1999, 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 may require Holdings to recognize additional non-
cash compensation commencing in the third quarter of 2000.
Quantitative and Qualitative Disclosures About Market Risk
As of June 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.
42
<PAGE>
BUSINESS
Overview
We seek to become a premier nationwide provider of audio entertainment and
information programming. We will transmit our XM Radio service by satellites to
vehicle, home and portable radios. We own one of two FCC licenses to provide a
satellite digital radio service in the United States. We will offer a wide
variety of music, news, talk, sports and other specialty programming on up to
100 distinct channels. We believe that customers will be attracted to our
service because of its wide variety of formats, digital quality sound and coast-
to-coast coverage.
We are constructing our satellite system and have contracts with third
party programmers, vendors and other partners. Key milestones achieved include
the following:
. $1.1 billion of equity and debt proceeds raised to date, net of expenses
and repayment of debt; our strategic and financial investors include
General Motors, Clear Channel Communications, DIRECTV, Telcom Ventures,
Columbia Capital, Madison Dearborn Partners, American Honda and AEA
Investors;
. Contract with Hughes Space and Communications for construction and in-
orbit delivery of two high-powered satellites and a ground spare;
. Contracts with LCC International for the design of our international
repeater network and Hughes Electronics for the design and manufacture of
our terrestrial repeaters;
. Long-term agreement with the OnStar division of General Motors covering
the installation and exclusive marketing and distribution of XM Radio
service in General Motors vehicles;
. Contracts with Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine,
Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM
radios;
. Agreements with leading specialty programmers, for many of which we will
be the exclusive satellite radio platform, covering at least 24 channels,
including AsiaOne, Black Entertainment Television (BET), BBC World
Service, Bloomberg News Radio, Clear Channel, CNN en Espanol, CNNfn, CNN
Sports Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting Corporation
(formerly Heftel), NASCAR, One-on-One Sports, Radio One, Salem
Communications, Sporting News, Weather Channel and USA Today;
. Agreement with Freightliner Corporation to install XM radios in
Freightliner trucks; and
. Agreement with Sirius Radio to develop a unified standard for satellite
radios, which will facilitate the ability of consumers to purchase an
interoperable radio capable of receiving both our and Sirius Radio's
service.
Market Opportunity
We believe that there is a significant market for our satellite radio service.
Market studies show strong demand for radio service, as evidenced by radio
listening trends, data relating to sales and distribution of radios and the
general growth in radio advertising. In addition, we note that in many markets
audio programming choices are limited to mass appeal formats. We believe our
national subscription service will complement traditional local radio. Moreover,
the success of subscription entertainment services in other media such as cable
television and market research further indicate potential for significant
consumer demand for satellite radio services.
Radio Listening
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On average, adults listen to the radio 3.2 hours a day, with the amount of
radio listening fairly evenly distributed across gender and age groups. The
percentage of people listening to radio is also high. Market data show that over
75% of the entire United States population age 12 and older listen to the radio
daily, and over 95% listen on a weekly basis (Radio Marketing Guide and Factbook
for Advertisers, Radio Advertising Bureau, Fall 1999 to Spring 2000).
In addition, more people listen to radio than to other comparable audio
entertainment formats. The popularity of radio versus these other formats
appears particularly strong in the car, where we will be targeting our service
initially. An estimated 69% of consumers chose radio as their most listened to
format in the car as compared to 15% for cassettes and 9% for CDs (Radio
Listening Habits, CEMA 1999).
Radio Sales and Distribution
A large number of radios are sold in the United States on an annual basis.
In 1999, radio manufacturers sold over 29 million car radios, including 17
million original equipment automobile radios and 11 million aftermarket
automobile radios, as well as 1.2 million aftermarket automobile CD changers.
Original equipment radios are installed in new cars; aftermarket radios are
installed in the automobile after purchase. Based on these statistics, each
additional one million subscribers would represent less than 3.5% of the new
original equipment manufacturer and aftermarket car radios brought to market
annually and would generate incremental subscription revenues, at $9.95 per
month, of approximately $120 million.
Radio Advertising
The continued popularity of radio is also reflected in the growth of radio
advertising. The Radio Advertising Bureau estimates that radio advertising
revenue in 1999 climbed to $17.7 billion, an increase of 15% over 1998. Veronis,
Suhler & Associates projects a compound annual increase of 9.7% through 2003.
This growth rate exceeds the projected increase in advertising spending for
television, newspapers, magazines, yellow pages and outdoor advertising
(Communications Industry Forecast, 1999).
Current Limitations on Programming Choice
Many consumers have access to a limited number of stations and programming
formats offered by traditional AM/FM radio. Our service is expected to be
attractive to underserved radio listeners who want expanded radio choices.
Limited Number of Radio Stations. The number of radio stations available
to many consumers in their local market is limited in comparison to the up to
100 channels we expect to offer on a nationwide basis. In 1998, there were only
47 AM/FM radio stations as listed by Arbitron broadcasting in New York City, the
largest radio market in the United States. In fact, many metropolitan areas
outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and
Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron
(American Radio, Spring 1999 Ratings Report, Duncan's American Radio, 1999).
We estimate that our coast-to-coast service will reach over 98 million
listeners age 12 and over who are beyond the range of the largest 50 markets as
measured by Arbitron. Of these listeners, 36 million live beyond the largest 276
markets (Census data and Fall 1999 Market Rankings, The Arbitron Company). In
addition, there are 22 million people age 12 and above who receive five or fewer
stations (The Satellite Report 1999, C. E. Unterberg, Towbin).
Limited Programming Formats. We believe that there is significant demand
for a satellite radio service that expands the current programming choices
available to these potential listeners. Over 52% of all commercial radio
stations use one of only three general programming formats--country, adult
contemporary and news/talk/sports (Veronis, Schuler & Associates Communications
Industry Forecast 1999). Over 71% of all commercial radio
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stations use one of only five general formats--the same three, plus oldies and
religion. The small number of available programming choices means that artists
representing niche music formats likely receive little or no airtime in many
markets. Radio stations prefer featuring artists they believe appeal to the
broadest market. However, according to the Recording Industry Association of
America, recorded music sales of niche music formats such as classical, jazz,
movie and Broadway soundtracks, new age, children's programming and others
comprised up to 21% of total recorded music sales in 1998 (1998 Consumer
Profile).
Demand for Subscription Services and Products
Penetration data relating to cable, satellite television, and premium movie
channels suggest that consumers are willing to pay for services that
dramatically expand programming choice or enhance quality. As of 1999, over 67%
of TV households subscribe to basic cable television at an average monthly cost
of $29, and over 11% of TV households subscribe to satellite television at an
average monthly cost of $51 (National Cable Television Association website and
DBSdish.com website). Also in 1999, according to Paul Kagan Associates,
subscribers to cable and satellite services purchased more than 75 million
premium channel units, such as HBO, Showtime and Cinemax, for which they paid an
extra monthly charge on top of the basic monthly fee.
Demand for Satellite Radio Services
Several studies have been conducted demonstrating the demand for satellite
radio service.
In June 1999, we commissioned Strategic Marketing And Research Techniques
(SMART), a leading market research company and Dr. Frank M. Bass, a leading
authority on the diffusion of new products and inventor of the Bass curve, to
estimate the demand for satellite radio based on survey data and historical
information. SMART surveyed 1,800 people ages 16 and over. The study concluded
that as many as 49 million people may subscribe to satellite radio by 2012,
assuming a $9.95 monthly subscription fee and a radio price point of $150-$399
depending upon the type of car or home unit chosen. The study also anticipates
that satellite radio will grow even faster than DBS.
In December 1998, we commissioned SMART to conduct a study based on one-on-
one interviews with over 1,000 licensed drivers ages 16 to 64 in ten
geographically dispersed markets. The study concluded that approximately 50% of
aftermarket radio purchases would be for AM/FM/satellite radio units with a
single-disc CD player. This assumed a radio price point of $399, a $75
installation fee and a $10 monthly subscription fee for the service. The same
study also found that consumers are more likely to buy satellite radio units
that offer at least 80 channels.
In November 1998, we commissioned Yankelovich Partners to gauge consumer
interest in satellite radio. This involved surveying 1,000 people via telephone
and correlating the results with the Yankelovich MONITOR study, which is the
longest standing tracking study of consumer values and attitudes in the United
States. The study indicated that 18% of people age 16 and older were
"definitely" or "probably" willing to pay $9.99 per month to receive
satellite radio and an additional $150 for a satellite radio when buying a new
car.
The XM Radio Service
We are designing the XM Radio service to address the tastes of each of our
targeted market segments through a combination of niche and broad appeal
programming. We believe that our distinctive approach to programming, combined
with digital quality sound and virtually seamless signal coverage throughout the
continental United States, will position us to become the leading provider of
the next generation in radio.
We Will Differentiate XM Radio from Traditional AM/FM Radio
Local radio stations, even those which are part of national networks, focus
on maximizing listener share within
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local markets. This limits the types of programming they can profitably provide
to mass appeal formats. In contrast, our nationwide reach and ability to provide
up to 100 channels in each radio market will allow us to aggregate listeners
from markets across the country, expanding the types of programming we can
provide. The following chart indicates differences between XM Radio and
traditional AM/FM radio.
<TABLE>
<CAPTION>
XM Radio Traditional AM/FM Radio
<S> <C> <C>
Convenience: go anywhere Virtually seamless signal coverage Local area coverage
capability in the United States
Choice: wide variety/number of Up to 100 channels with a wide Limited formats in many markets
stations variety of programming
Improved audio quality Digital quality sound Analog AM/FM quality sound
Fewer commercials Average 6-7 minutes per hour; Average 13-17 minutes per hour
some channels commercial free
More information about music Text display with title/name of No visual display
song/artist
</TABLE>
We plan to further differentiate XM Radio from traditional AM/FM radio in
the following ways.
Provide music formats unavailable in many markets. XM Radio will offer many
music formats that are popular but currently unavailable in many markets. More
than 52% of all commercial radio stations in markets measured by Arbitron use
one of only three programming formats: country; adult contemporary; or
news/talk/sports. There are many types of music with significant popularity, as
measured by recorded music sales and concert revenues, that are unavailable in
many traditional AM/FM radio markets. Such music could include classical
recordings or popular blues and rap music that have retail appeal but are not
commonly played on traditional AM/FM radio. This music also includes special
recordings such as the Irish dance soundtrack "Riverdance" and the "Three
Tenors" concerts which generate millions of CD sales, yet are not typically
played on today's AM/FM stations. Additionally, heavy metal and dance are two of
the more popular musical styles not currently broadcast in many small and medium
sized markets. Even major markets do not always offer a full complement of
formats.
Superserve popular music formats. We will be able to offer more specific
programming choices than traditional AM/FM radio generally offers for even the
most popular listening formats. For example, on traditional AM/FM radio oldies
music is often generalized on a single format. We will be able to segment this
category by offering several dedicated, era-specific formats. We also plan to
offer up to six dedicated channels with urban formats and four distinct country
music formats.
Use more extensive playlists. Traditional AM/FM radio stations frequently
use limited playlists that focus on artists and specific music that target the
largest audience. With our large channel capacity and focus on specific formats,
we have the ability to provide more variety to attract listeners dissatisfied
with repetitive and/or limited playlist selection offered by traditional radio.
Deliver a wide range of ethnic and informational programming. We will
provide a variety of formats that target specific ethnic and special interest
groups who are rarely served by traditional AM/FM radio. We believe by using our
national platform to aggregate geographically disparate groups through affinity
programming, we will provide advertisers a valuable way to market products and
services to these groups by advertising on our affinity channels.
Develop promotional opportunities with record companies, recording artists
and radio personalities. Because
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of our nationwide coverage and resulting economies of scale, we will be able to
deliver a variety of national promotions and events that would not be cost
effective or efficient on a market-by-market basis through traditional AM/FM
radio distribution. Also, we will seek to hire and develop high profile talk and
disc jockey talent capable of becoming the next generation of national radio
stars with an influence on radio similar to the impact that the new breed of
cable TV talk hosts have had on the television industry.
Respond quickly when major music and cultural events occur. XM Radio
programmers will respond quickly to changing musical tastes, seasonal music and
emerging popular cultural events, such as Bruce Springsteen and Ricky Martin
tours, by providing listeners with extensive coverage utilizing our large
channel capacity.
Take advantage of digital's higher quality signal. There are several music
formats that have strong demand but have been relegated to AM stations with
weaker signals due to lack of available FM frequencies. Such AM formats include
traditional country music, big band/nostalgia and gospel formats that we will be
able to deliver with superior sound quality.
Focus on special demands of mobile listeners. A significant percentage of
radio listeners, such as truckers, routinely travel through two or more radio
markets on a frequent basis. According to the U.S. Department of Transportation,
there were over three million truckers in the United States in 1997. We believe
these listeners will be attracted to a radio service with national coast-to-
coast coverage. We are seeking to specifically identify and target the listening
demands of this audience.
Availability of commercial-free and limited-advertising channels. We
believe that a significant portion of the listening market would pay to
subscribe to a radio service that provided commercial-free channels and channels
with reduced advertising, as demonstrated by the appeal of limited periods of
non-stop music used by some traditional AM/FM stations. Therefore, we plan to
target this audience with a number of commercial-free music channels covering
popular music formats. In addition, we expect that our limited-advertising
channels will carry less than half the advertising spots of typical AM/FM
stations.
Use cross-promotion capability to market XM Radio. We will dedicate a
percentage of our advertising inventory across our channels to promote specific
programming and brand loyalty. AM/FM radio stations traditionally promote on a
single channel basis to build awareness.
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Representative XM Radio Channel List
The following table is a list of representative channels we may offer.
Channels in italics represent contractual commitments with content providers.
Representative Channels of XM Radio
ROCK MUSIC
----------
Classic Rock
Classic Hard Rock
New Hard Rock
New Alternative
Classic Alternative
Soft Rock
ECLECTIC MUSIC
---------------
Contemporary Christian (Salem)
Traditional Christian (Salem)
Blues
Traditional Jazz
Reggae/Island
World Music
American Folk
Pop Classical
Traditional Classical
Modern Jazz
Progressive/Fusion
POP MUSIC
---------
Top 20 Contemporary Hits
Disco/Dance
Broadway Show Tunes
Modern Adult Contemporary
Classic Vocalists
All Request Contemporary Hits
SPORTS
------
Sports Headlines (CNN/Sports)
Sports Talk (One-On-One Sports, Sporting News)
Sportsman Channel
Automotive (NASCAR)
COUNTRY MUSIC
-------------
Mainstream Country
Classic Country
Bluegrass/Traditional Country
All Request Country
INFORMATION
-----------
All News (USA Today)
All News (Bloomberg)
Public Affairs (C-SPAN)
Financial News (CNN fn)
News/Information (BBC World Service)
Home & Garden
Love/Relationship Line
Farm/Rural
Health/Fitness
Comedy
Audio Books
Consumer Classified
Soap Operas
For Truckers Only
Movie Soundtrack Channel
Relationship Classified (-18)
Relationship Classified (19-30)
Relationship Classified (31-50)
Relationship Classified (51+)
Lifestyles
Celebrity Gossip
Entertainment News
Game Show/Contest
URBAN MUSIC
-----------
Hip Hop/Rap (BET/Radio One)
Urban Dance Mix (Radio One)
Classic Soul (BET/Radio One)
Gospel (BET/Radio One)
Adult Urban (BET/Radio One)
Top 20 Urban
ENVIRONMENTAL MUSIC
-------------------
Soft Jazz
New Age
Electronic
Environmental (Earth Sounds)
Beautiful Instrumentals
HISPANIC
--------
Tejano (Hispanic Broadcasting Corp.)
Caribbean (Hispanic Broadcasting Corp.)
Regional Mexican (Hispanic Broadcasting Corp.)
Rock en Espanol (Hispanic Broadcasting Corp.)
Hispanic Ballads (Hispanic Broadcasting Corp.)
Hispanic News (CNN en Espanol)
OLDIES MUSIC
------------
40's Oldies
50's Oldies
60's Oldies
70's Oldies
80's Oldies
90's Oldies
Love Songs
TALK
----
African American Talk (BET/Radio One)
Asian/Indian Talk (AsiaOne)
Christian/Family Talk (Salem)
Mandarin Talk (AsiaOne)
Conservative Talk
Liberal Talk
Senior Citizen Talk
Rock Talk
Hispanic Talk
Teen Talk
CHILDREN'S MUSIC
----------------
Pre-School
Grade School/pre-teen
SPECIAL/EVENTS
--------------
Reserved Channels
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Key Elements of Our Business
We have developed a business strategy to become a premier nationwide
provider of audio entertainment and information programming in the vehicle, home
and portable markets. Our strategy includes the following elements.
Programming
We believe that the quality and diversity of our programming will be a key
driver of consumer interest in our service. To that end, we have developed a
unique programming strategy that offers consumers
. Original music and information channels created by XM Originals, our in-
house programming unit;
. Channels created by well-known providers of brand name programming; and
. The availability of commercial-free and advertiser-supported channels.
XM Originals. Through a programming unit in XM Radio called "XM
Originals", we will create a significant number of original channel formats
with content focusing on popular music such as oldies, rock and country, and on
new and innovative formats, including jazz, blues, reggae and pop classical.
These formats will include artists with strong music sales and concert revenue
who do not get significant airplay on traditional AM/FM radio stations. We also
intend to brand individual channels creating a specific station personality and
image using compelling on-air talent and other techniques to attract listeners
in our target market segments. We have hired a team of programming professionals
with a proven track record of introducing new radio formats and building local
and national listenership.
Brand Name Programming Partners. We intend to complement our original
programming with a variety of unique and diverse content provided to us by brand
name programming providers. We have signed contracts representing at least 24
channels with numerous well-known specialty and niche programmers that will
provide brand name content for XM Radio. These companies include:
Media Radio
----------
-- Bloomberg News Radio -- Hispanic Broadcasting Corporation
(formerly Heftel)
-- USA Today -- Clear Channel Communications
-- CNNfn -- Radio One
-- CNN en Espanol -- Salem Communications
-- CNN Sports Illustrated -- AsiaOne
-- C-SPAN Radio -- One-On-One Sports
-- Black Entertainment Television -- BBC World Service
-- DIRECTV -- NASCAR
-- Weather Channel
-- Sporting News
Availability of Commercial-Free and Limited-Advertising Channels. We will
provide a number of commercial-free music channels covering popular music
formats. In addition, our limited-advertising channels will carry less than half
the advertising of a typical AM/FM radio station. We expect the diversity of our
programming line-up will appeal to a large audience, including urban and rural
listeners of all ages, ethnicities, economic groups and specialty interests. We
expect to tailor our programming and marketing to appeal to specific groups
within those audiences that research has shown are most likely to subscribe to
our satellite radio service. Initially, we plan to concentrate our programming
efforts on listeners who are most receptive to innovative entertainment
services, so-called early adopters, and new car buyers. According to our
research, 16-34 years old adults will compose a high percentage of our early
adopters; we will therefore focus a significant portion of our programming and
marketing efforts to appeal to them. In addition, we will develop programming
and marketing specifically to appeal to other
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market segments such as baby boomers who are 35-53 years old, seniors who are 54
years old and older, African-Americans, Asian-Americans and Hispanics.
Future Content Arrangements. Under our agreement with Sirius Radio, all
new arrangements with providers of programming or content, including celebrity
talent, must be non-exclusive and may not reward any provider for not providing
content to the other party .
Marketing and Distribution
Our marketing strategy will be designed to build awareness and demand among
potential subscribers in our target markets and the advertising community. In
addition, we expect to work closely with radio and automotive manufacturers and
retail distributors to promote rapid market penetration.
Establish Broad Distribution Channels for XM Radios
We plan to market our satellite radio service through several distribution
channels including national electronics retailers, car audio dealers, mass
retailers and automotive manufacturers. In addition, we will support our
distribution channels by building awareness of XM Radio with a substantial
introductory launch campaign, including national and local advertising.
Exclusive Distribution Agreement with General Motors. We have an agreement
with the OnStar division of General Motors whereby, for a 12-year period,
General Motors will exclusively distribute and market the XM Radio service and
install XM radios in General Motors vehicles beginning in 2001. General Motors
sold over 4.9 million automobiles in 1999, which represented more than 29% of
the United States automobile market. Under the agreement, we have substantial
payment obligations to General Motors, including among others, certain
guaranteed, annual, fixed payment obligations. While we have discussed with
General Motors certain installation projections, General Motors is not required
to meet any minimum targets for installing XM radios in General Motors vehicles.
In addition, certain of the payments to be made by us under this agreement will
not be directly related to the number of XM radios installed in General Motors
vehicles. Our contract with General Motors is described in more detail under the
caption "Certain Relationships and Related Party Transactions--Distribution
Agreement with General Motors and OnStar." We are currently in discussions with
other car manufacturers regarding additional distribution agreements.
Distribution through Radio Manufacturers. We have signed contracts with
Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi and Clarion for the
development, manufacture and distribution of XM radios for use in cars and a
contract with Sony Electronics to design, manufacture and market XM radios for
the portable, home, aftermarket and original equipment manufacture car stereo
markets. One of these manufacturers, Delco Electronics Corporation, a subsidiary
of Delphi Automotive Systems, is the leading original equipment manufacturer of
radios for the automobile industry, producing more than 33% of car radios
manufactured for installation in new automobiles in the United States in 1997.
Delphi-Delco is also the leading manufacturer of car radios sold in General
Motors vehicles and has signed a contract to build our radios for General
Motors. Sony is the leader in sales of portable CD players by a large margin and
one of the top three sellers of shelf systems. Sony has agreed to assist with
marketing XM Radios and has agreed to incentive arrangements that condition its
compensation on use of XM Radios manufactured by Sony or containing Sony
hardware. Motorola is a leading supplier of integrated electronics systems to
automobile manufacturers. Mitsubishi Electric Automotive America, together with
its parent corporation, Mitsubishi Electric Corp., is the largest Japanese
manufacturer of factory-installed car radios in the United States. Clarion is a
leader in the car audio and mobile electronics industry. Two of our other
manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together
sold over 31% of aftermarket car radios sold in the United States in 1999. We
have also signed a contract with SHARP to manufacture and distribute XM radios
for home and portable use. We are pursuing additional agreements for the
manufacture and distribution of XM radios, subject to contract limitations on
the number of manufacturer distributors during the early years of service. We
also plan to meet with automobile dealers to educate them about XM Radio and
develop sales and promotional campaigns to
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promote XM radios to new car buyers.
These leading radio manufacturers have strong retail and dealer
distribution networks in the United States. We expect to have access to the
distribution channels and direct sales relationships of these distributors,
including national electronics retailers, car audio dealers and mass retailers.
We do not intend to manufacture or hold inventory of XM radios. Radio
distribution likely would be handled by fulfillment centers, which hold
inventory for the radio manufacturers and ship products directly to listeners at
the manufacturers' request.
Rural Market Distribution/Alternative Distribution. We intend to market our
satellite radio service in rural counties, using distribution channels similar
to satellite television, to penetrate rural households not served by traditional
electronic retailers. In addition, we plan to pursue alternative distribution
opportunities such as catalog/direct marketing, the Internet and marketing
through affinity groups.
Future Distribution Arrangements. We have signed an agreement with Sirius
Radio to develop a unified standard for satellite radios to facilitate the
ability of consumers to purchase one radio capable of receiving both our and
Sirius Radio's services. Both companies expect to work with their automobile and
radio manufacturing partners to integrate the new standard. Future agreements
with automakers and radio manufactures will specify the unified satellite radio
standard. Furthermore, future agreements with retail and automotive distribution
partners and content providers will be on a non-exclusive basis and may not
reward any distribution partner for not distributing the satellite radio system
of the other party.
In addition, we have signed an agreement with Freightliner Corporation to
install XM radios in Freightliner trucks.
Maximize Revenue Through Dual Sources
As with other subscription-based entertainment media such as cable
television, we expect to generate revenue by charging a monthly subscription fee
and selling limited advertising time. We will earn all of the revenue from
advertising on our own programming and a portion of the revenues from
advertising on third party programming. XM Radio offers a new national radio
platform for advertisers that solves many of the problems associated with buying
radio advertising nationally on a spot or syndicated basis. We believe the
attractiveness of one-stop national radio advertising buys will provide a
significant source of income as our subscriber base grows.
Subscriber Development and Expansion
We expect to promote XM Radio as a national brand name with an exciting
image. Several months prior to service commencement, we will launch an
advertising campaign in several United States markets to test and generate early
feedback on the product offerings and stimulate early demand. Promotional
activities currently under consideration include distributing sample programming
at retail outlets, concert venues and on the Internet to generate initial
interest. For instance, we have entered into an agreement with SFX Entertainment
to be the exclusive satellite radio advertiser at live concerts and sporting
events presented by, and live entertainment venues managed by, SFX.
Although XM Radio will be available nationwide upon commencement of
operations, we will initially concentrate promotional activities in several key
markets and rapidly expand to other large markets. This phased roll-out
strategy, similar to that employed by consumer electronics manufacturers and
special services such as DIRECTV and Web TV, will enable us to refine our launch
implementation throughout the roll-out period. The advertising will consist of
both branding and promotion efforts for XM Radio, as well as separate campaigns
to promote and brand individual channels. Initially, we will focus marketing
efforts on the various channels targeting young adults, who we believe are more
likely to drive early penetration. We also expect to benefit from free local
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media coverage as XM Radio is first offered in each new market.
XM Radio will promote subscriber acuisition activities with both original
equipment and aftermarket radio manufacturers. This might include
. promotional campaigns directed towards automobile manufacturers and
dealers;
. promotional campaigns for free months of service with purchase of an
XM radio or free installations for aftermarket car radios;
. incentive programs for retailer sales forces;
. in-store promotional campaigns, including displays located in
electronics, music and other retail stores, rental car agencies and
automobile dealerships; and
. jointly funded local advertising campaigns with retailers.
Advertiser Development and Acquisition
Our ability to aggregate various local niche market segments into national
audiences will be attractive to national advertisers and agencies. We have held
extensive meetings with media directors, planners and buyers at advertising and
media buying agencies to develop advertiser awareness of the benefits of
satellite radio. We expect to have advertising sales offices in seven major
media markets to sell directly to advertising agencies and media buying groups
and have engaged Premiere Radio Networks to be our advertising sales
representative. We will also work with ratings agencies in our advertising-
supported business. Statistical Research, Inc., which produces Radar reports,
has agreed to work with us to develop other ratings methodologies for satellite
radio.
During our early years of service, we do not expect to have a listener base
sufficient to attract substantial national advertising dollars on individual
channels at competitive rates. Thus, we plan initially to attract national
advertisers and agencies with the following kinds of incentives.
Charter Advertising Agreements. We have contracts with several advertisers,
advertising agencies and media buying companies offering charter advertising
packages at reduced rates for a limited time. Each charter advertiser will
purchase a minimum amount of advertising from us during the period that the
reduced rates are in effect. We intend to sign additional contracts on similar
terms.
Foreign Language Advertising. We and our programmers plan to offer foreign
language advertising on specific foreign language-based channels. Several major
national advertisers have expressed strong interest in the ability to advertise
to these hard-to-reach customer segments.
The XM Radio System
We are designing our system to provide satellite radio to the continental
United States and coastal waters using radio frequencies allocated by the FCC
for satellite radio. These radio frequencies are within a range of frequencies
called the S-Band. The XM Radio system will be capable of providing high quality
satellite services to XM radios in automobiles, trucks, recreation vehicles and
pleasure craft, as well as to fixed or portable XM radios in the home, office or
other fixed locations. The XM Radio system design uses a network consisting of
an uplink facility, two high-power satellites and, where necessary, ground-based
repeaters to provide digital audio service to XM radios.
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Space Segment
Satellite Construction. Under our satellite contract with Hughes Space and
Communications, Hughes is building and will launch two HS 702 high-power
satellites for the XM Radio system. Hughes Space and Communications is also
building one ground spare satellite, to be available in the event of a failed
launch of any satellite or to accommodate our satellite system growth.
The HS 702 is the highest powered commercial communications satellite
currently available. The first HS 702 satellite was successfully launched in the
fourth quarter of 1999 and a total of three HS 702 satellites are currently
scheduled for launch before the launch of our satellites. Our satellites are
currently in systems testing. Both communications payloads, provided by Alcatel,
have been completed and integrated into the spacecraft bus. The communications
payload electronics are designed to make best use of technologies that have
already been developed or used in previous satellite programs. The design
includes significant redundancy and protective measures to prevent loss of
service.
Hughes Space and Communications has also contracted to provide us with
launch and operations support services, equipment and software. Under our
contract, Hughes must deliver the first satellite no later than December 31,
2000 and the second satellite no later than April 11, 2001.
Satellite Transmission. We anticipate that our two satellites will be
deployed at 85 West Longitude and 115 West Longitude. After reaching their
designated orbital location, the satellites will receive audio signals from our
programming center and retransmit the signals across the continental United
States. The satellites will be 30 Degrees apart in longitude in order to enhance
the probability of clear line-of-sight communication between the satellites and
XM mobile radios.
The transmission coverage areas, or footprints, of our satellites encompass
the 48 contiguous states and nearby coastal waters. We have tailored these
footprints to provide nearly uniform availability over the United States and to
minimize transmission spillage across the United States borders into Canada and
Mexico. However, because coverage does extend to the Gulf of Mexico, the
California coast and the Atlantic coast, we also expect to be able to provide XM
Radio to the cruise ships, cargo vessels and leisure boats which frequent these
waters.
Our satellites will transmit audio programming within 12.5 MHz range of
S-Band radio frequencies that have been allocated by the FCC for our exclusive
use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth
will be subdivided to carry the transmission of six signals, two signals to be
transmitted from each of our two satellites and two signals to be transmitted by
the terrestrial repeater network. The audio programming for XM Radio will be
carried on two satellite signals, and the remaining two satellite signals and
the terrestrial repeater signals will repeat the audio programming to enhance
overall signal reception. The transmission of higher quality sound requires the
use of more kilobits per second than the transmission of lesser quality sound.
In order to provide high-quality digital sound, we expect that music channels
will require approximately 56 to 64 kilobits per second, depending on the type
of compression technology used, whereas talk channels will require significantly
less band width. We expect to use our allocated bandwidth in such a way as to
provide up to 100 channels of programming, with our music channels having a high
bandwidth allocation so as to provide high-quality digital sound.
Launch Services. Hughes Space and Communications has signed an agreement
with Sea Launch Limited Partnership, a joint venture in which Boeing Commercial
Space Company has a controlling 40% interest, to provide the launch services for
our satellites. The Sea Launch vehicle uses a new rocket called the Zenit-3SL,
which is based on a two-stage rocket called the Zenit-2, plus a stage which is
the upper stage of a Russian-developed rocket called the Proton rocket.
Sea Launch has developed a new launch system to launch rockets from an
ocean-based platform. Sea Launch will perform all rocket and satellite
processing at the Sea Launch home port in Long Beach, California. Sea Launch
will move the platform to its launch position in the South Pacific Ocean near
the equator, where the satellites can be
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launched more efficiently by avoiding the requirement to conduct an orbital
plane change. In March 1999, Sea Launch successfully launched a rocket carrying
an inert payload into geo-stationary orbit. Sea Launch also successfully
launched its first commercial satellite, DIRECTV-1R, in October 1999. Three of
the four launches from the Sea Launch platform have been successful, including
the most recent launch on July 28, 2000. Our first satellite is scheduled for
launch in late 2000. As of June 30, 2000, Sea Launch had contracts for an
additional 19 launches.
Insurance. We bear the risk of loss for each of the satellites from the
time of launch, subject to exceptions set forth in our agreement with Hughes
Space and Communications, and we intend to obtain insurance to cover that risk.
We intend to purchase launch and in-orbit insurance policies from global space
insurance underwriters. The launch insurance premiums for both satellites are
expected to cost us approximately $50 million. We cannot predict the status of
the insurance market near the time of launch, which is the customary time for
purchasing satellite insurance. We expect that the policies we obtain will
indemnify us for a total, constructive total or partial loss of either of the
satellites that occurs from the time of launch through each satellite's expected
lifetime. We intend to obtain coverage which will exceed all hardware, insurance
and launch service costs related to the in-orbit replacement of a lost
satellite. However, any insurance we may obtain will not protect us from the
adverse effect on our business operations due to the loss of a satellite. We
expect that these policies will contain standard commercial satellite insurance
provisions, including standard coverage exclusions.
Ground Segment
Satellite Control. Each of our satellites will be monitored by a telemetry,
tracking and control station, and both satellites will be controlled by a
satellite control station. Each of the stations will have a backup station. We
have a contract with an experienced satellite operator to perform the telemetry,
tracking and control functions.
Programming and Business Center. Programming from both our studios and
external sources will be sent to our programming center, which will package and
retransmit signals to our satellites through the uplink station. Financial
services and certain administrative support will be carried on at our business
center. Communications traffic between the various XM Radio facilities will be
controlled by the network monitoring center. The network monitoring center will
monitor satellite signals and the terrestrial repeater network to ensure that
the XM Radio system is operating properly. We plan to design and install fault
detection systems to detect various system failures before they cause
significant damage.
Terrestrial Repeaters. We are installing a terrestrial repeater system to
supplement the coverage of our satellites. Terrestrial repeaters are ground-
based electronics equipment which receive and re-transmit the satellite signals.
We have signed a contract with LCC International, a wireless service site
planner, for the design and deployment of our terrestrial repeater network. LCC
International has completed initial site planning. The contract with LCC
International is described in more detail under the caption "Certain
Relationships and Related Party Transactions--Engineering Contract with LCC
International." We have entered into a contract with Hughes Electronics
Corporation for the design, development and manufacture of the terrestrial
repeaters. The contract is described in greater detail under the caption
"Certain Relationships and Related Party Transactions--Contracts with Hughes."
In some areas, satellite signals may be subject to blockages from tall
buildings and other obstructions. Due to the satellites' longitudinal
separation, in most circumstances where reception is obscured from one
satellite, XM Radio will still be available from the other satellite. In some
urban areas with a high concentration of tall buildings, however, line-of-sight
obstructions to both satellites may be more frequent. In such areas, we will
install terrestrial repeaters to facilitate signal reception. We will install
terrestrial repeaters on rooftops and existing tower structures where they will
receive the satellite signals, amplify them and retransmit them at a
significantly higher signal strength than is possible directly from the
satellites. Before we may install many of our planned terrestrial repeaters, we
must obtain roof rights in suitable locations and on acceptable terms. We do not
expect this to present a serious problem to our construction of a terrestrial
repeater network.
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The high power levels and proprietary signal design of the terrestrial
signals may allow XM radios to receive signals when a terrestrial repeater is
not in view, including within buildings and other structures which can be
penetrated by the terrestrial repeater signal. In some indoor locations which
cannot receive the repeater signal, users will need to use small externally
mounted antennas that will receive the signal from one of the two satellites.
We have contracted to purchase 1,550 terrestrial repeaters and may install
as many as 1,700 terrestrial repeaters to cover urban areas in approximately 70
markets. We expect that this system will commence operation by the second
quarter of 2001. We estimate that the largest urban markets may require in
excess of 100 repeaters, while smaller cities with fewer tall buildings may
require as few as one to three repeaters. We also intend to use additional small
repeaters in areas such as tunnels, where reception would otherwise be severely
restricted. Our placement of terrestrial repeaters will be guided by a newly
developed radio frequency analysis technique which, employing technology similar
to that used in certain cellular telephone systems, analyzes the satellite
footprint to discover areas likely to have impaired reception of XM Radio.
We expect to benefit from the expertise gained by Motient with its ARDIS
terrestrial two-way data network consisting of approximately 1,700 base stations
sites serving cities throughout the United States. We may use a portion of these
sites in our system.
XM Radios. We will transmit XM Radio throughout the continental United
States to vehicle, portable, home and plug and play radios. Our radios will be
capable of receiving both XM Radio and traditional AM/FM stations. We believe
prototypes will be available by December 2000, and radios will be commercially
available by commencement of commercial operations.
We have signed a contract with STMicroelectronics to design and produce
chips which will decode the XM Radio signal. Additionally, some of the design
elements in the chipsets currently being made for the WorldSpace International
system, which operates in a different frequency band, will be integrated into
our chipsets. Lucent Digital Radio has agreed to provide coding technology for
our audio signals.
Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and Clarion
have signed contracts with us to develop, manufacture and distribute XM radios
which can be used in the car, and we have signed a contract with Sony
Electronics to design, manufacture and market XM radios for the portable, home,
aftermarket and original equipment manufacture car stereo markets. We have also
signed a contract with SHARP to manufacture XM radios for home and portable use.
Unified Standard for Satellite Radio. On February 16, 2000, we signed an
agreement with Sirius Radio to develop a unified standard for satellite radios
to facilitate the ability of consumers to purchase one radio capable of
receiving both our and Sirius Radio's services. The technology relating to this
unified standard will be jointly developed, funded and owned by the two
companies. In addition, we will work together with Sirius Radio to proliferate
the new standard by creating a service mark for satellite radio. This unified
standard is intended to meet FCC rules that require interoperability with both
licensed satellite radio systems.
As part of the agreements, each company has licensed to the other its
intellectual property relating to its system; the value of this license will be
considered part of each company's contribution toward the joint development. In
addition, each company has agreed to license its non-core technology, including
non-essential features of its system, to the other at commercially reasonable
rates. In connection with this agreement, the pending patent litigation against
XM Radio has been resolved.
We anticipate that it will take several years to develop radios capable of
receiving both services. At the commercial launch of our service, we anticipate
that our consumers will be able to purchase radios only capable of receiving our
service.
Both companies expect to work with their automobile and radio manufacturing
partners to integrate the new standard. Future agreements with automakers and
radio manufacturers will specify the unified satellite radio standard.
Furthermore, future agreements with retail and automotive distribution partners
and content providers will
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be on a non-exclusive basis.
We and Sirius Radio have also agreed to negotiate in good faith to provide
service to each other's subscribers in the event of a catastrophic failure of
the XM Radio system or the Sirius Radio system.
Competition
We expect to face competition for both listeners and advertising dollars.
Sirius Satellite Radio
Our direct competitor in satellite radio service is likely to be Sirius
Radio, the only other FCC licensee for satellite radio service in the United
States. Since October 1997, Sirius Radio's common stock has traded on the Nasdaq
National Market. Sirius Radio plans to deploy three satellites in a North
American elliptical orbit and a network of terrestrial repeaters. Sirius
Satellite Radio has announced in recent SEC filings that it has arrangements for
the construction, implementation and distribution of its service and that it
expects to begin receiving revenue from operations in early 2001, which is
slightly ahead of our planned commencement of commercial operations in the
second quarter of 2001.
Traditional AM/FM Radio
Our competition will also include traditional AM/FM radio. Unlike XM Radio,
traditional AM/FM radio already has a well established market for its services
and generally offers free broadcast reception paid for by commercial advertising
rather than by a subscription fee. Also, many radio stations offer information
programming of a local nature, such as traffic and weather reports, which XM
Radio initially will be unable to offer as effectively as local radio, or at
all. The AM/FM radio broadcasting industry is highly competitive. Radio stations
compete for listeners and advertising revenues directly with other radio
stations within their markets on the basis of a variety of factors, including
. program content;
. on-air talent;
. transmitter power;
. source frequency;
. audience characteristics;
. local program acceptance; and
. the number and characteristics of other radio stations in the market.
Currently, traditional AM/FM radio stations broadcast by means of analog
signals, not digital transmission. We believe, however, that in the future
traditional AM/FM radio broadcasters may be able to transmit digitally into the
bandwidth occupied by current AM/FM stations.
Internet Radio
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There are a growing number of Internet radio broadcasts which provide
listeners with radio programming from around the country and the world. Internet
radio can be heard through a personal computer equipped with a modem, sound card
and speakers. Announcements have been made about plans by one or more companies
to deliver Internet radio to cars or portable radios using satellites. Although
we believe that the current sound quality of Internet radio is below standard
and may vary depending on factors such as network traffic, which can distort or
interrupt the broadcast, we expect that improvements from higher bandwidths,
faster modems and wider programming selection may make Internet radio a more
significant competitor in the future.
There are a number of Internet-based audio formats in existence or in
development which could compete directly with XM Radio. For example, Internet
users with the appropriate hardware and software can download sound files for
free or for a nominal charge and play them from their personal computers or from
specialized portable players. In addition, prominent members of the music and
computer industry have supported an initiative known as the Secure Digital Music
Initiative to become a standard for fee-based electronic distribution of
copyrighted sound recordings. Although presently available formats have
drawbacks such as hardware requirements and download bandwidth constraints,
which we believe would make XM Radio a more attractive option to consumers,
Internet-based audio formats may become increasingly competitive as quality
improves and costs are reduced.
Direct Broadcast Satellite and Cable Audio
A number of companies provide specialized audio service through either
direct broadcast satellite and cable audio systems. These services are targeted
to fixed locations, mostly in-home. The radio service offered by direct
broadcast satellite and cable audio is generally an add-on service to the higher
priced video service.
Regulatory Matters
XM Radio and Sirius Radio received licenses from the FCC in October 1997 to
construct and operate satellite radio service. The FCC has allocated 25 MHz for
the new service in a range of radio frequencies known as the S-Band.
As an owner of one of two FCC licenses to operate a commercial satellite
radio service in the United States, we will continue to be subject to regulatory
oversight by the FCC. Our development, implementation and eventual operation of
our system will be subject to significant regulation by the FCC under authority
granted under the Communications Act and related federal law. Non-compliance by
us with FCC rules and regulations could result in fines, additional license
conditions, license revocation or other detrimental FCC actions. Any of these
FCC actions may harm our business. There is no guarantee that the rules and
regulations of the FCC will continue to support our business plan.
One of the two losing bidders in the satellite radio license auction filed
an application for review of the order granting our FCC license, but the
challenge was denied. The losing bidder is seeking review by the FCC. The losing
bidder has argued that WorldSpace had effectively taken control of us without
FCC approval and that WorldSpace has circumvented the FCC's application cut-off
procedures. WorldSpace is no longer a stockholder in Holdings. We have opposed
this appeal and have denied the allegations contained in the challenge. The
FCC's order granting our license remains in effect during the pendency of the
application for review. Although we believe that the award of the license to us
will continue to be upheld, we cannot predict the ultimate outcome of this
challenge. If this challenge is successful, the FCC could take a range of
actions, any of which could harm our ability to proceed with our planned
satellite radio service.
We have filed applications with the FCC for approval of a transfer of
control of our DARS license and other FCC licenses from Motient Corporation to a
diffuse group of owners, none of whom will have a controlling interest. The
opportunity for objections from interested parties has not yet passed.
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Our license, which is held by a subsidiary wholly owned by XM, has a term
of eight years from commencement of XM's operations and may be renewed. The FCC
requires the satellite radio licensees, including us, to adhere to certain
milestones in the development of their systems, including a requirement that the
licensees begin full operation by October 2003.
Our FCC license requires us to meet the following milestones:
<TABLE>
<CAPTION>
Deadline Milestone Status
-------- --------- ------
<S> <C> <C>
October 1998 Complete contracting for first satellite Completed March 1998
October 1999 Complete contracting for second satellite Completed March 1998
October 2001 Begin in-orbit operation of at least one satellite Expected Fourth Quarter 2000
October 2003 Begin full operation of the XM Radio system Expected Second Quarter 2001
</TABLE>
While we have already fulfilled the first two milestones, we may not meet
the remaining two milestones, in part because we depend on third parties to
build and launch our satellites. If we fail to meet these milestones, the FCC
could take a range of actions, any of which may harm our business.
For business and technical reasons, we have decided to modify certain
aspects of the satellite radio system described in our May 1997 amended
application to the FCC. Specifically, we intend to
. increase the satellites' transmission power;.
. eliminate coverage of Alaska and Hawaii; and
. change the total number of signals carried by the satellites and
terrestrial repeaters.
We will subdivide our 12.5 MHz of allocated bandwidth to carry six signals
instead of five as previously stated in our FCC application. Two signals will be
transmitted by each of the two satellites, and two signals will be transmitted
by our terrestrial repeaters. We plan to request that the FCC allow us to modify
the XM Radio system to incorporate these changes. While the FCC regularly
approves modifications to commercial licenses, it may not approve our request.
The FCC has indicated that it may in the future impose public service
obligations, such as channel set-asides for educational programming, on
satellite radio licensees.
The FCC's rules require interoperability with all licensed satellite radio
systems that are operational or under construction. The FCC conditioned our
license on certification by us that our final receiver design is interoperable
with the final receiver design of the other licensee, Sirius Radio, which plans
to use a different transmission technology than we plan to use. Because of
uncertainty regarding the design of Sirius Radio's systems, we may face
difficulties initially in meeting this interoperability requirement. We have
signed an agreement with Sirius Radio to develop a unified standard for
satellite radios, but we anticipate that it will take several years to develop
the technologies necessary for radios that will be capable of receiving both our
service and Sirius Radio's service. Accordingly, we may not be able to meet the
FCC's interoperability requirements by the time we launch our commercial
operations and may need to obtain an extension of time or modification of this
requirement from the FCC. Furthermore, complying with the interoperability
requirement could make the radios more difficult and costly to manufacture.
The FCC is currently conducting a rulemaking proceeding to establish rules
for terrestrial repeater transmitters, which we plan to deploy to fill in gaps
in satellite coverage. The FCC has proposed to permit us to deploy these
facilities. Specifically, the FCC has proposed a form of blanket licensing for
terrestrial repeaters and service rules which would prohibit satellite radio
licensees from using terrestrial repeating transmitters to originate local
programming or transmit signals other than those received from the satellite
radio satellites. Various parties, including the National Association of
Broadcasters, have asked the FCC to
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. delay consideration of terrestrial repeater rules until XM Radio and
Sirius Radio provide additional information regarding planned
terrestrial repeaters;
. require individual licensing of each terrestrial repeater;
. limit the number of repeaters that may be deployed; and
. impose a waiting period on the use of repeaters in order to determine if
signal reception problems can be resolved through other means.
Our plans to deploy terrestrial repeaters in our system may be impacted,
possibly materially, by whatever rules the FCC issues in this regard.
The FCC also may adopt limits on emissions of terrestrial repeaters to
protect other services using nearby frequencies. While we believe that we will
meet any reasonable non-interference standard for terrestrial repeaters, the FCC
has no specific standard at this time, and the application of such limits might
increase our cost of using repeaters. Although we are optimistic that we will be
able to construct and use terrestrial repeaters as needed, the development and
implementation of the FCC's ultimate rules might delay this process or restrict
our ability to do so.
We will need to coordinate the XM Radio system with systems operating in
the same frequency bands in adjacent countries. Canada and Mexico are the
countries whose radio systems are most likely to be affected by satellite radio.
The United States government, which conducts the coordination process, has
resolved the issue with the Canadian government and has reached an agreement
with the Mexican government that has not yet been fully approved by that
government.
We will operate the communication uplinks between our own earth station and
our satellites in a band of radio frequencies that are used for several other
services. These services are known under FCC rules as fixed services, broadcast
auxiliary services, electronic news gathering services, and mobile satellite
services for uplink station networks. Although we are optimistic that we will
succeed in coordinating domestic uplink station networks, we may not be able to
coordinate use of this spectrum in a timely manner, or at all. We have filed an
application with the FCC for approval of a satellite earth station to be located
in Washington, D.C. This application has not yet been granted.
We also need to protect our system from out-of-band emissions from
licensees operating in adjacent frequency bands. Wireless Communication Service
licensees operating in frequency bands adjacent to the satellite radio's S-Band
allocation must comply with certain out-of-band emission limits imposed by the
FCC to protect satellite radio systems. These limits, however, are less
stringent than those we proposed. In addition, in April 1998, the FCC proposed
to amend its rules to allow for new radio frequency lighting devices that would
operate in an adjacent radio frequency band. We opposed the proposal on the
grounds that the proliferation of this new kind of lighting and its proposed
emission limits, particularly if used for street lighting, may interfere with XM
Radio. However, the FCC may not rule in our favor, a decision which could
adversely affect our signal quality. Interference from other unlicensed
frequency devices may also adversely affect the Company's signal.
The FCC order granting our license determined that because we are a private
satellite system providing a subscription service on a non-common carrier basis,
we would not be subject to the FCC's foreign ownership restrictions. However,
such restrictions would apply to us if we were to offer non subscription
services, which may appear more lucrative to potential advertisers than
subscription services. The FCC also stated in its order that it may reconsider
its decision not to subject satellite radio licensees to its foreign ownership
restrictions.
Sea Launch, Alcatel and other vendors are subject to United States export
regulations. Our vendors will need approval from the State Department under
technology export statutes and regulations for the launch of our satellites.
Although these are not new requirements, the export of technology has received
considerable attention in response
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to concerns about the export of technology to China by the United States defense
contractors. The negative publicity may lead the United States Congress to alter
the relevant laws or regulations, or may change the State Department's policy in
enforcing the regulations. Any change in applicable law or policy may result in
delay of our satellite launch.
Intellectual Property
System Technology
We have contracted with several technology companies to implement portions
of the XM Radio system. These technology companies include Hughes Space and
Communications and Alcatel (satellites); Delphi-Delco, Sony, Motorola, Pioneer,
Alpine, Mitsubishi, Audiovox, Clarion and SHARP (car and home radios);
STMicroelectronics (chipsets); Lucent Digital Radio (audio coding technology);
Fraunhofer Institute (various technologies) and LCC International (design of
repeater network). We will not acquire any intellectual property rights in the
satellites. We will have joint ownership of or a license to use the technology
developed by the radio and chipset manufacturers. We will own the design of our
system, including aspects of the technology used in communicating from the
satellites and the design of the repeater network.
Our system design, our repeater system design and the specifications we
supplied to our radio and chipset manufacturers incorporates or may in the
future incorporate some intellectual property licensed to us on a non-exclusive
basis by WorldSpace Management. WorldSpace Management has used this technology
in its own non-United States satellite radio system. We also have the right to
sublicense the licensed technology to any third party, including chipset
manufacturers, terrestrial repeater manufacturers and receiver manufacturers in
connection with the XM Radio system. Under our agreement with WorldSpace
Management we must pay one time, annual or percentage royalty fees or reimburse
WorldSpace Management for various costs for various elements of the licensed
technology that we decide to use in the XM Radio system. We have incurred costs
of $6.7 million to WorldSpace Management under this agreement through June 30,
2000. We will not be required to pay royalties to WorldSpace Management for
licensed technology that we do not use in our system. We anticipate the
Fraunhofer Institute will continue to provide various development services for
us in connection with the design of our system.
Motient has granted us a royalty-free license with respect to certain
ground segment communications technology and antenna technology.
Motient and WorldSpace Management have also granted us royalty-free, non-
exclusive and irrevocable licenses to use and sublicense all improvements to
their technology. The technology licenses from Motient and WorldSpace Management
renew automatically on an annual basis unless terminated for a breach which has
not been or cannot be remedied.
We believe that the intellectual property rights we have licensed under our
technology license were independently developed or duly licensed by Motient or
WorldSpace International, as the case may be. We cannot assure you, however,
that third parties will not bring suit against us for patent or other
infringement of intellectual property rights.
We have signed an agreement with Sirius Radio to develop a unified standard
for satellite radios to facilitate the ability of consumers to purchase one
radio capable of receiving both our and Sirius Radio's services. The technology
relating to this unified standard will be jointly developed, funded and owned by
the two companies. As part of the agreement, each company has licensed to the
other its intellectual property relating to the unified standard and to its
system; the value of this license will be considered part of its contribution
toward the joint project. In addition, each company has agreed to license its
non-core technology, including non-essential features of its system, to the
other at commercially reasonable rates. Each party will be entitled to license
fees or a credit towards its obligation to fund one half of the development cost
of the technologies used to develop a unified standard for satellite radios. The
amount of the fees or credit will be based upon the validity, value, use,
importance and available alternatives of the technology each contributes and
will be determined over time by agreement of the parties or by
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arbitration. We cannot predict at this time the amount of license fees, if any,
payable by or to XM or Sirius Radio or the size of the credits to XM and Sirius
Radio from the use of their technology. This may require additional capital,
which could be significant.
Prior Litigation with Sirius Radio; Technology License
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against us in the United States District
Court for the Southern District of New York, alleging that we were infringing or
would infringe three patents assigned to Sirius Radio. In its complaint, Sirius
Radio sought money damages to the extent we manufactured, used or sold any
product or method claimed in their patents and injunctive relief. This suit was
resolved in February 2000 in accordance with the terms of a joint development
agreement between us and Sirius Radio in which both companies agreed to develop
a unified standard for satellite radios and license our respective intellectual
property, including the patents that were the subject of the suit, for use in
this joint development. If this agreement is terminated before the value of the
licenses has been determined due to our failure to perform a material covenant
of obligation, then this suit could be refiled.
If this litigation were recommenced, we believe based on the planned design
of our system, our knowledge of the differences between our system and the
claims of the Sirius Radio patents and on advice we have previously received
from our patent counsel, that a court would find that we have not and will not
infringe any Sirius Radio patents. However, the litigation could harm us, even
if we were successful. It would divert our management's attention and might make
it more difficult for us to raise financing or enter into other agreements with
third parties. In addition, even if we prevailed, the Sirius Radio litigation
might prevent us from moving forward with the development of the XM Radio system
in a timely manner. The Sirius Radio patents involved in the litigation relate
to certain aspects of signal and reception methodologies that may be employed by
a satellite radio system. If this suit were refiled and we lost all or part of
this litigation, we could become liable to Sirius Radio for money damages and
subject to an injunction preventing us from using certain technology in the XM
Radio system. Any such injunction could force us to engineer technology which
would not be subject to the injunction, license or develop alternative
technology, or seek a license from, and pay royalties to, Sirius Radio. If any
of these strategies becomes necessary, it could be costly and time-consuming and
would likely delay any implementation of our system. If we could not accomplish
any strategy, or could not do so in a timely manner at an acceptable cost, our
business would be harmed.
Copyrights to Programming
We must negotiate and enter into music programming royalty arrangements
with performing rights societies such as the American Society of Composers,
Authors and Publishers, Broadcast Music, Inc., and SESAC, Inc. These
organizations collect royalties and distribute them to songwriters and music
publishers and negotiate fees with copyright users based on a percentage of
revenues. Radio broadcasters currently pay a combined total of approximately 4%
of their revenues to these performing rights societies. We expect to negotiate
or establish license fees through a rate court proceeding in the U.S. District
Court for the Southern District of New York, but such royalty arrangements may
be more costly than anticipated.
Under the Digital Performance Right in Sound Recordings Act of 1995 and the
Digital Millennium Copyright Act of 1998, we also have to negotiate royalty
arrangements with the owners of the sound recordings. The Recording Industry
Association of America will negotiate licenses and collect royalties on behalf
of copyright owners for this performance right in sound recordings. Cable audio
services currently pay a royalty rate of 6.5% of gross subscriber revenue. This
rate was set by the Librarian of Congress, which has statutory authority to
decide rates through arbitration, and was affirmed on May 21, 1999 by the United
States Court of Appeals for the District of Columbia. Although we believe we can
distinguish XM Radio sufficiently from the cable audio services in order to
negotiate a lower statutory rate, we may not be able to do so.
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The XM(TM) Trademark
We believe that XM Radio will be seen as the complement to AM and FM radio.
We have an application pending in the United States Patent and Trademark Office
for the registration of the trademark "XM" in connection with the transmission
services offered by our company and expect that our brand name and logo will be
prominently displayed on the surface of XM radios together with the radio
manufacturer's brand name. This will identify the equipment as being XM Radio-
compatible and build awareness of XM Radio. We intend to maintain our trademark
and the anticipated registration. We are not aware of any material claims of
infringement or other challenges to our right to use the "XM" trademark in the
United States.
Personnel
As of July 31, 2000, we had 142 employees. In addition, we rely upon a
number of consultants and other advisors. The extent and timing of any increase
in staffing will depend on the availability of qualified personnel and other
developments in our business. None of our employees is represented by a labor
union, and we believe that our relationship with our employees is good.
Property
Our executive offices, studio and production facilities are located at 1500
Eckington Place, N.E., Washington, D.C. 20002, under a ten year lease of
approximately 120,000 square feet.
Legal Proceedings
Except for the FCC proceeding described under the caption "Business--
Regulatory Matters," we are not a party to any material litigation or other
proceedings.
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MANAGEMENT
Directors, Executive Officers and Other Key Employees
The following table sets forth information concerning directors, executive
officers and key employees of Holdings and XM (which have the same directors and
executive officers). All directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Officers
are elected by and serve at the discretion of Holdings' or XM's board of
directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Gary M. Parsons............ 50 Chairman of the Board of Directors
Hugh Panero................ 44 President, Chief Executive Officer and Member, Board of Directors
Nathaniel A. Davis(1)...... 46 Member, Board of Directors
Thomas J. Donohue(2)....... 62 Member, Board of Directors
Randall T. Mays (1)(2)..... 35 Member, Board of Directors
Randy S. Segal (1)......... 44 Member, Board of Directors
Jack Shaw (2).............. 61 Member, Board of Directors
Dr. Rajendra Singh (2)..... 45 Member, Board of Directors
Ronald L. Zarrella......... 50 Member, Board of Directors
Pierce J. Roberts, Jr. .... 54 Member, Board of Directors
Walter V. Purnell, Jr. .... 55 Member, Board of Directors
Lee Abrams................. 48 Senior Vice President, Chief of Programming
Stephen Cook............... 45 Senior Vice President, Sales and Marketing
Steven P. Gavenas.......... 44 Senior Vice President, New Business Development
Dr. Stelios Patsiokas...... 47 Senior Vice President, Technology
Heinz Stubblefield......... 43 Senior Vice President, Chief Financial Officer
Joseph M. Titlebaum........ 37 Senior Vice President, General Counsel and Secretary
John R. Wormington......... 55 Senior Vice President, Engineering and Operations
</TABLE>
________________
(1) Member of the audit committee.
(2) Member of the compensation committee.
Set forth below are descriptions of the backgrounds and principal
occupations of each of Holdings' and XM's directors and executive officers.
Gary M. Parsons has served as Chairman of the board of directors of
Holdings and XM since May 1997. Mr.
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<PAGE>
Parsons is Chairman of the board of directors of Motient, a position he has held
since March 1998. Mr. Parsons joined Motient in July 1996 and has also served as
its Chief Executive Officer and President. Previously, Mr. Parsons was with MCI
Communications Corporation where he served in a variety of roles from 1990 to
1996, including most recently as Executive Vice President of MCI Communications,
and as Chief Executive Officer of MCI's subsidiary MCImetro, Inc. From 1984 to
1990, Mr. Parsons was one of the principals of Telecom*USA, which was acquired
by MCI. Prior to the recruitment of Hugh Panero, Mr. Parsons served as our Chief
Executive Officer.
Hugh Panero has served as a member of the board of directors and as
President and Chief Executive Officer of Holdings and XM since June 1998. Mr.
Panero has over 16 years experience building and managing entertainment
distribution services. Most recently, from 1993 to 1998, Mr. Panero served as
President and Chief Executive Officer of Request TV, a national pay-per-view
network owned by Liberty Media and Twentieth Century Fox. Prior to his
employment with Request TV, Mr. Panero spent ten years with Time Warner Cable
where he was part of the team which built the cable systems serving parts of
Queens and Brooklyn, New York. Mr. Panero held various positions with Time
Warner Cable, including Vice President, Marketing.
Nathaniel A. Davis has served as a member of the board of directors of
Holdings and XM since October 1999. Mr. Davis is President, Chief Operating
Officer and a director of Nextlink Communications Inc. From December 1998 to
December 1999, he was Executive Vice President of Nextel Communications where he
had responsibility for the technical and engineering operations of Nextel's
nationwide switching and wireless communications network, billing and
information technology systems. From August 1986 through November 1998, Mr.
Davis served in a variety of senior engineering and finance roles at MCI, most
recently as Senior Vice President and Chief Financial Officer of MCI
Telecommunications. Mr. Davis serves on the board of directors of Capital
Management Corporation.
Thomas J. Donohue has served as a member of the board of directors of
Holdings and XM since October 1999. Mr. Donohue is President and Chief Executive
Officer of the U.S. Chamber of Commerce, the world's largest business
federation, and has been active in national policy and non-profit operations for
30 years. From July 1984 through September 1997, Mr. Donohue served as President
and Chief Executive Officer of the American Trucking Association. He serves on
the board of directors of Union Pacific Corporation, Sunrise Assisted Living
Corporation, Marymount University and the Hudson Institute.
Randall T. Mays has served as a member of the board of directors of
Holdings and XM since July 1999. Mr. Mays is the Executive Vice President and
Chief Financial Officer of Clear Channel Communications. Mr. Mays has been
associated with Clear Channel since 1993 when he was elected Vice President and
Treasurer. Mr. Mays also serves on the board of directors of American Tower
Corporation.
Randy S. Segal has served as a board member of Holdings and XM since July
1999. Ms. Segal has served as Motient's Senior Vice President, General Counsel
and Secretary since October 1992. From October 1983 to October 1992, Ms. Segal
was associated with the law firm of Debevoise & Plimpton in New York, New York.
Prior to joining Debevoise, Ms. Segal clerked for the Honorable Jerre S.
Williams of the United States Court of Appeals for the Fifth Circuit, and for
the Honorable Edmund L. Palmieri for the United States District Court for the
Southern District of New York.
Jack Shaw has served as a member of the board of directors of Holdings and
XM since May 1997. Mr. Shaw is Corporate Senior Executive Vice President-
Enterprise Sector of Hughes Electronics Corporation and served as Chief
Executive Officer and Chairman of Hughes Network Systems, Inc. from 1987 and
1988, respectively, through January 2000. Mr. Shaw is a member of the Hughes
Electronics Corporation Executive Committee. Mr. Shaw has been a director of
Motient since July 1996 and has previously served as Chairman of Motient's
Board. Previously, Mr. Shaw held senior management positions with companies
including ITT Space Communications, Inc., Digital Communications Corporation and
M/A-Com Telecommunications, Inc., which was acquired by Hughes Electronics
Corporation in 1987 .
Rajendra Singh has served as a board member of Holdings and XM since July
1999. Dr. Singh is a member of
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the board of directors and a co-founder of LCC. Dr. Singh was President of LCC
from its formation in 1983 until September 1994, was Chief Executive Officer
from January 1994 until January 1995, and was Interim President from September
1998 to May 1999. Dr. Singh is Chairman of the Members Committee of Telcom
Ventures L.L.C. and a director of Teligent, Inc., a wireless local access
provider. He is also a director of Aether System, Inc., a provider of wireless
services and systems.
Ronald L. Zarrella has served as a member of the board of directors of
Holdings and XM since July 1999. Mr. Zarrella is an Executive Vice President of
General Motors and President of GM North America, a position he has held since
October 1998. Mr. Zarrella has been associated with General Motors since 1994
when he was elected Vice President and Group Executive in charge of the North
American Vehicle Sales Service and Marketing Group.
Pierce J. Roberts, Jr. has served as a board member of Holdings and XM
since August 2000. Mr. Roberts has been Managing Director of AEA Investors since
September 1999. Previously, he was with Bear Stearns from 1993 to 1998 where he
was the head of the Telecom investment banking group, Managing Director at The
Blackstone Group, Vice President-Corporate Development at BellSouth Corporation,
and founder of his own corporate development business.
Walter V. Purnell, Jr. has served as a board member of Holdings and XM since
August 2000. Mr. Purnell has been a director and Chief Executive Officer of
Motient Corporation since January 1999 and President since March 1998.
Previously, Mr. Purnell was President and Chief Executive Officer of ARDIS since
September 1995. Before that, Mr. Purnell had served as the chief financial
officer of ARDIS since its founding in 1990. Before 1990, Mr. Purnell held a
broad range of senior executive positions with IBM over 23 years, with financial
responsibility over significant telecommunications and other business divisions,
both domestically and internationally.
Lee Abrams has served as Senior Vice President, Chief of Programming of
Holdings and XM since June 1998. Mr. Abrams is a prominent radio
programmer/consultant with more than 30 years of experience in radio, and since
1970 has been a consultant to a variety of radio stations, networks and record
companies. He is credited with many innovations in radio programming, including
transforming FM radio, pioneering the album rock format in the 1970s, adult
contemporary radio and urban, classic and smooth jazz radio in the 1980s and
active rock radio in the 1990s. He most recently has served as a consultant for
ABC Radio Networks, Capstar, Thorn-EMI and Sony, among others.
Stephen Cook has served as Senior Vice President, Sales and Marketing of
Holdings and XM since February 1999. Previously, Mr. Cook was Chief Operating
Officer for Conxus Communications, where he successfully launched its portable
voice messaging product, Pocketalk, in the top 12 United States markets. From
1990 to 1997, Mr. Cook held key management positions with GTE's cellular
operations, including VP of Marketing and President of the Southeast region.
Prior to that time, Mr. Cook also spent five years in brand management with
Procter & Gamble and has more than 15 years of experience with launching and
marketing new consumer products.
Steven P. Gavenas has served as Senior Vice President, New Business
Development since December 1999. Previously, from June 1996 to November 1999,
Mr. Gavenas held several positions in WorldSpace International, including VP of
Marketing, EVP Corporate Strategy and EVP Commercial Operations. Before joining
WorldSpace, from September 1989 to May 1996 Mr. Gavenas was a management
consultant with McKinsey and Company, Inc., an international strategy consulting
firm.
Stelios Patsiokas has served as Senior Vice President, Technology of
Holdings and XM since October 1998. Previously, Dr. Patsiokas was with Motorola,
Inc., where he served in a variety of consumer electronics design and
development roles since 1979. Since 1996, Dr. Patsiokas was Director of Product
Development, for Motorola's Messaging Systems Product Group, where he was
involved with developing the PageWriter/TM/ 2000 two-way messaging device. Dr.
Patsiokas holds 24 United States patents.
Heinz Stubblefield has served as Senior Vice President, Chief Financial
Officer of Holdings and XM since June 1998. Previously, from March 1996 to May
1998, Mr. Stubblefield was Chief Financial Officer for WorldSpace International.
Before joining WorldSpace, from February 1993 to February 1996, Mr. Stubblefield
was Corporate
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<PAGE>
Controller for Next Software Corporation and, prior to that time, spent several
years as divisional CFO for Raychem Corporation's German offices.
Joseph M. Titlebaum has served as Senior Vice President, General Counsel
and Secretary of Holdings and XM since September 1998. From 1990 to 1998, Mr.
Titlebaum was an attorney with the law firm of Cleary, Gottlieb, Steen &
Hamilton. With a specialty in telecommunications ventures, Mr. Titlebaum has
expertise in structuring, negotiating and implementing corporate finance and
mergers and acquisitions transactions.
John R. Wormington has served as Senior Vice President, Engineering and
Operations of Holdings and XM since September 1998. Mr. Wormington has
leadership experience in commercial and governmental development, design and
operational deployment of a variety of high technology projects. Mr. Wormington
came to our company from Hughes, where since September 1995 he was a senior
executive and led the project management team responsible for that company's HS
702 satellite program. During his distinguished military career (retiring as an
Air Force Brigadier General in 1995), Mr. Wormington was responsible for a wide
range of large government projects requiring technical management and
operational leadership skills necessary to meet strict implementation deadlines,
including responsibility for conducting all launch and range operations at Cape
Canaveral.
Provisions Governing Holdings' Board of Directors
Holdings' board of directors consists of eleven members, five of whom are
selected by Motient, including Holdings' Chairman and Holdings' President and
Chief Executive Officer, and one of whom is selected by each of General Motors,
Clear Channel, Telcom Ventures and AEA Investors. The remaining two are
independent directors. One of the independent directors must be approved by
Motient, and one must be approved by a majority of the interests held by General
Motors, Clear Channel, the TCM Group and the Series C investors. Following
receipt of approval of the FCC to transfer control of Holdings to a diffuse
group of stockholders, Holdings' board of directors will consist of ten members:
three will be selected by Motient, one will be selected by each of General
Motors, Clear Channel, Telcom Ventures and AEA Investors, one will be Holdings'
President and Chief Executive Officer, and the remaining two will be independent
directors of recognized industry experience and stature whose nominations must
be approved by Motient and a majority of the interests held by General Motors,
Clear Channel, Telcom Ventures and the Series C investors. General Motors,
Clear Channel, the TCM Group and American Honda also have observation rights at
meetings of Holdings' board of directors. The foregoing board and observation
rights are subject to these entities, as parties to a shareholders' agreement
with Holdings, maintaining their original investment or certain minimum share
percentages in Holdings.
Terms of Directors
All members of Holdings' and XM's board of directors hold office until the
next annual meeting of stockholders and the election and qualification of their
successors.
Board Committees
The board of directors of Holdings has established compensation and audit
committees. Each committee reports to the board of directors. The compensation
committee, currently consisting of Messrs. Singh, Shaw, Donohue and Mays, is
responsible for determining and paying compensation, salaries, annual bonuses,
stock option grants and benefits to officers, directors and employees. The audit
committee, currently consisting of Messrs. Mays, Davis, Roberts and Ms. Segal,
reviews, acts on and reports to the board of directors with respect to various
auditing and accounting matters. These matters include the selection of
Holdings' and XM's auditors and review of Holdings' and XM's accounting books,
records and policies.
Compensation of Directors
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Holdings' independent directors (as determined under Holdings'
shareholders' agreement) receive retainer fees of $2,500 per quarter. In
addition, these independent directors receive $2,000 for every meeting attended
in person and $500 for every meeting attended telephonically. Independent
directors also receive $3,000 per year for each board committee on which they
serve. In July 1999, Holdings also granted each non-employee director, other
than Messrs. Roberts and Purnell, an option to purchase 26,757 shares of its
Class A common stock at $9.52 per share. These options are immediately
exercisable and have ten-year terms. Mr. Zarrella has elected to forego receipt
of these options.
Chairman of the Board. On July 21, 2000, Holdings issued to Mr. Parsons
5,000 shares of Class A common stock in compensation for his service to us.
Holdings will have a right to repurchase these shares for $37.25 per share if
Mr. Parsons' service with us ends prior to July 21, 2001. On July 21, 2000,
Holdings also issued to Mr. Parsons a ten-year option to purchase 100,000 shares
of Holdings' Class A common stock at an exercise price of $37.25 per share. The
option vests in equal amounts on each of the first, second and third
anniversaries of the date of grant. On July 16, 1999, Holdings issued to Mr.
Parsons 14,716 shares of Class A common stock in compensation for his service to
us and granted Mr. Parsons a ten-year option to purchase 267,570 shares of
Holdings' Class A common stock at an exercise price of $9.52 per share, of which
160,542 have vested. 53,514 shares will vest in each of the next two years. The
vesting of 53,514 of the 160,542 shares that vested in the first year and the
shares that vest at the end of the second and third years are subject to the
fulfillment of performance criteria.
Executive Compensation
The following table sets forth the compensation earned by Holdings' named
executive officers which include Holdings' Chief Executive Officer and all other
executive officers whose salary and bonus for the year ended December 31, 1999
exceeded $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Awards
Annual Compensation -----------------
-------------------------------------------------- Class A Shares
Underlying
Name and Principal Position(s) Year Salary Bonus Other Options
---------------------------------------------------- ---- ------------ ------------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
Hugh Panero
President and Chief Executive Officer............ . 1998 $163,333 $ 65,333 $293,060(1) 267,570
1999 286,533 125,000 1,354 100,000
Lee Abrams
Senior Vice President, Chief of Programming...... . 1998 125,417 27,413 30,989(2) 53,514
1999 220,000 56,100 47,900 50,000
Stelios Patsiokas
Senior Vice President, Technology................ . 1998 43,077 16,710 59,966(3) 53,514
1999 211,700 84,680 213 50,000
Heinz Stubblefield
Senior Vice President, Chief Financial Officer... . 1998 116,667 60,000 -- 53,514
1999 208,000 62,400 1,589 50,000
Stephen Cook
Senior Vice President, Sales and Marketing . 1998 -- -- -- --
1999 205,960 70,082 51,927(4) 103,514
</TABLE>
-----------------
(1) Includes a signing bonus of $200,000.
(2) Includes a signing bonus of $28,000.
(3) Includes a signing bonus of $59,966.
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<PAGE>
(4) Includes a signing bonus of $50,000.
Employment Agreements
Hugh Panero is employed as Holdings' President, Chief Executive Officer and
member of the board of directors for a term of three years under an employment
agreement effective June 1, 1998. His employment agreement provides for an
annual base salary of $280,000, subject to increase from time to time by the
board of directors. Mr. Panero is also eligible for a pro-rata annual bonus to
be determined by the board of directors of Holdings according to Mr. Panero's
personal job performance and mutually agreed upon corporate goals and
objectives. The bonus target guideline is 40% of Mr. Panero's annual base
salary. Under Mr. Panero's employment agreement and pursuant to Holdings' shares
award plan, Holdings granted to Mr. Panero a 10-year option to purchase 267,570
shares of Holdings' Class A common stock at an exercise price of $9.52 per
share, of which 89,190 have vested. This option vests at the rate of
. 107,028 shares in three equal annual installments beginning on the first
anniversary of the grant; and
. 160,542 shares in three equal annual installments beginning on the first
anniversary of the grant based on achievement of performance objectives.
All options vest in the event of death or involuntary termination within
one year of a change of control of our company; otherwise, all non-vested
options would be forfeited upon termination of employment. Following termination
of employment, vested stock options would cease to be exercisable
. immediately, if Mr. Panero is terminated for cause;
. three months after termination, in the event of a voluntary termination;
. six months, following an involuntary termination; or
. one year following death, disability, retirement, or in the event of
voluntary or involuntary termination within one year following a change
of control.
His employment agreement restricts Mr. Panero from engaging in any business in
the United States which resembles or competes with us for a period of one year
following termination of his employment.
We also have agreements with the following named executive officers:
Name Title Effective Date
---------------------- ----------------------------- -------------------
Lee Abrams........... . Senior Vice President, Chief June 8, 1998
of Programming
Stephen Cook......... . Senior Vice President, Sales February 22, 1999
and Marketing
Stelios Patsiokas.... . Senior Vice President, October 19, 1998
Technology
Heinz Stubblefield... . Senior Vice President, Chief June 1, 1998
Financial Officer
Mr. Stubblefield's agreement is for a term of three years, which will
automatically renew for a period of an additional two years unless either party
gives 60 days notice to the other; Mr. Patsiokas' agreement is for a term of
three years; and Mr. Abrams' and Mr. Cook's agreement have no specified term.
Each agreement provides that the executive is eligible for an annual bonus to be
determined by the board of directors based upon agreed upon performance
measures. These amounts are up to 40% of annual base salary for Mr. Patsiokas,
up to 35% of annual
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base salary for Mr. Cook and up to 30% of annual base salary for Messrs.
Stubblefield and Abrams. The agreement for Mr. Patsiokas and Mr. Cook provide
for severance payment of one year's salary payable in a lump sum upon
termination of employment by us other than for cause. The agreement for Mr.
Stubblefield provides for severance payment of one year's salary and bonus, plus
the pro-rated portion of earned bonus and options scheduled to vest for the
current year, payable in a lump sum upon termination of employment by us other
than for cause. Under these agreements and the terms of Holdings' shares award
plan, Holdings has granted to each of Messrs. Abrams, Cook, Patsiokas and
Stubblefield a 10-year option to purchase 53,514 shares of Class A common stock
of Holdings at an exercise price of $9.52 per share. Each of these options vests
in three equal annual installments beginning on the first anniversary of the
grant.
Shares Award Plan
General
In 1998, Holdings' board of directors adopted a 1998 Shares Award Plan for
employees, consultants and non-employee directors. The plan is administered by
the board's compensation committee.
We can grant options, stock appreciation rights, restricted stock or
phantom shares under the plan. The aggregate number of shares of Holdings' Class
A common stock with respect to which awards may be granted under the shares
award plan is 5,000,000 shares. Holdings may not grant awards of more than
267,570 shares of its common stock to any participant in any calendar year.
Options granted under the shares award plan may be either incentive or non-
incentive stock options within the meaning of the Internal Revenue Code. Each
option will be exercisable in whole or in installments, as determined at the
time of grant. The term of any option granted may not be more than 10 years from
the date of grant. Stock appreciation rights of Holdings may be granted in
tandem with another award, in addition to another award or unrelated to any
other award. No stock appreciation right may be exercisable until six months
after the day of grant. A stock appreciation right entitles the participant to
receive the excess of the fair market value of Holdings common stock on the date
of the exercise of the stock appreciation right over its grant price.
If Holdings engages in a corporate transaction, which consists of a merger,
a consolidation, a dissolution, a liquidation, or a sale of all or substantially
all of its assets, then the holder of an outstanding award will have the right
immediately prior to the effective date of the transaction to exercise such
awards without regard to any installment provision regarding exercisabilty. All
such awards which are not so exercised will be forfeited as of the effective
time of the transaction. If we have had a change of control of Holdings, each
participant will be entitled to receive an equivalent award. An equivalent award
is defined as a continuation of the awards, an agreement by the person acquiring
Holdings to honor or assume the award, or the substitution of a new award with
an inherent value at least equivalent to the original award, and on terms at
least as beneficial to the participant as is the original award. If it is not
possible to grant such an equivalent award, Holdings may grant a cash
equivalent, calculated as described in the shares award plan. If the
participant's employment with us is terminated by reason of involuntary
termination within one year following the change of control, the equivalent
award may be exercised in full beginning on the date of such termination.
Stock Option Grants
The following table sets forth information concerning the stock options
granted by Holdings to named executive officers under the 1998 Shares Award Plan
in 1999.
Individual Grants
--------------------------------------------------
69
<PAGE>
<TABLE>
<CAPTION>
Number of
Common Percent of Potential Realizable Value
Shares Total Exercise at Assumed Annual Rates
Underlying Options Price of Stock Price
Options Granted to Per Appreciation for Stock
Name Granted Employees Share Expiration Date Term
---- ---------- --------------- -------- ------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
5% 10%
-------- ----------
Hugh Panero.......... 100,000 6.8% $12.00 October 8, 2009 $754,674 $1,912,491
Lee Abrams........... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
Stephen Cook......... 53,514 3.6 9.52 February 22, 2009 320,392 811,937
50,000 3.4 12.00 October 8, 2009 377,337 956,245
Stelios Patsiokas.... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
Heinz Stubblefield... 50,000 3.4 12.00 October 8, 2009 377,337 956,245
</TABLE>
The following table sets forth the number of shares acquired and the value
realized upon exercise of stock options during 1999 and the number of shares of
Class A common stock subject to exercisable and unexercisable stock options held
as of December 31, 1999 by each of our named executive officers. Value at fiscal
year end is measured as the difference between the exercise price and the fair
market value at close of market on December 31, 1999, which was $38.13.
Aggregate Option Exercises in 1999 and Values at December 31, 1999
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options
December 31, 1999 December 31, 1999
--------------------------------- --------------------------------
Number of
Shares
Acquired on Value
Name Exercise Realized Exercisable(#) Unexercisable(#) Exercisable($) Unexercisable($)
---- ----------- -------- --------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Hugh Panero........... -- -- 89,190 278,380 2,551,280 7,715,060
Lee Abrams............ -- -- 17,838 85,676 510,256 2,326,762
Stephen Cook.......... -- -- -- 103,514 -- 2,837,018
Stelios Patsiokas..... -- -- 17,838 85,676 510,256 2,326,762
Heinz Stubblefield.... -- -- 17,838 85,676 510,256 2,326,762
</TABLE>
Employee Stock Purchase Plan
We have an employee stock purchase plan that provides for the issuance of
300,000 shares of Class A common stock. All employees whose customary employment
is more than 20 hours per week and for more than five months in any calendar
year are eligible to participate in the stock purchase plan, provided that any
employee who would own five percent or more of our total combined voting power
immediately after an offering date under the plan is not eligible to
participate. Eligible employees must authorize us to deduct an amount from their
pay during offering periods established by the compensation committee. The
purchase price for shares under the plan will be determined by the compensation
committee but may not be less than 85% of the lesser of the market price of the
common stock on the first or last business day of each offering period.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Contracts with Hughes
Our Satellite Purchase Contract for In-Orbit Delivery, dated March 20,
1998, and amended and restated on July 21, 1999, with Hughes Space and
Communications calls for Hughes to deliver
. in-orbit, two high-power satellites;
. an optional ground spare satellite upon exercise of XM Radio's option;
and
. satellite launch services.
We expect to incur total payment obligations under this contract of
approximately $541.3 million, which includes amounts we expect to pay pursuant
to the exercise of the option to build the ground spare satellite and certain
financing costs and in-orbit incentive payments. Payments are to be made to
Hughes Space and Communications upon certain calendar dates and completion of
discrete milestones and other events. As of June 30, 2000, we have paid $350.8
million under this contract and have recognized an additional $2.0 million in
accrued milestone payments.
We have granted Hughes Space and Communications a first priority security
interest in any rights we may have in Hughes' work product under the satellite
contract to secure our payment obligations to Hughes under the contract. This
security interest will be released once we have made substantial pre-arranged
payments to Hughes Space and Communications under our satellite contract or, if
earlier, upon the launch of the satellites.
We may, subject to certain conditions, terminate the satellite contract at
our convenience, in which case Hughes Space and Communications will be entitled
to certain payments. We may also terminate the satellite contract for certain
events of default by Hughes or in case it becomes reasonably certain that the
total amount of excusable delay in Hughes' performance under the satellite
contract caused by events beyond Hughes' control, excluding delays we caused,
will exceed 485 calendar days.
The first satellite is to be delivered to us in orbit by December 31, 2000,
the second by April 11, 2001. The scheduled launch period for the first
satellite is the period from November 1, 2000 through February 1, 2001. The
scheduled launch period for the second satellite is the period from February 15,
2001 through May 15, 2001. If there is a delay of more than six months in the
launch of either the first or second satellite, we would be able to select an
alternative launch system from within or outside of Hughes' inventory of launch
vehicles, subject to certain payment conditions set forth in the satellite
contract.
For each satellite, title will transfer to us after Hughes Space and
Communications successfully completes certain tests and analyses on each
satellite upon arrival at its specified orbital location. If Hughes fails to
deliver either satellite on or before the fiftieth day following its delivery
date, then Hughes must pay us liquidated damages which accrue on a daily basis.
The total aggregate amount of liquidated damages for failure to meet the
delivery dates of both satellites is limited to $16.0 million. These liquidated
damages are in addition to other limited liquidated damages for delay in the
launch of the satellites. We would have no other damages or remedies for late
delivery of a satellite. If, on the other hand, Hughes launches both satellites
on or before December 31, 2000, we will pay Hughes $6.0 million in addition to
the contract price.
We have entered into a contract with Hughes Electronics Corporation for the
design, development and manufacture of the terrestrial repeaters, which will
supplement our high-powered satellite signals. Production of the repeaters is
expected to begin in July 2000 and be completed in February 2001. Payments under
this contract are expected to be approximately $128.0 million. As of June 30,
2000, we have paid $12.5 million under this contract.
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<PAGE>
The contract provides that we may reduce the number of repeaters ordered
under the contract to a specified minimum order or terminate the terrestrial
repeater contract altogether, in which case we are required to pay certain
amounts to Hughes Electronics depending on the date of the reduction or
termination and other factors. We have agreed to make certain incentive payments
to Hughes Electronics for timely delivery of the terrestrial repeaters. In the
event of late delivery of the terrestrial repeaters, we are entitled to
specified liquidated damages. In certain events of default by Hughes
Electronics, we may terminate the contract and would be entitled to have the
work completed by a third party plus certain costs resulting from the
termination.
Hughes Space and Communications is owned by Hughes Electronics Corporation.
On January 13, 2000, Hughes Electronics announced its intention to sell Hughes
Space and Communications to Boeing. We believe this sale, if consummated, would
not have any material effect on us. Motient, whose single largest stockholder on
a fully diluted basis is Hughes Communications, owns approximately 22% of the
outstanding shares of Holdings' common stock on a fully diluted basis
(approximately 47% of the voting power), or 34% assuming no conversion of
preferred stock (approximately 54% of the voting power). General Motors, which
owns Hughes Electronics and with whom we have a distribution agreement as
described below, owns a 7% equity interest in Holdings and an additional 8%
equity interest in Holdings is held by DIRECTV, a direct subsidiary of Hughes
Electronics and an indirect subsidiary of General Motors.
Distribution Agreement with General Motors and OnStar
We have signed a long-term distribution agreement with the OnStar division
of General Motors providing for the installation of XM radios in General Motors
vehicles. During the term of the agreement, which expires 12 years from the
commencement date of our commercial operations, General Motors has agreed to
distribute our service to the exclusion of other satellite digital radio
services that broadcast in the S-Band. General Motors will factory-install XM
radios, purchased exclusively from our authorized manufacturers, in certain new
General Motors vehicles and not install any radios which receive Sirius Radio as
the only satellite radio service. We will have a non-exclusive right to arrange
for the installation of XM radios included in OnStar systems in non-General
Motors vehicles that are sold for use in the United States.
We have agreed, for a nine-month period beginning on July 1, 2001, that
General Motors shall be the exclusive vehicle manufacturer in whose new vehicles
we will activate the XM Radio service. If, however, we cannot install XM radios
prior to January 1, 2002, then this exclusivity arrangement will apply for a
six-month period beginning on the later of July 1, 2002 or the date we commence
full commercial operations. In addition, we have significant annual, fixed
payment obligations to General Motors for four years following commencement of
commercial operation. These payments approximate $35 million in the aggregate
during this period. Additional annual fixed payment obligations beyond the
initial four years of the contract term range from less than $35 million to
approximately $130 million through 2009, aggregating approximately $400 million.
In order to encourage the broad installation of XM radios, we have agreed to
subsidize a portion of the cost of XM radios, and to make incentive payments to
General Motors when the owners of General Motors vehicles with installed XM
radios become subscribers for the XM Radio service within 12 months of
purchasing a General Motors vehicle equipped with an XM radio. We must also
share with General Motors a percentage of the subscription revenue attributable
to General Motors vehicles with installed XM radios. We will also make available
to General Motors a limited amount of bandwidth for audio and/or data
transmission by General Motors to owners of General Motors vehicles equipped
with XM radios.
This agreement is subject to renegotiation if four years after the
commencement of commercial operations and at two-year intervals thereafter
General Motors does not achieve and maintain specified installation levels,
starting with 1.24 million units after four years and thereafter increasing by
the lesser of 600,000 units per year and amounts proportionate to our share of
the satellite digital radio market. There can be no assurance as to the outcome
of any such renegotiations. General Motors' exclusivity obligations will
discontinue if, four years after we commence commercial operations and at two-
year intervals thereafter, our mobile aftermarket share falls below 40% if there
are two satellite radio providers in the United States, or below 33% if there
are three satellite radio providers in the United States.
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In February 2000, we signed an agreement with Sirius Radio to develop a
unified standard for satellite radios, which will facilitate the ability of
consumers to purchase one radio capable of receiving both our and Sirius Radio's
services. In accordance with the terms of the agreement, we expect to work with
General Motors to integrate the new standard under the terms of our distribution
agreement with General Motors. Our agreement with General Motors provides that
if General Motors elects to install radios which are capable of receiving
broadcasts from other satellite radio providers, in the absence of any
regulatory requirements to do so, we may seek to renegotiate the distribution
agreement. If the FCC requires the installation of interoperable radios, we will
renegotiate the distribution agreement on mutually acceptable terms.
Engineering Contract with LCC International
We have signed a contract with LCC International for the engineering of and
site preparation of our terrestrial repeater network. The repeater network will
supplement our high-powered satellite signals. Payments by XM Radio under this
contract are expected to approximate $115.0 million. This contract does not
include the repeater hardware, which will be supplied by a separate vendor. As
of June 30, 2000, we have paid $13.9 million under this contract and accrued an
additional $13.7 million.
The contract designates LCC International as the prime contractor for the
implementation of our terrestrial repeater sites. Under this contract, LCC
International will perform various services, including program management radio
frequency engineering, site acquisition, architectural and engineering design,
zoning, regulatory services, network management testing and construction and
interim system maintenance. The initial site planning is now complete for 70
cities and metropolitan areas and implementation work is continuing.
The design of our terrestrial repeater system will be guided by a radio
frequency analysis technique developed by LCC International. This technique uses
analysis of the satellite footprint to discover areas likely to have impaired
reception of XM Radio through technology similar to that used in certain
cellular telephone systems.
Dr. Rajendra Singh, a member of Holdings' board of directors and a member
of the board of directors of LCC International, controls the largest shareholder
of both LCC International and one of Holdings' principal shareholders, Telcom-XM
Investors L.L.C. See "Principal Stockholders."
Technology License Agreement with Motient
Motient has granted us a royalty-free license with respect to certain
technology to be used in connection with the implementation of the XM Radio
system, including, among other things, certain ground segment communications
technology and antenna technology. We also have the right to sublicense this
technology to any third party, including chipset manufacturers, terrestrial
repeater manufacturers and receiver manufacturers in connection with the XM
Radio system.
Under cross-license provisions in the license, if we obtain from any third
party the right to use any technology which could be used to develop, implement
and commercialize a satellite radio system for transmission in the United
States, we will make all reasonable efforts to obtain for Motient the right to
use such technology. We have granted to Motient a royalty-free, non-exclusive
and irrevocable license to any and all technology and improvements we develop
relating to the XM Radio system. This cross-license is for use and sublicensing
worldwide outside the United States and its territories, or inside the United
States and its territories only in connection with Motient's mobile satellite
business in the United States and other than in connection with any satellite
radio system.
The technology license renews automatically on an annual basis unless
terminated for a breach which has not been or cannot be remedied.
Technical Services Agreement with Motient
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We have a technical services agreement with Motient under which Motient
provides us with certain technical, engineering, marketing and strategic
planning services. We pay Motient at specified hourly rates, which we believe
approximate rates available from unrelated parties. On or after our commencement
of commercial operations, Motient or we may terminate the technical services
agreement at any time.
Other Transactions with Motient
In 1997, Motient contributed $143,000 for Holdings to establish our
original application for the FCC license. Also in 1997, Holdings received $1.5
million as a capital contribution from Motient. During 1998, Motient incurred
general and administrative costs and professional fees for us and established an
intercompany balance of $458,000. During June 1999, Motient provided Holdings a
line of credit under which we drew $250,000. This was repaid, and the line of
credit terminated, in July 1999.
Registration Rights Agreement
Holdings has a registration rights agreement with Motient, the former
holders of its Series A subordinated convertible notes and the holders of its
Series C preferred stock. Commencing July 7, 2000, each of these parties other
than the Series C holders is entitled to demand registration with respect to its
Class A common stock, including shares issuable upon conversion of other
securities. The Series C holders will have such rights beginning on August 9,
2001. Motient is entitled to make two demands. These rights are subject to
Holdings' right to defer the timing of a demand registration and an
underwriters' right to cut back shares in an underwritten offering. In certain
instances if a demand registration is cut back by more than 75% of the number of
shares originally requested to be registered, then the party requesting
registration shall be entitled to one additional demand registration
request.
In addition to these demand rights, following our commencement of
commercial operations, parties to the registration rights agreement may request
registration of at least $25.0 million of Class A common stock of Holdings.
Parties to the registration rights agreement also have rights to include
their Class A common stock of Holdings in registered offerings initiated by
Holdings, other than an offering for high yield debt. The Series C holders may
also demand registration upon a change of control of Holdings.
Shareholders' Agreement
Holdings has entered into a shareholders' agreement with Motient, the
former holders of its Series A subordinated convertible notes and the holders of
its Series C preferred stock, containing, among others, the provisions described
below.
Conversion of Shares of Class B Common Stock to Class A Common Stock
Motient owns all of the Class B common stock, which is convertible into its
Class A common stock on a one for one basis at any time at Motient's discretion.
In addition, under the shareholders' agreement, the holders of a majority of
Holdings' outstanding Class A common stock, which must include at least 20% of
the public holders of the Class A common stock, may require conversion by
Motient. This conversion will not be effected, however, if the FCC does not
approve the transfer of control of XM Radio from Motient to a diffuse group of
stockholders.
Restrictions on Transfer of Shares of Holdings' Securities
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Except for affiliated transactions, Motient will not be permitted to
transfer any of Holdings' securities until the earlier of the date on which we
begin commercial operations or October 8, 2000. Shares of Holdings' Class B
common stock, all of which are currently owned by Motient, are transferable only
upon conversion into shares of Class A common stock.
Non-Competition
Motient has agreed not to compete with XM Radio in the satellite radio
business in the United States for so long as Motient holds 5% of Holdings'
common stock and for a period of three years following any transfer which
results in Motient owning less than 5% of Holdings' common stock.
Governance
The parties to the agreement are entitled to designate directors to our
board of directors and to observe meetings of the board of directors. We have
described these provisions previously under the caption "Management--Provisions
Governing the Board of Directors." In addition, the parties have agreed to take
all necessary actions to give effect to the agreement including to prevent any
conflict between the agreement and our governing instruments.
Investor Operational Agreements
We have agreements with Clear Channel, DIRECTV and the TCM Group, which is
owned by Columbia Capital, Telcom Ventures and Madison Dearborn Partners, under
which we will make available to them up to 406.6 kilobits per second, 204.8
kilobits per second, and 64.0 kilobits per second each, respectively, of our
bandwidth, for them to supply programming to us with content reasonably
acceptable to us, on terms (including revenue sharing) no less favorable than
those offered to similar commercial programmers who provide similar programming.
Until these options are exercised and this bandwidth is actually used by them,
we can use the bandwidth. Any use of our bandwidth by these companies must be in
compliance with applicable laws, must not interfere with our business or our
obligations to other content providers, and must meet our quality standards.
The agreements call for us to have a technology advisory committee on which
Clear Channel, DIRECTV and the TCM Group have representatives. The committee
will direct the selection of appropriate billing, customer service and
conditional access systems for us, as well as our overall system integration
effort. We have granted to Clear Channel, DIRECTV, and TCM Group under these
agreements a royalty-free, non-transferable, non-exclusive license to use, sell,
manufacture and have manufactured any and all technology we develop relating to
the XM Radio system worldwide for any purpose other than one related to digital
audio radio service.
We have entered into a technical services agreement with DIRECTV with
respect to customer service, billing and conditional access capabilities, and we
will use DIRECTV's customer service, billing and conditional access capabilities
if made available to us on competitive terms and conditions. DIRECTV is to make
good faith efforts to represent us in obtaining distribution of XM Radio service
through DIRECTV's existing retail distribution network. We will provide Clear
Channel and DIRECTV with access to our advertising at the lowest available
commercial rates. Clear Channel must make good faith efforts to give us access
to its advertising at the lowest available commercial rates.
The agreements provide for further good faith negotiations with respect to
other arrangements, including advertising barter arrangements, marketing of XM
Radio service by Clear Channel and DIRECTV, and technology cooperation.
These agreements remain in effect so long as Clear Channel, DIRECTV, and
Columbia Capital, Telcom Ventures and Madison Dearborn Partners hold at least 5%
of Holdings' fully diluted ownership or the full amount of
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their original investments in Holdings.
July 1999 Transactions
We engaged in a series of transactions in July 1999 in which WorldSpace,
Inc. ceased to be an owner of Holdings, Motient became the owner of the
securities of Holdings previously held by WorldSpace, and several of the
transactions and agreements described above were entered into. These
transactions are described under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources--Sources of Funds" and in the notes to our Consolidated Financial
Statements.
Series C Preferred Stock
On August 8, 2000, Holdings completed the sale of 235,000 shares of its
Series C convertible redeemable preferred stock in a private placement. Several
of Holdings' existing major stockholders--Columbia Capital, Madison Dearborn
Partners, DIRECTV and Baron Asset Fund--were among the purchasers. The terms of
the Series C preferred stock are described under the caption "Description of
Capital Stock--Preferred Stock--Series C Convertible Preferred Stock."
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PRINCIPAL STOCKHOLDERS
XM is 100% owned by Holdings.
The following table and the accompanying notes set forth certain
information concerning the beneficial ownership of Holdings' Class A common
stock by each person who is known by us to own beneficially more than five
percent of such stock, each director and each named executive officer, and all
directors and executive officers as a group. Except as otherwise indicated, each
person listed in the table has informed us that such person has sole voting and
investment power with respect to such person's shares of common stock and record
and beneficial ownership with respect to such person's shares of common stock.
As of August 15, 2000, there were 33,081,399 shares of Holdings' Class A
common stock outstanding and 16,557,262 shares of Holdings' Class B common stock
outstanding, all of which Class B shares were owned by Motient. As of August
15, 2000, there were 10,786,504 shares of Holdings' Series A convertible
preferred stock outstanding, all of which was owned between General Motors and
DIRECTV. The Class B common stock and the Series A convertible preferred stock
are each convertible into Class A common stock on a one-for-one basis. Class B
common stock is entitled to three votes for each share. Share ownership in the
table below includes shares we may issue if certain stockholders exercise
outstanding options within 60 days after August 15, 2000.
<TABLE>
<CAPTION>
Number of Class A Percentage of
Shares Total Class A
Beneficially Owned Shares
<S> <C> <C>
Beneficial Owners of More Than 5%:
Motient Corporation 16,757,262(1) 33.8%
10802 Parkridge Boulevard
Reston, VA 20191-5416
General Motors Corporation 11,861,221(2) 26.6%
100 Renaissance Center
3031 West Grand Boulevard
PO Box 100
Detroit, MI 48265-1000
Clear Channel Investments, Inc. 8,329,877 25.2%
200 Concord Plaza, Suite 600
San Antonio, TX 78216
DIRECTV Enterprises, Inc. 6,307,969(3) 16.1%
2230 E. Imperial Highway
El Segundo, CA 90245
Madison Dearborn Capital Partners III, L.P. -4,663,418(4) 14.1%
Madison Dearborn Special Equity III, L.P.
Special Advisors Fund I, LLC
3 First National Plaza, Suite 3800
Chicago, IL 60602
Columbia XM Radio Partners, L.L.C. 3,531,343(5) 10.7%
Columbia XM Satellite Partners III, LLC
Columbia Capital Equity Partners III (QP), L.P.
201 N. Union Street, Suite 300
</TABLE>
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<TABLE>
<S> <C> <C>
Alexandria, VA 22314
Telcom-XM Investors, L.L.C. 2,661,211(6) 8.0%
211 North Union Street, Suite 300
Alexandria, VA 22314
Baron Asset Fund 2,253,314(7) 6.8%
Baron Capital Asset Fund
Baron iOpportunity Fund
767 Fifth Avenue, 49/th/ Floor
New York, New York 10153
AEA XM Investors I LLC 2,264,151(8) 6.8%
AEA XM Investors II LLC
65 E. 55th Street
New York, New York 10022
American Honda Motor Co., Inc. 1,886,792(9) 5.7%
1919 Torrance Boulevard
Torrance, California 90501
</TABLE>
<TABLE>
<CAPTION>
Percentage
Number of of Total
Class A Shares Class A
Name Beneficially Owned Shares
---- ------------------ ------
Directors and Named Executive Officers
<S> <C> <C>
Gary M. Parsons 190,258(10) *
Hugh Panero 183,773(11) *
Randall T. Mays 26,757 *
Randy S. Segal 26,757 *
Jack Shaw 26,757 *
Rajendra Singh 26,757(6) *
Ronald L. Zarrella --
Nathaniel Davis 26,757 *
Thomas R. Donohue 26,757 *
Pierce J. Roberts, Jr. 12,619(12) *
Walter V. Purnell, Jr. 10,000 *
Lee Abrams 35,861(13) *
Stephen Cook 22,353(14) *
Stelios Patsiokas 20,196(14) *
Heinz Stubblefield 38,196(13) *
All directors and executive officers as a group (16 persons) 908,154(15) 2.7%
</TABLE>
----------------
* Less than 1%.
(1) Includes 16,557,262 shares issuable upon conversion of Class B common
stock.
(2) Includes 10,786,504 shares issuable upon conversion of Series A convertible
preferred stock, 5,393,252 of which are owned by DIRECTV.
(3) Includes 5,393,252 shares issuable upon conversion of Series A convertible
preferred stock and 754,717 shares issuable upon conversion of Series C
convertible preferred stock.
(4) Includes 1,886,792 shares issuable upon conversion of Series C convertible
preferred stock, of which Madison Dearborn Capital Partners III, L.P. owns
1,845,811 shares and Madison Dearborn Special Equity III, L.P. owns 40,981
shares.
(5) Includes 754,717 shares issuable upon conversion of Series C convertible
preferred stock, of which Columbia
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XM Radio Partners, L.L.C. owns 169,811 shares, Columbia XM Satellite
Partners III, LLC owns 309,559 shares and Columbia Capital Equity Partners
III (QP), L.P. owns 275,347 shares.
(6) Rajendra Singh, a member of our board of directors, indirectly owns a
controlling interest in Telcom-XM Investors, L.L.C. Dr. Singh disclaims
beneficial ownership of the shares of Class A common stock beneficially
owned by Telcom-XM Investors, L.L.C.
(7) Includes 1,320,755 shares issuable upon conversion of Series C convertible
preferred stock, of which Baron Asset Fund owns 1,169,811 shares, Baron
Capital Asset Fund owns 75,472 shares and Baron iOpportunity Fund owns
75,472 shares.
(8) Includes 2,264,151 shares issuable upon conversion of Series C convertible
preferred stock, of which AEA XM Investors I LLC owns 259,207 shares and
AEA XM Investors II LLC owns 2,004,944 shares.
(9) Includes 1,886,792 shares issuable upon conversion of Series C convertible
preferred stock.
(10) Does not include 207,028 shares issuable upon exercise of options which are
not exercisable within 60 days. A trust for the benefit of Mr. Parsons'
minor children, of which Mr. Parsons' spouse is the trustee, has acquired a
minority membership interest in Columbia XM Radio Partners, L.L.C., a
minority participatory interest in each of Madison Dearborn Capital
Partners III, L.P. and Madison Dearborn Special Equity III, L.P. and 5,393
shares. Mr. Parsons disclaims beneficial ownership of these interests.
(11) Does not include 155,857 shares issuable upon exercise of options which are
not exercisable within 60 days.
(12) Includes 2,500 shares issuable upon exercise of Series B convertible
preferred stock. Mr. Roberts is affiliated with AEA XM Investors Inc.,
which is the general partner of each of XM Investors I LP, a Delaware
limited partnership, and XM Investors II LP, a Delaware limited
partnership, which each manage AEA XM Investors I LLC and AEA XM Investors
II LLC, respectively. Mr. Roberts disclaims beneficial ownership of the
shares of Class A common stock beneficially owned by each of AEA XM
Investors I LLC and AEA XM Investors II LLC.
(13) Does not include 51,171 shares issuable upon exercise of options which are
not exercisable within 60 days.
(14) Does not include 69,009 shares issuable upon exercise of options which are
not exercisable within 60 days.
(15) Does not include 607,740 shares issuable upon exercise of options which are
not exercisable within 60 days.
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DESCRIPTION OF CAPITAL STOCK
XM's authorized capital stock consists of 3,000 shares of common stock,
$.10 par value per share. XM currently has 125 shares of its common stock
outstanding, all of which are issued to Holdings.
Holdings' authorized capital stock consists of 180,000,000 shares of Class
A common stock, $.01 par value per share, 30,000,000 shares of Class B common
stock, $.01 par value per share, 30,000,000 shares of Class C common stock, $.01
par value per share, 15,000,000 shares of Series A convertible preferred stock,
$.01 par value per share, 3,000,000 shares of 8.25% Series B convertible
redeemable preferred stock, $.01 par value per share and 250,000 shares of 8.25%
Series C convertible redeemable preferred stock, $.01 par value per share. The
following summary description of Holdings' capital stock is subject to Holdings'
Restated Certificate of Incorporation and Restated Bylaws and the Delaware
General Corporation Law.
Common Stock
As of August 15, 2000, there were 33,081,399 shares of Class A common stock
outstanding and 16,557,262 shares of Class B common stock outstanding.
Class A Common Stock
Holders of Holdings' Class A common stock are entitled
. to one vote for each share held on any matter submitted for
stockholder approval;
. to receive on a pro rata basis, dividends and distributions, if any,
as the board of directors may declare out of legally available funds;
and
. upon the liquidation, dissolution, winding up or insolvency of
Holdings, to share ratably in the net assets of Holdings available
after Holdings pays its liabilities and any preferential amounts to
which holders of the Series A convertible preferred stock may be
entitled.
Holders of Holdings' Class A common stock have no preemptive, redemption or
sinking fund rights.
Class B Common Stock
Holdings' Class B common stock has the same rights as Holdings' Class A
common stock except that Holdings' Class B common stock is entitled to three
votes for each share. Shares of Holdings' Class B common stock are convertible
into shares of Class A common stock on a one-for-one basis, subject to
antidilution protection if Holdings effects a recapitalization.
Class C Common Stock
Holders of Holdings' Class C common stock are entitled to the same rights
as holders of Class A common stock except that the holders of Holdings' Class C
common stock are not entitled to vote on any matter submitted for stockholder
approval.
Preferred Stock
The board of directors of Holdings may issue preferred stock in one or more
series and may fix the designations, powers, preferences and relative,
participating, optional and other special rights, qualifications,
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limitations and restrictions on the preferred stock, including the dividend
rate, conversion rights, voting rights, redemption price and liquidation
preference, and may fix the number of shares to be included in any such series.
Any Holdings' preferred stock may rank senior to Holdings' common stock for the
payment of dividends or amounts upon liquidation, dissolution or winding-up, or
both. In addition, any shares of Holdings' preferred stock may have class or
series voting rights. Issuances of Holdings' preferred stock, while providing
Holdings' with flexibility in connection with general corporate purposes, may,
among other things, have an adverse effect on the rights of holders of Holdings'
common stock. The board of directors, without stockholder approval, can issue
preferred stock with voting and conversion rights that could adversely affect
the voting power and other rights of holders of common stock. Preferred stock
could thus be issued quickly with terms calculated to delay or prevent a change
of control of Holdings or to make the removal of management more difficult. In
certain circumstances, this could have the effect of decreasing the market price
of Holdings' common stock.
Series A Convertible Preferred Stock
Holdings' Series A convertible preferred stock has the following
characteristics:
. a right to receive dividends and distributions ratably with the
holders of Holdings' common stock;
. a $9.52 per share payment preference over Holdings' common stock in
the event of Holdings' liquidation, dissolution, winding up or
insolvency;
. a right to convert, at the election of the holder, one share of the
Series A convertible preferred stock into one share of Holdings' Class
A common stock; and
. shares of Holdings' Series A convertible preferred stock do not have
-- voting rights;
-- any preference with respect to dividends and distributions;
-- preemptive rights;
-- sinking fund rights; or
-- redemption rights.
Following the occurrence of a recapitalization, as described under the
caption "Class B Common Stock", each share of Holdings' Series A convertible
preferred stock will be convertible into the kind and number of shares of
securities or other property to which the holders of such share of Series A
convertible preferred stock would have been entitled to receive if the holder
had converted such share of Series A convertible preferred stock into Holdings'
Class A common stock immediately prior to the recapitalization.
As of August 15, 2000, there were 10,786,504 shares of Holdings' Series A
convertible preferred stock outstanding.
Series B Convertible Preferred Stock
General. Each share of Series B convertible preferred stock has a
"liquidation preference" of $50, which is the amount a holder of one share of
Series B convertible preferred stock would be entitled to receive if Holdings
were liquidated. Holdings will pay cumulative dividends on the Series B
convertible preferred stock at a rate per annum equal to 8.25% of the
liquidation preference per share quarterly in arrears commencing May 1, 2000.
Dividends will be payable in cash or, at our option, in shares of Class A common
stock, or a combination thereof.
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Optional Conversion by Holders. Holders of the Series B convertible
preferred stock have the right to convert some or all of their shares of Series
B convertible preferred stock into shares of our Class A common stock, unless we
have already redeemed them. The conversion price is $40 per share. At that
price, holders of the Series B convertible preferred stock would receive 1.25
shares of our Class A common stock for each $50 liquidation preference of Series
B convertible preferred stock. Holders of Series B convertible preferred stock
are not entitled to any accrued dividends upon conversion. The conversion price
will be adjusted if specified dilutive events occur.
Upon the occurrence of a change of control (as defined in the certificate
of designation governing the Series B convertible preferred stock) of Holdings,
holders will have the option, during the period commencing on the date that the
applicable change of control notice is mailed to holders and ending at the close
of business on the 45th day thereafter, to convert all, but not less than all,
of their shares of Series B convertible preferred stock into Class A common
stock at a conversion rate equal to $50 (the liquidation preference per share of
Series B convertible preferred stock) divided by a special conversion price
which will be based upon a formula dependent upon the market value of Holdings'
Class A common stock.
Redemption of the Series B Convertible Preferred Stock by Holdings.
Beginning on February 3, 2003, Holdings will have the right to redeem some or
all of the Series B convertible preferred stock at a redemption price equal to
105.775% of the liquidation preference, or $52.90 per share, plus accrued
dividends, if any, to the date of redemption. The redemption price will decline
until it equals 100.0% on February 2, 2010, and will remain at 100.0% thereafter
until redeemed. Holdings may pay this redemption price in cash or shares of its
Class A common stock (subject to some restrictions) or a combination of the two.
Holdings will be required to redeem any Series B convertible preferred
stock still outstanding on February 1, 2012, at a redemption price equal to 100%
of the total liquidation preference plus accrued dividends, if any, to that
date. Holdings must pay this redemption price in shares of its Class A common
stock.
Method of Dividends and Redemption Payments. Holdings may, at its option,
make any dividend payments due on its Series B convertible preferred stock in
cash, by delivery of freely tradeable shares of its Class A common stock or
through any combination of cash and freely tradeable shares of its Class A
common stock. Any optional redemption payments on its Series B convertible
preferred stock must be paid in cash. Mandatory redemption payments due on the
Series B convertible preferred stock must be paid by delivery of shares of Class
A common stock. Shares of Class A common stock issued to make dividend or
mandatory redemption payments on the Series B convertible preferred stock shall
be valued at 95% of the average market value (as defined in the certificate of
designation) if such shares of Class A common stock are freely tradeable, or 90%
of the average market value if such shares of Class A common stock are not
freely tradeable.
Ranking. The Series B convertible preferred stock ranks:
. junior to all Holdings' existing and future indebtedness and other
obligations,
. junior to any of Holdings' capital stock or preferred stock which
provides that it be ranked senior to the Series B convertible
preferred stock and which receives the requisite approval of the
holders of Series B convertible preferred stock,
. equal with any of Holdings' preferred stock issued in the future which
provides that it be ranked equal with the Series B convertible
preferred stock, and
. senior to all Series A convertible preferred stock and all shares of
Holdings' other capital stock, unless the other stock expressly
provides otherwise.
Limited Voting Rights. Holders will generally not be entitled to any
voting rights, unless Holdings' has not declared or paid dividends on the Series
B convertible preferred stock for a total of six quarterly periods.
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Trading. Holdings has not applied and does not intend to apply for the
listing of the Series B convertible preferred stock on any securities exchange.
As of August 15, 2000, there were 1,493,061 shares of Series B convertible
preferred stock outstanding.
Series C Convertible Preferred Stock
Voting Rights. The holders of Series C preferred stock are entitled to
vote on all matters on which the holders of common stock are entitled to vote,
in the same manner and with the same effect as the holders of common stock,
voting together with the holders of common stock as a single class. In any vote
with respect to which the Series C preferred stock vote with the holders of
common stock as a single class, each holder of Series C preferred stock shall
have a number of votes per share of Series C preferred stock equal to the number
of shares of common stock into which such shares of Series C preferred stock are
convertible. The holders of Series C preferred stock are entitled to notice of
all stockholder meetings in accordance with Holdings' bylaws.
In addition, the affirmative vote or consent of holders of at least 60% of
the outstanding Series C preferred stock is required for the following:
. any change to the certificate of incorporation or bylaws of
Holdings or any of its subsidiaries material to the Series C
holders or any change to any certificate of designation relating
to securities senior to or pari passu with the Series C preferred
stock;
. the authorization, creation, reclassification or issuance of any
series or class of securities senior to or pari passu with the
Series C preferred stock, except that Holdings may issue up to
$250 million in aggregate liquidation preference of Series C
preferred stock and securities pari passu with the Series C
preferred stock, which amount includes the Series C preferred
stock issuance;
. any increases in the outstanding number of shares of Holdings'
Series A convertible preferred stock or Series B preferred stock
and the Series C preferred stock other than increases in
connection with anti-dilution adjustments in accordance with the
terms of such securities;
. any increase or decrease in the authorized number of shares of
Series C preferred stock;
. the issuance of common stock or securities convertible into
common stock which would increase the number of shares of common
stock outstanding by 20% or more, except for the Series C
preferred stock issuance and issuances in respect of securities
convertible into or exercisable for common stock already
outstanding (securities issued in connection with any high yield
issuance and common stock paid as a dividend on the Series B
preferred stock in accordance with the terms thereof are not
counted in the above 20% calculation);
. the incurrence by Holdings or any of its subsidiaries of
indebtedness or issuance of securities that contain financial,
operational or subscriber maintenance or milestone covenants
which if not met would put Holdings or any of its subsidiaries in
default under the terms of the indebtedness;
. the declaration and payment of any dividends on any securities
junior to or pari passu with the Series C preferred stock other
than dividends consisting solely of common stock to the holders
of Series B preferred stock to the extent required by the terms
thereof and dividends consisting solely of common stock, subject
to the 20% limitation described above;
. any merger or liquidation of Holdings or any of its subsidiaries;
. any action that results in Holdings or its subsidiaries entering
into an agreement that would impose material restrictions on
Holdings' ability to honor the exercise of any rights of Series C
holders, or violate, or be in conflict with, the rights of Series
C holders;
. the purchase or redemption of any securities of Holdings or any
of its subsidiaries except that Holdings can exercise its option
to repurchase up to 35% of XM's 14% senior secured notes due 2010
and any similar option to repurchase contained in future high
yield issuances, redeem the Series B preferred stock and the
Series C preferred stock in accordance with their terms, and
redeem equity securities in an aggregate amount up to $5 million;
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. the making of loans or advances to, transferring properties to,
or guaranteeing any indebtedness of the Holdings' subsidiaries
other than subsidiaries related to Holdings' satellite radio
business;
. any change in the principal nature of the business of Holdings or
its subsidiaries to a business other than the satellite radio
business or a business related thereto;
. any transactions with affiliates, other than those on an arm's
length basis and as to which approval of a majority of the
disinterested directors has been received for transactions in
excess of $5 million, and a fairness opinion has been received
for transactions in excess of $20 million (transactions with
affiliates do not include transactions (including employment
agreements or arrangements or employee benefit plans) in the
ordinary course of business approved by a majority of the
disinterested directors, transactions between or among Holdings
and its wholly-owned subsidiaries, payment of reasonable
directors' fees and provisions of customary indemnification for
directors, officers and employees of Holdings, and pre-existing
contractual arrangements and any renewals, extensions,
implementations or modifications thereof that are not materially
adverse to the Series C holders and that have been approved by a
majority of the disinterested directors);
. the sale or transfer of all or substantially all of the assets of
Holdings and its subsidiaries;
. entering into any transaction that would result in any subsidiary
of Holdings not being wholly owned by Holdings other than pledges
of common stock in connection with any financing transaction; and
. agreement or commitment of Holdings to do any of the foregoing.
Redemption. The Series C preferred stock may not be required to be
redeemed for four and a half years. The Series C preferred stock may be redeemed
for cash, or, at the holder's option, in shares of Holdings' Class A common
stock issued at the conversion price or in a combination thereof, at our option
after four and a half years at redemption prices ranging from 100.000% to
105.775% of the liquidation preference plus accumulated and unpaid dividends.
Unless it has already been redeemed or converted, the Series C preferred stock
will be mandatorily redeemed by Holdings, in common stock, on February 1, 2012,
at a redemption price equal to 100% of the liquidation preference, together with
accumulated and unpaid dividends to the mandatory redemption date.
Dividends. The holders of Series C preferred stock will be entitled to
receive, when, as and if dividends are declared by the board of directors out of
funds legally available therefor, cumulative dividends from the issue date of
the Series C preferred stock accruing at the rate per annum of 8.25% of the
liquidation preference per share, payable in arrears. The affirmative vote of
the primary Series C investor and holders of at least 60% of the outstanding
Series C preferred stock will be required for any declaration or payment of
dividends on the Series C preferred stock, except during a liquidation event.
Dividends are payable in cash. Holders of Series C preferred stock are also
entitled to receive dividends, on an as converted basis, at any time that a
dividend is declared with respect to Holdings' common stock and will receive
such dividend before any dividend is paid on the common stock. If Holdings
fails to make required payments on the Series C preferred stock, or, after a 30-
day notice and cure period, fails to observe the Series C voting requirements or
perform under its covenants with the Series C holders, the dividend rate
increases to 10.25% during the first year of the event of noncompliance and to
12.25% thereafter. Once the noncompliance is cured, the dividend rate reverts
to 8.25%.
Conversion. The shares of Series C preferred stock are convertible at the
holders' option at any time into shares of our Class A common stock at the
conversion price then in effect. Currently the conversion price is $26.50. The
conversion price is subject to adjustment upon stock splits and combinations,
certain dividend payments and distributions in common stock, indebtedness,
securities or assets. The conversion price is also subject to weighted average
anti-dilution adjustments if Holdings issues common stock or common stock-linked
securities at a price less than 100% of the Series C conversion price. Upon a
change of control, each holder of Series C preferred stock has the option to
convert all, but not less than all, of such holder's shares of Series C
preferred stock at the applicable redemption price. After two years, upon the
fiftieth consecutive day that the common stock trading price equals or exceeds
$50 per share, Holdings has the option to convert each share of Series C
preferred stock at a conversion rate equal to the liquidation preference plus
accumulated and unpaid dividends for four and a half years multiplied by
105.775% divided by the conversion price.
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Liquidation Rights. Each share of Series C preferred stock has a
"liquidation preference" of $1,000, which is the amount a holder of one share of
Series C preferred stock would be entitled to receive if we were liquidated,
plus any accrued dividends. Upon the voluntary or involuntary liquidation,
dissolution, winding up or sale of Holdings or reduction or decrease in
Holdings' capital stock resulting in a distribution of assets to the holders of
any class or series of Holdings' capital stock, holders of the Series C
preferred stock will be entitled to be paid, out of Holdings' assets available
for distribution, the greater of (i) the liquidation preference per share plus
an amount equal to all accumulated and unpaid dividends multiplied by the
applicable redemption price per share and (ii) the amount the holders of Series
C preferred stock would have been entitled to receive if such holders had
converted upon a liquidation event before any distribution is made on any junior
securities, including common stock.
Ranking. The Series C preferred stock ranks senior to all classes of
common stock, the Series A preferred stock and any other class or series of
common or preferred stock issued hereafter, the terms of which do not expressly
provide that it will rank senior to the Series C preferred stock. The Series C
preferred stock ranks on a parity with the Company's Series B preferred stock
and any other class or series of common or preferred stock issued hereafter, the
terms of which expressly provide that it will rank on a parity with the Series C
preferred stock. The Series C preferred stock ranks junior to each class or
series of preferred stock issued hereafter, the terms of which expressly provide
that such class or series will rank senior to the Series C preferred stock.
Registration Rights. Holders of the Series C preferred stock have the
right to demand registration of the shares of Class A common stock issuable upon
conversion of their Series C preferred stock beginning one year after the Series
C issuance. This right is subject to Holdings' right to defer the timing of a
demand registration statement and an underwriters' right to cut back shares in
an underwritten offering. In certain instances, if a demand registration is cut
back by more than 75% of the number of shares originally requested to be
registered, then the party requesting registration shall be entitled to one
additional demand registration request. The Series C holders also have rights to
demand registration upon a change of control of Holdings and to include their
Class A common stock in special registered offerings initiated by Holdings,
other than an offering relating to high yield debt.
Trading. Holdings has not applied and do not intend to apply for the
listing of the Series C preferred stock on any securities exchange.
As of August 15, 2000, there were 235,000 shares of Holdings' Series C
preferred stock outstanding.
Warrants
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 we attain
our millionth customer, and the number of shares underlying the warrant will be
determined by the percentage of XM Radios that have a Sony brand name as of the
vesting date. If Sony achieves its maximum performance target, it will receive
2% of the total number of shares of 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. The Sony
warrant also grants certain registration rights to Sony for the shares of
Holdings' Class A common stock issuable upon exercise of the warrant.
Certain Provisions of Holdings' Certificate of Incorporation and Bylaws
Certificate of Incorporation
Holdings' certificate of incorporation permits its board of directors
without stockholder approval to issue shares of preferred stock up to the number
of shares authorized for issuance in Holdings' certificate of incorporation,
except as limited by Nasdaq rules. Holdings could use these additional shares
for a variety of corporate purposes. These purposes include future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. Holdings' ability to issue these shares of preferred stock could
make it more difficult or discourage an attempt to obtain control of Holdings by
means of a proxy contest, tender offer, merger or otherwise.
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Federal communications law prohibits the holding of a broadcast license by
a corporation of which more than 20.0% of the capital stock is owned directly or
beneficially by aliens. Where a corporation controls another entity that holds
such an FCC license, such corporation may not have more than 25.0% of its
directors as aliens and may not have more than 25.0% of its capital stock owned
directly or beneficially by aliens, in each case, if the FCC finds that the
public interest would be served by such prohibitions. Failure to comply with
these requirements may result in the FCC issuing an order requiring divestiture
of alien ownership to bring a company into compliance with federal law. In
addition, fines or a denial of renewal, or revocation of the license are
possible. Although we are not currently subject to these foreign ownership
restrictions, in order to provide flexibility should our regulatory status
change our restated certificate of incorporation permits the redemption of
common stock from stockholders where necessary to protect our license.
Bylaws
As currently in effect, Holdings' bylaws require that the number of
directors be as provided in Holdings' shareholders' agreement. See
"Management--Provisions Governing the Board of Directors." Holdings' bylaws
provide that special meetings of the stockholders may be called by the board of
directors, by stockholders holding at least 15% of the outstanding common stock
or by the chief executive officer or the president. The bylaws may be amended or
repealed, or new bylaws may be adopted, by the stockholders or the board of
directors, subject to the Holdings shareholders' agreement. If there is a
conflict between the bylaws and the shareholders' agreement, the latter will
govern.
Stockholder Actions
Except as otherwise expressly provided in Holdings' certificate of
incorporation or bylaws, resolutions may be adopted at stockholders' meetings by
the affirmative vote of a simple majority of the aggregate number of votes
represented by all shares entitled to vote thereon and represented, in person or
by proxy, at the meeting. Holdings' bylaws establish special advance notice
procedures for stockholders who wish to make director nominations or bring other
business before stockholder meeting. In addition, stockholders may act by
written consent without a meeting if approved by the holders of a majority of
the aggregate number of votes represented by all shares entitled to vote
thereon, provided that notice of any such action must be subsequently furnished
to all stockholders if such approval was not unanimous.
Directors may be elected by a plurality of votes cast by stockholders at a
meeting or by written consent, assuming a quorum is present, in person or by
proxy, or acting by written consent. The quorum required for a meeting or action
by written consent of stockholders consists of stockholders holding a majority
of the issued and outstanding shares present in person or by proxy and entitled
to vote. Stockholders' meetings are convened upon advance notice of at least 10
days and not more than 60 days.
Limitation of Liability and Indemnification Matters
Holdings' and XM's certificates of incorporation provide that directors
shall not be personally liable to Holdings or XM or its stockholders for
monetary damages for any breach of fiduciary duty as a director, except for
liability
. for any breach of the director's duty of loyalty to Holdings or XM or
its stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
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. under a provision of Delaware General Corporation Law relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which such director derived an improper
personal benefit.
As a result of this provision, Holdings or XM and Holdings' stockholders may be
unable to obtain monetary damages from a director for breach of his or her duty
of care.
In addition, Holdings' and XM's certificates of incorporation and bylaws
provide for the indemnification of directors and officers and any director or
officer who is or was serving at Holdings' or XM's request as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the full extent authorized or permitted by the laws
of Delaware against expenses, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any threatened, pending or
completed action, suit or proceeding to which such person was or is made a party
or is threatened to be made a party by reason of serving in any of the foregoing
capacities. The indemnification includes, to the full extent authorized or
permitted by the Delaware General Corporation Law, payment by Holdings or XM of
the expenses in advance of any proceeding. In addition, Holdings has entered or
will enter into indemnification agreements with its directors and executive
officers that provide indemnification in addition to the indemnification
provided in its bylaws. Under the bylaws, Holdings and XM may, but are not
obligated to, maintain insurance, at their expense, for the benefit of Holdings
and XM and of any person to be indemnified by them.
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DESCRIPTION OF EXCHANGE NOTES
The senior secured notes were sold as part of a unit offering. Each unit
consisted of $1,000 principal amount of notes of XM and one warrant to purchase
8.024815 shares of Class A common stock of Holdings. Upon the commencement of
this exchange offer, the XM notes and the Holdings warrants were effectively
separated so that each may be transferred separately from the other.
You can find the definitions of certain terms used in this description
under the subheading "Certain Definitions."
The senior secured notes were, and the exchange notes will be, issued under
the indenture between XM and United States Trust Company of New York, as
trustee, in a private transaction that is not subject to the registration
requirements of the Securities Act. The terms of the notes include those stated
in the indenture and those made part of the indenture by reference to the Trust
Indenture Act of 1939, as amended. The security agreement referred to under the
caption "Security" defines the terms of the security interests that will
secure the notes. The pledge agreement referred to under the caption "Interest
Reserve" defines the terms of the interest reserve for the notes.
The following description is a summary of the material provisions of the
indenture, the registration rights agreement, the pledge agreement and the
security agreement. It does not restate those agreements in their entirety. We
urge you to read the indenture, the registration rights agreement, the pledge
agreement and the security agreement because they, and not this description,
define your rights as holders of the notes. Copies of the indenture, the
registration rights agreement, the pledge agreement and the security agreement
are available as set forth below under "--Additional Information." Certain
defined terms used in this description but not defined below under "--Certain
Definitions" have the meanings assigned to them in the indenture.
As of the date of the indenture, all of our subsidiaries will be
"restricted subsidiaries." However, under the circumstances described below
under the subheading "--Certain Covenants--Designation of Restricted and
Unrestricted Subsidiaries," XM will be permitted to designate certain of our
subsidiaries as "Unrestricted Subsidiaries." Our unrestricted subsidiaries
will not be subject to many of the restrictive covenants in the indenture.
Brief Description of the Notes
The Notes
The notes:
. are general obligations of XM;
. are secured by a first priority pledge of the capital stock of XM's
FCC license subsidiary, subject to permitted liens;
. are pari passu in right of payment to all existing and future senior
indebtedness of XM; and
. are senior in right of payment to all existing and future subordinated
indebtedness of XM.
Principal, Maturity and Interest
The indenture provides for the issuance by XM of notes, of which $325.0
million principal amount were issued. XM may issue additional notes from time to
time. Any offering of additional notes is subject to the covenant described
below under the caption "--Certain Covenants--Incurrence of Indebtedness." The
notes and any additional notes subsequently issued under the indenture would be
treated as a single class for all purposes under the indenture, including,
without limitation, waivers, amendments, redemptions and offers to purchase. XM
will issue notes in denominations of $1,000 and integral multiples of $1,000.
The notes will mature on March 15, 2010.
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Interest on the notes will accrue at the rate of 14% per annum and will be
payable semi-annually in arrears on March 15 and September 15, commencing on
September 15, 2000. The Company will make each interest payment to the holders
of record on the immediately preceding March 1 and September 1.
Interest on the notes will accrue from March 15, 2000 or, if interest has
already been paid, from the date it was most recently paid. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Methods of Receiving Payments on the Notes
If a holder owning $1.0 million or more in aggregate principal amount of
the notes has given wire transfer instructions to XM, XM will pay all principal,
interest and premium and liquidated damages, if any, on that holder's notes in
accordance with those instructions. All other payments on notes will be made at
the office or agency of the paying agent and registrar within the City and State
of New York unless XM elects to make interest payments by check mailed to the
holders at their addresses set forth in the register of holders.
Paying Agent and Registrar for the Notes
The trustee will initially act as paying agent and registrar. XM may change
the paying agent or registrar without prior notice to the holders, and XM or any
of its subsidiaries may act as paying agent or registrar.
Transfer and Exchange
A holder may transfer or exchange notes in accordance with the indenture.
The registrar and the trustee may require a holder, among other things, to
furnish appropriate endorsements and transfer documents and XM may require a
holder to pay any taxes and fees required by law or permitted by the indenture.
XM is not required to transfer or exchange any note selected for redemption.
Also, XM is not required to transfer or exchange any note for a period of 15
days before a selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
Interest Reserve
A portion of XM's obligations under the notes will be secured pending
disbursement pursuant to the pledge agreement by a pledge of an escrow account
maintained for such purpose. The initial amount deposited in the escrow account
was precisely determined in order to provide sufficient funds to enable XM to
make the first six interest payments with respect to the notes. The initial
amount deposited in the escrow account was approximately $123.0 million (the
"cash collateral"). Any cash collateral remaining after XM makes the first six
interest payments on the notes will be released to XM. The pledge agreement
provides for the grant by XM to the trustee of a security interest in the cash
collateral for the benefit of the holders of the notes. Such security interest
secures the payment and performance when due of the obligations of XM under the
indenture with respect to the notes and under such notes, as provided in the
pledge agreement. The liens created by the pledge agreement are first priority
security interests in the cash collateral. The ability of holders to realize
upon any such funds or securities may be subject to certain bankruptcy law
limitations in the event of a bankruptcy of XM.
The cash collateral will be disbursed from the escrow account only to pay
interest on the notes and, upon certain repurchases or redemptions of the notes,
to pay principal of and premium, if any, thereon. Pending such disbursements,
all funds contained in the escrow account will be invested in a portfolio of
U.S. government securities. Upon the acceleration of the maturity of the notes
or the failure to pay principal at maturity or upon certain redemptions and
repurchases of the notes, the pledge agreement provides for the foreclosure by
the trustee
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upon the net proceeds of the escrow account. Under the terms of the indenture,
the proceeds of the escrow account shall be applied, first, to amounts owing to
the trustee in respect of fees and expenses of the trustee and second, to the
obligations under the notes and the indenture.
Security
The notes are secured by a first priority security interest in all of the
capital stock of the FCC license subsidiary, subject to permitted liens.
XM is entitled to incur additional secured financing as set forth in
"Certain Covenants -- Incurrence of Indebtedness" and "--Liens". Any such
secured financing with respect to the collateral must be secured on an equal
basis with the holders of the notes.
XM and the collateral agent have entered into a security agreement defining
the terms of the security interests that secure the notes. These security
interests secure the payment and performance when due of all of the obligations
of XM under the indenture and the notes as provided in the security agreement.
So long as no event of default shall have occurred and be continuing, and
subject to certain terms and conditions, XM is entitled to exercise any voting
and other consensual rights pertaining to the collateral pledged by it.
Upon the occurrence and during the continuance of an event of default,
subject to the provisions of an intercreditor agreement between the trustee and
the representatives of any future secured financing:
(1) all rights of XM to exercise such voting or other consensual rights shall
cease, and all such rights shall become vested in the collateral agent,
which, to the extent permitted by law, shall have the sole right to
exercise such voting and other consensual rights; and
(2) the collateral agent may sell the collateral or any part thereof in
accordance with the terms of the security agreement.
Regulatory considerations may affect the collateral agent's ability to
exercise rights with respect to the collateral upon the occurrence of an event
of default. In particular, the trustee under the indenture is not entitled to
exercise any rights with respect to the collateral upon the occurrence of an
event of default if such action would constitute or result in any assignment of
XM's FCC license or any change of control (whether as a matter of law or fact)
of XM unless the prior approval of the FCC is first obtained. XM cannot assure
you that any such required FCC approval can be obtained on a timely basis, or at
all.
The collateral agent will determine the circumstances and manner in which
the collateral shall be disposed of, including, but not limited to, the
determination of whether to release all or any portion of the collateral from
the liens created by the security agreement and whether to foreclose on the
collateral following an event of default.
The security agreement shall be terminated and the security interests will
be released upon the full and final payment and performance of all obligations
of XM under the indenture and the notes.
Optional Redemption
At any time prior to March 15, 2003, XM may on any one or more occasions
redeem up to 35% of the aggregate principal amount of notes issued under the
indenture at a redemption price of 114% of the principal amount thereof, plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date, with the net cash proceeds of one or more equity offerings by XM or any
parent corporation of XM the net proceeds of which are contributed to the common
equity of XM (other than an offering of disqualified stock); provided that:
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(1) at least 65% of the aggregate principal amount of notes issued under the
indenture remains outstanding immediately after the occurrence of such
redemption (excluding notes held by XM and its subsidiaries); and
(2) the redemption must occur within 90 days of the date of the closing of such
equity offering.
Except pursuant to the preceding paragraph, the notes will not be
redeemable at XM's option prior to March 15, 2005.
On and after March 15, 2005, XM may redeem all or a part of the notes upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest and liquidated damages, if any, thereon, to the applicable
redemption date, if redeemed during the twelve-month period beginning on March
15 of the years indicated below:
Year Percentage
---- ----------
2005.............................. 107.000%
2006.............................. 104.667%
2007.............................. 102.333%
2008 and thereafter............... 100.000%
Mandatory Redemption
XM is not required to make mandatory redemption or sinking fund payments
with respect to the notes.
Repurchase at the Option of Holders
Change of Control
If a change of control occurs, each holder of notes will have the right to
require XM to repurchase all or any part (equal to $1,000 or an integral
multiple thereof) of that holder's notes pursuant to a change of control offer
on the terms set forth in the indenture. In the change of control offer, XM will
offer a change of control payment in cash equal to 101% of the aggregate
principal amount of notes repurchased plus accrued and unpaid interest and
liquidated damages, if any, thereon, to the date of purchase. Within 30 days
following any change of control, XM will mail a notice to each holder describing
the transaction or transactions that constitute the change of control and
offering to repurchase notes on the change of control payment date specified in
such notice, which date shall be no earlier than 30 days and no later than 60
days from the date such notice is mailed, pursuant to the procedures required by
the indenture and described in such notice. XM will comply with the requirements
of Rule 14e-1 under the Exchange Act and any other securities laws and
regulations thereunder to the extent such laws and regulations are applicable in
connection with the repurchase of the notes as a result of a change of control.
To the extent that the provisions of any securities laws or regulations conflict
with the change of control provisions of the indenture, XM will comply with the
applicable securities laws and regulations and will not be deemed to have
breached its obligations under the change of control provisions of the indenture
by virtue of such conflict.
On the change of control payment date, XM will, to the extent lawful:
(1) accept for payment all notes or portions thereof properly tendered pursuant
to the change of control offer;
(2) deposit with the paying agent an amount equal to the change of control
payment in respect of all notes or portions thereof so tendered; and
(3) deliver or cause to be delivered to the trustee the notes so accepted
together with an officers' certificate stating the aggregate principal
amount of notes or portions thereof being purchased by XM.
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The paying agent will promptly mail to each holder of notes so tendered the
change of control payment for such notes, and the trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each holder
a new note equal in principal amount to any unpurchased portion of the notes
surrendered, if any; provided that each such new note will be in a principal
amount of $1,000 or an integral multiple thereof.
XM will publicly announce the results of the change of control offer on or
as soon as practicable after the change of control payment date.
The provisions described above that require XM to make a change of control
offer following a change of control will be applicable regardless of whether any
other provisions of the indenture are applicable. Except as described above with
respect to a change of control, the indenture does not contain provisions that
permit the holders of the notes to require that XM repurchase or redeem the
notes in the event of a takeover, recapitalization or similar transaction.
XM will not be required to make a change of control offer upon a change of
control if a third party makes the change of control offer in the manner, at the
times and otherwise in compliance with the requirements set forth in the
indenture applicable to a change of control offer made by XM and purchases all
notes validly tendered and not withdrawn under such change of control offer.
The definition of change of control includes a phrase relating to the
direct or indirect sale, lease, transfer, conveyance or other disposition of
"all or substantially all" of the properties or assets of XM and its
subsidiaries taken as a whole. Although there is a limited body of case law
interpreting the phrase "substantially all," there is no precise established
definition of the phrase under applicable law. Accordingly, the ability of a
holder of notes to require XM to repurchase such notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of XM and its subsidiaries taken as a whole to another person or group may be
uncertain.
Asset Sales
XM will not, and will not permit any of its restricted subsidiaries to,
consummate an asset sale unless:
(1) XM (or the restricted subsidiary, as the case may be) receives
consideration at the time of such asset sale at least equal to the fair
market value of the assets or equity interests issued or sold or otherwise
disposed of;
(2) such fair market value is determined by XM's board of directors (whose good
faith determination shall be conclusive) and evidenced by a resolution of
the board of directors set forth in an officers' certificate delivered to
the trustee; and
(3) at least 75% of the consideration therefor received by XM or such
restricted subsidiary is in the form of cash or cash equivalents. For
purposes of this provision, each of the following shall be deemed to be
cash:
(a) any liabilities (as shown on XM's or such restricted subsidiary's most
recent balance sheet) of XM or any restricted subsidiary (other than
contingent liabilities and liabilities that are by their terms
subordinated to the notes) that are assumed by the transferee of any
such assets pursuant to a customary novation agreement that releases
XM or such restricted subsidiary from further liability; and
(b) any securities, notes or other obligations received by XM or any such
restricted subsidiary from such transferee that are converted by XM or
such restricted subsidiary into cash (to the extent of the cash
received in that conversion) within 30 days of the receipt thereof.
Within 360 days after the receipt of any net proceeds from an asset sale,
XM may:
(x) apply such net proceeds
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(1) to acquire all or substantially all of the assets of, or a majority of the
voting stock of, another permitted business, or voting stock of a
restricted subsidiary engaged in a permitted business (other than any such
voting stock owned or held by a restricted subsidiary);
(2) to make a capital expenditure; or
(3) to acquire other assets that are used or useful in a permitted business
that have an expected useful life of one year or longer;
(y) enter into a legally binding agreement to apply such net proceeds
as described in the preceding clause (x) within six months after
such agreement is entered into and apply such net proceeds in
accordance with the terms of such agreement or the provisions of
clause (x) above; provided that if such agreement terminates XM
shall have until the earlier of (i) 90 days after the date of
such termination and (ii) six months after the date of the Asset
Sale resulting in such net proceeds to effect such an
application; or
(z) to permanently repay (and reduce the commitments with respect to)
pari passu indebtedness.
Pending the final application of any such net proceeds, XM may temporarily
reduce revolving credit borrowings or otherwise invest such net proceeds in any
manner that is not prohibited by the indenture.
Any net proceeds from asset sales that are not applied or invested as
provided in the preceding paragraph will constitute "excess proceeds." When the
aggregate amount of excess proceeds exceeds $10.0 million, XM will make an asset
sale offer to all holders of notes and all holders of other indebtedness that is
pari passu with the notes containing provisions similar to those set forth in
the indenture with respect to offers to purchase or redeem with the proceeds of
sales of assets to purchase the maximum principal amount of notes and such other
pari passu indebtedness that may be purchased out of the excess proceeds. The
offer price in any asset sale offer will be equal to 100% of principal amount
plus accrued and unpaid interest and liquidated damages, if any, to the date of
purchase, and will be payable in cash. If any excess proceeds remain after
consummation of an asset sale offer, XM may use such excess proceeds for any
purpose not otherwise prohibited by the indenture. If the aggregate principal
amount of notes and such other pari passu indebtedness tendered into such asset
sale offer exceeds the amount of excess proceeds, the trustee shall select the
notes and such other pari passu indebtedness to be purchased on a pro rata basis
based on the principal amount of notes and such other pari passu indebtedness
tendered. Upon completion of each asset sale offer, the amount of excess
proceeds will be reset at zero.
XM will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with each repurchase of notes
pursuant to an asset sale offer. To the extent that the provisions of any
securities laws or regulations conflict with the asset sales provisions of the
indenture, XM will comply with the applicable securities laws and regulations
and will not be deemed to have breached its obligations under the asset sale
provisions of the indenture by virtue of such conflict.
The agreements governing XM's other indebtedness contain, or may in the
future contain, prohibitions of certain events, including events that would
constitute a change of control or an asset sale. In addition, the exercise by
the holders of notes of their right to require XM to repurchase the notes upon a
change of control or an asset sale could cause a default under these other
agreements, even if the change of control or asset sale itself does not.
Finally, XM's ability to pay cash to the holders of notes upon a repurchase may
be limited by XM's then existing financial resources. See "Risk Factors--XM may
not have the ability to fund a change of control offer if required by the
indenture."
Selection and Notice
If less than all of the notes are to be redeemed at any time, the trustee
will select notes for redemption as
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follows:
(1) if the notes are listed, in compliance with the requirements of the
principal national securities exchange on which the notes are listed; or
(2) if the notes are not so listed, on a pro rata basis, by lot or by such
method as the trustee shall deem fair and appropriate.
No notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days before
the redemption date to each holder of notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
If any note is to be redeemed in part only, the notice of redemption that
relates to that note shall state the portion of the principal amount thereof to
be redeemed. A new note in principal amount equal to the unredeemed portion of
the original note will be issued in the name of the holder thereof upon
cancellation of the original note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest ceases to
accrue on notes or portions of them called for redemption.
Certain Covenants
Restricted Payments
XM will not, and will not permit any of its restricted subsidiaries to,
directly or indirectly:
(1) declare or pay any dividend or make any other payment or distribution on
account of XM's equity interests (including, without limitation, any
payment in connection with any merger or consolidation involving XM) or to
the direct or indirect holders of XM's equity interests in their capacity
as such (other than dividends or distributions payable in equity interests
(other than disqualified stock) of XM and cash in lieu of fractional
interests not to exceed 1% of the equity interests distributed or paid);
(2) purchase, redeem or otherwise acquire or retire for value (including,
without limitation, in connection with any merger or consolidation
involving XM) any equity interests of XM (other than any such equity
interests owned by XM or any of its restricted subsidiaries) or any
Affiliate of XM (other than any of its restricted subsidiaries);
(3) make any payment on or with respect to, or purchase, redeem, defease or
otherwise acquire or retire for value any indebtedness that is subordinated
to the notes except a payment of interest or principal at the stated
maturity thereof; or
(4) make any restricted investment (all such payments and other actions set
forth in clauses (1) through (4) above being collectively referred to as
"restricted payments"),
unless, at the time of and after giving effect to such restricted payment:
(1) no default or event of default shall have occurred and be continuing or
would occur as a consequence thereof; and
(2) XM would, at the time of such restricted payment and after giving pro forma
effect thereto as if such restricted payment had been made at the beginning
of the applicable four-quarter period, have been permitted to incur at
least $1.00 of additional indebtedness pursuant to the total consolidated
indebtedness to adjusted operating cash flow ratio test set forth in the
first paragraph of the covenant described below under the caption "--
Incurrence of Indebtedness;" and
(3) such restricted payment, together with the aggregate amount of all other
restricted payments made by XM and
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its restricted subsidiaries after the date of the indenture (excluding
restricted payments permitted by clauses (2), (3) and (4) of the next
succeeding paragraph), is less than the sum, without duplication, of:
(a) the difference between (i) the cumulative available cash flow
determined at the time of such restricted payment and (ii) 150% of the
cumulative consolidated interest expense of XM determined for the
period commencing on the beginning of the first fiscal quarter
commencing after the date of the indenture and ending on the last day
of the latest fiscal quarter for which consolidated financial
statements of XM are available preceding the date of such restricted
payment, plus
(b) 100% of the aggregate net cash proceeds received by XM since the date
of the indenture as a contribution to its common equity capital or
from the issue or sale of equity interests of XM (other than
disqualified stock) or from the issue or sale of convertible or
exchangeable disqualified stock or convertible or exchangeable debt
securities of XM that have been converted into or exchanged for such
equity interests (other than equity interests (or disqualified stock
or debt securities) sold to a subsidiary of XM), plus
(c) to the extent that any unrestricted subsidiary is redesignated as a
restricted subsidiary after the date of the indenture, the lesser of
(i) the fair market value of XM's investment in such subsidiary as of
the date of such redesignation and (ii) such fair market value
immediately prior to the time such subsidiary was designated as an
unrestricted subsidiary; plus
(d) to the extent that any restricted investment that was made after the
date of the indenture is sold for cash or otherwise liquidated or
repaid for cash, the lesser of (i) the cash return of capital with
respect to such restricted investment (less the cost of disposition,
if any) and (ii) the initial amount of such restricted investment,
minus
(e) the aggregate principal amount of indebtedness then outstanding which
was incurred pursuant to clause (1)(b) of the definition of "permitted
debt" set forth below under the caption "-Incurrence of Indebtedness."
The preceding provisions will not prohibit, so long as no default has
occurred and is continuing or would be caused thereby:
(1) the payment of any dividend or other distribution within 60 days after the
date of declaration thereof, if at said date of declaration such payment
would have complied with the provisions of the indenture, and such payment
will be deemed to have been paid on the date of declaration for purposes of
the calculation in the foregoing paragraph;
(2) the redemption, repurchase, retirement, defeasance or other acquisition of
any subordinated indebtedness of XM or of any equity interests of XM in
exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a restricted subsidiary of XM) of, equity
interests of XM (other than disqualified stock) and cash payments in lieu
of fractional interests not to exceed 1% of the equity interests so
redeemed, repurchased, retired, defeased or otherwise acquired; provided
that the amount of any such net cash proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition
shall be excluded from clause (3) (b) of the preceding paragraph;
(3) the purchase, redemption, defeasance or other acquisition or retirement for
value of subordinated indebtedness of XM in exchange for, or out of the net
cash proceeds of a substantially concurrent incurrence (other than to a
restricted subsidiary of XM) of permitted refinancing indebtedness;
(4) the payment of any dividend by a restricted subsidiary of XM to the holders
of its common equity interests on a pro rata basis;
(5) the repurchase, redemption or other acquisition or retirement for value of
any equity interests of XM or any restricted subsidiary of XM held by any
member of XM's (or any of its restricted subsidiaries') management pursuant
to any management equity subscription agreement or stock option agreement
in effect as of the date of
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the indenture; provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired equity interests shall not
exceed $250,000 in any twelve-month period;
(6) the purchase of any subordinated indebtedness at a purchase price not
greater than 100% of the principal amount or accreted value thereof, as the
case may be, together with accrued interest, if any, following an asset
sale in accordance with provisions similar to those contained in the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales"; provided, however, that prior to making any such
purchase XM have made the excess proceeds offer as provided in such
covenant with respect to the notes and has purchased all notes validly
tendered for payment in connection with such excess proceeds offer;
(7) making payments to dissenting shareholders pursuant to applicable law in
connection with a consolidation or merger of XM made in compliance with the
provisions of the indenture;
(8) restricted investments in an amount equal to 100% of total incremental
equity since the date of the indenture determined as of the date any such
restricted investment is made, less the aggregate principal amount of
indebtedness then outstanding which was incurred pursuant to clause (1)(b)
of the definition of "permitted debt" set forth below under the caption "-
Incurrence of Indebtedness;"
(9) the purchase of (a) any subordinated indebtedness of XM at a purchase price
not greater than 101% of the principal amount or accreted value thereof, as
the case may be, together with accrued interest, if any, in the event of a
change of control in accordance with provisions similar to those of the
covenant described under the caption "Repurchase at the Option of Holders--
Change of Control" or (b) any Preferred Stock of XM at a purchase price not
greater than 101% of the liquidation preference thereof, together with
accrued dividends, if any, in the event of a change of control in
accordance with provisions similar to those of the covenant described under
the caption "Repurchase at the Option of Holders--Change of Control";
provided, however, that, in each case, prior to such purchase XM has made
the change of control offer as provided in the indenture with respect to
the notes and has purchased all notes validly tendered for payment in
connection with such change of control offer;
(10) the payment of dividends to Holdings the proceeds of which are used to
satisfy ordinary course administrative expenses of Holdings, but in no
event to exceed $1.0 million in any given fiscal year; and
(11) the payment of any dividend required pursuant to the tax sharing agreement
between XM and Holdings, as such is in effect on the date of the indenture.
The amount of all restricted payments (other than cash) shall be the fair
market value on the date of the restricted payment of the asset(s) or securities
proposed to be transferred or issued to or by XM or such restricted subsidiary,
as the case may be, pursuant to the restricted payment. The fair market value of
any assets or securities that are required to be valued by this covenant shall
be determined by the board of directors whose good faith resolution with respect
thereto shall be conclusive and shall be delivered to the trustee. The board of
directors' determination must be based upon an opinion or appraisal issued by an
accounting, appraisal or investment banking firm of national standing if the
fair market value exceeds $20.0 million. Not later than the date of making any
restricted payment, XM shall deliver to the trustee an officers' certificate
stating that such restricted payment is permitted and setting forth the basis
upon which the calculations required by this "restricted payments" covenant were
computed, together with a copy of any fairness opinion or appraisal required by
the indenture.
Incurrence of Indebtedness
XM will not, and will not permit any of its restricted subsidiaries to,
directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise, with respect to
(collectively, "incur") any indebtedness (including acquired debt), and XM will
not issue any disqualified stock; provided, however, that XM may incur
indebtedness or issue disqualified stock and a restricted subsidiary may incur
acquired debt, if the ratio of total consolidated indebtedness to adjusted
consolidated operating cash flow for XM's
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most recently ended four full fiscal quarters for which internal financial
statements are available immediately preceding the date on which such additional
indebtedness is incurred or such disqualified stock is issued would have been at
less than or equal to 6.0 to 1.0, determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
indebtedness had been incurred or the disqualified stock had been issued, as the
case may be, at the beginning of such four-quarter period.
The first paragraph of this covenant will not prohibit the incurrence of
any of the following items of indebtedness (collectively, "permitted debt"):
(1) the incurrence by XM of pari passu indebtedness in an aggregate principal
amount (including the aggregate principal amount of all permitted
refinancing indebtedness incurred to refund, refinance or replace any
indebtedness incurred pursuant to this clause (1)), which does not exceed:
(a) $500 million plus the amount equal to 125% of total incremental equity
as of the date of such incurrence;
(2) unsecured subordinated indebtedness or disqualified stock of XM incurred to
finance the construction, expansion, development or acquisition of music
libraries and other recorded music programming, furniture, fixtures and
equipment (including satellites, ground stations and related equipment) if
such subordinated indebtedness or disqualified stock, as applicable, has a
weighted average life to maturity longer than the weighted average life to
maturity of the notes and has a final stated maturity of principal later
than the stated maturity of principal of the notes;
(3) unsecured subordinated indebtedness or disqualified stock of XM incurred
after the commercial operations commencement date in an aggregate principal
amount (or liquidation preference, as applicable) (including the aggregate
principal amount (or liquidation preference, as applicable) of all
permitted refinancing indebtedness incurred to refund, refinance or replace
any indebtedness or disqualified stock, as applicable, incurred pursuant to
this clause (3)) at any time outstanding not to exceed the product of (a)
$100.0 and (b) the number of Subscribers at such time if such subordinated
indebtedness or disqualified stock, a applicable, has a weighted average
life to maturity longer than the weighted average life to maturity of the
notes and has a final stated maturity of principal later than the stated
maturity of principal of the notes;
(4) the incurrence by XM and its restricted subsidiaries of the existing
indebtedness;
(5) the incurrence by XM of indebtedness represented by the senior secured
notes issued on the date of the indenture and the exchange notes to be
issued pursuant to the registration rights agreement;
(6) the incurrence by XM or any of its restricted subsidiaries of indebtedness
represented by capital lease obligations, mortgage financings or purchase
money obligations, in each case, incurred for the purpose of financing all
or any part of the purchase price or cost of construction or improvement of
property, plant or equipment used in the business of XM or such subsidiary,
in an aggregate principal amount, including all permitted refinancing
indebtedness incurred to refund, refinance or replace any indebtedness
incurred pursuant to this clause (6), not to exceed $30.0 million at any
time outstanding;
(7) the incurrence by XM or any of its restricted subsidiaries of permitted
refinancing indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace indebtedness (other than intercompany
indebtedness) that was permitted by the indenture to be incurred under the
first paragraph of this covenant or clauses (1), (2), (3), (4), (5), (6),
(7), or (12) of this paragraph;
(8) the incurrence by XM or any of its restricted subsidiaries of intercompany
indebtedness between or among XM and any of its restricted subsidiaries;
provided, however, that:
(a) if XM is the obligor on such indebtedness, such indebtedness must be
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the notes; and
(b) (i) any subsequent issuance or transfer of equity interests that
results in any such indebtedness being held
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by a person other than XM or a restricted subsidiary thereof and
(ii) any sale or other transfer of any such indebtedness to a
person that is not either XM or a restricted subsidiary thereof;
shall be deemed, in each case, to constitute an incurrence of
such indebtedness by XM or such restricted subsidiary, as the
case may be, that was not permitted by this clause (8);
(9) the incurrence by XM of hedging obligations that are incurred for the
purpose of fixing or hedging (x) interest rate risk with respect to any
floating rate indebtedness that is permitted by the terms of this indenture
to be outstanding or (y) fluctuation in currency values;
(10) the accrual of interest, the accretion or amortization of original issue
discount, the payment of interest on any indebtedness in the form of
additional indebtedness with the same terms, and the payment of dividends
on disqualified stock in the form of additional shares of the same class of
disqualified stock will not be deemed to be an incurrence of indebtedness
or an issuance of disqualified stock for purposes of this covenant;
provided, in each such case, that the amount thereof is included in fixed
charges of XM as accrued;
(11) the incurrence by XM of additional indebtedness (including acquired debt)
or disqualified stock in an aggregate principal amount (or liquidation
preference or accreted value, as applicable) at any time outstanding,
including all permitted refinancing indebtedness incurred to refund,
refinance or replace any indebtedness or disqualified stock incurred
pursuant to this clause (11), not to exceed $30.0 million; and
(12) indebtedness the proceeds of which are utilized solely to finance working
capital in an aggregate principal amount not to exceed the lesser of (a)
$50.0 million and (b) 80% of qualified receivables.
XM will not incur any indebtedness (including permitted debt) that is
contractually subordinated in right of payment to any other indebtedness of XM
unless such indebtedness is also contractually subordinated in right of payment
to the notes on substantially identical terms; provided, however, that no
indebtedness of XM shall be deemed to be contractually subordinated in right of
payment to any other indebtedness of XM solely by virtue of being unsecured.
For purposes of determining compliance with this "incurrence of
indebtedness" covenant, in the event that an item of proposed indebtedness meets
the criteria of more than one of the categories of permitted debt described in
clauses (1) through (12) above, or is entitled to be incurred pursuant to the
first paragraph of this covenant, XM will be permitted to classify such item of
indebtedness on the date of its Incurrence in any manner that complies with this
covenant.
Liens
XM will not and will not permit any of its restricted subsidiaries to,
create, incur, assume or otherwise cause or suffer to exist or become effective
any lien of any kind (other than permitted liens) upon any of their property or
assets, now owned or hereafter acquired.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
XM will not, and will not permit any of its restricted subsidiaries to,
directly or indirectly, create or permit to exist or become effective any
consensual encumbrance or restriction on the ability of any restricted
subsidiary to:
(1) pay dividends or make any other distributions on its capital stock to XM or
any of its restricted subsidiaries, or with respect to any other interest
or participation in, or measured by, its profits, or pay any indebtedness
owed to XM or any of its restricted subsidiaries;
(2) make loans or advances to XM or any of its restricted subsidiaries;
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(3) transfer any of its properties or assets to XM or any of its restricted
subsidiaries; or
(4) guarantee any indebtedness of XM or any of its restricted subsidiaries.
However, the preceding restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(1) existing indebtedness as in effect on the date of the indenture and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, provided that such
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacement or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than
those contained in such existing indebtedness, as in effect on the date of
the indenture;
(2) the indenture and the notes;
(3) applicable law;
(4) any instrument governing indebtedness or capital stock of a person acquired
by XM or any of its restricted subsidiaries as in effect at the time of
such acquisition (except to the extent such indebtedness was incurred in
connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any person, or the properties or assets
of any person, other than the person, or the property or assets of the
person, so acquired, provided that, in the case of indebtedness, such
indebtedness was permitted by the terms of the indenture to be incurred;
(5) customary non-assignment provisions in leases or contracts or real property
mortgages or related documents entered into in the ordinary course of
business and consistent with past practices;
(6) purchase money obligations, capital lease obligations or mortgage
financings that impose restrictions on the property so acquired of the
nature described in clause (3) of the preceding paragraph;
(7) any agreement for the sale or other disposition of a restricted subsidiary
that restricts distributions by that Subsidiary pending its sale or other
disposition;
(8) permitted refinancing indebtedness, provided that the restrictions
contained in the agreements governing such permitted refinancing
indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the indebtedness being refinanced;
(9) liens securing indebtedness that limit the right of the debtor to dispose
of the assets subject to such Lien;
(10) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements, assets sale agreements, stock sale
agreements and other similar agreements entered into in the ordinary course
of business; and
(11) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
Merger, Consolidation or Sale of Assets
XM may not, directly or indirectly: (1) consolidate or merge with or into
another person (whether or not XM is the surviving corporation); or (2) sell,
assign, transfer, convey or otherwise dispose of all or substantially all of the
properties or assets of XM and its restricted subsidiaries taken as a whole, in
one or more related transactions, to another person; unless:
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(1) either: (a) XM is the surviving corporation; or (b) the person formed by or
surviving any such consolidation or merger (if other than XM) or to which
such sale, assignment, transfer, conveyance or other disposition shall have
been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia;
(2) the person formed by or surviving any such consolidation or merger (if other
than XM) or the person to which such sale, assignment, transfer, conveyance
or other disposition shall have been made assumes all the obligations of XM
under the notes, the indenture, the registration rights agreement, the
pledge agreement and the security agreement pursuant to agreements
reasonably satisfactory to the trustee;
(3) immediately after such transaction no default or event of default exists;
and
(4) XM or the person formed by or surviving any such consolidation or merger (if
other than XM), or to which such sale, assignment, transfer, conveyance or
other disposition shall have been made:
(a) will have consolidated net worth immediately after the transaction equal
to or greater than the consolidated net worth of XM immediately
preceding the transaction; and
(b) will, on the date of such transaction after giving pro forma effect
thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable four-quarter period, be
permitted to incur at least $1.00 of additional indebtedness pursuant to
the total consolidated indebtedness to adjusted consolidated operating
cash flow ratio test set forth in the first paragraph of the covenant
described above under the caption "--Incurrence of Indebtedness".
In addition, XM may not, directly or indirectly, lease all or substantially
all of its properties or assets, in one or more related transactions, to any
other person. This ''Merger, Consolidation or Sale of Assets'' covenant will not
apply to a sale, assignment, transfer, conveyance or other disposition of assets
between or among XM and any of its wholly owned restricted subsidiaries.
Transactions with Affiliates
XM will not, and will not permit any of its restricted subsidiaries to, make
any payment to, or sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any affiliate (each, an
"affiliate transaction"), unless the following are complied with:
(1) such affiliate transaction is on terms that are no less favorable to XM or
the relevant restricted subsidiary than those that would have been obtained
in a comparable transaction by XM or such restricted subsidiary with an
unrelated person; and
(2) XM delivers to the trustee:
(a) with respect to any affiliate transaction or series of related affiliate
transactions involving aggregate consideration in excess of $5.0
million, a resolution of the board of directors set forth in an
officers' certificate certifying that such affiliate transaction
complies with this covenant and that such affiliate transaction has been
approved by a majority of the members of the board of directors who are
disinterested with respect to such affiliate transaction; and
(b) with respect to any affiliate transaction or series of related affiliate
transactions involving aggregate consideration in excess of $20.0
million, an opinion as to the fairness to XM or such restricted
subsidiary of such affiliate transaction from a financial point of view
issued by an accounting, appraisal or investment banking firm of
national standing.
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The following items shall not be deemed to be affiliate transactions and,
therefore, will not be subject to the provisions of the prior paragraph:
(1) any transaction by XM or any restricted subsidiary with an affiliate
directly related to the purchase, sale or distribution of products in the
ordinary course of business consistent with industry practice which has been
approved by a majority of the members of the board of directors who are
disinterested with respect to such transaction;
(2) any employment agreement or arrangement or employee benefit plan entered
into by XM or any of its restricted subsidiaries in the ordinary course of
business of XM or such restricted subsidiary;
(3) transactions between or among XM and/or its restricted subsidiaries;
(4) payment of reasonable directors fees and provisions of customary
indemnification to directors, officers and employees of XM and its
restricted subsidiaries;
(5) sales of equity interests (other than disqualified stock) to affiliates of
XM;
(6) restricted payments that are permitted by the provisions of the indenture
described above under the caption "--Restricted Payments" and "Permitted
Investments" described under clauses (8) and (9) of the definition of such
term;
(7) transactions pursuant to the tax sharing agreement; and
(8) contractual arrangements existing on the date of the indenture, and any
renewals, extensions, implementations or modifications thereof that are not
materially adverse to the holders.
Sale and Leaseback Transactions
XM will not, and will not permit any of its restricted subsidiaries to,
enter into any sale and leaseback transaction; provided that XM may enter into a
sale and leaseback transaction if:
(1) the lease is for a period, including renewal rights, of not in excess of
five years;
(2) the transaction is solely between XM and any restricted subsidiary or solely
between restricted subsidiaries; or
(3) XM or such restricted subsidiary, within 12 months after the sale or
transfer of any assets or properties is completed, applies an amount not
less than the net proceeds received from such sale in accordance with of the
"asset sale" provisions of the indenture.
Insurance
(a) XM will obtain prior to the launch of each satellite and will maintain
launch insurance with respect to each satellite launch covering the
period from the launch to 180 days following the launch of each
satellite in an amount equal to or greater than the sum of (1) the cost
to replace such satellite with a satellite of comparable or superior
technological capability (as determined by the board of directors, whose
determination shall be conclusive and evidenced by a board resolution)
and having at least as much transmission capacity as the satellite to be
replaced, (2) the cost to launch a replacement satellite pursuant to the
contract whereby a replacement satellite will be launched and (3) the
cost of launch insurance for such replacement or, in the event that XM
has reason to believe that the cost of obtaining comparable insurance
for a replacement would be materially higher, XM's best estimate of the
cost of such comparable insurance. Notwithstanding the foregoing, XM
will not be obligated to maintain insurance pursuant to this
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paragraph (a) with respect to (1) the launch of its first satellite and
(2) any subsequent launch not preceded by a launch failure or failure of
any satellite within 180 days from the date of its launch; provided,
however, that XM's spare satellite shall be under construction in
accordance with the terms of the Hughes satellite contract or XM shall
have otherwise obtained a spare satellite.
(b) XM will maintain full in-orbit insurance with respect to each satellite
it owns and launches in an amount at least equal to (1) the cost to
replace such satellite with a satellite of comparable or superior
technological capability (as determined by the board of directors, whose
determination shall be conclusive and evidenced by a board resolution)
and having at least as much transmission capacity as the satellite to be
replaced, (2) the cost to launch a replacement satellite pursuant to the
contract pursuant to which a replacement satellite will be launched and
(3) the cost of launch insurance for such replacement or, in the event
that XM has reason to believe that the cost of obtaining comparable
insurance for a replacement would be materially higher, XM's best
estimate of the cost of such comparable insurance. The in-orbit
insurance required by this paragraph will provide that if 50% or more of
a satellite's capacity is lost, the full amount of insurance will become
due and payable, and that if a satellite is able to maintain more than
50% but less than 100% of its capacity, a portion of such insurance will
become due and payable.
(c) In the event that XM receives proceeds from insurance relating to any
satellite, XM is entitled to use all or a portion of such proceeds to
repay any vendor or third-party purchase money financing pertaining to
such satellite that is required to be repaid by reason of the loss
giving rise to such insurance proceeds. XM will use the remainder of
such proceeds to develop and construct a replacement satellite;
provided, however, that (1) such replacement satellite is of comparable
or superior technological capability as compared with the satellite
being replaced and has at least as much transmission capacity as the
satellite being replaced (as determined by the board of directors, whose
determination shall be conclusive and evidenced by a board resolution);
(2) XM will have sufficient funds (together with the proceeds of any
business interruption insurance) to service XM's projected debt service
requirements until the scheduled launch of XM's spare satellite and for
one year thereafter and to develop and construct such replacement
satellite; and (3) XM's spare satellite is scheduled to be launched
within 12 months of the receipt of such proceeds. Any such proceeds not
used as permitted by this paragraph shall constitute excess proceeds for
purposes of the asset sale provisions of the indenture.
Limitation on Issuances and Sales of Equity Interests in Restricted Subsidiaries
XM will not, and will not permit any of its restricted subsidiaries to,
transfer, convey, sell, lease or otherwise dispose of any equity interests in
any restricted subsidiary of XM that owns, operates or otherwise has the right
to use core XM Radio assets to any person, and XM will not permit any restricted
subsidiary of XM to issue any of its equity interests other than:
(1) to XM or a restricted subsidiary of XM;
(2) issuances of director's qualifying shares to the extent necessary to comply
with applicable law;
(3) to the extent required by applicable law, issuances or transfers to
nationals of the jurisdiction in which a restricted subsidiary is organized
in an amount not to exceed 1% of the total equity interests of such
restricted subsidiary;
(4) distributions of capital stock other than disqualified stock to all common
shareholders of a restricted subsidiary on a pro rata basis; or
(5) the sale of all the equity interests in such restricted subsidiary; provided
that the cash net proceeds from such transfer, conveyance, sale, lease or
other disposition are applied in accordance with the covenant described
above under the caption "--Repurchase at the Option of Holders--Asset
Sales."
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Payments for Consent
XM will not, and will not permit any of its subsidiaries to, directly or
indirectly, pay or cause to be paid any consideration to or for the benefit of
any holder of notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the indenture or the notes unless such
consideration is offered to be paid and is paid to all holders of the notes that
consent, waive or agree to amend in the time frame set forth in the solicitation
documents relating to such consent, waiver or agreement.
Reports
Whether or not required by the SEC, so long as any notes are outstanding, XM
will furnish to the holders of notes, within 15 days following the time periods
specified in the SEC's rules and regulations:
(1) all quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if XM were
required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report on the annual financial
statements by XM's certified independent accountants; and
(2) all current reports that would be required to be filed with the SEC on Form
8-K if XM were required to file such reports.
In addition, following the consummation of the exchange offer contemplated
by the registration rights agreement, whether or not required by the SEC, XM
will file a copy of all of the information and reports referred to in clauses
(1) and (2) above with the SEC for public availability within the time periods
specified in the SEC's rules and regulations (unless the SEC will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition, XM has agreed that, for so long
as any notes remain outstanding, it will furnish to the holders and to
securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
If any of XM's unrestricted subsidiaries constitute significant
subsidiaries, then the quarterly and annual financial information required by
the preceding paragraph shall include a reasonably detailed presentation, either
on the face of the financial statements or in the footnotes thereto, and in
Management's Discussion and Analysis of Financial Condition and Results of
Operations, of the financial condition and results of operations of XM and its
restricted subsidiaries separate from the financial condition and results of
operations of the unrestricted subsidiaries of XM.
Events of Default and Remedies
Each of the following is an event of default:
(1) default for 30 days in the payment when due of interest on, or liquidated
damages with respect to, the notes
(2) default in payment when due of the principal of, or premium, if any, on the
notes,
(3) default in the performance, or breach, of the provisions of the covenant
described in "Merger, Consolidation or Sale of Assets," the failure to
make or consummate a change of control offer in accordance with the
provisions of the covenant described in "Repurchase at the Option of
Holders--change of control" or the failure to make or consummate an asset
sale offer in accordance with the provisions of the "Covenant described
under "--Repurchase at the Option of Holders--Asset Sales";
(4) failure by XM or any of its restricted subsidiaries for 60 days after notice
from the trustee or holders of at least
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25% of the outstanding notes to comply with any of the other agreements in
the indenture, the pledge agreement or the security agreement;
(5) default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any indebtedness for
money borrowed by XM or any of its restricted subsidiaries (or the payment
of which is guaranteed by XM or any of its restricted subsidiaries) whether
such indebtedness or guarantee now exists, or is created after the date of
the indenture, if that default:
(a) is caused by a failure to pay principal of, or interest or premium, if
any, on such indebtedness prior to the expiration of the grace period
provided in such indebtedness on the date of such default (a "payment
default"); or
(b) results in the acceleration of such indebtedness prior to its express
maturity,
and, in each case, the principal amount of any such indebtedness, together
with the principal amount of any other such indebtedness under which there
has been a payment default or the maturity of which has been so accelerated,
aggregates $10.0 million or more;
(6) failure by XM or any of its restricted subsidiaries to pay final
nonappealable judgments aggregating in excess of $10.0 million (net of any
amounts with respect to which a reputable and creditworthy insurance company
has acknowledged liability in writing), which judgments are not paid,
discharged or stayed for a period of 60 days; and
(7) breach of any material representation or warranty or agreement in the pledge
agreement or the security agreement, the repudiation by XM of any of its
obligations under the pledge agreement or the security agreement or the
unenforceability of the pledge agreement or the security agreement against
XM for any reason; and
(8) certain events of bankruptcy or insolvency with respect to XM or any of its
significant subsidiaries.
In the case of an event of default arising from certain events of bankruptcy
or insolvency, with respect to XM or any significant subsidiary, all outstanding
notes will become due and payable immediately without further action or notice.
If any other event of default occurs and is continuing, the trustee or the
holders of at least 25% in principal amount of the then outstanding notes may
declare all the notes to be due and payable immediately.
Holders of the notes may not enforce the indenture or the notes except as
provided in the indenture. Subject to certain limitations, holders of a majority
in principal amount of the then outstanding notes may direct the trustee in its
exercise of any trust or power. The trustee may withhold from holders of the
notes notice of any continuing default or event of default (except a default or
event of default relating to the payment of principal or interest or liquidated
damages) if it determines that withholding notice is in their interest.
The holders of a majority in aggregate principal amount of the notes then
outstanding by notice to the trustee may on behalf of the holders of all of the
notes waive any existing default or event of default and its consequences under
the indenture except a continuing default or event of default in the payment of
interest or liquidated damages on, or the principal of, the notes.
In the case of any event of default occurring by reason of any willful
action or inaction taken or not taken by or on behalf of XM with the intention
of avoiding payment of the premium that XM would have had to pay if XM then had
elected to redeem the notes pursuant to the optional redemption provisions of
the indenture, an equivalent premium shall also become and be immediately due
and payable to the extent permitted by law upon the acceleration of the notes.
If an event of default occurs prior to March 15, 2005, by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of XM with the
intention of avoiding the prohibition on redemption of the notes prior to March
15, 2005, then the premium specified in the indenture shall also become
immediately due and payable to the extent permitted by law upon the acceleration
of the notes.
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XM is required to deliver to the trustee annually a statement regarding
compliance with the indenture. Upon becoming aware of any default or event of
default, XM is required to deliver to the trustee a statement specifying such
default or event of default.
No Personal Liability of Directors, Officers, Employees and Stockholders
No director, officer, employee, agent, incorporator, member, manager,
partner or stockholder of XM as such, shall have any liability for any
obligations of XM under the notes, the indenture, the pledge agreement, the
security agreement or for any claim based on, in respect of, or by reason of,
such obligations or their creation. Each holder of notes by accepting a note
waives and releases all such liability. The waiver and release are part of the
consideration for issuance of the notes. The waiver may not be effective to
waive liabilities under the federal securities laws.
Legal Defeasance and Covenant Defeasance
XM may, at its option and at any time, elect to have all of its obligations
discharged with respect to the outstanding notes ("legal defeasance") except
for:
(1) the rights of holders of outstanding notes to receive payments in respect of
the principal of, or interest or premium and liquidated damages, if any, on
such notes when such payments are due from the trust referred to below;
(2) XM's obligations with respect to the notes concerning issuing temporary
notes, registration of notes, mutilated, destroyed, lost or stolen notes and
the maintenance of an office or agency for payment and money for security
payments held in trust;
(3) the rights, powers, trusts, duties and immunities of the trustee, and XM's
obligations in connection therewith; and
(4) the legal defeasance provisions of the indenture.
In addition, XM may, at its option and at any time, elect to have its
obligations released with respect to certain covenants that are described in the
indenture ("covenant defeasance") and thereafter any omission to comply with
those covenants shall not constitute a default or event of default with respect
to the notes. In the event covenant defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "events of default" will no longer constitute an event
of default with respect to the notes.
In order to exercise either legal defeasance or covenant defeasance:
(1) XM must irrevocably deposit with the trustee, in trust, for the benefit of
the holders of the notes, cash in U.S. dollars, non-callable government
securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, or interest and premium and liquidated
damages, if any, on the outstanding notes on the stated maturity or on the
applicable redemption date, as the case may be, and XM must specify whether
the notes are being defeased to maturity or to a particular redemption date;
(2) in the case of legal defeasance, XM shall have delivered to the trustee an
opinion of counsel reasonably acceptable to the trustee confirming that (a)
XM has received from, or there has been published by, the Internal Revenue
Service a ruling or (b) since the date of the indenture, there has been a
change in the applicable federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that,
the holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a
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result of such legal defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have
been the case if such legal defeasance had not occurred;
(3) in the case of covenant defeasance, XM shall have delivered to the trustee
an opinion of counsel reasonably acceptable to the trustee confirming that
the holders of the outstanding notes will not recognize income, gain or loss
for federal income tax purposes as a result of such covenant defeasance and
will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred;
(4) no default or event of default shall have occurred and be continuing either:
(a) on the date of such deposit (other than a default or event of default
resulting from the borrowing of funds to be applied to such deposit); or (b)
or insofar as events of default from bankruptcy or insolvency events are
concerned, at any time in the period ending on the 91st day after the date
of deposit;
(5) such legal defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under any material agreement or
instrument (other than the indenture) to which XM or any of its Subsidiaries
is a party or by which XM or any of its Subsidiaries is bound;
(6) XM must have delivered to the trustee an opinion of counsel to the effect
that, assuming no intervening bankruptcy of XM between the date of deposit
and the 91st day following the deposit and assuming that no holder is an
"insider" of XM under applicable bankruptcy law, after the 91st day
following the deposit, the trust funds will not be subject to the effect of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally;
(7) XM must deliver to the trustee an officers' certificate stating that the
deposit was not made by XM with the intent of preferring the holders of
notes over the other creditors of XM with the intent of defeating,
hindering, delaying or defrauding creditors of XM or others; and
(8) XM must deliver to the trustee an officers' certificate and an opinion of
counsel, each stating that all conditions precedent relating to the legal
defeasance or the covenant defeasance have been complied with.
Amendment, Supplement and Waiver
Except as provided in the next two succeeding paragraphs, the indenture, the
notes, the pledge agreement or the security agreement may be amended or
supplemented with the consent of the holders of at least a majority in principal
amount of the notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, notes), and any existing default or compliance with any provision of the
indenture or the notes may be waived with the consent of the holders of a
majority in principal amount of the then outstanding notes (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any notes held by a non-consenting holder):
(1) reduce the principal amount of notes whose holders must consent to an
amendment, supplement or waiver;
(2) reduce the principal of or change the fixed maturity of any note or alter
the provisions with respect to the redemption of the notes (other than
provisions relating to the covenants described above under the caption "--
Repurchase at the Option of Holders");
(3) reduce the rate of or change the time for payment of interest on any note;
(4) waive a default or event of default in the payment of principal of, or
interest or premium, or liquidated
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damages, if any, on the notes (except a rescission of acceleration of the
notes by the holders of at least a majority in aggregate principal amount of
the notes and a waiver of the payment default that resulted from such
acceleration);
(5) make any note payable in money other than that stated in the notes;
(6) make any change in the provisions of the indenture relating to waivers of
past defaults or the rights of holders of notes to receive payments of
principal of, or interest or premium or liquidated damages, if any, on the
notes;
(7) waive a redemption payment with respect to any note (other than a payment
required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders");
(8) release any portion of the collateral or the cash collateral from the lien
of the security agreement or the pledge agreement, except in accordance with
the terms thereof; or
(9) make any change in the preceding amendment and waiver provisions.
Notwithstanding the preceding, without the consent of any holder of notes,
XM and the trustee may amend or supplement the indenture or the notes:
(1) to cure any ambiguity, defect or inconsistency;
(2) to provide for uncertificated notes in addition to or in place of
certificated notes;
(3) to provide for the assumption of XM's obligations to holders of notes in the
case of a merger or consolidation or sale of all or substantially all of
XM's assets;
(4) to make any change that would provide any additional rights or benefits to
the holders of notes or that does not adversely affect the legal rights
under the indenture of any such holder; or
(5) to comply with requirements of the SEC in order to effect or maintain the
qualification of the indenture under the Trust Indenture Act.
Satisfaction and Discharge
The indenture will be discharged and will cease to be of further effect as
to all notes issued thereunder, when:
(1) either:
(a) all notes that have been authenticated (except lost, stolen or destroyed
notes that have been replaced or paid and notes for whose payment money
has theretofore been deposited in trust and thereafter repaid to XM)
have been delivered to the trustee for cancellation; or
(b) all notes that have not been delivered to the trustee for cancellation
have become due and payable by reason of the making of a notice of
redemption or otherwise or will become due and payable within one year
and XM has irrevocably deposited or caused to be deposited with the
trustee as trust funds in trust solely for the benefit of the holders,
cash in U.S. dollars, non-callable government securities, or a
combination thereof, in such amounts as will be sufficient without
consideration of any reinvestment of interest, to pay and discharge the
entire indebtedness on the notes not delivered to the trustee for
cancellation for principal, premium and liquidated damages, if any, and
accrued interest to the date of maturity or redemption;
(2) no default or event of default shall have occurred and be continuing on the
date of such deposit or shall occur as
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a result of such deposit (other than a default or event of default resulting
from the borrowing of funds to be applied to such deposit) and such deposit
will not result in a breach or violation of, or constitute a default under,
any other instrument to which XM is a party or by which XM is bound;
(3) XM has paid or caused to be paid all sums payable by it under the indenture;
and
(4) XM has delivered irrevocable instructions to the trustee under the indenture
to apply the deposited money toward the payment of the notes at maturity or
the redemption date, as the case may be.
In addition, XM must deliver an officers' certificate and an opinion of
counsel to the trustee stating that all conditions precedent to satisfaction and
discharge have been satisfied.
Concerning the Trustee
If the trustee becomes a creditor of XM, the indenture limits its right to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The trustee will
be permitted to engage in other transactions; however, if it acquires any
conflicting interest it must eliminate such conflict within 90 days, apply to
the SEC for permission to continue or resign.
The holders of a majority in principal amount of the then outstanding notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the trustee, subject to
certain exceptions. The indenture provides that in case an event of default
shall occur and be continuing, the trustee will be required, in the exercise of
its power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
holder of notes, unless such holder shall have offered to the trustee security
and indemnity satisfactory to it against any loss, liability or expense.
Additional Information
Anyone who receives this prospectus may obtain a copy of the indenture, the
registration rights agreement, the pledge agreement and the security agreement,
without charge by writing to XM Satellite Radio Inc., 1500 Eckington Place,
N.E., Washington, D.C. 20002, Attention: General Counsel.
Registration Rights; Liquidated Damages
The following description is a summary of the material provisions of the
registration rights agreement. It does not restate that agreement in its
entirety. We urge you to read the registration rights agreement in its entirety
because it, and not this description, defines your registration rights as
holders of these notes. See "--Additional Information."
XM and the initial purchasers entered into the registration rights
agreement, pursuant to which, XM agreed to file with the SEC the exchange offer
registration statement on the appropriate form under the Securities Act with
respect to the exchange notes. Upon the effectiveness of the exchange offer
registration statement, XM will offer to the holders of transfer restricted
securities pursuant to the exchange offer who are able to make certain
representations the opportunity to exchange their transfer restricted securities
for exchange notes.
If:
(1) XM is not
(a) required to file the exchange offer registration statement; or
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(b) permitted to consummate the exchange offer because the exchange offer is
not permitted by applicable law or SEC policy; or
(2) any holder of transfer restricted securities notifies XM prior to the 20th
day following consummation of the exchange offer that:
(a) it is prohibited by law or SEC policy from participating in the exchange
offer; or
(b) that it may not resell the exchange notes acquired by it in the exchange
offer to the public without delivering a prospectus and the prospectus
contained in the exchange offer registration statement is not
appropriate or available for such resales; or
(c) that it is a broker-dealer and owns notes acquired directly from XM or
an affiliate of XM,
XM will file with the SEC a shelf registration statement to cover resales of the
notes by the holders thereof who satisfy certain conditions relating to the
provision of information in connection with the shelf registration statement.
The Company will use its reasonable best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
SEC.
For purposes of the preceding, "transfer restricted securities" means each
note until:
(1) the date on which such note has been exchanged by a person other than a
broker-dealer for an exchange note in the exchange offer;
(2) following the exchange by a broker-dealer in the exchange offer of a senior
secured note for an exchange note, the date on which such exchange note is
sold to a purchaser who receives from such broker-dealer on or prior to the
date of such sale a copy of the prospectus contained in the exchange offer
registration statement;
(3) the date on which such note has been effectively registered under the
Securities Act and disposed of in accordance with the shelf registration
statement; or
(4) the date on which such note is distributed to the public pursuant to Rule
144 under the Securities Act.
The registration rights agreement provides:
(1) XM will file an exchange offer registration statement with the SEC on or
prior to 90 days after the closing of the offering of the March 2000 senior
secured notes;
(2) XM will use its best efforts to have the exchange offer registration
statement declared effective by the SEC on or prior to 180 days after the
closing of the March 2000 senior secured notes offering;
(3) unless the exchange offer would not be permitted by applicable law or SEC
policy, XM will
(a) commence the exchange offer; and
(b) use its best efforts to issue on or prior to 30 business days, or
longer, if required by the federal securities laws, after the date on
which the exchange offer registration statement was declared effective
by the SEC, exchange notes in exchange for all notes tendered prior
thereto in the exchange offer; and
(4) if obligated to file the shelf registration statement, XM will use its best
efforts to file the shelf registration statement with the SEC on or prior to
30 days after such filing obligation arises and to cause the shelf
registration to be declared effective by the SEC on or prior to 120 days
after such obligation arises.
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If:
(1) XM fails to file any of the registration statements required by the
registration rights agreement on or before the date specified for such
filing; or
(2) any of such registration statements is not declared effective by the SEC on
or prior to the date specified for such effectiveness (the "effectiveness
target date"); or
(3) XM fails to consummate the exchange offer within 30 business days of the
effectiveness target date with respect to the exchange offer registration
statement; or
(4) the shelf registration statement or the exchange offer registration
statement is declared effective but thereafter ceases to be effective or
usable in connection with resales of transfer restricted securities during
the periods specified in the registration rights agreement (each such event
referred to in clauses (1) through (4) above, a "registration default"),
then XM will pay liquidated damages to each holder of notes, with respect to the
first 90-day period immediately following the occurrence of the first
registration default in an amount equal to $.05 per week per $1,000 principal
amount of notes held by such holder.
The amount of the liquidated damages will increase by an additional $.05 per
week per $1,000 principal amount of notes with respect to each subsequent 90-day
period until all registration defaults have been cured, up to a maximum amount
of liquidated damages for all registration defaults of $.30 per week per $1,000
principal amount of notes.
All accrued liquidated damages will be paid by XM on each damages payment
date to the global note holder by wire transfer of immediately available funds
or by federal funds check and to holders of certificated notes by wire transfer
to the accounts specified by them or by mailing checks to their registered
addresses if no such accounts have been specified.
Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
Holders of notes will be required to make certain representations to XM (as
described in the registration rights agreement) in order to participate in the
exchange offer and will be required to deliver certain information to be used in
connection with the shelf registration statement and to provide comments on the
shelf registration statement within the time periods set forth in the
registration rights agreement in order to have their notes included in the shelf
registration statement and benefit from the provisions regarding liquidated
damages set forth above. By acquiring transfer restricted securities, a holder
will be deemed to have agreed to indemnify XM against certain losses arising out
of information furnished by such holder in writing for inclusion in any shelf
registration statement. Holders of notes will also be required to suspend their
use of the prospectus included in the shelf registration statement under certain
circumstances upon receipt of written notice to that effect from XM.
Certain Definitions
Set forth below are certain defined terms used in the indenture. Reference
is made to the indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified person (x) indebtedness
of any other person existing at the time such other person is merged with or
into or became a subsidiary of such specified person or (y) indebtedness secured
by a lien encumbering any asset acquired by such specified person, provided
that, in each case, such indebtedness or lien, as applicable, is not incurred in
connection with, or in contemplation of, such other person merging with or into,
or becoming a subsidiary of, such specified person.
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"Adjusted Consolidated Operating Cash Flow" means consolidated operating
cash flow for the latest four fiscal quarters for which consolidated financial
statements of XM are available, taken as a whole. For purposes of calculating
consolidated operating cash flow for any four fiscal quarter period for purposes
of this definition, (1) all restricted subsidiaries of XM on the date of the
transaction giving rise to the need to calculate adjusted consolidated operating
cash flow (the "transaction date") shall be deemed to have been restricted
subsidiaries at all times during such four fiscal quarter period and (2) any
unrestricted subsidiary on the transaction date shall be deemed to have been an
unrestricted subsidiary at all times during such four fiscal quarter period.
In addition, for purposes of calculating adjusted consolidated operating
cash flow:
(1) acquisitions that have been made by the specified person or any of its
restricted subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter
reference period or subsequent to such reference period and on or prior to
the calculation date shall be given pro forma effect as if they had occurred
on the first day of the four-quarter reference period and adjusted
consolidated operating cash flow for such reference period shall be
calculated on a pro forma basis but without giving effect to clause (3) of
the proviso set forth in the definition of consolidated net income; and
(2) the consolidated operating cash flow attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the calculation date, shall be excluded.
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified person. For purposes of this definition,
"control," as used with respect to any person, shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management or policies of such person, whether through the ownership of voting
securities, by agreement or otherwise; provided that beneficial ownership of 10%
or more of the voting stock of a person shall be deemed to be control. For
purposes of this definition, the terms "controlling," "controlled by" and
"under common control with" shall have correlative meanings.
"Asset Sale" means:
(1) the sale, lease, conveyance or other disposition of any assets; provided
that the sale, conveyance or other disposition of all or substantially all
of the assets of XM and its restricted subsidiaries taken as a whole will be
governed by the provisions of the indenture described above under the
caption "--Repurchase at the Option of Holders--Change of Control" and/or
the provisions described above under the caption "--Certain Covenants--
Merger, Consolidation or Sale of Assets" and not by the provisions of the
asset sale covenant; and
(2) the issuance of equity interests in any of the XM's restricted subsidiaries
or the sale of equity interests in any of its subsidiaries.
Notwithstanding the preceding, the following items shall not be deemed to be
asset sales:
(1) any single transaction or series of related transactions that involves
assets having a fair market value or that involve net proceeds of less than
$1.0 million;
(2) a transfer of assets between or among XM and its wholly owned restricted
subsidiaries,
(3) an issuance of equity interests by a wholly owned restricted subsidiary to
XM or to another wholly owned restricted subsidiary;
(4) the sale or lease of equipment, inventory, accounts receivable or other
assets in the ordinary course of business;
(5) the sale or other disposition of cash or cash equivalents;
(6) a restricted payment or permitted investment that is permitted by the
covenant described above under the
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caption "--Certain Covenants--Restricted Payments;" and
(7) any issuance or sale of equity interests of an unrestricted subsidiary.
"Attributable Debt" in respect of a sale and leaseback transaction means, at
the time of determination, the present value of the obligation of the lessee for
net rental payments during the remaining term of the lease included in such sale
and leaseback transaction including any period for which such lease has been
extended or may, at the option of the lessor, be extended. Such present value
shall be calculated using a discount rate equal to the rate of interest implicit
in such transaction, determined in accordance with GAAP.
"Beneficial Owner" has the meaning assigned to such term in Rule 13d-3 and
Rule 13d-5 under the Exchange Act, except that in calculating the beneficial
ownership of any particular "person" (as that term is used in Section 13(d)(3)
of the Exchange Act), such "person" shall be deemed to have beneficial ownership
of all securities that such "person" has the right to acquire by conversion or
exercise of other securities, whether such right is currently exercisable or is
exercisable only upon the occurrence of a subsequent condition. The terms
"beneficially owns" and "beneficially owned" shall have a corresponding meaning.
"Board of Directors" means:
(1) with respect to a corporation, the board of directors of the corporation;
(2) with respect to a partnership, the board of directors of the general partner
of the partnership; and
(3) with respect to any other person, the board or committee of such person
serving a similar function.
"Bond Property" means (1) the collateral or (2) any license owned by a
wholly owned restricted subsidiary of XM that is required in order to operate an
XM Radio Business.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at that time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means:
(1) in the case of a corporation, corporate stock;
(2) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock;
(3) in the case of a partnership or limited liability company, partnership or
membership interests (whether general or limited); and
(4) any other interest or participation that confers on a person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing person.
"Cash Equivalent" means:
(1) United States dollars;
(2) securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support
thereof) having maturities of not more than six months from the date of
acquisition;
(3) certificates of deposit and eurodollar time deposits with maturities of six
months or less from the date of
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acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case, with any domestic commercial bank
having capital and surplus in excess of $500.0 million;
(4) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (2) and (3) above
entered into with any financial institution meeting the qualifications
specified in clause (3) above;
(5) commercial paper having one of the two highest ratings obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Rating Services and in
each case maturing within six months after the date of acquisition; and
(6) money market funds at least 95% of the assets of which constitute cash
equivalents of the kinds described in clauses (1) through (5) of this
definition.
"Change of Control" means the occurrence of any of the following:
(1) the direct or indirect sale, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the properties or
assets of XM and its restricted subsidiaries taken as a whole to any
"person" (as that term is used in Section 13(d)(3) of the Exchange Act)
other than a principal or a related party of a principal;
(2) the adoption of a plan relating to the liquidation or dissolution of XM;
(3) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that any "person" (as
defined above), other than the principals and their related parties, becomes
the beneficial owner, directly or indirectly, of more than 50% of the voting
stock of Holdings or XM, measured by voting power rather than number of
shares;
(4) the first day on which a majority of the members of the board of directors
of XM or Holdings are not continuing directors; or
(5) Holdings or XM consolidates with, or merges with or into, any person, or any
person consolidates with, or merges with or into, Holdings or XM, in any
such event pursuant to a transaction in which any of the outstanding voting
stock of Holdings or XM, as the case may be, or such other person is
converted into or exchanged for cash, securities or other property, other
than any such transaction where the voting stock of Holdings or XM, as the
case may be, outstanding immediately prior to such transaction is converted
into or exchanged for voting stock (other than disqualified stock) of the
surviving or transferee person constituting a majority of the outstanding
shares of such voting stock of such surviving or transferee person
(immediately after giving effect to such issuance); or
(6) the first day on which XM ceases to be a wholly owned subsidiary of
Holdings.
"Collateral" has the meaning assigned to it in the security agreement.
"Collateral Agent" means U.S. Bank National Association.
"Commercial Operations Commencement Date" means the first date on which XM
begins providing the XM radio service to third party subscribers that have paid
for such service.
"Consolidated Net Income" means, with respect to any specified person for
any period, the aggregate of the net income of such person and its restricted
subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:
(1) the net income (but not loss) of any person that is not a restricted
subsidiary or that is accounted for by the
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equity method of accounting shall be included only to the extent of the
amount of dividends or distributions paid in cash to the specified person or
a wholly owned restricted subsidiary thereof;
(2) the net income of any restricted subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by
that restricted subsidiary of that net income is not at the date of
determination permitted without any prior governmental approval (that has
not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to that restricted subsidiary or
its stockholders;
(3) the net income of any person acquired in a pooling of interests transaction
for any period prior to the date of such acquisition shall be excluded; and
(4) the cumulative effect of a change in accounting principles shall be
excluded.
"Consolidated Net Worth" means, with respect to any specified person as of
any date, the sum of:
(1) the consolidated equity of the common stockholders of such person and its
consolidated restricted subsidiaries as of such date; plus
(2) the respective amounts reported on such person's balance sheet as of such
date with respect to any series of preferred stock (other than disqualified
stock) that by its terms is not entitled to the payment of dividends unless
such dividends may be declared and paid only out of net earnings in respect
of the year of such declaration and payment, but only to the extent of any
cash received by such person upon issuance of such preferred stock.
"Consolidated Operating Cash Flow" means, with respect to any specified
person for any period, the consolidated net income of such person for such
period plus:
(1) an amount equal to any extraordinary loss plus any net loss realized by such
person or any of its restricted subsidiaries in connection with an asset
sale, to the extent such losses were deducted in computing such consolidated
net income; plus
(2) provision for taxes based on income or profits of such person and its
restricted subsidiaries for such period, to the extent that such provision
for taxes was deducted in computing such consolidated net income; plus
(3) consolidated interest expense of such person and its restricted subsidiaries
for such period, whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of debt issuance costs and
original issue discount, non-cash interest payments, the interest component
of any deferred payment obligations, the interest component of all payments
associated with capital lease obligations and attributable debt,
commissions, discounts and other fees and charges incurred in respect of
letter of credit or bankers' acceptance financings, and net of the effect of
all payments made or received pursuant to hedging obligations), to the
extent that any such expense was deducted in computing such consolidated net
income; plus
(4) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash expenses (excluding any such non-
cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such person and its restricted
subsidiaries for such period to the extent that such depreciation,
amortization and other non-cash expenses were deducted in computing such
consolidated net income; minus
(5) non-cash items increasing such consolidated net income for such period,
other than the accrual of revenue in the ordinary course of business, in
each case, on a consolidated basis and determined in accordance with GAAP.
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Notwithstanding the preceding, the provision for taxes based on the income
or profits of, and the depreciation and amortization and other non-cash expenses
of, a restricted subsidiary of XM shall be added to consolidated net income to
compute consolidated operating cash flow of XM only to the extent that a
corresponding amount would be permitted at the date of determination to be
dividended to XM by such restricted subsidiary without prior governmental
approval (that has not been obtained), and without direct or indirect
restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that restricted subsidiary or its stockholders.
"Continuing Directors" means, as of any date of determination, any member of
the board of directors of XM who:
(1) was a member of such board of directors on the date of the indenture; or
(2) was nominated for election or elected to such board of directors with the
approval of a majority of the continuing directors who were members of such
board at the time of such nomination or election.
"Cumulative Available Cash Flow" means, as at any date of determination, the
positive cumulative consolidated operating cash flow realized during the period
commencing on the beginning of the first fiscal quarter following the date of
the indenture and ending on the last day of the most recent fiscal quarter
immediately preceding the date of determination for which consolidated financial
information of XM is available or, if such cumulative consolidated operating
cash flow for such period is negative, the negative amount by which cumulative
consolidated operating cash flow is less than zero.
"Core XM Radio Assets" means XM Radio assets reasonably necessary to operate
the XM Radio business.
"Default" means any event that is, or with the passage of time or the giving
of notice or both would be, an event of default.
"Disqualified Stock" means any capital stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the notes mature. Notwithstanding the preceding sentence, any
capital stock that would constitute disqualified stock solely because the
holders thereof have the right to require XM to repurchase such capital stock
upon the occurrence of a change of control or an asset sale shall not constitute
disqualified stock if the terms of such capital stock provide that XM may not
repurchase or redeem any such capital stock pursuant to such provisions unless
such repurchase or redemption complies with the covenant described above under
the caption "--Certain Covenants--Restricted Payments."
"Domestic Subsidiary" means any restricted subsidiary that was formed under
the laws of the United States or any state thereof or the District of Columbia.
"Equity Interests" means capital stock and all warrants, options or other
rights to acquire capital stock (but excluding any debt security that is
convertible into, or exchangeable for, capital stock).
"Existing Indebtedness" means indebtedness of XM and its restricted
subsidiaries in existence on the date of the indenture, until such amounts are
repaid.
"FCC License Subsidiary" means XM Radio Inc., a wholly owned subsidiary of
XM that owns all of XM's FCC licenses to provide satellite digital radio service
in the United States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as
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have been approved by a significant segment of the accounting profession, which
are in effect from time to time.
"Guarantee" means a guarantee other than by endorsement of negotiable
instruments for collection in the ordinary course of business, direct or
indirect, in any manner including, without limitation, by way of a pledge of
assets or through letters of credit or reimbursement agreements in respect
thereof, of all or any part of any indebtedness.
"Hedging Obligations" means, with respect to any specified person, the
obligations of such person under:
(1) interest rate swap agreements, interest rate cap agreements and interest
rate collar agreements; and
(2) other agreements or arrangements designed to protect such person against
fluctuations in interest rates or currency values.
"Holdings" means XM Satellite Radio Holdings Inc.
"Hughes Repeater Contract" means the contract for the design, development
and purchase of terrestrial repeater equipment by and between XM and Hughes
Electronics Corporation, dated February 14, 2000 as amended from time to time
provided that such amendments, taken as a whole, shall not be materially adverse
to XM.
"Hughes Repeater Escrow Agreement" means the agreement between XM and
Hughes Electronics Corporation, dated as of March 2, 2000, providing for the
escrow of funds payable under the Hughes repeater contract.
"Hughes Satellite Agreement" means the satellite purchase agreement
between XM and Hughes Space and Communications Inc., dated July 21, 1999, as in
effect on the date of the indenture and as it may be amended from time to time
in any respect other than with respect to the terms or scope of the security
interest granted by XM thereunder.
"Indebtedness" means, with respect to any specified person, any
indebtedness of such person, whether or not contingent, in respect of:
(1) borrowed money;
(2) evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof);
(3) banker's acceptances;
(4) representing capital lease obligations;
(5) the balance deferred and unpaid of the purchase price of any property,
except any such balance that constitutes an accrued expense or trade
payable; or
(6) representing any hedging obligations,
if and to the extent any of the preceding items (other than letters of credit
and hedging obligations) would appear as a liability upon a balance sheet of the
specified person prepared in accordance with GAAP. In addition, the term
"indebtedness" shall include (a) all indebtedness of others secured by a lien
on any asset of the specified person (whether or not such indebtedness is
assumed by the specified person), (b) to the extent not otherwise included, the
Guarantee by the specified person of any indebtedness of any other person and
(c) all attributable debt of such person.
The amount of any indebtedness outstanding as of any date shall be:
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(1) the accreted value thereof, in the case of any indebtedness issued with
original issue discount; and
(2) the principal amount thereof, together with any interest thereon that is
more than 30 days past due, in the case of any other indebtedness.
"Investments" means, with respect to any person, all direct or indirect
investments by such person in other persons (including affiliates) in the form
of loans (including guarantees or other obligations), advances or capital
contributions (excluding commission, travel and similar advances to officers,
directors and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of indebtedness, equity interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP. If XM or any
restricted subsidiary of XM sells or otherwise disposes of any equity interests
of any direct or indirect restricted subsidiary of XM such that, after giving
effect to any such sale or disposition, such person is no longer a restricted
subsidiary of XM, XM shall be deemed to have made an investment on the date of
any such sale or disposition equal to the fair market value of the equity
interests of such restricted subsidiary not sold or disposed of in an amount
determined as provided in the final paragraph of the covenant described above
under the caption "--Certain Covenants--Restricted Payments." The acquisition
by XM or any restricted subsidiary of XM of a person that holds an Investment in
a third Person shall be deemed to be an Investment by XM or such restricted
subsidiary in such third person in an amount equal to the fair market value of
the investment held by the acquired person in such third person determined as
provided in the final paragraph of the covenant described above under the
caption "--Certain Covenants--Restricted Payments."
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law,
including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction.
"Net Income" means, with respect to any specified person, the net income
(loss) of such person and its restricted subsidiaries, determined in accordance
with GAAP and before any reduction in respect of preferred stock dividends,
excluding, however:
(1) any gain or loss, together with any related provision for taxes on such
gain or loss, realized in connection with: (a) any asset sale; or (b) the
disposition of any securities by such person or any of its restricted
subsidiaries or the extinguishment of any indebtedness of such person or
any of its restricted subsidiaries; and
(2) any extraordinary gain or loss, together with any related provision for
taxes on such extraordinary gain or loss.
"Net Proceeds" means the aggregate cash proceeds received by XM or any of
its restricted subsidiaries in respect of any asset sale (including, without
limitation, any cash received upon the sale or other disposition of any non-cash
consideration received in any asset sale), net of the direct costs relating to
such asset sale, including, without limitation, legal, accounting and investment
banking fees, and sales commissions, and any relocation expenses incurred as a
result thereof, taxes paid or payable as a result thereof, in each case, after
taking into account any available tax credits or deductions and any tax sharing
arrangements, and amounts required to be applied to the repayment of
indebtedness secured by a lien on the asset or assets that were the subject of
such asset sale and any reserve for adjustment in respect of the sale price of
such asset or assets established in accordance with GAAP.
"Non-Recourse Debt" means indebtedness:
(1) as to which neither XM nor any of its restricted subsidiaries (a) provides
credit support of any kind (including any undertaking, agreement or
instrument that would constitute indebtedness) or (b) is directly or
indirectly liable as a guarantor or otherwise;
(2) no default with respect to which (including any rights that the holders
thereof may have to take enforcement
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action against an unrestricted subsidiary) would permit upon notice, lapse
of time or both any holder of any other indebtedness of XM or any of its
restricted subsidiaries to declare a default on such other indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity; and
(3) as to which the definitive documentation therefor specifies that the
lenders thereunder will not have any recourse to the stock or assets of XM
or any of its restricted subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any indebtedness.
"Pari Passu Indebtedness" means indebtedness of XM that is pari passu in
right of payment to the notes.
"Permitted Business" means any of the lines of business conducted by XM
and its restricted subsidiaries on the date hereof and any business similar,
ancillary or related thereto or that constitutes a reasonable extension or
expansion thereof, including in connection with XM's existing and future
technology, trademarks and patents.
"Permitted Investments" means:
(1) any investment in XM or in a wholly owned restricted subsidiary of XM;
(2) any investment in cash equivalents;
(3) any investment by XM or any restricted subsidiary of XM in a person, if as
a result of such investment:
(a) such person becomes a wholly owned restricted subsidiary of XM; or
(b) such person is merged, consolidated or amalgamated with or into, or
transfers or conveys substantially all of its assets to, or is
liquidated into, XM or a wholly owned restricted subsidiary of XM;
(4) any investment made as a result of the receipt of non-cash consideration
from an asset sale that was made pursuant to and in compliance with the
covenant described above under the caption "--Repurchase at the Option of
Holders--Asset Sales;"
(5) any acquisition of assets solely in exchange for the issuance of equity
interests (other than disqualified stock) of XM;
(6) hedging obligations;
(7) investments in existence on the date of the indenture and modifications
thereof;
(8) investments in securities of trade creditors or customers received in
compromise of obligations of such person incurred in the ordinary course of
business, including under any plan of reorganization or similar arrangement
upon the bankruptcy or insolvency of such person;
(9) loans and advances to officers, directors and employees of XM or any of its
restricted subsidiaries in the ordinary course of business not to exceed $2
million at any time outstanding;
(10) investments indirectly acquired by XM or any of its restricted subsidiaries
through a direct investment in another person made in compliance with the
indenture, provided that such investments existed prior to and were not
made in contemplation of such acquisition;
(11) investments in a joint venture with Sirius Satellite Radio, Inc., or an
affiliate thereof, the proceeds of which investments are used solely to
develop interoperable radio technology capable of receiving and processing
radio system signals broadcast by both XM and Sirius Satellite Radio Inc.,
for the licensing of other satellite
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radio technology from XM and Sirius Satellite Radio, Inc. in connection
therewith and for activities reasonably ancillary thereto in accordance
with the joint development agreement between XM and Sirius Satellite Radio,
Inc., as in effect on the date hereof or as it may be amended in a manner
not materially adverse to XM; and
(12) other investments in any person having an aggregate fair market value
(measured on the date each such investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (12) since the date of the
indenture/that are at the time outstanding not to exceed $10.0 million.
"Permitted Liens" means:
(1) liens on the bond property or any other assets of XM or its restricted
subsidiaries securing pari passu indebtedness incurred pursuant to clause
(1) of the covenant described under "Incurrence of Indebtedness" or
permitted refinancing indebtedness in respect thereof; provided, that the
notes shall be equally and ratably secured by such bond property or other
assets;
(2) liens in favor of XM;
(3) liens on property, or on shares of stock or indebtedness, of a person
existing at the time such person is merged with or into or consolidated
with XM or any restricted subsidiary of XM; provided that such Liens were
in existence prior to the contemplation of such merger or consolidation and
do not extend to any assets other than those of the person merged into or
consolidated with XM or the restricted subsidiary;
(4) liens on property (other than bond property) existing at the time of
acquisition thereof by XM or any restricted subsidiary of XM, provided that
such Liens were not incurred in contemplation of such acquisition;
(5) liens to secure the performance of bids, tenders, leases, statutory
obligations, surety or appeal bonds, performance bonds or other obligations
of a like nature incurred in the ordinary course of business;
(6) liens to secure indebtedness (including capital lease obligations)
permitted by clause (6) of the second paragraph of the covenant entitled
"--Certain Covenants--Incurrence of Indebtedness" covering only the
assets acquired with such indebtedness (other than bond property);
(7) liens existing on the date of the indenture including liens arising
thereunder in favor of the trustee and including liens under the Hughes
repeater escrow agreement;
(8) liens for taxes, assessments or governmental charges or claims that are not
yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, provided that any
reserve or other appropriate provision as shall be required in conformity
with GAAP shall have been made therefor;
(9) liens securing the notes;
(10) liens which do not attach to the bond property incidental to the conduct
of XM's or a restricted subsidiary's business or the ownership of its
property and assets not securing indebtedness, and which do not in the
aggregate materially detract from the value of the assets or property of XM
and its restricted subsidiaries taken as a whole, or materially impair the
use hereof in the operation of its business;
(11) liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security;
(12) judgment liens which do not attach to the bond property not giving rise to
an event of default;
(13) easements, rights-of-way, zoning restrictions and other similar charges or
encumbrances in respect of real
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property not interfering in any material respect with the ordinary conduct
of the business of XM or any of its restricted subsidiaries;
(14) any interest or title of a lessor under any capitalized lease obligation;
(15) leases or subleases granted to others that do not materially interfere
with the ordinary course of business of XM and its restricted subsidiaries;
(16) liens arising from filing Uniform Commercial Code financing statements
regarding leases;
(17) liens in favor of customs and revenue authorities arising as a mater of
law to secure payment of customer duties in connection with the importation
of goods;
(18) carriers', warehousemen's, mechanics', landlords', materialmen's,
repairmen's or other similar Liens arising in the ordinary course of
business that are not delinquent or remain payable without penalty;
(19) liens which do not attach to the Bond Property securing hedging
obligations which hedging obligations relate to indebtedness that is
otherwise permitted under the indenture;
(20) liens encumbering property or other assets under construction in the
ordinary course of business arising from progress or partial payments by a
customer of XM or its restricted subsidiaries relating to such property or
other assets;
(21) liens arising out of conditional sale, title retention, consignment or
similar arrangements for the sale of goods entered into by XM or any of its
restricted subsidiaries in the ordinary course of business;
(22) liens on XM's interests in satellites and its terrestrial repeater network
subject to purchase under the Hughes satellite agreement and the Hughes
repeater contract, respectively;
(23) liens incurred in the ordinary course of business of XM or any restricted
subsidiary with respect to obligations that do not exceed $10.0 million at
any one time outstanding; and
(24) liens on qualified receivables securing indebtedness permitted by clause
(12) of the second paragraph of the covenant entitled "--Certain
Covenants--Incurrence of Indebtedness."
"Permitted Refinancing Indebtedness" means any indebtedness of XM or any
of its restricted subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
indebtedness of XM or any of its restricted subsidiaries (other than
intercompany indebtedness); provided that:
(1) the principal amount (or accreted value, if applicable) of such permitted
refinancing indebtedness does not exceed the principal amount (or accreted
value, if applicable) of the indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus all accrued interest thereon and the
amount of all expenses, consent fees and premiums incurred in connection
therewith);
(2) (A) if such permitted refinancing indebtedness has a weighted average life
to maturity shorter than that of the notes or a final maturity date earlier
than the final maturity date of the notes, such permitted refinancing
indebtedness shall have a weighted average life to maturity no shorter than
the remaining weighted average life to maturity of the debt so extended,
refinanced, renewed, replaced, defeased or refunded and a final stated
maturity no earlier than the final maturity date of the debt so extended,
refinanced, renewed, replaced, defeased or refunded or (B) in all other
cases, such permitted refinancing indebtedness shall have a final maturity
date later than the final maturity date of, and shall have a weighted
average life to maturity equal to or greater than the weighted average life
to maturity of, the notes;
(3) if the indebtedness being extended, refinanced, renewed, replaced, defeased
or refunded is subordinated in right
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of payment to the notes, such permitted refinancing indebtedness is
subordinated in right of payment to, the notes on terms at least as
favorable to the holders of notes as those contained in the documentation
governing the indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; and
(4) such indebtedness is incurred either by XM or by the restricted subsidiary
who is the obligor on the indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company or government or other entity.
"Pledge Agreement" means the agreement, dated March 15, 2000, between XM
and the trustee, governing the pledge of the escrow account.
"Principals" means Motient Corporation, General Motors Corporation,
DIRECTV Enterprises, Inc. and Clear Channel Investments, Inc.
"Qualified Receivables" means the aggregate amount of accounts
receivables of XM determined in accordance with GAAP that are not more than 90
days past due.
"Related Party" means:
(1) any controlling stockholder, 80% (or more) owned Subsidiary, or immediate
family member (in the case of an individual) of any principal; or
(2) any trust, corporation, partnership or other entity, the beneficiaries,
stockholders, partners, owners or persons beneficially holding an 80% or
more controlling interest of which consist of any one or more principals
and/or such other persons referred to in the immediately preceding clause
(1).
"Restricted Investment" means an Investment other than a permitted
investment.
"Restricted Subsidiary" of a person means any subsidiary of the referent
person that is not an unrestricted subsidiary.
"Security Agreement" means the agreement, dated March 15, 2000, between
XM and the collateral agent, defining the terms of the security interests that
secure the notes.
"Significant Subsidiary" means any subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such regulation is in effect on
the date hereof.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"Subscriber" means a subscriber in good standing to the XM Radio Service
that has paid subscription fees for at least one month of such service and whose
subscription payments are not delinquent.
"Subsidiary" means, with respect to any specified person:
(1) any corporation, association or other business entity of which more than
50% of the total voting power of shares of capital stock entitled (without
regard to the occurrence of any contingency) to vote in the election of
directors, managers or trustees thereof is at the time owned or controlled,
directly or indirectly, by such person or one or more of the other
subsidiaries of that person (or a combination thereof); and
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(2) any partnership (a) the sole general partner or the managing general
partner of which is such person or a subsidiary of such person or (b) the
only general partners of which are such person or one or more subsidiaries
of such person (or any combination thereof).
"Tax Sharing Agreement" means the tax sharing agreement dated March 15,
2000 among holdings, XM and XM Radio Inc., as in effect on the date of the
indenture.
"Total Consolidated Indebtedness" means, at any date of determination, an
amount equal to the aggregate amount of all indebtedness of XM and the
restricted subsidiaries, determined on a consolidated basis in accordance with
GAAP, outstanding as of the date of determination.
"Total Incremental Equity" means, at any date of determination, the sum
of, without duplication: (1) the aggregate cash proceeds received by XM after
the issue date from the issuance or sale of capital stock of XM (other than
disqualified stock but including capital stock issued upon the conversion of
convertible indebtedness or from the exercise of options, warrants or rights to
purchase capital stock of XM other than disqualified stock) to any person other
than a restricted subsidiary; plus (2) an amount equal to the sum of (a) the net
reduction in Investments in any person (other than permitted investments)
resulting from the payment in cash of dividends, repayments of loans or advances
or other transfers of assets, in each case to XM or any restricted subsidiary
after the issue date from such person and (b) the portion (proportionate to XM's
equity interest in such restricted subsidiary) of the fair market value of the
net assets of any unrestricted subsidiary at the time such unrestricted
subsidiary is designated a restricted subsidiary; provided, however, that in the
case of (a) or (b) above, the foregoing sum shall not exceed the amount of
investments previously made (and treated as a restricted payment) by XM or any
restricted subsidiary in such person or unrestricted subsidiary and that
constitutes a restricted payment that has been deducted from Total Incremental
Equity pursuant to clause (3) below; minus (3) the aggregate amount of all
restricted payments declared or made on or after the Issue Date (including the
aggregate amount paid pursuant to clauses (1), (2), (3), (4), (5), (6) and (8)
of the second paragraph of the covenant described above under the caption "--
Certain Covenants--Restricted Payments."
"Unrestricted Subsidiary" means any subsidiary of XM (other than the FCC
license subsidiary) that is designated by the board of directors as an
unrestricted subsidiary pursuant to a board resolution, but only to the extent
that such subsidiary:
(1) has no indebtedness other than non-recourse debt;
(2) is not party to any agreement, contract, arrangement or understanding with
XM or any restricted subsidiary of XM unless the terms of any such
agreement, contract, arrangement or understanding are no less favorable to
XM or such restricted subsidiary than those that might be obtained at the
time from persons who are not affiliates of XM;
(3) is a person with respect to which neither XM nor any of its restricted
subsidiaries has any direct or indirect obligation (a) to subscribe for
additional equity interests or (b) to maintain or preserve such person's
financial condition or to cause such person to achieve any specified levels
of operating results; and
(4) has not guaranteed or otherwise directly or indirectly provided credit
support for any indebtedness of XM or any of its restricted subsidiaries.
Any designation of a subsidiary of XM as an unrestricted subsidiary shall
be evidenced to the trustee by filing with the trustee a certified copy of the
Board Resolution giving effect to such designation and an officers' certificate
certifying that such designation complied with the preceding conditions and was
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments." If, at any time, any unrestricted subsidiary
would fail to meet the preceding requirements as an unrestricted subsidiary, it
shall thereafter cease to be an unrestricted subsidiary for purposes of the
indenture and any indebtedness of such subsidiary shall be deemed to be incurred
by a restricted subsidiary of XM as of such date and, if such indebtedness is
not permitted to be incurred
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as of such date under the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness," XM shall be in default of such
covenant. The Board of Directors of XM may at any time designate any
unrestricted subsidiary to be a restricted subsidiary; provided that such
designation shall be deemed to be an incurrence of indebtedness by a restricted
subsidiary of XM of any outstanding indebtedness of such unrestricted subsidiary
and such designation shall only be permitted if (1) such indebtedness is
permitted under the covenant described under the caption "--Certain Covenants--
Incurrence of indebtedness," calculated on a pro forma basis as if such
designation had occurred at the beginning of the four-quarter reference period;
and (2) no default or event of default would be in existence following such
designation.
"Voting Stock" of any person as of any date means the capital stock of
such person that is at the time entitled to vote in the election of the Board of
Directors of such person.
"Weighted Average Life to Maturity" means, when applied to any
indebtedness or disqualified stock at any date, the number of years obtained by
dividing:
(1) the sum of the products obtained by multiplying (a) the amount of each then
remaining installment, sinking fund, serial maturity or other required
payments of principal (or liquidation preference, as applicable), including
payment at final maturity, in respect thereof, by (b) the number of years
(calculated to the nearest one-twelfth) that will elapse between such date
and the making of such payment; by
(2) the then outstanding principal amount (or liquidation preference) of such
indebtedness (or disqualified stock, as applicable).
"Wholly Owned Restricted Subsidiary" of any specified person means a
restricted subsidiary of such person all of the outstanding capital stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such person or by one or more wholly owned
restricted subsidiaries of such person and one or more wholly owned restricted
subsidiaries of such person.
"XM Radio Assets" means all assets, rights, services and properties,
whether tangible or intangible, used or intended for use in connection with an
XM Radio Business, including satellites, terrestrial repeating stations, FCC
licenses, uplink facilities, musical libraries and other recorded programming,
furniture, fixtures and equipment and telemetry, tracking, monitoring and
control equipment.
"XM Radio Business" means the business of transmitting digital radio
programming throughout the United States by satellite and terrestrial repeating
stations to be received by subscribers, including any business in which XM was
engaged on the date of the indenture, and any business reasonably related
thereto.
"XM Radio Service" means digital radio programming transmitted by
satellites and terrestrial repeating stations to vehicle, home and portable
radios in the United States.
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BOOK ENTRY, DELIVERY AND FORM
Except as described in the next paragraph, the outstanding notes were, and
the exchange notes will be, initially issued in the form of one or more notes in
registered, global form ("Global Notes"). The Global Notes were deposited on
the date of the closing of the note offering with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC (such nominee being referred to herein as the "Global Note
Holder").
Global Notes that are issued as described below under "--Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Notes"). Upon the transfer of Certificated Notes,
Certificated Notes may, unless all Global Notes have previously been exchanged
for Certificated Notes, be exchanged for an interest in the Global Note
representing the principal amount of notes being transferred, subject to the
transfer restrictions set forth in the indenture.
DTC has advised us that DTC is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the initial purchasers of the notes), banks, trust companies,
clearing corporations and certain other organizations. Access to DTC's system is
also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the "Indirect
Participants"). Persons who are not Participants may beneficially own
securities held by or on behalf of DTC only through the Participants or the
Indirect Participants. The ownership interests in, and transfers of ownership
interests in, each security held by or on behalf of DTC are recorded on the
records of the Participants and Indirect Participants.
DTC has also advised us that, pursuant to procedures established by it:
(1) upon deposit of the Global Notes, DTC will credit the accounts of
Participants designated by the initial purchasers of the notes with
portions of the principal amount of the applicable Global Notes; and
(2) ownership of these interests in the Global Notes will be shown on, and
the transfer of ownership thereof will be effected only through,
records maintained by DTC (with respect to the Participants) or by the
Participants and the Indirect Participants (with respect to other
owners of beneficial interest in the Global Notes).
Prospective purchasers are advised that the laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Note to such Persons will be limited to such extent.
So long as the Global Note Holder is the registered owner of any Global
Notes, the Global Note Holder will be considered the sole Holder under the
indenture of any notes evidenced by the Global Notes. Beneficial owners of notes
evidenced by the Global Notes will not be considered the owners or Holders
thereof under the indenture for any purpose, including with respect to the
giving of any directions, instructions or approvals to the Trustee thereunder.
Neither we nor the Trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC relating to the Global Notes.
Payments in respect of the principal of, and premium, if any, liquidated
damages, if any, and interest on any notes registered in the name of DTC or its
nominee will be payable to DTC in its capacity as the registered Holder under
the indenture. Under the terms of the indenture, we and the Trustee will treat
the persons in whose names the notes, including the Global Notes, are registered
as the owners thereof for the purpose of receiving such payments and for any and
all other purposes whatsoever. Consequently, neither we nor the Trustee has or
will have any responsibility or liability for:
(1) any aspect of DTC's records or any Participant's or Indirect
Participant's records relating to or payments
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made on account of beneficial ownership interest in the Global Notes,
or for maintaining, supervising or reviewing any of DTC's records or
any Participant's or INdirect Participant's records relating to the
beneficial ownership interest in the Global Notes; or
(2) any other matter relating to the actions and practices of DTC or any of
its Participant's or Indirect Participants.
DTC's current practice, upon receipt of any payment in respect of
securities such as the notes (including principal and interest) is to credit the
accounts of the relevant Participants with the payment on the payment date, in
amounts proportionate to their respective holdings in the principal amount of
beneficial interest in the relevant security as shown on the records of DTC
unless DTC has reason to believe it will not receive payment on such payment
date.
Payments by the Participants and the Indirect Participants to the
beneficial owners of notes will be governed by standing instructions and
customary practices and will be the responsibility of the Participants or the
Indirect Participants and will not be the responsibility of DTC, us or the
Trustee. Neither we nor the Trustee will be liable for any delay by DTC or any
of its Participants in identifying the beneficial owners of the notes, and we
and the Trustee may conclusively rely on and will be protected in relying on
instructions from DTC or its nominee for all purposes.
Certified Notes
A Global Note is exchangeable for definitive notes in registered
certificated form ("Certified Notes") if:
(1) DTC:
(a) notifies us that it is unwilling or unable to continue as
depository for the Global Notes and we thereupon fail to appoint a
successor depository; or
(b) has ceased to be a clearing agency registered under the Exchange
Act;
(2) we, at our option, notify the Trustee in writing that it elects to
cause the issuance of the Certificated Notes; or
(3) there shall have occurred and be continuing a Default or Event of
Default with respect to the Notes.
In addition, beneficial interests in a Global Note may be exchanged for
Certificated Notes upon request but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the indenture. In all cases,
Certificated Notes delivered in exchange for any Global Note or beneficial
interests therein will be registered in the names, and issued in any approved
denominations, requested by or on behalf of the depository (in accordance with
its customary procedures) and will bear the applicable restrictive legend,
unless we determine otherwise in compliance with applicable law.
Same Day Settlement and Payment
The indenture requires that payments in respect of the notes represented by
the applicable Global Notes (including principal, premium, if any, interest and
liquidated damages, if any) be made by wire transfer of immediately available
funds to the accounts specified by the Global Note Holder. With respect to
Certificated Notes, we will make all payments of principal, premium, if any,
interest and liquidated damages, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. The notes represented by the Global Notes are expected to be eligible
to trade in the PORTAL market and to trade in DTC's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such notes will,
therefore, be required by DTC to be settled in immediately available funds. We
expect that secondary trading in any Certificated Notes also will be settled in
immediately available funds.
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Exchange Offer
Upon the occurrence of the exchange offer for the notes, we will issue and
the trustee will authenticate (i) one or more non-transfer restricted Global
Notes in an aggregate principal amount equal to the principal amount of the
beneficial interests in the transfer restricted Global Notes tendered for
exchange by persons that certify in their letters of transmittal that (x) they
are not broker-dealers, (y) they are not participating in a distribution of the
exchange notes and (z) they are not affiliates (as defined in Rule 144 of the
Securities Act) of XM, and accepted for exchange and (ii) Certificated Notes in
an aggregate principal amount of the applicable transfer restricted Certificated
Notes accepted for exchange. Concurrently with the issuance of such notes, the
trustee will cause the aggregate principal amount of the applicable transfer
restricted Global Notes to be reduced accordingly, and we will execute and the
trustee will execute and deliver to the persons designated by the holders of
Certificated Notes so accepted for exchange non-transfer restricted Certificated
Notes in the appropriate principal amount.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of some important U.S. federal income
tax considerations relating to participation in the exchange offer and of the
ownership and disposition of the exchange notes. This discussion is based on
currently existing provisions of the Internal Revenue Code (the "Code"),
existing, temporary and proposed Treasury regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as in effect or
proposed on the date hereof and all of which are subject to change, possibly
with retroactive effect, or different interpretations. This discussion generally
does not address the tax consequences to subsequent purchasers of exchange notes
and is limited to purchasers who purchased the units comprised of outstanding
notes and warrants at their "issue price," as defined below under "Allocation
of Purchase Price Between notes and warrants", and hold such notes as capital
assets, within the meaning of section 1221 of the Code. Moreover, this
discussion is for general information only and does not address all of the tax
consequences that may be relevant to particular initial purchasers in light of
their personal circumstances or to certain types of initial purchasers who are
subject to special rules, such as certain financial institutions, insurance
companies, tax-exempt entities, traders or dealers in securities or currencies,
certain U.S. expatriates, persons holding the notes as part of a hedging or
conversion transaction, "straddle" or other integrated transaction and U.S.
holders whose "functional currency" is not the U.S. dollar. This discussion
does not address the tax consequences of the law of any state, locality or
foreign jurisdiction.
ALL PERSONS CONSIDERING THE TENDER OF AN ORIGINAL NOTE FOR AN EXCHANGE NOTE
ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX
CONSEQUENCES TO THEM OF THE RECEIPT OF EXCHANGE NOTES PURSUANT TO THE EXCHANGE
OFFER AND OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE EXCHANGE NOTES,
INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR ANY STATE, LOCAL OR
FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES) IN APPLICABLE TAX LAWS
OR INTERPRETATIONS THEREOF.
Exchange of Outstanding Notes for Exchange Notes
The exchange of outstanding notes for exchange notes pursuant to the
exchange offer will not constitute a taxable event to holders. Rather, the
exchange notes will be treated as a continuation of the outstanding notes for
federal income tax purposes, and are referred to together as "notes" in this
summary of federal income tax considerations. Consequently, no gain or loss will
be recognized by a holder upon receipt of an exchange note, the holding period
of the exchange note will include the holding period of the outstanding note,
and the initial basis of the exchange note will be the same as the basis of the
outstanding note immediately before the exchange.
U.S. HOLDERS
As used herein, a "U.S. holder" is a beneficial owner of a March 2000
senior secured note that is, for U.S. federal income tax purposes:
. an individual citizen or resident of the United States;
. a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision
thereof (unless in the case of a partnership, applicable Treasury
Regulations provide otherwise);
. an estate the income of which is subject to U.S. federal income
taxation regardless of source;
. a trust if both (A) a United States court is able to exercise primary
supervision over the administration of the trust, and (B) one or more
United States persons have the authority to control all substantial
decisions
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of the trust (including specified trusts in existence on August 20,
1996 and treated as United States persons prior to that date and that
timely elected to continue to be treated as United States persons).
Allocation of purchase price between notes and warrants
For U.S. federal income tax purposes, the purchase of an outstanding note
and a warrant was treated as the purchase of an "investment unit." The issue
price of a unit for U.S. federal income tax purposes is the first price at which
a substantial amount of units is sold, excluding sales to bond holders, brokers
or similar persons acting as underwriters, placement agents or wholesalers. The
issue price of a unit was allocated between the outstanding note and the warrant
based on the relative fair market values of each such component of the unit on
the issue date. Pursuant to Treasury Regulations issued under provisions of the
Code relating to original issue discount (the "OID Regulations"), each U.S.
holder for U.S. federal income tax purposes is bound by XM's and Holdings'
allocation unless such holder discloses on a statement attached to its tax
return for the taxable year that includes the acquisition date of such unit that
its allocation differs from that of XM and Holdings. We believed that the
aggregate issue price of each unit should be allocated $797.70 to the
outstanding note and $202.30 to the warrant. We cannot assure you that the IRS
will accept XM's allocation. If XM's allocation were successfully challenged by
the IRS, the issue price, original issue discount on the March 2000 senior
secured note and gain or loss on the sale or disposition of a March 2000 senior
secured note would be different from that resulting under the allocation
determined by XM and Holdings.
Taxation of stated interest
Stated interest paid or accrued on the notes will be taxable to a U.S.
holder as ordinary interest income in accordance with such U.S. holder's method
of accounting for U.S. federal income tax purposes.
Original issue discount
The notes will have original issue discount, or "OID" for U.S. federal tax
purposes, and accordingly, U.S. holders of the notes will be subject to special
tax accounting rules, as described in greater detail below. U.S. holders of
notes should be aware that they generally must include OID in gross income for
U.S. federal income tax purposes on an annual basis under a constant yield
accrual method regardless of their method of accounting. As a result, U.S.
holders will include OID in income in advance of the receipt of cash
attributable to such income. However, U.S. holders of the notes generally will
not be required to include separately in income cash payments received on such
notes to the extent such payments constitute payments of previously accrued OID.
The notes will be treated as issued with OID equal to the excess of the
"stated redemption price at maturity" of a note over its "issue price." The
issue price of a note is described above under "--Allocation of purchase price
between notes and warrants." The stated redemption price at maturity of a note
is the total of all payments on the note that are not payments of "qualified
stated interest." Qualified stated interest is interest that is unconditionally
payable, in cash or property (other than debt instruments of the issuer), at
least annually at a single fixed rate during the entire term of the note that
appropriately takes into account the length of intervals between payments.
Stated interest on the notes will be treated as qualified stated interest.
The amount of OID includible in income by a U.S. holder of a note, or
"accrued OID," is the sum of the "daily portions" of OID with respect to the
note for each day during the taxable year or portion thereof in which such U.S.
holder holds such note. The daily portion is determined by allocating to each
day in any "accrual period" a pro-rata portion of the OID that accrued in such
period. For this purpose, the term "accrual period" means an interval of time
selected by the holder of one year or less; provided that each scheduled payment
of principal or interest either occurs on the final day of an accrual period or
the first day of an accrual period. The amount of OID that accrues with respect
to any accrual period is the excess of (a) the product of the note's adjusted
issue price at the beginning of such accrual period and its yield to maturity,
determined on the basis of compounding at the close of each accrual period and
properly adjusted for the length of such periods over (b) the amount of stated
interest allocable to such accrual period. Special rules may apply for
calculating OID for an initial short accrual period. The "adjusted issue
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price" of a note at the start of any accrual period is equal to its issue price
increased by the accrued OID for each prior accrual period and reduced by any
payments made on such note (other than payments of stated interest) on or before
the first day of the accrual period. The "yield to maturity" is the discount
rate that, when used to compute the present value of all payments to be made
under a note, produces an amount equal to the issue price of the note.
Mandatory And Optional Redemptions
Certain events such as certain changes of control or certain equity
offerings will result in certain redemption rights and obligations of XM with
respect to the notes as specified elsewhere herein. Under the OID Regulations,
computation of OID on the notes is not affected by such redemption rights and
obligations if, based on all the facts and circumstances as of the issue date,
the stated payment schedule of the notes (that does not reflect such events) is
significantly more likely than not to occur. In addition, we may redeem the
notes, at any time on or after March 15, 2005, at redemption prices specified
elsewhere herein plus accrued and unpaid interest to the date of redemption.
Under the OID Regulations, solely for purposes of computing OID, it is assumed
that the issuer will exercise any unconditional option to redeem a debt
instrument if such exercise will lower the yield-to-maturity of the debt
instrument. We do not intend to treat the redemption provisions described in
this paragraph as affecting the computation of OID on the notes. U.S. holders
may wish to consult their tax advisors regarding the treatment of such
contingencies under the OID Regulations.
Impact of Applicable High Yield Discount Obligation Rules
If the "yield to maturity" on the notes equals or exceeds the sum of 5% and
the "applicable federal rate" (a rate based on the yield to Treasury Securities
with similar maturity) in effect for the month in which the notes are issued and
the notes have "significant OID," the notes will be considered "applicable high
yield discount obligations." A debt instrument has "significant OID" if the
aggregate amount which would be includible in gross income of a holder with
respect to such instrument for periods before the close of any accrual period
ending after the date five years after the date of issue exceeds the sum of (i)
the aggregate amount of interest required to be paid under the instrument before
the close of such accrual period and (ii) the product of the issue price of such
instrument and its yield to maturity.
If the notes are "applicable high yield discount obligations," XM will not
be permitted to deduct for United States federal income tax purposes OID accrued
on the notes until such time as XM actually pays such OID in cash or in property
other than stock or debt of XM (or persons related to XM). Moreover, to the
extent that the total return on the notes exceeds the sum of 6% and the
applicable federal rate, such excess (the "Dividend-Equivalent Interest") will
not be deductible at any time by XM for United States federal income tax
purposes (regardless of whether XM actually pays such Dividend Equivalent
Interest in cash or in other property). Such Dividend-Equivalent Interest would
be treated as a dividend to the extent it is deemed to have been paid out of
XM's current or accumulated earnings and profits. Accordingly, a United States
holder that is a domestic corporation may be entitled to take a dividends-
received deduction with respect to any Dividend-Equivalent Interest received by
such corporate United States holder on the note. In such event, corporate United
States holders should consult with their tax advisors concerning the
availability of a dividends-received deduction. We believe that the notes are
applicable high yield discount obligations.
Redemption, sale, exchange or retirement of the notes.
In general, a U.S. holder will recognize gain or loss on the redemption,
sale, exchange or retirement of a note equal to the difference between the
amount realized on the redemption, sale, exchange or retirement, except to the
extent such amount is attributable to accrued but unpaid interest, which will be
taxable as ordinary income, and such U.S. holder's adjusted tax basis in the
note. A U.S. holder's adjusted tax basis in the note will be its issue price
(described above under "--Allocation of purchase price between notes and
warrants") increased by the amount of any OID previously included in the U.S.
holder's income with respect to such note and reduced by the amount of any cash
payments on the note other than payments of stated interest. As a general rule,
with the exception of, among other things, amounts attributable to accrued but
unpaid interest, such gain or loss recognized on the redemption, sale, exchange
or retirement of a note will be capital gain or loss. With respect to non-
corporate U.S. holders, capital
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gain is subject to reduced rates of tax if the note was held for more than
twelve months, and the deductibility of capital losses is subject to
limitations.
NON-U.S. HOLDERS
The following discussion summarizes certain United States federal income
tax consequences relevant to a Non-U.S. holder of a note. As used herein, a
"Non-U.S. holder" is a beneficial owner of a note that is not a U.S. holder.
This discussion does not deal with all aspects of United States federal
income taxation that may be relevant to any particular Non-U.S. holder in light
of that holder's personal circumstances with respect to such holder's purchase,
ownership or disposition of the notes, including such holder holding the notes
through a partnership. For example, persons who are partners in foreign
partnerships and beneficiaries of foreign trusts or estates who are subject to
United States federal income tax because of their own status, such as United
States residents or foreign persons engaged in a trade or business in the United
States, may be subject to United States federal income tax even though the
entity is not subject to such tax.
Stated Interest and OID on the Notes
Under current United States federal income tax law, payments of stated
interest or OID on a note by XM or any paying agent to a holder that is a Non-
U.S. holder will not be subject to withholding of United States federal income
tax if (i) such payment is effectively connected with a trade or business within
the United States by such Non-U.S. holder (and, if a tax treaty applies, is
attributable to a U.S. permanent establishment of the Non-U.S. holder), or (ii),
under the "portfolio interest exemption," both (a) the holder does not actually
or constructively own 10 percent or more of the combined voting power of all
classes of stock of XM and is not a controlled foreign corporation related to XM
through stock ownership and (b) the beneficial owner provides a statement signed
under penalties of perjury that includes its name and address and certifies (on
an IRS Form W-8BEN or a substantially similar substitute form) that it is a Non-
U.S. person in compliance with applicable requirements.
Interest on a note that is effectively connected with the conduct of a
trade or business in the United States by a Non-U.S. holder (and, if a tax
treaty applies, is attributable to a U.S. permanent establishment of the Non-
U.S. holder), although exempt from the withholding tax (assuming appropriate
certification is provided), may be subject to graduated United States federal
income tax on a net income basis and also, in the case of a corporate holder, an
additional branch profits tax at 30% (or a lower rate provided in an appropriate
treaty) as if such amounts were earned by a U. S. holder.
Sale or Redemption of Notes
Except as described below and subject to the discussion concerning backup
withholding, a Non-U.S. holder generally will not be subject to withholding of
United States federal income tax with respect to any gain realized upon the sale
or redemption of notes. Further, a Non-U.S. holder generally will not be subject
to United States federal income tax with respect to any such gain unless (i) the
gain is effectively connected with a United States trade or business of such
Non-U.S. person (and, if a tax treaty applies, is attributable to a U.S.
permanent establishment of the Non-U.S. holder), (ii) subject to certain
exceptions, the Non-U.S. holder is an individual who holds the note as a capital
asset and is present in the United States for 183 days or more in the taxable
year of the disposition, or (iii) the Non-U.S. holder is subject to tax pursuant
to the provisions of United States tax law applicable to certain United States
expatriates.
Information reporting and backup withholding
In general, information reporting requirements will apply to payments of
principal, premium, if any, and
130
<PAGE>
interest on a note, and payments of the proceeds of the sale of a note to
certain non-corporate U.S. holders, and a 31% backup withholding tax may apply
to such payments if the U.S. holder (i) fails to furnish or certify his correct
taxpayer identification number to the payer in the manner required, (ii) is
notified by the IRS that he has failed to report payments of interest properly,
or (iii) under certain circumstances, fails to certify that he has not been
notified by the IRS that he is subject to backup withholding for failure to
report interest payments.
Information reporting requirements will apply to payments of interest to Non-
U.S. holders where such interest is subject to withholding or is exempt from
U.S. withholding tax pursuant to a tax treaty, or where such interest is exempt
from U.S. tax under the portfolio interest exemption. Backup withholding may
apply to payments of interest on a note to Non-U.S. holders unless they certify
their foreign status or qualify for a treaty benefit or the portfolio interest
exemption. Copies of these information returns may also be made available under
the provisions of a specific treaty or agreement to the tax authorities of the
country in which the Non-U.S. holder resides.
Treasury Regulations provide that backup withholding and information reporting
will not apply to payments of principal on the notes to a Non-U.S. holder if the
Non-U.S. holder certifies as to its status as a Non-U.S. holder under penalties
of perjury or otherwise establishes an exemption (provided that neither XM or
its paying agent has actual knowledge that the holder is a U.S. person or that
the conditions of any other exemption are not, in fact, satisfied).
The payment of proceeds from the disposition of notes to or through the U.S.
office of any broker, U.S. or foreign, will be subject to information reporting
and possible backup withholding unless the owner certifies as to its non-U.S.
status under penalty of perjury or otherwise establishes an exemption, provided
that the broker does not have actual knowledge that the holder is a U.S. person
or that the conditions of any other exemption are not, in fact, satisfied. The
payment of the proceeds from the disposition of a note to or through a non-U.S.
office of a non-U.S. broker will not be subject to information reporting or
backup withholding unless such broker is (i) a "controlled foreign
corporation" for U.S. federal income tax purposes, or (ii) a foreign person 50%
or more of whose gross income from all sources for the 3-year period ending with
the close of its taxable year preceding the payment, or for such part of the
period that the broker has been in existence, is derived from activities that
are effectively connected with the conduct of a U.S. trade or business (a "U.S.
related person").
In the case of the payment of proceeds from the disposition of notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, Treasury regulations require information reporting on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. holder and the broker has no knowledge to the contrary.
Holders of notes should be aware that the Treasury Department promulgated
revised final regulations regarding the withholding and information reporting
rules discussed above. In general, the final regulations do not significantly
alter the substantive withholding and information reporting requirements but
unify certain certification procedures and forms and clarify reliance standards.
The final regulations would generally be effective for payments made after
December 31, 2000, subject to certain transition rules should consult their tax
advisors regarding the application of such Treasury regulations.
Any amounts withheld under the backup withholding rules from a payment to a
holder would be allowed as a refund or a credit against such holder's federal
income tax liability, provided the required information is furnished to the IRS.
131
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account in the
exchange offer must acknowledge that it will deliver a prospectus in connection
with any resale of such exchange notes. This prospectus, as it may be amended
or supplemented from time to time, may be used by a broker-dealer in connection
with resales of exchange notes received in exchange for outstanding notes where
such outstanding notes were acquired as a result of market-making activities or
other trading activities. We have agreed that, starting on the expiration date
and ending on the close of business on the first anniversary of the expiration
date, we will make this prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
We will not receive any proceeds from any sale of exchange notes by broker-
dealers. Exchange notes received by broker-dealers for their own account in the
exchange offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the exchange notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such broker-
dealer and/or the purchasers of any such exchange notes. Any broker-dealer that
resells exchange notes that were received by it for its own account in the
exchange offer and any broker or dealer that participates in a distribution of
such exchange notes may be deemed to be an "underwriter" within the meaning of
the Securities Act and any profit of any such resale of exchange notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of one year after the expiration date, we will promptly send
additional copies of this prospectus and any amendment or supplement to this
prospectus to any broker-dealer that requests such documents in the Letter of
Transmittal. We have agreed to pay all expenses incident to the exchange offer,
including the expenses of one counsel for the holders of the outstanding notes,
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the outstanding notes, including any broker-dealers,
against various liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
The legality of the exchange notes offered by this prospectus are being passed
upon for XM by Hogan & Hartson L.L.P., Washington, D.C. Certain legal matters
with respect to communications regulatory issues were passed upon for XM by
Fisher Wayland Cooper Leader & Zaragoza L.L.P., Washington, D.C. Certain legal
matters in connection with the offering of the outstanding notes were passed
upon for the initial purchasers by Latham & Watkins, New York, New York.
EXPERTS
Our consolidated financial statements as of December 31, 1997, 1998 and 1999
and for the years ended December 31, 1997, 1998 and 1999 and for the period from
December 15, 1992 (date of inception) through December 31, 1999, have been
included herein and in the registration statement, in reliance upon the report
of KPMG LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing. The report of KPMG LLP contains an explanatory paragraph that states
that we have not commenced operations and are dependent upon additional debt or
equity financings, which raises substantial doubt about our ability to continue
as a going concern. Our consolidated financial statements do not include any
adjustments that might result from the outcome of that uncertainty.
132
<PAGE>
AVAILABLE INFORMATION
Holdings is subject to the Securities and Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, is required to file
reports, proxy statements and other information with the SEC. Holdings' SEC
filings are available to be inspected and copied at the public reference
facilities maintained by the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549. Holdings' filings also are available over the
Internet at the SEC's website at http://www.sec.gov. The Class A common stock of
Holdings is listed on the Nasdaq National Market under the symbol "XMSR."
XM currently is not subject to the informational reporting requirements of the
Exchange Act. Upon effectiveness of this registration statement, however, XM
will become subject to the informational requirements of the Exchange Act.
Holdings and XM have agreed that, whether or not Holdings and XM are required
to do so by the rules and regulations of the SEC, for so long as any of the
senior secured notes, exchange notes or warrants remain outstanding, Holdings
and XM will furnish to the holders of any such securities and file with the SEC
(unless the SEC will not accept such a filing) (i) all quarterly and annual
financial information that would be required to be contained in such a filing
with the SEC on Forms 10-Q and 10-K if Holdings or XM were required to file such
forms, including a "Management's Discussion and Analysis of Results of
Operations and Financial Condition" and, with respect to the annual information
only, a report thereon by our certified independent public accountants and (ii)
all reports that would be required to be filed with the SEC on Form 8-K if
Holdings or XM were required to file such reports. In addition, for so long as
any of the senior secured notes or exchange notes remain outstanding, Holdings
and XM have agreed, if they are not subject to the reporting requirements of
Sections 13(a) or 15(d) of the Exchange Act, to make available to any
prospective purchaser of any such securities or beneficial owner of any such
securities in connection with any sale thereof, the information required by Rule
144A(d)(4) under the Securities Act.
133
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Report.................................................................................... F-2
Consolidated Balance Sheets..................................................................................... F-3
Consolidated Statements of Operations........................................................................... F-4
Consolidated Statements of Stockholder's Equity................................................................. F-5
Consolidated Statements of Cash Flows........................................................................... F-6
Notes to Consolidated Financial Statements...................................................................... F-7
Condensed Consolidated Balance Sheets as of December 31, 1999 and June 30, 2000 (unaudited)..................... F-21
Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 1999
and 2000 and for the period December 15, 1992 (date of inception) to June 30, 2000.............................. F-22
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999
and 2000 and for the period December 15, 1992 (date of inception) to June 30, 2000.............................. F-23
Notes to Unaudited Condensed Consolidated Financial Statements.................................................. F-25
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
XM Satellite Radio Inc. and Subsidiary:
We have audited the accompanying consolidated balance sheets of XM
Satellite Radio Inc. and subsidiary (a development stage company) as of December
31, 1998 and 1999, and the related consolidated statements of operations,
stockholder's equity, and cash flows for each of the years in the three-year
period ended December 31, 1999, and for the period from December 15, 1992 (date
of inception) to December 31, 1999. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of XM Satellite
Radio Inc. and subsidiary (a development stage company) as of December 31, 1998
and 1999, and the results of their operations and their cash flows for each of
the years in the three-year period ended December 31, 1999 and for the period
from December 15, 1992 (date of inception) to December 31, 1999, in conformity
with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in note
9 to the consolidated financial statements, the Company has not commenced
operations and is dependent upon additional debt or equity financing, which
raises substantial doubt about its ability to continue as a going concern.
Management's plan in regard to these matters is also described in note 9. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG LLP
McLean, VA
February 16, 2000
except for Note 12,
which is as of
March 15, 2000
F-2
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
(in thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 310 $ 49,630
Short-term investments........................................................... -- 69,472
Prepaid and other current assets................................................. 172 1,077
-------- --------
Total current assets......................................................... 482 120,179
Other assets:
System under construction........................................................ 155,334 333,500
Property and equipment, net of accumulated depreciation and amortization of
$57 and $347................................................................... 449 2,551
Goodwill and intangibles, net of accumulated amortization of $0 and $1,220....... -- 25,380
Other assets..................................................................... 132 3,524
-------- --------
Total assets................................................................. $156,397 $485,134
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................................................................. $ 23,125 $ 23,258
Accrued expenses................................................................. 472 1,514
Due to related party............................................................. 5,257 --
Royalty payable.................................................................. -- 1,646
Term loan........................................................................ 34 --
-------- --------
Total current liabilities.................................................... 28,888 26,418
Term loan, net of current portion..................................................... 53 --
Royalty payable, net of current portion............................................... -- 3,400
Capital lease, net of current portion................................................. -- 212
-------- --------
Total liabilities............................................................ 28,941 30,030
-------- --------
Stockholder's equity:
Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and
outstanding.................................................................... -- --
Additional paid-in capital....................................................... 144,818 502,646
Deficit accumulated during development stage..................................... (17,362) (47,542)
-------- --------
Total stockholder's equity................................................... 127,456 455,104
-------- --------
Commitments and contingencies (notes 9 and 10)
Total liabilities and stockholder's equity................................... $156,397 $485,134
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1997, 1998 and 1998, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of inception)
1997 1998 1999 to December 31, 1999
----------- ------------ ------------ --------------------
(in thousands)
<S> <C> <C> <C> <C>
Revenue $ -- $ -- $ -- $ --
---------- ----------- ----------- --------
Operating expenses:
Research and development............ -- 6,941 4,274 11,215
Professional fees................... 1,090 5,242 9,948 16,280
General and administrative.......... 20 4,010 16,448 20,478
------- -------- -------- --------
Total operating expenses......... 1,110 16,193 30,670 47,973
------- -------- -------- --------
Operating loss................... (1,110) (16,193) (30,670) (47,973)
Other income (expense):
Interest income..................... -- 26 533 559
Interest expense.................... (85) -- (43) (128)
------- -------- -------- --------
Net loss......................... $(1,195) $(16,167) $(30,180) $(47,542)
======= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated Total
Additional During Stockholders'
Paid-in Development Equity
Common Stock Capital Stage (Deficit)
---------------------- --------------- ------------------ -------
Shares Amount
-------- ------------
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Issuance of common stock
(December 15, 1992)................................ 100 $ -- $ -- $ -- $ --
-------- ------------ -------- ----------- --------
Balance at December 31, 1992........................ 100 -- -- -- --
Net loss............................................ -- -- -- -- --
-------- ------------ -------- ----------- --------
Balance at December 31, 1993........................ 100 -- -- -- --
Net loss............................................ -- -- -- -- --
-------- ------------ -------- ----------- --------
Balance at December 31, 1994........................ 100 -- -- -- --
Net loss............................................ -- -- -- -- --
-------- ------------ -------- ----------- --------
Balance at December 31, 1995........................ 100 -- -- -- --
Net loss............................................ -- -- -- -- --
-------- ------------ -------- ----------- --------
Balance at December 31, 1996........................ 100 -- -- -- --
Contributions to paid-in capital.................... -- -- 73,107 -- 73,107
Issuance of common stock and capital
contributions...................................... 25 -- 9,143 -- 9,143
Loan assumed by Parent.............................. -- -- 8,477 -- 8,477
Issuance of options................................. -- -- 500 -- 500
Net loss............................................ -- -- -- (1,195) (1,195)
-------- ------------ -------- ----------- --------
Balance at December 31, 1997........................ 125 -- 91,227 (1,195) 90,032
Contributions to paid-in capital.................... -- -- 53,591 -- 53,591
Net loss............................................ -- -- -- (16,167) (16,167)
-------- ------------ -------- ----------- --------
Balance at December 31, 1998........................ 125 -- 144,818 (17,362) 127,456
Contributions to paid-in capital.................... -- -- 301,994 -- 301,994
Increase in FCC license, goodwill and intangibles
from WorldSpace Transaction......................... -- -- 51,624 -- 51,624
Non-cash stock compensation......................... -- -- 4,210 -- 4,210
Net loss............................................ -- -- -- (30,180) (30,180)
-------- ------------ -------- ----------- --------
Balance at December 31, 1999........................ 125 $ -- $502,646 $ (47,542) $455,104
======== ============ ======== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1997, 1998 and 1999, and for the period from
December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
December 15, 1992
(date of
inception) to
1997 1998 1999 December 31, 1999
------------- -------------- ------------- ------------------
(in thousands)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss........................................................ $ (1,195) $(16,167) $ (30,180) $ (47,542)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.................................. -- 57 1,510 1,567
Non-cash stock compensation.................................... -- -- 4,210 4,210
Changes in operating assets and liabilities:
Increase in prepaid and other current assets................. -- (212) (905) (1,117)
Decrease in other assets..................................... -- -- 30 30
Increase in accounts payable and accrued expenses............ 531 9,764 7,482 17,777
Increase in amounts due to related party..................... -- 5,257 -- 5,257
-------- -------- --------- ---------
Net cash used in operating activities....................... (664) (1,301) (17,853) (19,818)
-------- -------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.............................. -- (506) (2,008) (2,514)
Additions to system under construction.......................... (90,031) (43,406) (159,510) (292,947)
Purchase of short-term investments.............................. -- -- (69,472) (69,472)
Other investing activities...................................... -- -- (3,422) (3,422)
-------- -------- --------- ---------
Net cash used in investing activities....................... (90,031) (43,912) (234,412) (368,355)
-------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock and capital
contribution................................................... 9,143 -- -- 9,143
Capital contribution from parent through transfer of
liabilities.................................................... 72,576 45,527 301,669 419,772
Proceeds from issuance of loan payable to related party......... 8,477 -- -- 8,477
Proceeds from issuance of options............................... 500 -- -- 500
Other investing activities...................................... -- (5) (84) (89)
-------- -------- --------- ---------
Net cash provided by financing activities................... 90,696 45,522 301,585 437,803
-------- -------- --------- ---------
Net increase in cash and cash equivalents........................ 1 309 49,320 49,630
Cash and cash equivalents at beginning of period................. -- 1 310 --
-------- -------- --------- ---------
Cash and cash equivalents at end of period....................... $ 1 $ 310 $ 49,630 $ 49,630
======== ======== ========= =========
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles from
WorldSpace Transaction......................................... $ -- $ -- $ 51,624 $ 51,624
Property acquired through capital leases........................ -- -- 470 470
Non-cash interest capitalized................................... -- 29 -- 29
Accrued system milestone payments............................... -- 21,867 15,500 15,500
Loan converted into additional paid-in capital.................. 8,477 -- -- 8,477
Options converted into additional paid-in capital............... 500 -- -- 500
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OF CASH FLOWS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(1) Summary of Significant Accounting Policies and Practices
(a) Nature of Business
XM Satellite Radio Inc. ("XMSR" or the "Company"), formerly American Mobile
Radio Corporation, was incorporated on December 15, 1992 in the State of
Delaware as a wholly owned subsidiary of American Mobile Satellite Corporation
("AMSC") for the purpose of procuring a digital audio radio service ("DARS")
license. Business activity for the period from December 15, 1992 through
December 31, 1996 was insignificant. Pursuant to various financing agreements
entered into in 1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI
acquired a 20 percent interest in XMSR.
On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the
"Parent"), formerly AMRC Holdings Inc., as a holding company for XMSR in
connection with the construction, launch and operation of a domestic
communications satellite system for the provision of DARS. AMSC and WSI
exchanged their respective interests in XMSR for equivalent interests in the
Company, which had no assets, liabilities or operations prior to the
transaction.
(b) Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of XM Satellite
Radio Inc. and its subsidiary, XM Radio Inc. All significant intercompany
transactions and accounts have been eliminated. The Company's management has
devoted substantially all of its time to the planning and organization of the
Company, obtaining its DARS license, and to the process of addressing regulatory
matters, initiating research and development programs, conducting market
research, initiating construction of the satellite system, securing content
providers, and securing adequate debt and equity capital for anticipated
operations and growth. The Company has not generated any revenues and planned
principal operations have not commenced. Accordingly, the Company's financial
statements are presented as those of a development stage enterprise, as
prescribed by Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises.
(c) Cash and Cash Equivalents
The Company considers short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents. The Company
had the following cash and cash equivalents balances (in thousands):
December 31,
------------------
1998 1999
-------- --------
Cash on deposit........................... $ 28 $ 63
Money market funds........................ 282 9,555
Commercial paper.......................... -- 40,012
-------- --------
$ 310 $ 49,630
======== ========
(d) Short-term Investments
The Company holds commercial paper with maturity dates of less than one
year that is stated at amortized cost, which approximates fair value.
(e) Property and Equipment
Property and equipment are carried at cost less accumulated depreciation
and amortization. Depreciation and
For the period from December 15, 1992 (date of inception) to December 31, 1999
amortization is calculated using the straight-line method over the following
estimated useful lives:
F-7
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Furniture, fixtures and computer equipment 3 years
Machinery and equipment 7 years
Leasehold improvements Remaining lease
(f) System Under Construction
The Company is currently developing its satellite system. Costs related to
the project are being capitalized to the extent that they have future benefits.
As of December 31, 1999, all amounts recorded as system under construction
relate to costs incurred in obtaining a Federal Communications Commission
("FCC") license and approval as well as the system development. The FCC
license will be amortized using the straight line method over an estimated
useful life of fifteen years. Amortization of the license will begin on
commercial launch. Depreciation of the Company's satellites will commence upon
in-orbit delivery. Depreciation of the Company's ground stations will commence
upon commercial launch. The satellites and the ground stations will be
depreciated over their estimated useful lives.
On October 16, 1997, the FCC granted XMSR a license to launch and operate
two geostationary satellites for the purpose of providing DARS in the United
States in the 2332.5-2345 Mhz (space-to-earth) frequency band, subject to
achieving certain technical milestones and international regulatory
requirements. The license is valid for eight years upon successful launch and
orbital insertion of the satellites. The Company's license requires that it
comply with a construction and launch schedule specified by the FCC for each of
the two authorized satellites. The FCC has the authority to revoke the
authorizations and in connection with such revocation could exercise its
authority to rescind the Company's license. The Company believes that the
exercise of such authority to rescind the license is unlikely.
System under construction consists of the following (in thousands):
December 31,
-----------------------
1998 1999
-------- --------
License................................... $ 90,031 $115,055
Satellite system.......................... 63,273 204,083
Terrestrial system........................ -- 6,578
Spacecraft control facilities............. 2,000 2,000
Broadcast facilities and other............ -- 5,574
Capitalized interest...................... 30 210
-------- --------
$155,334 $333,500
======== ========
The Company's policy is to review its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be
(g) Goodwill and Intangible Assets
Goodwill and intangible assets, which represents the excess of purchase
price over fair value of net assets acquired, is amortized on a straight-line
basis over the expected periods to be benefited, generally 15 years. The Company
assesses the recoverability of its intangible assets by determining whether the
amortization of the goodwill
F-8
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
and intangible assets balance over its remaining life can be recovered through
undiscounted future operating cash flows. The amount of goodwill and intangible
assets impairment, if any, is measured based on projected discounted future
operating cash flows using a discount rate reflecting the Company's average cost
of funds. The assessment of the recoverability of goodwill will be impacted if
estimated future operating cash flows are not achieved.
(h) Stock-Based Compensation
The Company accounts for stock-based compensation arrangements in
accordance with the provisions of Accounting Principle Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25), and related
interpretations, and complies with the disclosure provisions of SFAS No. 123,
Accounting for Stock-Based Compensation. Under APB 25, compensation expense is
based upon the difference, if any, on the date of grant, between the fair value
of the Company's stock and the exercise price. All stock-based awards to non-
employees are accounted for at their fair value in accordance with SFAS No. 123.
(i) Research and Development
Research and development costs are expensed as incurred.
(j) Income Taxes
The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Deferred income taxes are recognized for the tax
consequences in future years of differences between the tax bases of assets and
liabilities and the financial reporting amounts at each year-end, based on
enacted tax laws and statutory tax rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized. Income tax expense is the sum of tax payable for the period and
the change during the period in deferred tax assets and liabilities.
(k) Comprehensive Income
In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive
Income (SFAS 130). This statement establishes standards for reporting and
displaying comprehensive income and its components in the financial statements.
This statement is effective for all interim and annual periods with the year
ended December 31, 1998. The Company has evaluated the provisions of SFAS 130
and has determined that there were no transactions that have taken place during
the years ended December 31, 1997, 1998 and 1999 that would be classified as
other comprehensive income.
(l) Accounting Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of expenses during
the reporting period. The estimates involve judgments with respect to, among
other things, various future factors which are difficult to predict and are
beyond the control of the Company. Significant estimates include valuation of
the Company's investment in the DARS license, goodwill and intangible assets,
and the valuation allowances against deferred tax assets. Accordingly, actual
amounts could differ from these estimates.
(m) Reclassifications
Certain fiscal year 1997 and 1998 amounts have been reclassified to conform
to the fiscal 1999 consolidated financial statement presentation.
F-9
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(n) Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. The new standard
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts and for
hedging activities. This statement, as amended, is effective for all fiscal
quarters beginning after June 15, 2000. The Company does not expect SFAS No. 133
to have a material affect on its financial position or results of operations.
(2) Related Party Transactions
The Company had related party transactions with the following shareholders:
(a) AMSC
In 1997, AMSC contributed $143,000 for the Company to establish the
original application for the FCC license. On March 28, 1997, the Company
received $1,500,000 as a capital contribution from AMSC. Effective January 15,
1999, the Parent issued a convertible note maturing on September 30, 2006 to
AMSC for $21,419,000. (See note 3(d)). The proceeds from the convertible note
were contributed to the Company as additional paid-in capital.
(b) WSI
On March 28, 1997, the Company received $1,500,000 as a capital
contribution from WSI. The Company issued WSI 25 shares of common stock for this
consideration.
On April 16, 1997, the Company received $15,000,000 from WSI, which
represented $6,000,000 as an additional capital contribution and $9,000,000 as a
six-month bridge loan (see note 3). The liability for the draw against the
bridge loan was assumed by the Parent on May 16, 1997.
In addition to financing, the Company has relied upon certain related
parties for legal and technical services. Total expenses incurred in
transactions with related parties are as follows (in thousands):
Year Ended December 31, 1997
-----------------------------
WSI AMSC Total
---------- ------- --------
Professional fees.............. $ 960 130 1,090
General and administrative..... -- 20 20
------- --- ------
Total....................... $ 960 150 1,110
======= === ======
Year Ended December 31, 1998
----------------------------
WSI AMSC Total
---------- ------- --------
Research and development....... $ 6,624 -- 6,624
Professional fees.............. 2,529 353 2,882
General and administrative..... 903 60 963
------- --- ------
Total....................... $10,056 413 10,469
======= === ======
Year Ended December 31, 1999
----------------------------
WSI AMSC Total
---------- ------- --------
Research and development....... $ 50 -- 50
Professional fees.............. -- 219 219
General and administrative..... -- 5 5
------- --- ------
Total....................... $ 50 224 274
======= === ======
F-10
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Additionally, during 1998 and 1999 the Company incurred $925,000 and $0,
respectively, of WSI project management costs that were capitalized to the
satellite system. With the WorldSpace Transaction, which is discussed in note 3,
on July 7, 1999, WSI ceased to be a related party; therefore, the expenses
reflected for WSI are representative of the period from January 1, 1999 through
July 7, 1999.
(c) Parent
On May 16, 1997, the Parent obtained a $1,000,000 working capital loan
facility from WSI. During 1997, the Company drew down $663,000 against the
facility with the remaining $337,000 drawn in 1998 (see note 3). The proceeds
from these draws were contributed to the Company as additional paid-in capital.
On October 16, 1997, the Parent received $71,911,000 from WSI, which
represented an additional $13,522,000 under the bridge loan and $58,389,000
under the additional amounts loan (see note 3). The proceeds from these draws
were contributed to the Company as additional paid-in capital.
On April 1, 1998, the Parent entered into an agreement with WSI to issue
$54,536,000 in subordinated convertible notes. During 1998 and 1999, the Parent
drew down $45,583,000 and $8,953,000, respectively, under the agreement (see
note 3). The proceeds from these draws were contributed to the Company as
additional paid-in capital.
In July 1998, the Parent contributed furniture and equipment with a book
value of $104,000 to the Company.
On October 8, 1999, the Parent completed an initial public offering of
10,000,000 shares of Class A common stock at $12.00 per share. The offering
yielded net proceeds of $111,437,000, which was contributed to the Company as
additional paid-in capital.
On October 17, 1999, the underwriters of the Parent's initial public
offering exercised the over-allotment option for an additional 241,000 shares of
Class A common stock at $12.00 per share. This exercise yielded net proceeds of
$2,697,000, which was contributed to the Company as additional paid-in capital.
(3) Debt
(a) Loans Payable Due to Related Party
In March 1997, XMSR entered into a series of agreements (the
"Participation Agreement") with AMSC and WSI in which both companies provided
various equity and debt funding commitments to XMSR for the purpose of financing
the activities of XMSR in connection with the establishment of a DARS satellite
system in the United States. On May 16, 1997, certain portions of the
Participation Agreement were subsequently ratified with substantially the same
terms and conditions under the Bridge Loan, Additional Amounts Loan and Working
Capital Credit Facility (the "Loan Agreement"). Additionally, all draws under
the Loan Agreement were assumed by the Parent and contributed to the Company as
additional paid-in capital.
Bridge Loan
XMSR executed the first tranche of the bridge loan with WSI. On April 16,
1997, XMSR received proceeds of $8,497,000 for a loan with a face amount of
$9,000,000. XMSR issued an option for the first tranche of the bridge loan.
Under the option, WSI could have purchased 38.8889 shares of common stock at
$241,714 per share. The option could have been exercised in whole or in
incremental amounts between April 16, 1998 and October 16, 2000.
XMSR allocated $500,000 to the option. The liability for the draw against the
bridge loan and the option were assumed by the Parent on May 16, 1997.
Consequently, $8,979,000 was contributed to XMSR as additional paid-in capital.
On October 16, 1997, the Parent executed the second tranche of the bridge loan
and received proceeds of $12,771,000 for a loan with a face amount of
$13,522,000, which was contributed to XMSR as additional paid-in capital.
F-11
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Additional Amounts Loan
On October 16, 1997, the Parent executed the additional amounts loan with
WSI and received proceeds of $58,219,000 for a loan with a face amount of
$58,389,000. The proceeds from the additional amounts loan were contributed to
XMSR as additional paid-in capital.
Working Capital Loan
On May 16, 1997, the Parent executed the working capital loan with WSI
whereby the Parent would receive proceeds of $920,000 for a loan with a face
amount of $1,000,000. The Parent drew down $663,000 and $337,000 against the
line of credit through December 31, 1997 and 1998, respectively. The proceeds
from the working capital loan were contributed to XMSR as additional paid-in
capital.
(b) Subordinated Convertible Notes Payable Due to Related Party
Effective April 1, 1998, the Parent entered into a convertible note
agreement with WSI that provided for a maximum of $54,536,000 through the
issuance of subordinated convertible notes. As of December 31, 1998 and July 7,
1999, $45,583,000 and $54,536,000, respectively, had been drawn through the
issuance of subordinated convertible notes. The proceeds from the draws against
the convertible notes were contributed to the Company as additional paid-in
capital. As discussed in note 3(c), all amounts due to WSI under the debt
agreements were acquired by AMSC or repaid on July 7, 1999.
(c) Exchange of WSI's Interest in the Parent (WorldSpace Transaction)
On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in
the Parent in exchange for approximately 8.6 million shares of AMSC's common
stock. Additionally, the Parent issued an aggregate $250.0 million of Series A
subordinated convertible notes (see note 3(e)) to several new investors and used
$75.0 million of the proceeds it received from the issuance of these notes to
redeem certain outstanding loan obligations owed to WSI. The remaining proceeds
were contributed to the Company as additional paid-in capital. As a result of
these transactions, as of July 7, 1999, AMSC owned all of the issued and
outstanding stock of the Company. Concurrent with AMSC's acquisition of the
remaining interest in the Parent, the Company recognized goodwill and
intangibles of $51,624,000, which has been allocated as follows (in thousands):
FCC license.................... $ 25,024
Goodwill....................... 13,738
Programming agreements......... 8,000
Receiver agreements............ 4,600
Other intangibles.............. 262
--------
$ 51,624
========
(d) Notes to Related Party
On January 15, 1999, the Parent issued a convertible note to AMSC for
$21,419,000. The proceeds from the note were contributed to the Company as
additional paid-in capital.
(e) Issuance of Series A Subordinated Convertible Notes of the Parent to New
Investors
At the closing of the WorldSpace Transaction, the Parent issued an
aggregate $250.0 million of Series A subordinated convertible notes to six new
investors--General Motors Corporation, $50.0 million; Clear Channel
F-12
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and
Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0
million. As discussed in note 3(c), the net proceeds from these notes were
contributed to the Company. XMSR agreed to guaranty the obligations of the
Parent under the Series A Subordinated Convertible Note. These notes, along with
$6,849,000 of accrued interest, were converted into the Parent's preferred and
common stock upon the initial public offering of the Parent; thereby, canceling
the guarantee.
(4) Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, short-term investments,
receivables, accounts payable, accrued expenses, royalty payable and the term
loan approximate their fair market value because of the relatively short
duration of these instruments as of December 31, 1998 and 1999, in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments.
The fair value of the loans and subordinated convertible notes due to
related party at December 31, 1998 could not be estimated as such amounts are
due to the Company's stockholders.
(5) Stock-Based Compensation
The Company operates two separate stock option plans, the details of which
are described below.
1998 Shares Award Plan
On June 1, 1998, the Parent adopted the 1998 Shares Award Plan (the
"Plan") under which XMSR employees, officers consultants, and non-employee
directors may be granted options to purchase shares of Class A common stock of
the Parent. The Parent initially authorized 1,337,850 shares of common stock
under the Plan, which was increased to 2,675,700 in July 1999. The options are
exercisable in installments determined by the compensation committee of the
Parent's board of directors. The options expire as determined by the committee,
but no later than ten years from the date of grant. On July 8, 1999, the
Parent's board of directors voted to reduce the exercise price of the options
outstanding in the shares award plan from $16.35 to $9.52 per share, which
represented the fair value of the stock on the date of repricing. Transactions
and other information relating to the Plan for the year ended December 31, 1998
and 1999 are summarized below:
Outstanding Options
-------------------------
Weighted-
Average
Number of Exercise
Shares Price
----------- ------------
Balance, January 1, 1998.......... -- --
787,297 $16.35
Options granted................ -- --
Options canceled or expired.... -- --
Options exercised.............. --------- ------
787,297 $16.35
Balance, December 31, 1998........ 2,188,988 10.50
Options granted................ 818,339 16.35
Option repricing............... 57,786 13.91
Options canceled or expired.... 1,071 9.52
Options exercised.............. --------- ------
2,099,089 $10.32
Balance, December 31, 1999........ ========= ======
The following table summarizes information about stock options outstanding
at December 31, 1998 and 1999:
F-13
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
<TABLE>
<CAPTION>
Options
Options Outstanding Exercisable
---------------------------------------------- ------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
-------------- ------------ ---- ----- ------------ -----
<S> <C> <C> <C> <C> <C> <C>
1998 $ 16.35 787,297 9.5 years $ 16.35 -- $ 16.35
1999 $ 9.52-$12.00 2,099,089 9.24 years $ 10.32 416,294 $ 9.52
</TABLE>
There were no and 416,294 stock options exercisable at December 31, 1998 and
1999, respectively. There were 575,540 shares available under the plan for
future grants at December 31, 1999. At December 31, 1999, all options have been
issued to employees, officers and directors.
The per share weighted-average fair value of employee options granted
during the year ended December 31, 1998 and 1999 was $10.54 and $6.21,
respectively, on the date of grant using the Black-Scholes Option Pricing Model
with the following weighted-average assumptions:
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1998 1999
------------------ ------------------
<S> <C> <C>
Expected dividend yield.................................. 0% 0%
Volatility............................................... 56.23% 63.92%
Risk-free interest rate range............................ 4.53% to 5.57% 5.47% to 5.97%
Expected life............................................ 7.5 years 5 years
============= =============
</TABLE>
Employee Stock Purchase Plan
In 1999, the Parent established an employee stock purchase plan that
provides for the issuance of 300,000 shares of the Parent's Class A common
stock. All XMSR employees whose customary employment is more than 20 hours per
week and for more than five months in any calendar year are eligible to
participate in the stock purchase plan, provided that any employee who would own
five percent or more of the Company's total combined voting power immediately
after an offering date under the plan is not eligible to participate. Eligible
employees must authorize the Company to deduct an amount from their pay during
offering periods established by the compensation committee. The purchase price
for shares under the plan will be determined by the compensation committee but
may not be less than 85 percent of the lesser of the market price of the common
stock on the first or last business day of each offering period. As of December
31, 1999, 28,791 shares had been issued to XMSR employees under this plan
The per share weighted-average fair value of purchase rights granted during
the year was $10.00 for the year ended December 31, 1999. The estimates were
calculated at the grant date using the Black-Scholes Option Pricing Model with
the following assumptions at December 31, 1999:
Expected dividend yield............... 0%
Volatility............................ 63.92%
Risk-free interest rate range......... 4.53%
Expected life......................... 0.23 years
The Company applies APB 25 in accounting for stock-based compensation for
both plans and, accordingly, no compensation cost has been recognized for its
stock options in the financial statements other than for performance based stock
options and for options granted with exercise prices below fair value on the
date of grant. The Company incurred $4,070,000 in compensation cost for these
options. Had the Company determined compensation cost based on the fair value at
the grant date for its stock options under SFAS 123, the Company's net loss and
net loss per share would have been increased to the pro forma amounts indicated
below (in thousands):
F-14
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
Year Ended December 31,
1998 1999
--------- ---------
Net loss:
As reported.... $ 16,167 $30,180
Pro forma...... 17,508 30,990
(6) Assumptions of Liabilities
On May 16, 1997, the Parent assumed the bridge loan and the option
liability held by XMSR. After
May 16, 1997, the Parent initiated all future debt with lenders and
contributed the proceeds to XMSR as a contribution of capital and maintained the
debt. The Parent also assumed other liabilities relating to the technical
support agreement.
(7) Profit Sharing and Employee Savings Plan
On July 1, 1998, the Company adopted a profit sharing and employee savings
plan under Section 401(k) of the Internal Revenue Code. This plan allows
eligible employees to defer up to 15 percent of their compensation on a pre-tax
basis through contributions to the savings plan. The Company contributed $0.50
in 1998 and 1999 for every dollar the employees contributed up to 6 percent of
compensation, which amounted to $14,000 and $164,000, respectively.
(8) Income Taxes
For the period from December 15, 1992 (date of inception) to October 8,
1999, the Parent and the Company filed consolidated federal and state tax
returns where permitted with its majority stockholder AMSC. The Company
generated net operating losses and other deferred tax benefits that were not
utilized by AMSC. As no formal tax sharing agreement has been finalized, the
Company was not compensated for the net operating losses. Had the Company filed
on a stand-alone basis for the three-year period ending December 31, 1999, the
Company's tax provision would be as follows:
Taxes on income included in the statements of operations consists of the
following (in thousands):
December 31,
----------------------
1997 1998 1999
------ ------ ------
Current taxes:
Federal............................ $ -- $ -- $ --
State.............................. -- -- --
----- ----- -----
Total current taxes.............. -- -- --
----- ----- -----
Deferred taxes:
Federal............................ -- -- --
State.............................. -- -- --
----- ----- -----
Total current taxes.............. -- -- --
----- ----- -----
Total tax expense (benefit) $ -- $ -- $ --
===== ===== =====
A reconciliation of the statutory tax expense, assuming all income is taxed
at the statutory rate applicable to the income and the actual tax expense is as
follows (in thousands):
F-15
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
December 31,
-----------------
<TABLE>
<CAPTION>
1997 1998 1999
------------ -------------- --------------
<S> <C> <C> <C>
Income before taxes on income, as reported in the
statements of income..................................... $(1,195) $(16,167) $(30,181)
======= ======== ========
Theoretical tax on the above amount at 35%................ (418) (5,658) (10,563)
State tax, net of federal benefit......................... (120) (1,604) 1,370
Increase in taxes resulting from permanent differences,
net...................................................... -- 31 2,120
Adjustments arising from differences in the basis of
measurement for tax purposes and financial reporting
purposes and other....................................... -- -- 13,252
Change in valuation allowance............................. 538 7,231 (6,179)
------- -------- --------
Taxes on income for the reported year..................... $ -- $ -- $ --
======= ======== ========
</TABLE>
At December 31, 1997, 1998 and 1999, deferred income tax consists of future
tax assets/(liabilities) attributable to the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998 1999
-------- ---------- ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss/other tax attribute carryovers.... $ 39 $ 518 $ 2,054
Start-up costs....................................... 499 7,251 14,972
----- ------- --------
Gross total deferred tax assets.................. 538 7,769 17,026
Valuation allowance for deferred tax assets........... (538) (7,769) (1,590)
----- ------- --------
Net deferred assets.............................. -- -- 15,436
----- ------- --------
Deferred tax liabilities:
Fixed assets......................................... -- -- (51)
FCC license.......................................... -- -- (10,160)
Other intangible assets.............................. -- -- (5,225)
----- ------- --------
Net deferred tax liabilities..................... -- -- (15,436)
----- ------- --------
Total tax expense (benefit)...................... $ -- $ -- $ --
===== ======= ========
</TABLE>
(9) Accumulated Deficit
The Company is devoting its efforts to develop, construct and expand a
digital audio radio network. This effort involves substantial risk and future
operating results will be subject to significant business, economic, regulatory,
technical, and competitive uncertainties and contingencies. These factors
individually or in the aggregate could have an adverse effect on the Company's
financial condition and future operating results and create an uncertainty as to
the Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might be necessary should the
Company be unable to continue as a going concern.
In order to commence satellite-based radio broadcasting services, the
Company will require substantial funds to develop and construct the DARS system,
develop and launch radio communications satellites, retire debt incurred in
connection with the acquisition of the DARS license and to sustain operations
until it generates positive cash flow.
At the Company's current stage of development, economic uncertainties exist
regarding successful acquisition of additional debt and equity financing and
ultimate profitability of the Company's proposed service. The Company is
currently constructing its satellites and will require substantial additional
financing before construction is completed. Failure to obtain the required long-
term financing will prevent the Company from realizing its objective of
providing satellite-delivered radio programming. Management's plan to fund
operations and capital expansion includes the additional sale of debt and equity
securities through public and private sources. There are no assurances, however,
that such financing will be obtained.
F-16
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(10) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be
met for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for
Review by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WSI had effectively taken
control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its right
to the FCC license will withstand the challenge as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Parent entered into agreements with AMSC and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which AMSC and WorldSpace MC would provide technical support in areas related to
the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be
terminated by the parties on or after the date of the commencement of commercial
operation following the launch of the Company's first satellite. There are no
minimum services purchase requirements. The Company incurred costs of $413,000
and $224,000 under its agreement with AMSC during 1998 and 1999, respectively.
The Company incurred costs of $4,357,000 and $0 under its agreement with
WorldSpace MC during 1998 and 1999, respectively. The Parent assumed all
liabilities under the agreements.
(d) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing agreement
with AMSC and WorldSpace MC by which as compensation for certain licensed
technology currently under development to be used in the XM Radio system, XMSR
will pay up to $14,300,000 to WorldSpace MC over a ten-year period. XMSR
incurred costs to WorldSpace MC of $6,624,000 and $50,000, payable to WorldSpace
MC, under the agreement during 1998 and 1999, respectively. Any additional
amounts to be incurred under this agreement are dependent upon further
development of the technology, which is at XMSR's option. No liability exists to
AMSC or WorldSpace MC should such developments prove unsuccessful. The Company
maintains an accrual of $5,046,000, payable to WorldSpace MC for quarterly
royalty payments to be made. In addition, XMSR agreed to pay 1.2 percent of
quarterly net revenues to WorldSpace MC and a royalty of $0.30 per chipset,
payable to WorldSpace MC for equipment manufactured using certain source
encoding and decoding signals technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and
Communications, Inc. ("Hughes") amended the satellite contract to construct
and launch the Company's satellites to implement a revised work timetable,
payment schedule to reflect the timing of the receipt of additional funding, and
technical modifications. The Company expects to incur total payment obligations
under this contract of approximately $541,300,000, which includes amounts the
Company expects to pay pursuant to the exercise of the option to build the
ground spare satellite and certain financing costs and in-orbit incentive
payments. As of December 31, 1998 and 1999, the Company had paid $40,481,250 and
$183,918,000, respectively, under this contract.
F-17
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(f) LCC International Services Contract
In August 1999, the Company signed a contract with LCC International, Inc.,
a related party, for the engineering for its terrestrial repeater network.
Payments by the Company under this contract are expected to aggregate
approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the
Company has paid $6,578,000 under this contract.
(g) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations, General
Motors has agreed to distribute the service to the exclusion of other S-band
satellite digital radio services. The Company will also have a non-exclusive
right to arrange for the installation of XM radios included in OnStar systems in
non-General Motors vehicles that are sold for use in the United States. The
Company has significant annual, fixed payment obligations to General Motors for
four years following commencement of commercial service. These payments
approximate $35,000,000 in the aggregate during this period. Additional annual
fixed payment obligations beyond the initial four years of the contract term
range from less than $35,000,000 to approximately $130,000,000 through 2009,
aggregating approximately $400,000,000. In order to encourage the broad
installation of XM radios in General Motors vehicles, the Company has agreed to
subsidize a portion of the cost of XM radios, and to make incentive payments to
General Motors when the owners of General Motors vehicles with installed XM
radios become subscribers for the Company's service. The Company must also share
with General Motors a percentage of the subscription revenue attributable to
General Motors vehicles with installed XM radios, which percentage increases
until there are more than 8 million General Motors vehicles with installed XM
radios. The Company will also make available to General Motors bandwidth on the
Company's systems. The agreement is subject to renegotiations at any time based
upon the installation of radios that are compatible with a unified standard or
capable of receiving Sirius Satellite Radio's (formerly known as CD Radio)
service. The agreement is subject to renegotiations if, four years after the
commencement of XM Radio's commercial operations and at two-year intervals
thereafter GM does not achieve and maintain specified installation levels of
General Motors vehicles capable of receiving the Company's service, starting
with 1,240,000 units after four years, and thereafter increasing by the lesser
of 600,000 units per year and amounts proportionate to target market shares in
the satellite digital radio service market. There can be no assurances as to the
outcome of any such renegotiations. General Motors' exclusivity obligations will
discontinue if, four years after the Company commences commercial operations and
at two-year intervals thereafter, the Company fails to achieve and maintain
specified minimum market share levels in the satellite digital radio service
market.
(h) Terrestrial Repeater Contract
In February 2000, the Company entered into a contract with Hughes
Electronics Corporation, a related party, for the design, development and
purchase of terrestrial repeater equipment. The total contract value is
$128,000,000 and the Company incurred and paid $3,500,000 under a letter
agreement in anticipation of this contract through December 31, 1999.
(i) Joint Development Agreement
On February 16, 2000, the Company signed an agreement with Sirius Satellite
Radio ("Sirius Radio"), a competitor of the Company, to develop a unified
standard for satellite radios to facilitate the ability of consumers to purchase
one radio capable of receiving both the Company's and Sirius Radio's services.
The technology relating to the unified standard will be jointly developed,
funded and owned by the two companies. As part of the agreement, each company
has licensed to the other its intellectual property relating to its system; the
value of this license will be considered part of its contribution toward the
joint development. In addition, each company has agreed to license its non-core
technology, including non-essential features of its system, to the other at
commercially reasonable rates.
F-18
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(j) Sony Warrants
In February 2000, the Parent issued a warrant to Sony exercisable for
shares of the Parent's Class A common stock. The warrant will vest at the time
that the Company attains its millionth customer, and the number of shares
underlying the warrant will be determined by the percentage of XM Radios that
have a Sony brand name as of the vesting date. If Sony achieves its maximum
performance target, it will receive 2% of the total number of shares of the
Parent's Class A common stock on a fully-diluted basis upon exercise of the
warrant. The exercise price of the Sony warrant will equal 105% of fair market
value of the Class A common stock on the vesting date, determined based upon the
20-day trailing average.
(k) Leases
The Company has three noncancelable operating leases for office space and
two noncancelable capital leases for equipment that expire over the next ten
years. The future minimum lease payments under noncancelable leases as of
December 31, 1999 are (in thousands):
<TABLE>
<CAPTION>
Operating Capital
--------- -------
leases leases
------ ------
<S> <C> <C>
Year ending December 31:
2000 $ 755 $ 172
2001 2,113 172
2002 2,180 86
2003 2,248 --
2004 2,281 --
Thereafter 14,354 --
------- ------
Total $23,931 430
=======
Less amount representing interest (52)
------
Present value of net minimum lease payments 378
Less current maturities (139)
------
Long-term obligations $ 239
======
</TABLE>
Rent expense for 1997, 1998 and 1999 was $0, $231,000 and $649,000,
respectively.
In January 2000, the Company established a $3,400,000 letter of credit as a
security deposit for one of its leases for office space.
(l) Prior Litigation
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite
radio license, commenced an action against the Company in the United States
District Court for the Southern District of New York, alleging that the Company
was infringing or would infringe three patents assigned to Sirius Radio. In its
complaint, Sirius Radio sought money damages to the extent the Company
manufactured, used or sold any product or method claimed in their patents and
injunctive relief. On February 16, 2000, this suit was resolved in accordance
with the terms of a joint development agreement between the Company and Sirius
Radio and both companies agreed to cross-license their respective property (see
note 10(i)). However, if this agreement is terminated before the value of the
license has been determined due to the Company's failure to perform a material
covenant or obligation, then this suit could be refiled.
F-19
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period from December 15, 1992 (date of inception) to December 31, 1999
(11) Secondary Offering and Sale of Series B Convertible Redeemable Preferred
Stock
On January 31, 2000, the Parent closed on a secondary offering of its Class
A common stock and preferred stock. The Company sold 4,000,000 shares of its
Class A common stock for $32.00 per share, which yielded net proceeds of
approximately $121,000,000. The Parent concurrently sold 2,000,000 shares of its
Series B convertible redeemable preferred stock for $50.00 per share, which
yielded net proceeds of approximately $96,300,000. The Series B convertible
redeemable preferred stock provides for 8.25% cumulative dividends that may be
paid in Class A common stock or cash. The Series B convertible redeemable
preferred stock is convertible into Class A common stock at a conversion price
of $40.00 per share and is redeemable in Class A common stock on February 3,
2003. The Parent contributed the net proceeds of the offerings to the Company.
On February 9, 2000, the underwriters exercised a portion of the over-
allotment option for 370,000 shares of Class A common stock, which yielded net
proceeds of approximately $11,233,000. The Parent contributed the net proceeds
of the offering to the Company.
(12) Private Units Offering
On March 15, 2000 the Parent and the Company closed a private placement of
325,000 units, each unit consisting of $1,000 principal amount of the Company's
14% senior secured notes due 2010 and one warrant to purchase 8.024815 shares of
the Parent's Class A common stock at a price of $49.50 per share. The Company
realized net proceeds of $191.0 million, excluding $123.0 million used to
acquire securities which will be used to pay interest payments due under the
notes for the first three years.
F-20
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
December 31, 1999 and June 30, 2000
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---- ----
(unaudited)
(in thousands, except share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................................................. $ 49,630 $ 266,331
Short-term investments.................................................................... 69,472 --
Restricted investments.................................................................... -- 93,415
Prepaid and other current assets.......................................................... 1,077 1,391
-------- ----------
Total current assets.................................................................... 120,179 361,137
Other assets:
Restricted investments, net of current portion............................................ -- 81,208
System under construction................................................................. 333,500 551,123
Property and equipment, net............................................................... 2,551 24,783
Goodwill and intangibles, net............................................................. 25,380 24,694
Other assets, net......................................................................... 3,524 13,761
-------- ----------
Total assets............................................................................ $485,134 $1,056,706
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable.......................................................................... $ 23,258 $ 39,333
Accrued expenses.......................................................................... 1,514 1,378
Accrued interest on senior secured notes................................................. -- 13,271
Royalty payable........................................................................... 1,646 2,296
Deferred lease benefit................................................................... -- 760
-------- ----------
Total current liabilities............................................................... 26,418 57,038
Senior secured notes....................................................................... -- 261,172
Royalty payable, net of current portion.................................................... 3,400 2,800
Deferred lease benefit, net of current portion............................................. -- 3,041
Capital lease, net of current portion...................................................... 212 168
-------- ----------
Total liabilities....................................................................... 30,030 324,219
-------- ----------
Stockholder's equity:
Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding
at December 31, 1999 and June 30, 2000 (unaudited)...................................... -- --
Additional paid-in capital................................................................ 502,646 797,734
Deficit accumulated during development stage.............................................. (47,542) (65,247)
-------- ----------
Total stockholder's equity.............................................................. 455,104 732,487
-------- ----------
Commitments and contingencies
Total liabilities and stockholder's equity.............................................. $485,134 $1,056,706
======== ==========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-21
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Six-Month Period ended June 30, 1999 and 2000,
and for the period
from December 15, 1992 (date of inception) to June 30, 2000
<TABLE>
<CAPTION>
Six Months ended
June 30 December 1, 1992
------------------- (date of inception)
1999 2000 to June 30, 2000
-------- --------- ---------------------
(in thousands, except share data)
<S> <C> <C> <C>
Revenue.................................................................................. $ -- $ -- $ --
------- -------- --------
Operating expenses:
Research and development................................................................ 1,378 4,738 15,953
Professional fees....................................................................... 2,560 10,713 26,994
General and administrative.............................................................. 4,503 15,237 35,715
------- -------- --------
Total operating expenses................................................................ 8,441 30,688 78,662
------- -------- --------
Operating loss.......................................................................... (8,441) (30,688) (78,662)
Other income -- interest income (expense), net ......................................... 76 12,983 13,415
------- -------- --------
Net loss................................................................................ $(8,365) $(17,705) $(65,247)
======= ======== ========
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-22
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six-Month Period ended June 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to June 30, 2000
<TABLE>
<CAPTION>
Six Months ended December 15, 1992
June 30, (date of inception) to
1999 2000 June 30, 2000
-------- --------- ----------------
(in thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................................................... $ (8,365) $ (17,705) $ (65,247)
Adjustments to reconcile net loss to net
Cash used in operating activities:
Depreciation and amortization................................................ 127 1,013 2,581
Non-cash stock compensation..................................................... -- 2,258 6,468
Changes in operating assets and liabilities:
(Increase) decrease in prepaid and other current assets....................... 80 (314) (1,391)
(Increase) decrease in other assets........................................... 21 (67) (130)
Increase in accounts payable and accrued expenses............................. 4,127 8,545 22,662
Decrease in accrued interest.................................................... -- (67) --
-------- --------- ---------
Net cash used in operating activities......................................... (4,010) (6,337) (35,057)
-------- --------- ---------
Cash flows from investing activities:
Purchase of property and equipment.............................................. (280) (18,742) (21,326)
Additions to system under construction.......................................... (18,256) (191,319) (487,688)
Net Purchase/Maturity of short-term investments................................. -- 69,472 --
Purchase of restricted investments.............................................. -- (125,863) (125,863)
Other investing activities...................................................... -- (54,250) (54,250)
-------- --------- ---------
Net cash used in investing activities......................................... (18,536) (320,702) (689,127)
-------- --------- ---------
Cash flows from financing activities:
Proceeds from sale of common stock and capital contribution from parent......... 22,411 292,868 730,666
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........................................... -- (8,382) (8,382)
Other net financing activities.................................................. (12) -- --
-------- --------- ---------
Net cash provided by financing activities..................................... 22,399 543,740 990,515
-------- --------- ---------
Net increase (decrease) in cash and cash equivalents.......................... (147) 216,701 266,331
-------- --------- ---------
Cash and cash equivalents at beginning of period................................. 310 49,630 --
Cash and cash equivalents at end of period....................................... $ 163 $ 266,331 $ 266,331
======== ========= =========
</TABLE>
F-23
<PAGE>
XM SATELLITE RADIO INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months ended June 30, 1999 and 2000, and for the period from
December 15, 1992 (date of inception) to June 30, 2000
<TABLE>
<CAPTION>
Six Months December 15, 1992
ended June 30, (date of inception) to
1999 2000 June 30, 2000
---- ---- -------------
<S> <C> <C> <C>
(in thousands)
Supplemental cash flow disclosure:
Increase in FCC license, goodwill and intangibles..... $ -- $ -- $51,624
Liabilities exchanged for convertible note to Parent.. -- -- 81,676
Loan converted into additional paid-in capital........ -- -- 8,477
Non-cash interest capitalized......................... 82 15,499 15,528
Accrued system milestone payments..................... 81,093 26,699 26,699
Property acquired through capital lease............... 431 -- 470
Use of deposit for terrestrial repeater contract...... -- 3,422 --
</TABLE>
See accompanying notes to unaudited condensed consolidated financial statements.
F-24
<PAGE>
XM SATELLITE RADIO INC. AND SUSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) Organization and Business
XM Satellite Radio Inc. ("XMSR" or the "Company") 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, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent
interest in XMSR.
On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc. (the
"Parent") as a holding company for XMSR in connection with the construction,
launch and operation of a domestic communications satellite system for the
provision of DARS. Motient and WSI exchanged their respective interests in XMSR
for equivalent interests in the Parent, 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. The Company's
management has devoted substantially all of its time to the planning and
organization of the Company, obtaining its DARS license, and to the process of
addressing regulatory matters, initiating research and development programs,
conducting market research, initiating construction of the satellite system,
securing content providers, and securing adequate debt and equity capital for
anticipated operations and growth. The Company has not generated any revenues
and planned principal operations have not commenced. Accordingly, the Company's
financial statements are presented as those of a development stage enterprise,
as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 7,
Accounting and Reporting by Development Stage Enterprises.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of only normal
recurring accruals, necessary for a fair presentation of the consolidated
financial position of XM Satellite Radio Inc. and subsidiary, a development
stage entity, as of June 30, 2000, and the results of operations for the six
months ended June 30, 1999 and 2000 and the period from December 15, 1992 (date
of inception) through June 30, 2000, and the cash flows for the six months ended
June 30, 1999 and 2000 and the period from December 15, 1992 (date of inception)
through June 30, 2000. The results of operations for the six months ended June
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 $125.9 million of US Treasury strips restricted to
provide for the first six scheduled interest payments on the Company's 14%
Senior Secured Notes due 2010, which are classified as held-to-maturity
securities under the provision of SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities, and $48.8 million in money market
funds for scheduled milestone payments under the Hughes Electronics Corporation
contract.
(4) Reclassifications
Certain amounts in the prior period's financial statements have been
reclassified to conform to the current period presentation.
F-25
<PAGE>
XM SATELLITE RADIO INC. AND SUSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(5) Commitments and Contingencies
(a) FCC License
The FCC has established certain system development milestones that must be met
for the Company to maintain its license to operate the system. The Company
believes that it is proceeding into the system development as planned and in
accordance with the FCC milestones.
(b) Application for Review of FCC License
One of the losing bidders for the DARS licenses filed an Application for Review
by the full FCC of the Licensing Order which granted the Company its FCC
license. The Application for Review alleges that WSI had effectively taken
control of the Company without FCC approval. The FCC or the U.S. Court of
Appeals has the authority to overturn the award of the FCC license should they
rule in favor of the losing bidder. Although the Company believes that its
right to the FCC license will withstand the challenge as WSI is no longer a
stockholder in the Company, no prediction of the outcome of this challenge can
be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Parent entered into agreements with Motient and
WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in
which Motient and WorldSpace MC would provide technical support in areas
related to the development of a DARS system. Payments for services provided
under these agreements are made based on negotiated hourly rates. These
agreements may be terminated by the parties on or after the date of the
commencement of commercial operation following the launch of the Company's
first satellite. There are no minimum services purchase requirements. The
Company incurred costs of $84,000 and $65,000 under its agreement with Motient
and no costs were incurred under its agreement with WorldSpace MC during the
quarter ended June 30, 2000 and 1999, respectively. The Parent assumed all
liabilities under the agreements.
(d) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing agreement
with Motient and WorldSpace MC by which as compensation for certain licensed
technology currently under development to be used in the XM Radio system, XMSR
will pay up to $14,300,000 to WorldSpace MC over a ten-year period. As of June
30, 2000, XMSR incurred costs of $6,696,000 payable to WorldSpace MC. Any
additional amounts to be incurred under this agreement are dependent upon
further development of the technology, which is at XMSR's option. No liability
exists to Motient or WorldSpace MC should such developments prove unsuccessful.
The Company maintains an accrual of $5,096,000 payable to WorldSpace MC, for
quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2
percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per
chipset, payable to WorldSpace MC, for equipment manufactured using certain
source encoding and decoding signals technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and Communications,
Inc. ("Hughes") amended the satellite contract to construct and launch the
Company's satellites to implement a revised work timetable, payment schedule to
reflect the timing of the receipt of additional funding, and technical
modifications. The Company expects to incur total payment obligations under
this contract of approximately $541,300,000, which includes amounts the Company
expects to pay pursuant to the exercise of the option to build the ground spare
satellite and certain financing costs and in-orbit incentive payments. On June
27, 2000, the Company exercised this option. As of June 30, 2000, the Company
had paid $350,820,000 under the Satellite contract with Hughes and had accrued
$2,000,000.
F-26
<PAGE>
XM SATELLITE RADIO INC. AND SUSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(f) Terrestrial Repeater System Contracts
In August 1999, the Company signed a contract with LCC International, Inc., a
related party, calling for payments of approximately $115,000,000 for
engineering and site preparation. As of June 30, 2000, the Company has paid
$13,956,000 under this contract, and accrued an additional $13,743,000. The
Company also entered into a contract effective October 22, 1999, with Hughes
Electronics Corporation for the design, development and manufacture of the
terrestrial repeaters. Payments under this contract are expected to be
approximately $128,000,000. As of June 30, 2000, the Company had paid
$12,500,000 under this contract, and accrued an additional $68,000.
(g) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar
division of General Motors providing for the installation of XM radios in
General Motors vehicles. During the term of the agreement, which expires 12
years from the commencement date of the Company's commercial operations,
General Motors has agreed to distribute the service to the exclusion of other
S-band satellite digital radio services. The Company will also have a non-
exclusive right to arrange for the installation of XM radios included in OnStar
systems in non-General Motors vehicles that are sold for use in the United
States. The Company has significant annual, fixed payment obligations to
General Motors for four years following commencement of commercial service.
These payments approximate $35,000,000 in the aggregate during this period.
Additional annual fixed payment obligations beyond the initial four years of
the contract term range from less than $35,000,000 to approximately
$130,000,000 through 2009, aggregating approximately $400,000,000. In order to
encourage the broad installation of XM radios in General Motors vehicles, the
Company has agreed to subsidize a portion of the cost of XM radios, and to make
incentive payments to General Motors when the owners of General Motors vehicles
with installed XM radios become subscribers for the Company's service. The
Company must also share with General Motors a percentage of the subscription
revenue attributable to General Motors vehicles with installed XM radios, which
percentage increases until there are more than 8 million General Motors
vehicles with installed XM radios. The Company will also make available to
General Motors bandwidth on the Company's systems. The agreement is subject to
renegotiations at any time based upon the installation of radios that are
compatible with a unified standard or capable of receiving Sirius Satellite
Radio's service. The agreement is subject to renegotiations if, four years
after the commencement of XM Radio's commercial operations and at two-year
intervals thereafter GM does not achieve and maintain specified installation
levels of General Motors vehicles capable of receiving the Company's service,
starting with 1,240,000 units after four years, and thereafter increasing by
the lesser of 600,000 units per year and amounts proportionate to target market
shares in the satellite digital radio service market. There can be no
assurances as to the outcome of any such renegotiations. General Motors'
exclusivity obligations will discontinue if, four years after the Company
commences commercial operations and at two-year intervals thereafter, the
Company fails to achieve and maintain specified minimum market share levels in
the satellite digital radio service market.
(h) Sony Warrant
In February 2000, the Company issued a warrant to Sony exercisable for shares
of the Parent's Class A common stock. The warrant will vest at the time that
the Company attains its millionth customer, and the number of shares underlying
the warrant will be determined by the percentage of XM Radios that have a Sony
brand name as of the vesting date. If Sony achieves its maximum performance
target, it will receive 2% of the total number of shares of the Parent's Class
A common stock on a fully-diluted basis upon exercise of the warrant. The
exercise price of the Sony warrant will equal 105% of fair market value of the
Parent's Class A common stock on the vesting date, determined based upon the
20-day trailing average.
On January 12, 1999, Sirius Radio, the other holder of an FCC satellite radio
license, commenced an action against the Company in the United States District
Court for the Southern District of New York, alleging that the
F-27
<PAGE>
XM SATELLITE RADIO INC. AND SUSIDIARY
(A Development Stage Company)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(i) Prior Litigation
Company was infringing or would infringe three patents assigned to Sirius
Radio. In its complaint, Sirius Radio sought money damages to the extent the
Company manufactured, used or sold any product or method claimed in their
patents and injunctive relief. On February 16, 2000, this suit was resolved in
accordance with the terms of a joint development agreement between the Company
and Sirius Radio and both companies agreed to cross-license their respective
property. However, if this agreement is terminated before the value of the
license has been determined due to the Company's failure to perform a material
covenant or obligation, then this suit could be refiled.
(6) Subsequent Events
(a) The Parent's Issuance of Series C Convertible Redeemable Preferred
Stock
On July 7, 2000, the Parent 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 $227,000,000, which were contributed to the Company as additional
paid-in capital. 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 of the Parent 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. The Parent must redeem the Series C convertible
redeemable preferred stock in Class A common stock on February 1, 2012.
(b) Application for Change of Control
On July 14, 2000, the Parent filed an application with the FCC to allow
the Parent 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
the Parent's Board of Directors .
F-28
<PAGE>
Part II
Information Not Required in Prospectus
Item 20. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law ("DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorneys' fees), as well as judgments, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have had
no reasonable cause to believe his or her conduct was unlawful. In addition, the
DGCL does not permit indemnification in an action or suit by or in the right of
the corporation, where such person has been adjudged liable to the corporation,
unless, and only to the extent that, a court determines that such person fairly
and reasonably is entitled to indemnity for costs the court deems proper in
light of liability adjudication. Indemnity is mandatory to the extent a claim,
issue or matter has been successfully defended.
The Certificate of Incorporation of XM (the "Certificate") contains
provisions that provide that no director of XM shall be liable for breach of
fiduciary duty as a director except for (1) any breach of the director's duty of
loyalty to XM or its stockholders; (2) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the law; (3)
liability under Section 174 of the DGCL; or (4) any transaction from which the
director derived an improper personal benefit. The Certificate contains
provisions that further provide for the indemnification of directors and
officers to the fullest extent permitted by the DGCL. The Company has obtained
directors and officers liability insurance against certain liabilities,
including liabilities under the Securities Act.
Item 21. Exhibits and Financial Statement Schedules.
(a) Exhibits.
Exhibit
-------
No. Description
---- -------------------------------------------------------------
3.1+ Restated Certificate of Incorporation of XM Satellite Radio Inc.
3.2+ Amended and Restated Bylaws of XM Satellite Radio Inc.
4.1 Indenture, dated as of March 15, 2000, between XM Satellite Radio
Inc. and United States Trust Company of New York.
4.2 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.
4.3 Form of 14% Senior Secured Note due 2010.
4.4 Security Agreement, dated March 15, 2000, between XM Satellite Radio
Inc. and United States Trust
Company of New York.
4.5 Pledge Agreement, dated March 15, 2000, between XM Satellite Radio
Inc. and United States Trust Company of New York.
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<PAGE>
5.1 Opinion of Hogan & Hartson L.L.P. concerning the legality of the
exchange notes.
8.1+ Opinion of Hogan & Hartson L.L.P. concerning certain tax
matters.
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/\* 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.
10.3/\* 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.
10.4/\* 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.
10.5/\* Amended and Restated Agreement by and between XM Satellite Radio, Inc
and STMicroelectronics Srl, dated September 27, 1999.
10.6/\* Distribution Agreement, dated June 7, 1999, between OnStar, a
division of General Motors Corporation, and XM Satellite Radio Inc.
10.7/\* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and DIRECTV, INC.
10.8/\* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and Clear Channel Communication, Inc.
10.9/\* Operational Assistance Agreement, dated as of June 7, 1999, between
XM Satellite Radio Inc. and TCM, LLC.
10.10/\ Agreement, dated as of July 16, 1999 between XM Satellite Radio
Holdings Inc. and Gary Parsons.
10.11/\ Employment Agreement, dated as of June 1, 1998, between XM Satellite
Radio Holdings Inc. and Hugh Panero.
10.12/\ Letter Agreement with Lee Abrams dated May 22, 1998.
10.13/\ Letter Agreement with Stelios Patsiokas dated September 14, 1998.
10.14/\ Letter Agreement with Heinz Stubblefield dated May 22, 1998.
10.15/\ Form of Indemnification Agreement between XM Satellite Radio Holdings
Inc. and each of its directors and executive officers.
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<PAGE>
10.16/\ 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.
10.17/\* 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.
10.18/\ Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio
Inc., dated September 29, 1999.
10.19/\/\ Letter Agreement with Stephen Cook dated January 12, 1999.
10.20* 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 XM Satellite Radio Holdings Inc.'s Annual Report on Form
10-K for the fiscal year ended December 31, 1999, filed with the SEC
on March 16, 2000).
10.21* Joint Development Agreement, dated February 16, 2000, between XM
Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by
reference to XM Satellite Radio Holdings Inc.'s Quarterly Report on
Form 10-Q for the quarter ended March 31, 2000, filed with the SEC on
May 12, 2000.)
12.1 Statement of Computation of Financial Ratios.
21.1+ Subsidiaries of XM Satellite Radio Inc.
23.1 Consent of KPMG LLP.
23.2 Consent of Hogan & Hartson L.L.P. (included in Exhibit 5.1)
25.1+ Statement of Eligibility of Trustee.
27.1 Financial Data Schedule.
99.1 Letter of Transmittal.
99.2 Notice of Guaranteed Delivery.
+ Previously filed.
/\ Incorporated by reference to Holdings' Registration Statement on Form S-1,
File No. 333-83619.
/\/\ Incorporated by reference to Holdings' Registration Statement on Form S-1,
File No. 333-93529.
* Pursuant to the Commission's Order Granting Confidential Treatment under
Rule 406 of the Securities Act of 1933, certain confidential portions of
this Exhibit were omitted by means of redacting a portion of the text.
(b) Financial Statement Schedules included separately in the Registration
Statement.
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy
II-3
<PAGE>
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of this Registration Statement through
the date of responding to the request. The undersigned registrant hereby
undertakes to supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in this Registration Statement when it
became effective.
The undersigned registrant hereby undertakes to file, during any period in
which offers or sales are being made, a post-effective amendment to this
Registration Statement; (i) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933 (the "Securities Act"); (ii) to reflect
in the prospectus any facts or events arising after the effective date of this
Registration Statement (or the most recent post-effective amendment hereof)
which, individually or in the aggregate, represents a fundamental change in the
information set forth in this Registration Statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Securities and Exchange Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of Registration
Fee" table in this Registration Statement when it becomes effective; and (iii)
to include any material information with respect to the plan of distribution not
previously disclosed in this Registration Statement or any material change to
such information in this Registration Statement. The undersigned registrant
hereby undertakes that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof. The undersigned registrant hereby undertakes to remove
from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering. The
undersigned registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act, each filing of the registrant's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this amended registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the District of Columbia, on the 1st
day of September, 2000.
XM SATELLITE RADIO INC.
By: *
-
-------------------------------------
Hugh Panero
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amended
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* President, Chief Executive September 1, 2000
-------------------------- Officer and Director (Principal Executive
Hugh Panero Officer)
* Senior Vice President, Chief Financial
-------------------------- Officer (Principal Financial and September 1, 2000
Heinz Stubblefield Accounting Officer)
* Chairman of the Board of Directors September 1, 2000
--------------------------
Gary M. Parsons
* Director September 1, 2000
--------------------------
Nathaniel A. Davis
* Director September 1, 2000
--------------------------
Thomas J. Donohue
* Director September 1, 2000
--------------------------
Randall T. Mays
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
* Director September 1, 2000
--------------------------
Randy S. Segal
Director _________ __, 2000
--------------------------
Jack Shaw
* Director September 1, 2000
--------------------------
Dr. Rajendra Singh
Director _________ __, 2000
--------------------------
Ronald L. Zarrella
Director _________ __, 2000
--------------------------
Pierce Jackson Roberts, Jr.
Director _________ __, 2000
--------------------------
Walter V. Purnell, Jr.
</TABLE>
*By: /s/ Joseph M. Titlebaum
Joseph M. Titlebaum
Attorney-in-Fact
II-6
