-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Fjp9KisUfwlJNg9XdKlafekrJUv2Yy4rtdmOxIInJ1LltlDYcxAEta+t0Ws3S/s3 ywv5gtV4Q7er8HwynWQH8g== 0000928385-00-000751.txt : 20000317 0000928385-00-000751.hdr.sgml : 20000317 ACCESSION NUMBER: 0000928385-00-000751 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: XM SATELLITE RADIO HOLDINGS INC CENTRAL INDEX KEY: 0001091530 STANDARD INDUSTRIAL CLASSIFICATION: COMMUNICATION SERVICES, NEC [4899] IRS NUMBER: 541878819 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-27441 FILM NUMBER: 571895 BUSINESS ADDRESS: STREET 1: 1250 23RD STREET NW STREET 2: SUITE 57 CITY: WASHINGTON STATE: DC ZIP: 20037-1100 BUSINESS PHONE: 2029697100 MAIL ADDRESS: STREET 1: 1250 23RD STREET NW STREET 2: SUITE 57 CITY: WASHINGTON STATE: DC ZIP: 20037-1100 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 ---------------- FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1999 Commission File Number: 0-27441 ---------------- XM Satellite Radio Holdings Inc. (Exact name of registrant as specified in its charter) Delaware 54-1878819 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1250 23rd Street, N.W. 20037-1100 Washington, DC (Zip Code) (Address of principal executive offices) (202) 969-7100 (Registrant's telephone number, including area code) ---------------- Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Title of Class Class A Common Stock, par value $.01 per share 8.25% Series B Convertible Redeemable Preferred Stock, par value $.01 per share ---------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of common stock held by non-affiliates of the registrant, based upon the closing price of the registrant's Class A common stock as of March 10, 2000 is $42.50. As of March 10, 2000, there were 32,156,738 shares of the registrant's Class A common stock and 16,557,262 shares of the registrant's Class B common stock outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ---- PART I Item 1. Business............................................ 1 Item 2. Properties.......................................... 19 Item 3. Legal Proceedings................................... 19 Item 4. Submission of Matters to a Vote of Security Holders............................................. 19 PART II *Item 5. Market for Registrant's Common Equity and Related Stockholders Matters................................ 20 *Item 6. Selected Consolidated Financial Data................ 21 *Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................. 22 *Item 7A. Quantitative and Qualitative Disclosures about Market Risk......................................... 28 Consolidated Financial Statements and Supplementary Item 8. Data................................................ 29 *Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................. 29 PART III Item 10. Directors and Executive Officers of the Registrant.. 30 Item 11. Executive Compensation.............................. 30 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 30 Item 13. Certain Relationships and Related Transactions...... 30 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K.................. 31 SIGNATURES.............................................................. 35 SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS........................... S-1 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1
i Except for any historical information, the matters we discuss in this Form 10-K concerning our company contain forward-looking statements. Any statements in this Form 10-K that are not statements of historical fact, are intended to be, and are, "forward-looking statements" under the safe harbor provided by Section 27(a) of the Securities Act of 1933. Without limitation, the words "anticipates," "believes," "estimates," "expects," "intends," "plans" and similar expressions are intended to identify forward-looking statements. The important factors we discuss below and under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," as well as other factors identified in our filings with the SEC and those presented elsewhere by its management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this Form 10-K. PART I ITEM 1. BUSINESS Unless the context otherwise requires, the terms "we," "our" and "us" refer to XM Satellite Radio Holdings, Inc. and its subsidiaries, including XM Satellite Radio Inc. XM Satellite Radio Inc. was incorporated in Delaware in 1992. XM Satellite Radio Holdings Inc. was incorporated in Delaware and became a holding company for XM Satellite Radio Inc. in early 1997. Overview We seek to become a premier nationwide provider of audio entertainment and information programming. We will transmit our XM Radio service by satellites to vehicle, home and portable radios. We own one of two FCC licenses to provide a satellite digital radio service in the United States. We will offer a wide variety of music, news, talk, sports and other specialty programming on up to 100 distinct channels. We believe that customers will be attracted to our service because of its wide variety of formats, digital quality sound and coast-to-coast coverage. We are constructing our satellite system and have contracts with third party programmers, vendors and other partners. Key milestones achieved include the following: . $865.0 million of equity proceeds raised to date, net of expenses, interest reserve and repayment of debt, including an initial public offering; an offering of subordinated convertible notes to several strategic and financial investors, including General Motors, Clear Channel Communications, DIRECTV, Telcom Ventures, Columbia Capital and Madison Dearborn Partners, which converted into equity at the time of our initial public offering; concurrent follow-on offerings of Class A common stock and Series B convertible redeemable preferred stock; and the private placement of units consisting of senior secured notes and warrants to purchase shares of Class A common stock; . Contract with Hughes for construction and in-orbit delivery of two high- powered satellites and long lead items for a ground spare; . Contracts with LCC International for design of our international repeater network and Hughes for the design and manufacture of the terrestrial repeaters; . Long-term agreement with the OnStar division of General Motors covering the installation and exclusive marketing and distribution of XM Radio service in General Motors vehicles; . Contracts with Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox, Clarion and SHARP to manufacture and distribute XM radios; . Agreement with STMicroelectronics, a leading digital audio chipset manufacturer, for the design and production of chipsets for XM radios; . Agreement with Lucent Digital Radio to provide coding technology for our audio signals; . Agreements with leading specialty programmers, for many of which we will be the exclusive satellite radio platform, covering at least 24 channels, including AsiaOne, Black Entertainment Television (BET), BBC World Service, Bloomberg News Radio, Clear Channel, CNN en Espanol, CNNfn, CNN 1 Sports Illustrated, C-SPAN, DIRECTV, Hispanic Broadcasting Corporation (formerly Heftel), NASCAR, One-on-One Sports, Radio One, Salem Communications, Sporting News, Weather Channel and USA Today; . Engaged Premiere Radio Networks to be our advertising sales representative; . Entered into marketing arrangements with SFX Entertainment and NASCAR; . Letter of intent with Freightliner Corporation to install XM radios in Freightliner trucks; and . Agreement with Sirius Radio to develop a unified standard for satellite radios, which will facilitate the ability of consumers to purchase an interoperable radio capable of receiving both our and Sirius Radio's service. Market Opportunity We believe that there is a significant market for our satellite radio service. Market studies show strong demand for radio service, as evidenced by radio listening trends, data relating to sales and distribution of radios and the general growth in radio advertising. In addition, we note that in many markets audio programming choices are limited to mass appeal formats. We believe our national subscription service will complement traditional local radio. Moreover, the success of subscription entertainment services in other media such as cable television and market research further indicate potential for significant consumer demand for satellite radio services. Radio Listening On average, adults listen to the radio 3.2 hours a day, with the amount of radio listening fairly evenly distributed across gender and age groups. The percentage of people listening to radio is also high. Market data show that over 75% of the entire United States population age 12 and older listen to the radio daily, and over 95% listen on a weekly basis (Radio Marketing Guide and Factbook for Advertisers, Radio Advertising Bureau, Fall 1999 to Spring 2000). In addition, more people listen to radio than to other comparable audio entertainment formats. The popularity of radio versus these other formats appears particularly strong in the car, where we will be targeting our service initially. An estimated 69% of consumers chose radio as their most listened to format in the car as compared to 15% for cassettes and 9% for CDs (Radio Listening Habits, CEMA 1999). Radio Sales and Distribution A large number of radios are sold in the United States on an annual basis. In 1999, radio manufacturers sold over 29 million car radios, including 17 million original equipment automobile radios and 11 million aftermarket automobile radios, as well as 1.2 million aftermarket automobile CD changers. Original equipment radios are installed in new cars; aftermarket radios are installed in the automobile after purchase. Based on these statistics, each additional one million subscribers would represent less than 3.5% of the new original equipment manufacturer and aftermarket car radios brought to market annually and would generate incremental subscription revenues, at $9.95 per month, of approximately $120 million. Radio Advertising The continued popularity of radio is also reflected in the growth of radio advertising. The Radio Advertising Bureau estimates that radio advertising revenue in 1999 climbed to $17.7 billion, an increase of 15% over 1998. Veronis, Suhler & Associates projects a compound annual increase of 9.7% through 2003. This growth rate exceeds the projected increase in advertising spending for television, newspapers, magazines, yellow pages and outdoor advertising (Communications Industry Forecast, 1999). Current Limitations on Programming Choice Many consumers have access to a limited number of stations and programming formats offered by traditional AM/FM radio. Our service is expected to be attractive to underserved radio listeners who want expanded radio choices. 2 Limited Number of Radio Stations. The number of radio stations available to many consumers in their local market is limited in comparison to the up to 100 channels we expect to offer on a nationwide basis. In 1998, there were only 47 AM/FM radio stations as listed by Arbitron broadcasting in New York City, the largest radio market in the United States. In fact, many metropolitan areas outside the largest 50 markets, such as Jacksonville, FL, Louisville, KY, and Oklahoma City, OK, have 30 or fewer AM/FM radio stations as listed by Arbitron (American Radio, Spring 1999 Ratings Report, Duncan's American Radio, 1999). We estimate that our coast-to-coast service will reach over 98 million listeners age 12 and over who are beyond the range of the largest 50 markets as measured by Arbitron. Of these listeners, 36 million live beyond the largest 276 markets (Census data and Fall 1999 Market Rankings, The Arbitron Company). In addition, there are 22 million people age 12 and above who receive five or fewer stations (The Satellite Report 1999, C. E. Unterberg, Towbin). Limited Programming Formats. We believe that there is significant demand for a satellite radio service that expands the current programming choices available to these potential listeners. Over 52% of all commercial radio stations use one of only three general programming formats--country, adult contemporary and news/talk/sports (Veronis, Schuler & Associates Communications Industry Forecast 1999). Over 71% of all commercial radio stations use one of only five general formats--the same three, plus oldies and religion. The small number of available programming choices means that artists representing niche music formats likely receive little or no airtime in many markets. Radio stations prefer featuring artists they believe appeal to the broadest market. However, according to the Recording Industry Association of America, recorded music sales of niche music formats such as classical, jazz, movie and Broadway soundtracks, new age, children's programming and others comprised up to 21% of total recorded music sales in 1998 (1998 Consumer Profile). Demand for Subscription Services and Products Penetration data relating to cable, satellite television, and premium movie channels suggest that consumers are willing to pay for services that dramatically expand programming choice or enhance quality. As of 1999, over 67% of TV households subscribe to basic cable television at an average monthly cost of $29, and over 11% of TV households subscribe to satellite television at an average monthly cost of $51 (National Cable Television Association website and DBSdish.com website). Also in 1999, according to Paul Kagan Associates, subscribers to cable and satellite services purchased more than 75 million premium channel units, such as HBO, Showtime, and Cinemax, for which they paid an extra monthly charge on top of the basic monthly fee. Demand for Satellite Radio Services Several studies have been conducted demonstrating the demand for satellite radio service. In June 1999, we commissioned Strategic Marketing And Research Techniques, (SMART), a leading market research company and Dr. Frank M. Bass, a leading authority on the diffusion of new products and inventor of the Bass curve, to estimate the demand for satellite radio based on survey data and historical information. SMART surveyed 1,800 people ages 16 and over. The study concluded that as many as 49 million people may subscribe to satellite radio by 2012, assuming $9.95 as a monthly subscription fee and a radio price point of $150- $399, depending upon the type of car or home unit chosen. The study also anticipated that satellite radio will grow even faster than DBS. In December 1998, we commissioned SMART to conduct a study based on one-on- one interviews with over 1,000 licensed drivers ages 16 to 64 in ten geographically dispersed markets. The study concluded that approximately 50% of aftermarket radio purchases would be for AM/FM/satellite radio units with a single-disc 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 3 study, which is the longest standing tracking study of consumer values and attitudes in the United States. The study indicated that 18% of people age 16 and older were "definitely" or "probably" willing to pay $9.99 per month to receive satellite radio and an additional $150 for a satellite radio when buying a new car. The XM Radio Service We are designing the XM Radio service to address the tastes of each of our targeted market segments through a combination of niche and broad appeal programming. We believe that our distinctive approach to programming, combined with digital quality sound and virtually seamless signal coverage throughout the continental United States, will position us to become the leading provider of the next generation in radio. We Will Differentiate XM Radio from Traditional AM/FM Radio Local radio stations, even those which are part of national networks, focus on maximizing listener share within local markets. This limits the types of programming they can profitably provide to mass appeal formats. In contrast, our nationwide reach and ability to provide up to 100 channels in each radio market will allow us to aggregate listeners from markets across the country, expanding the types of programming we can provide. The following chart indicates differences between XM Radio and traditional AM/FM radio.
XM Radio Traditional AM/FM Radio Convenience: go anywhere Virtually seamless signal Local area coverage capability coverage in the United States Choice: wide Up to 100 channels with a Limited formats in many markets variety/number of wide variety of programming stations Improved audio quality Digital quality sound Analog AM/FM quality sound Fewer commercials Average 6-7 minutes per Average 13-17 minutes per hour hour; some channels commercial free More information about Text display with title/name No visual display music of song/artist
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 4 specific formats, we have the ability to provide more variety to attract listeners dissatisfied with repetitive and/or limited playlist selection offered by traditional radio. Deliver a wide range of ethnic and informational programming. We will provide a variety of formats that target specific ethnic and special interest groups who are rarely served by traditional AM/FM radio. We believe by using our national platform to aggregate geographically disparate groups through affinity programming, we will provide advertisers a valuable way to market products and services to these groups by advertising on our affinity channels. Develop promotional opportunities with record companies, recording artists and radio personalities. Because of our nationwide coverage and resulting economies of scale, we will be able to deliver a variety of national promotions and events that would not be cost effective or efficient on a market-by-market basis through traditional AM/FM radio distribution. Also, we will seek to hire and develop high profile talk and disc jockey talent capable of becoming the next generation of national radio stars with an influence on radio similar to the impact that the new breed of cable TV talk hosts have had on the television industry. Respond quickly when major music and cultural events occur. XM Radio programmers will respond quickly to changing musical tastes, seasonal music and emerging popular cultural events, such as Bruce Springsteen and Ricky Martin tours, by providing listeners with extensive coverage utilizing our large channel capacity. Take advantage of digital's higher quality signal. There are several music formats that have strong demand but have been relegated to AM stations with weaker signals due to lack of available FM frequencies. Such AM formats include traditional country music, big band/nostalgia and gospel formats that we will be able to deliver with superior sound quality. Focus on special demands of mobile listeners. A significant percentage of radio listeners, such as truckers, routinely travel through two or more radio markets on a frequent basis. According to the U.S. Department of Transportation, there were over three million truckers in the United States in 1997. We believe these listeners will be attracted to a radio service with national coast-to-coast coverage. We are seeking to specifically identify and target the listening demands of this audience. Availability of commercial-free and limited-advertising channels. We believe that a significant portion of the listening market would pay to subscribe to a radio service that provided commercial-free channels and channels with reduced advertising, as demonstrated by the appeal of limited periods of non-stop music used by some traditional AM/FM stations. Therefore, we plan to target this audience with a number of commercial-free music channels covering popular music formats. In addition, we expect that our limited-advertising channels will carry less than half the advertising spots of typical AM/FM stations. Use cross-promotion capability to market XM Radio. We will dedicate a percentage of our advertising inventory across our channels to promote specific programming and brand loyalty. AM/FM radio stations traditionally promote on a single channel basis to build awareness. 5 Representative XM Radio Channel List The following table is a list of representative channels we may offer. Channels in italics represent contractual commitments with content providers. Representative Channels of XM Radio ROCK MUSIC INFORMATION HISPANIC Classic Rock All News (USA Today) Tejano (Hispanic Classic Hard Rock All News (Bloomberg) Broadcasting Corp.) New Hard Rock Public Affairs (C-SPAN) Caribbean (Hispanic New Alternative Financial News (CNNfn) Broadcasting Corp.) Classic Alternative News/Information (BBC Regional Mexican Soft Rock World Service) (Hispanic Broadcasting ECLECTIC MUSIC Home & Garden Corp.) Contemporary Christian Love/Relationship Line Rock en Espanol (Salem) Farm/Rural (Hispanic Broadcasting Traditional Christian Health/Fitness Corp.) (Salem) Comedy Hispanic Ballads Blues Audio Books (Hispanic Broadcasting Traditional Jazz Consumer Classified Corp.) Reggae/Island Soap Operas Hispanic News (CNN en World Music For Truckers Only Espanol) American Folk Movie Soundtrack Channel OLDIES MUSIC Pop Classical Relationship Classified 40's Oldies Traditional Classical (-18) 50's Oldies Modern Jazz Relationship Classified 60's Oldies Progressive/Fusion (19-30) 70's Oldies POP MUSIC Relationship Classified 80's Oldies Top 20 Contemporary Hits (31-50) 90's Oldies Disco/Dance Relationship Classified Love Songs Broadway Show Tunes (51+) TALK Modern Adult Lifestyles African American Talk Contemporary Celebrity Gossip (BET/Radio One) Classic Vocalists Entertainment News Asian/Indian Talk All Request Contemporary Game Show/Contest (AsiaOne) Hits URBAN MUSIC Christian/Family Talk SPORTS Hip Hop/Rap (BET/Radio (Salem) Sports Headlines One) Mandarin Talk (AsiaOne) (CNN/Sports) Urban Dance Mix (Radio Conservative Talk Sports Talk (One-On-One One) Liberal Talk Sports, Sporting News) Classic Soul (BET/Radio Senior Citizen Talk Sportsman Channel One) Rock Talk Automotive (NASCAR) Gospel (BET/Radio One) Hispanic Talk COUNTRY MUSIC Adult Urban (BET/Radio Teen Talk Mainstream Country One) CHILDREN'S MUSIC Classic Country Top 20 Urban Pre-School Bluegrass/Traditional ENVIRONMENTAL MUSIC Grade School/pre-teen Country Soft Jazz SPECIAL/EVENTS All Request Country New Age Reserved Channels Electronic Environmental (Earth Sounds) Beautiful Instrumentals Key Elements of Our Business We have developed a business strategy to become a premier nationwide provider of audio entertainment and information programming in the vehicle, home and portable markets. Our strategy includes the following elements. 6 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 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. 7 Marketing and Distribution Our marketing strategy will be designed to build awareness and demand among potential subscribers in our target markets and the advertising community. In addition, we expect to work closely with radio and automotive manufacturers and retail distributors to promote rapid market penetration. Establish Broad Distribution Channels for XM Radios We plan to market our satellite radio service through several distribution channels including national electronics retailers, car audio dealers, mass retailers and automotive manufacturers. In addition, we will support our distribution channels by building awareness of XM Radio with a substantial introductory launch campaign, including national and local advertising. Exclusive Distribution Agreement with General Motors. We have an agreement with the OnStar division of General Motors whereby, for a 12-year period, General Motors will exclusively distribute and market the XM Radio service and install XM radios in General Motors vehicles beginning in 2001. General Motors sold over 4.9 million automobiles in 1999, which represented more than 29% of the United States automobile market. Under the agreement, we have substantial payment obligations to General Motors, including among others, certain guaranteed, annual, fixed payment obligations. While we have discussed with General Motors certain installation projections, General Motors is not required to meet any minimum targets for installing XM radios in General Motors vehicles. In addition, certain of the payments to be made by us under this agreement will not be directly related to the number of XM radios installed in General Motors vehicles. Our contract with General Motors is described in more detail under the caption "Certain Relationships and Related Transactions-- Distribution Agreement with General Motors and OnStar." We are currently in discussions with other car manufacturers regarding additional distribution agreements. Distribution through Radio Manufacturers. We have signed contracts with Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox and Clarion for the development, manufacture and distribution of XM radios for use in cars and a contract with Sony Electronics to design, manufacture and market XM radios for the portable, home, aftermarket and original equipment manufacture car stereo markets. One of these manufacturers, Delco Electronics Corporation, a subsidiary of Delphi Automotive Systems, is the leading original equipment manufacturer of radios for the automobile industry, producing more than 33% of car radios manufactured for installation in new automobiles in the United States in 1997. Delphi-Delco is also the leading manufacturer of car radios sold in General Motors vehicles and has signed a contract to build our radios for General Motors. Sony is the leader in sales of portable CD players by a large margin and one of the top three sellers of shelf systems. Sony has agreed to assist with marketing XM Radios and has agreed to incentive arrangements that condition its compensation on use of XM Radios manufactured by Sony or containing Sony hardware. Motorola is a leading supplier of integrated electronics systems to automobile manufacturers. Mitsubishi Electronic Automotive America, together with its parent corporation Mitsubishi Electronic Corp., is the largest Japanese manufacturer of factory- installed car radios in the United States. Clarion is a leader in the car audio and mobile electronics industry. Two of our other manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together sold over 31% of aftermarket car radios sold in the United States in 1999. We have also signed a contract with SHARP to manufacture and distribute XM radios for home and portable use. We are pursuing additional agreements for the manufacture and distribution of XM radios, subject to contract limitations on the number of manufacturer distributors during the early years of service. We also plan to meet with automobile dealers to educate them about XM Radio and develop sales and promotional campaigns to promote XM radios to new car buyers. These leading radio manufacturers have strong retail and dealer distribution networks in the United States. We expect to have access to the distribution channels and direct sales relationships of these distributors, including national electronics retailers, car audio dealers and mass retailers. We do not intend to manufacture or hold inventory of XM radios. Radio distribution likely would be handled by fulfillment centers, which hold inventory for the radio manufacturers and ship products directly to listeners at the manufacturers' request. 8 Rural Market Distribution/Alternative Distribution. We intend to market our satellite radio service in rural counties, using distribution channels similar to satellite television, to penetrate rural households not served by traditional electronic retailers. In addition, we plan to pursue alternative distribution opportunities such as catalog/direct marketing, the Internet and marketing through affinity groups. Future Distribution Arrangements. We have signed an agreement with Sirius Radio to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both our and Sirius Radio's services. Both companies expect to work with their automobile and radio manufacturing partners to integrate the new standard. Future agreements with automakers and radio manufacturers will specify the unified satellite radio standard. Furthermore, future agreements with retail and automotive distribution partners and content providers will be on a non- exclusive basis and may not reward any distribution partner for not distributing the satellite radio system of the other party. In addition, we have signed a letter of intent with Freightliner Corporation to install XM radios in Freightliner trucks. Maximize Revenue Through Dual Sources As with other subscription-based entertainment media such as cable television, we expect to generate revenue by charging a monthly subscription fee and selling limited advertising time. We will earn all of the revenue from advertising on our own programming and a portion of the revenues from advertising on third party programming. XM Radio offers a new national radio platform for advertisers that solves many of the problems associated with buying radio advertising nationally on a spot or syndicated basis. We believe the attractiveness of one-stop national radio advertising buys will provide a significant source of income as our subscriber base grows. Subscriber Development and Expansion We expect to promote XM Radio as a national brand name with an exciting image. Several months prior to service commencement, we will launch an advertising campaign in several United States markets to test and generate early feedback on the product offerings and stimulate early demand. Promotional activities currently under consideration include distributing sample programming at retail outlets, concert venues and on the Internet to generate initial interest. For instance, we have entered into an agreement with SFX Entertainment to be the exclusive satellite radio advertiser at live concerts and sporting events presented by, and live entertainment venues managed by, SFX. Although XM Radio will be available nationwide upon commencement of operations, we will initially concentrate promotional activities in several key markets and rapidly expand to other large markets. This phased roll-out strategy, similar to that employed by consumer electronics manufacturers and special services such as DIRECTV and Web TV, will enable us to refine our launch implementation throughout the roll-out period. The advertising will consist of both branding and promotion efforts for XM Radio, as well as separate campaigns to promote and brand individual channels. Initially, we will focus marketing efforts on the various channels targeting young adults, who we believe are more likely to drive early penetration. We also expect to benefit from free local media coverage as XM Radio is first offered in each new market. XM Radio will promote subscriber acquisition activities with both original equipment and aftermarket radio manufacturers. This might include . promotional campaigns directed towards automobile manufacturers and dealers; . promotional campaigns for free months of service with purchase of an XM radio or free installations for aftermarket car radios; . incentive programs for retailer sales forces; . in-store promotional campaigns, including displays located in electronics, music and other retail stores, rental car agencies and automobile dealerships; and . jointly funded local advertising campaigns with retailers. 9 Advertiser Development and Acquisition Our ability to aggregate various local niche market segments into national audiences will be attractive to national advertisers and agencies. We have held extensive meetings with media directors, planners and buyers at advertising and media buying agencies to develop advertiser awareness of the benefits of satellite radio. We expect to have advertising sales offices in seven major media markets to sell directly to advertising agencies and media buying groups and have engaged Premiere Radio Networks to be our advertising sales representative. We will also work with ratings agencies in our advertising- supported business. Statistical Research, Inc., which produces Radar reports, has agreed to work with us to develop other ratings methodologies for satellite radio. During our early years of service, we do not expect to have a listener base sufficient to attract substantial national advertising dollars on individual channels at competitive rates. Thus, we plan initially to attract national advertisers and agencies with the following kinds of incentives. Charter Advertising Agreements. We have contracts with several advertisers, advertising agencies and media buying companies offering charter advertising packages at reduced rates for a limited time. Each charter advertiser will purchase a minimum amount of advertising from us during the period that the reduced rates are in effect. We intend to sign additional contracts on similar terms. Foreign Language Advertising. We and our programmers plan to offer foreign language advertising on specific foreign language-based channels. Several major national advertisers have expressed strong interest in the ability to advertise to these hard-to-reach customer segments. The XM Radio System We are designing our system to provide satellite radio to the continental United States and coastal waters using radio frequencies allocated by the FCC for satellite radio. These radio frequencies are within a range of frequencies called the S-Band. The XM Radio system will be capable of providing high quality satellite services to XM radios in automobiles, trucks, recreation vehicles and pleasure craft, as well as to fixed or portable XM radios in the home, office or other fixed locations. The XM Radio system design uses a network consisting of an uplink facility, two high-power satellites and, where necessary, ground-based repeaters to provide digital audio service to XM radios. Space Segment Satellite Construction. Under our satellite contract with Hughes, Hughes is building and will launch two HS 702 high-power satellites for the XM Radio system. Hughes has also agreed to provide, at our option, one ground spare satellite, to be available in the event of a failed launch of any satellite or to accommodate our satellite system growth. We believe that the HS 702 model will provide higher quality performance than other satellite options. The first HS 702 satellite was successfully launched in the fourth quarter of 1999 and a total of three HS 702 satellites are currently scheduled for launch before the launch of our satellites. Hughes has also contracted to provide us with launch and operations support services, equipment and software. Under our contract, Hughes must deliver the first satellite no later than December 31, 2000 and the second satellite no later than April 11, 2001. Hughes has engaged Alcatel to provide the communications payload electronics for our satellites. The communications payload electronics are designed to make best use of technologies that have already been developed or used in previous satellite programs. The design includes significant redundancy and protective measures to prevent loss of service. Satellite Transmission. We anticipate that our two satellites will be deployed at 85 West Longitude and 115 West Longitude. After reaching their designated orbital location, the satellites will receive audio signals from our programming center and retransmit the signals across the continental United States. The satellites will be 30(degrees) apart in longitude in order to enhance the probability of clear line-of-sight communication between the satellites and XM mobile radios. 10 The transmission coverage areas, or footprints, of our satellites encompass the 48 contiguous states and nearby coastal waters. We have tailored these footprints to provide nearly uniform availability over the United States and to minimize transmission spillage across the United States borders into Canada and Mexico. However, because coverage does extend to the Gulf of Mexico, the California coast and the Atlantic coast, we also expect to be able to provide XM Radio to the cruise ships, cargo vessels and leisure boats which frequent these waters. Our satellites will transmit audio programming within a 12.5 MHz range of S- Band radio frequencies that have been allocated by the FCC for our exclusive use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth will be subdivided to carry the transmission of six signals, two signals to be transmitted from each of our two satellites and two signals to be transmitted by the terrestrial repeater network. The audio programming for XM Radio will be carried on two satellite signals, and the remaining two satellite signals and the terrestrial repeater signals will repeat the audio programming to enhance overall signal reception. The transmission of higher quality sound requires the use of more kilobits per second than the transmission of lesser quality sound. In order to provide high-quality digital sound, we expect that music channels will require approximately 56 to 64 kilobits per second depending on the type of compression technology used, whereas talk channels will require significantly less band width. We expect to use our allocated bandwidth in such a way as to provide up to 100 channels of programming, with our music channels having a high bandwidth allocation so as to provide high-quality digital sound. Launch Services. Hughes has signed an agreement with Sea Launch Limited Partnership, a joint venture in which Boeing Commercial Space Company has a controlling 40% interest, to provide the launch services for our satellites. The launch vehicle uses a new rocket called the Zenit-3SL, which is based on a flight-proven two-stage rocket called the Zenit-2, plus a stage which is the flight-proven upper stage of a Russian-developed rocket called the Proton rocket. The Zenit-2 vehicle has been successfully launched 30 times in 35 attempts, for an 86% success rate. The upper stage has successfully flown in 186 flights on various rockets with five failures, for a 97% success rate. Sea Launch has developed a new launch system to launch rockets from an ocean-based platform. Sea Launch will perform all rocket and satellite processing at the Sea Launch home port in Long Beach, California. Sea Launch will move the platform to its launch position in the South Pacific Ocean near the equator, where the satellites can be launched more efficiently by avoiding the requirement to conduct an orbital plane change. In March 1999, Sea Launch successfully launched a rocket carrying an inert payload into geo-stationary orbit. Sea Launch also successfully launched its first commerical satellite, DIRECTV 1-R, in October 1999. As of December 31, 1999, Sea Launch had contracts for an additional 18 launches. In March 2000 a satellite launch by Sea Launch experienced an anomaly that resulted in the loss of the communications satellite payload. An investigation is currently underway by Boeing and its Sea Launch partners to determine the cause of the failure. We understand that Sea Launch will resume launches after the anomaly has been investigated and rectified. While there can be no assurances, given the anticipated Sea Launch turn around window between launches, as well as our placement on the launch manifest, with two others ahead of us, we do not expect any significant delay with our launch schedule. Insurance. We bear the risk of loss for each of the satellites from the time of launch, subject to exceptions set forth in our agreement with Hughes, and we intend to obtain insurance to cover that risk. We intend to purchase launch and in-orbit insurance policies from global space insurance underwriters. The insurance premiums for both satellites are expected to cost us approximately $50 million. We cannot predict the status of the insurance market near the time of launch, which is the customary time for purchasing satellite insurance. We expect that the policies we obtain will indemnify us for a total, constructive total or partial loss of either of the satellites that occurs from the time of launch through each satellite's expected lifetime. We intend to obtain coverage which will exceed all hardware, insurance and launch service costs related to the in-orbit replacement of a lost satellite. However, any insurance we may obtain will not protect us from the adverse effect on our business operations due to the loss of a satellite. We expect that these policies will contain standard commercial satellite insurance provisions, including standard coverage exclusions. 11 Ground Segment Satellite Control. Each of our satellites will be monitored by a telemetry, tracking and control station, and both satellites will be controlled by a satellite control station. Each of the stations will have a backup station. We have a contract with an experienced satellite operator to perform the telemetry, tracking and control functions. Programming and Business Center. Programming from both our studios and external sources will be sent to our programming center, which will package and retransmit signals to our satellites through the uplink station. Financial services and certain administrative support will be carried on at our business center. Communications traffic between the various XM Radio facilities will be controlled by the network monitoring center. The network monitoring center will monitor satellite signals and the terrestrial repeater network to ensure that the XM Radio system is operating properly. We plan to design and install fault detection systems to detect various system failures before they cause significant damage. Terrestrial Repeaters. We intend to install a terrestrial repeater system to supplement the coverage of our satellites. Terrestrial repeaters are ground- based electronics equipment which receive and re-transmit the satellite signals. We have signed a contract with LCC International, a wireless service site planner, for the design and deployment of our terrestrial repeater network. LCC International has completed initial site planning for 70 markets. The contract with LCC International is described in more detail under the caption "Certain Relationships and Related Transactions--Engineering Contract with LCC International." We have entered into a contract with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. The contract is described in greater detail under the caption "Certain Relationships and Related Party Transactions-Contracts with Hughes." In some areas, satellite signals may be subject to blockages from tall buildings and other obstructions. Due to the satellites' longitudinal separation, in most circumstances where reception is obscured from one satellite, XM Radio will still be available from the other satellite. In some urban areas with a high concentration of tall buildings, however, line-of-sight obstructions to both satellites may be more frequent. In such areas, we will install terrestrial repeaters to facilitate signal reception. We will install terrestrial repeaters on rooftops and existing tower structures where they will receive the satellite signals, amplify them and retransmit them at a significantly higher signal strength than is possible directly from the satellites. Before we may install many of our planned terrestrial repeaters, we must obtain roof rights in suitable locations and on acceptable terms. We do not expect this to present a serious problem to our construction of a terrestrial repeater network. The high power levels and proprietary signal design of the terrestrial signals may allow XM radios to receive signals when a terrestrial repeater is not in view, including within buildings and other structures which can be penetrated by the terrestrial repeater signal. In some indoor locations which cannot receive the repeater signal, users will need to use small externally mounted antennas that will receive the signal from one of the two satellites. We have contracted to purchase 1,550 terrestrial repeaters and may install as many as 1,700 terrestrial repeaters to cover urban areas in approximately 70 markets. We expect that this system will be operational by the second quarter of 2001. We estimate that the largest urban markets may require in excess of 100 repeaters, while smaller cities with fewer tall buildings may require as few as one to three repeaters. We also intend to use additional small repeaters in areas such as tunnels, where reception would otherwise be severely restricted. Our placement of terrestrial repeaters will be guided by a newly developed radio frequency analysis technique which, employing technology similar to that used in certain cellular telephone systems, analyzes the satellite footprint to discover areas likely to have impaired reception of XM Radio. We expect to benefit from the expertise gained by American Mobile with its ARDIS terrestrial two-way data network consisting of approximately 1,700 base stations sites serving cities throughout the United States. We may use a portion of these sites in our system. XM Radios. We will transmit XM Radio throughout the continental United States to vehicle, portable, home and plug and play radios. Our radios will be capable of receiving both XM Radio and traditional AM/FM stations. We believe prototypes will be available and limited production will begin by December 2000, and radios will be commercially available by commencement of commercial operation. 12 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 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 each company's contribution toward the joint development. In addition, each company has agreed to license its non-core technology, including non-essential features of its system, to the other at commercially reasonable rates. In connection with this agreement, the pending patent litigation against XM Radio has been resolved. We anticipate that it will take several years to develop radios capable of receiving both services. At the commercial launch of our service, we anticipate that our consumers will be able to purchase radios only capable of receiving our service. Both companies expect to work with their automobile and radio manufacturing partners to integrate the new standard. Future agreements with automakers and radio manufacturers will specify the unified satellite radio standard. Furthermore, future agreements with retail and automotive distribution partners and content providers will be on a non-exclusive basis. We and Sirius Radio have also agreed to negotiate in good faith to provide service to each other's subscribers in the event of a catastrophic failure of the XM Radio system or the Sirius Radio system. Competition We expect to face competition for both listeners and advertising dollars. Sirius Satellite Radio Our direct competitor in satellite radio service is likely to be Sirius Satellite Radio, the only other FCC licensee for satellite radio service in the United States. Since October 1997, Sirius Satellite Radio's common stock has traded on the Nasdaq National Market. Sirius Satellite Radio plans to deploy three satellites in a North American elliptical orbit and a network of terrestrial repeaters. Sirius Satellite Radio has announced in recent SEC filings that it has arrangements for the construction, implementation and distribution of its service and that it expects to begin receiving revenue from operations in early 2001, which is slightly ahead of our planned commencement of commercial operations in the second quarter of 2001. Traditional AM/FM Radio Our competition will also include traditional AM/FM radio. Unlike XM Radio, traditional AM/FM radio already has a well established market for its services and generally offers free broadcast reception paid for by commercial advertising rather than by a subscription fee. Also, many radio stations offer information programming of a local nature, such as traffic and weather reports, which XM Radio initially will be unable to offer as effectively as local radio, or at all. The AM/FM radio broadcasting industry is highly competitive. 13 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; . air talent; . transmitter power; . source frequency; . audience characteristics; . local program acceptance; and . the number and characteristics of other radio stations in the market. Currently, traditional AM/FM radio stations broadcast by means of analog signals, not digital transmission. We believe, however, that in the future traditional AM/FM radio broadcasters may be able to transmit digitally into the bandwidth occupied by current AM/FM stations. Internet Radio There are a growing number of Internet radio broadcasts which provide listeners with radio programming from around the country and the world. Internet radio can be heard through a personal computer equipped with a modem, sound card and speakers. One of the largest Internet radio providers, Broadcast.com Inc., currently provides a large number of stations on the Internet and has recently completed an initial public offering of stock, indicating growth in the industry. Announcements have been made about plans by one or more companies to deliver Internet radio to cars or portable radios using satellites. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors such as network traffic, which can distort or interrupt the broadcast, we expect that improvements from higher bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future. There are a number of Internet-based audio formats in existence or in development which could compete directly with XM Radio. For example, Internet users with the appropriate hardware and software can download sound files for free or for a nominal charge and play them from their personal computers or from specialized portable players. In addition, prominent members of the music and computer industry have supported an initiative known as the Secure Digital Music Initiative to become a standard for fee-based electronic distribution of copyrighted sound recordings. Although presently available formats have drawbacks such as hardware requirements and download bandwidth constraints, which we believe would make XM Radio a more attractive option to consumers, Internet-based audio formats may become increasingly competitive as quality improves and costs are reduced. Direct Broadcast Satellite and Cable Audio A number of companies provide specialized audio service through either direct broadcast satellite and cable audio systems. These services are targeted to fixed locations, mostly in-home. The radio service offered by direct broadcast satellite and cable audio is generally an add-on service to the higher priced video service. Regulatory Matters XM Radio and Sirius Radio received licenses from the FCC in October 1997 to construct and operate satellite radio service. The FCC has allocated 25 MHz for the new service in a range of radio frequencies known as the S-Band. As an owner of one of two FCC licenses to operate a commercial satellite radio service in the United States, we will continue to be subject to regulatory oversight by the FCC. Our development, implementation and eventual operation of our system will be subject to significant regulation by the FCC under authority granted under the Communications Act and related to federal law. Non-compliance by us with FCC rules and regulations could result in fines, additional license conditions, license revocation or other detrimental FCC actions. Any of these FCC actions may harm our business. There is no guarantee that the rules and regulations of the FCC will continue to support our business plan. 14 One of the two losing bidders in the satellite radio license auction filed an application for review of the order granting our FCC license, but the challenge was denied. The losing bidder is seeking review by the FCC. The losing bidder has argued that WorldSpace had effectively taken control of us without FCC approval and that WorldSpace has circumvented the FCC's application cut-off procedures. WorldSpace is no longer a stockholder in our company. We have opposed this appeal and have denied the allegations contained in the challenge. The FCC's order granting our license remains in effect during the pendency of the application for review. Although we believe that the award of the license to us will continue to be upheld, we cannot predict the ultimate outcome of this challenge. If this challenge is successful, the FCC could take a range of actions, any of which could harm our ability to proceed with our planned satellite radio service. Our license, which is held by a subsidiary wholly owned by us, has a term of eight years from commencement of our operations and may be renewed. The FCC requires the satellite radio licensees, including us, to adhere to certain milestones in the development of their systems, including a requirement that the licensees begin full operation by October 2003. Our FCC license requires us to meet the following milestones:
Deadline Milestone Status - -------- --------- ------ 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
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 have filed an application requesting that the FCC allow us to modify the XM Radio system to incorporate these changes. In response to our application, one commenter expressed concern that a grant of XM Radio's request to operate its satellites at higher power could have an adverse effect on international frequency coordination with the government of Mexico. We discuss the coordination of the XM Radio system with systems operating in the same frequency bands in adjacent countries below in this section. 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 15 several years to develop the technologies necessary for radios that will be capable of receiving both our service and Sirius Radio's service. Accordingly, we may not be able to meet the FCC's interoperability requirements by the time we launch our commercial operations and may need to obtain an extension of time or modification of this requirement from the FCC. Furthermore, complying with the interoperability requirement could make the radios more difficult and costly to manufacture. The FCC is currently conducting a rulemaking proceeding to establish rules for terrestrial repeater transmitters, which we plan to deploy to fill in gaps in satellite coverage. The FCC has proposed to permit us to deploy these facilities. Specifically, the FCC has proposed a form of blanket licensing for terrestrial repeaters and service rules which would prohibit satellite radio licensees from using terrestrial repeating transmitters to originate local programming or transmit signals other than those received from the satellite radio satellites. Various parties, including the National Association of Broadcasters, have asked the FCC to . delay consideration of terrestrial repeater rules until our company and Sirius Radio provide additional information regarding planned terrestrial repeaters; . require individual licensing of each terrestrial repeater; . limit the number of repeaters that may be deployed; and . impose a waiting period on the use of repeaters in order to determine if signal reception problems can be resolved through other means. Our plans to deploy terrestrial repeaters in our system may be impacted, possibly materially, by whatever rules the FCC issues in this regard. The FCC also may adopt limits on emissions of terrestrial repeaters to protect other services using nearby frequencies. While we believe that we will meet any reasonable non-interference standard for terrestrial repeaters, the FCC has no specific standard at this time, and the application of such limits might increase our cost of using repeaters. Although we are optimistic that we will be able to construct and use terrestrial repeaters as needed, the development and implementation of the FCC's ultimate rules might delay this process or restrict our ability to do so. We will need to coordinate the XM Radio system with systems operating in the same frequency bands in adjacent countries. Canada and Mexico are the countries whose radio systems are most likely to be affected by satellite radio. The United States government, which conducts the coordination process, has resolved the issue with Canada and has begun discussions with the Mexican government. However, the negotiations with Mexico could be complicated by that country's interest in developing a similar digital satellite radio service that might operate on the same frequencies as XM Radio will use in the United States. Although we are optimistic that the FCC will coordinate satellite radio frequency use with Mexico without compromising our ability to operate as planned, it may not be able to do so, which could materially affect XM Radio. We will operate the communication uplinks between our own earth station and our satellites in a band of radio frequencies that are used for several other services. These services are known under FCC rules as fixed services, broadcast auxiliary services, electronic news gathering services, and mobile satellite services for uplink station networks. Although we are optimistic that we will succeed in coordinating domestic uplink station networks, we may not be able to coordinate use of this spectrum in a timely manner, or at all. We also need to protect our system from out-of-band emissions from licensees operating in adjacent frequency bands. Wireless Communication Service licensees operating in frequency bands adjacent to the satellite radio's S-Band allocation must comply with certain out-of-band emission limits imposed by the FCC to protect satellite radio systems. These limits, however, are less stringent than those we proposed. In addition, in April 1998, the FCC proposed to amend its rules to allow for new radio frequency lighting devices that would operate in an adjacent radio frequency band. We opposed the proposal on the grounds that the proliferation of this new kind of lighting and its proposed emission limits, particularly if used for street lighting, may interfere with XM Radio. However, the FCC may not rule in our favor, a decision which could adversely affect our signal quality. 16 The FCC order granting our license determined that because we are a private satellite system providing a subscription service on a non-common carrier basis, we would not be subject to the FCC's foreign ownership restrictions. However, such restrictions would apply to us if we were to offer non subscription services, which may appear more lucrative to potential advertisers than subscription services. The FCC also stated in its order that it may reconsider its decision not to subject satellite radio licensees to its foreign ownership restrictions. Sea Launch, Alcatel and other vendors are subject to United States export regulations. Our vendors will need approval from the State Department under technology export statutes and regulations for the launch of our satellites. Although these are not new requirements, the export of technology has received considerable attention in response to concerns about the export of technology to China by the United States defense contractors. The negative publicity may lead the United States Congress to alter the relevant laws or regulations, or may change the State Department's policy in enforcing the regulations. Any change in applicable law or policy may result in delay of our satellite launch. Intellectual Property System Technology We have contracted with several technology companies to implement portions of the XM Radio system. These technology companies include Hughes and Alcatel (satellites); Delphi-Delco, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox, Clarion and SHARP (car and home radios); STMicroelectronics (chipsets); Lucent Digital Radio (audio coding technology); Fraunhofer Institute (various technologies) and LCC International (design of repeater network). We will not acquire any intellectual property rights in the satellites. We will have joint ownership of or a license to use the technology developed by the radio and chipset manufacturers. We will own the design of our system, including aspects of the technology used in communicating from the satellites and the design of the repeater network. Our system design, our repeater system design and the specifications we supplied to our radio and chipset manufacturers incorporates or may in the future incorporate some intellectual property licensed to us on a non-exclusive basis by WorldSpace Management. WorldSpace Management has used this technology in its own non-United States satellite radio system. We also have the right to sublicense the licensed technology to any third party, including chipset manufacturers, terrestrial repeater manufacturers and receiver manufacturers in connection with the XM Radio system. Under our agreement with WorldSpace Management we must pay one time, annual or percentage royalty fees or reimburse WorldSpace Management for various costs for various elements of the licensed technology that we decide to use in the XM Radio system. We have incurred costs of $6.7 million to WorldSpace Management under this agreement through December 31, 1999. We will not be required to pay royalties to WorldSpace Management for licensed technology that we do not use in our system. We anticipate that the Fraunhofer Institute will continue to provide various development services for us in connection with the design of our system. American Mobile has granted us a royalty-free license with respect to certain ground segment communications technology and antenna technology. American Mobile and WorldSpace Management have also granted us royalty-free, non-exclusive and irrevocable licenses to use and sublicense all improvements to their technology. The technology licenses from American Mobile and WorldSpace Management renew automatically on an annual basis unless terminated for a breach which has not been or cannot be remedied. We believe that the intellectual property rights we have licensed under our technology license were independently developed or duly licensed by American Mobile or WorldSpace International, as the case may be. We cannot assure you, however, that third parties will not bring suit against us for patent or other infringement of intellectual property rights. 17 We have signed an agreement with Sirius Radio to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both our and Sirius Radio's services. The technology relating to this unified standard will be jointly developed, funded and owned by the two companies. As part of the agreement, each company has licensed to the other its intellectual property relating to the unified standard and to its system; the value of this license will be considered part of its contribution toward the joint project. In addition, each company has agreed to license its non-core technology, including non-essential features of its system, to the other at commercially reasonable rates. Each party will be entitled to license fees or a credit towards its obligation to fund one half of the development cost of the technologies used to develop a unified standard for satellite radios. The amount of the fees or credit will be based upon the validity, value, use, importance and available alternatives of the technology each contributes and will be determined over time by agreement of the parties or by arbitration. We cannot predict at this time the amount of license fees, if any, payable by or to XM or Sirius Radio of the size or 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 or 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 3-4% of their revenues to these performing rights societies. We expect to negotiate or establish by arbitration royalty arrangements with these organizations, but such royalty arrangements may be more costly than anticipated or unavailable. Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we also have to negotiate royalty arrangements with the owners of the sound 18 recordings. The Recording Industry Association of America will negotiate licenses and collect royalties on behalf of copyright owners for this performance right in sound recordings. Cable audio services currently pay a royalty rate of 6.5% of gross subscriber revenue. This rate was set by the Librarian of Congress, which has statutory authority to decide rates through arbitration, and was affirmed on May 21, 1999 by the United States Court of Appeals for the District of Columbia. Although we believe we can distinguish XM Radio sufficiently from the cable audio services in order to negotiate a lower statutory rate, we may not be able to do so. The XMTM Trademark We believe that XM Radio will be seen as the complement to AM and FM radio. We have an application pending in the United States Patent and Trademark Office for the registration of the trademark "XM" in connection with the transmission services offered by our company and expect that our brand name and logo will be prominently displayed on the surface of XM radios together with the radio manufacturer's brand name. This will identify the equipment as being XM Radio- compatible and build awareness of XM Radio. We intend to maintain our trademark and the anticipated registration. We are not aware of any material claims of infringement or other challenges to our right to use the "XM" trademark in the United States. Personnel As of January 31, 2000, we had 67 employees. In addition, we rely upon a number of consultants and other advisors. The extent and timing of any increase in staffing will depend on the availability of qualified personnel and other developments in our business. None of our employees is represented by a labor union, and we believe that our relationship with our employees is good. ITEM 2. PROPERTIES Our executive offices are located at 1250 23rd Street, N.W., Suite 57, Washington, D.C. 20037-1100, and are leased pursuant to a lease agreement that will expire on October 31, 2000. We have entered into a ten year lease of approximately 120,000 square feet of additional space in Washington, D.C. to be used as our headquarters office, as well as for our studio and production facilities. ITEM 3. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1999. 19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Our Class A common stock has been quoted on the Nasdaq National Market under the symbol "XMSR" since our initial public offering on October 5, 1999. The following table presents, for the period indicated, the high and low sales prices per share of our Class A common stock as reported on the Nasdaq National Market.
High Low ------ ------- 1999: Fourth Quarter (beginning October 5, 1999)..................... $44.75 $11.625
On March 10, 2000, the last reported bid price for our Class A common stock on the Nasdaq National Market was $42.50. As of March 10, 2000, there were 76 holders of record of our Class A common stock. DIVIDEND POLICY We have not declared or paid any dividends since our date of inception. We do not intend to pay cash dividends on our common stock in the foreseeable future. We anticipate we will retain any earnings for use in our operations and the expansion of our business. We are obligated to pay dividends on our Series B convertible redeemable preferred stock, which we may pay in cash or in shares of our Class A common stock, at our option. RECENT SALES OF UNREGISTERED SECURITIES None. 20 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA In considering the following selected consolidated financial data, you should also read our consolidated financial statements and notes and the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations." The consolidated statements of operations data for the three-year period ended December 31, 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999, and the consolidated balance sheets data as of December 31, 1997, 1998 and 1999 are derived from our consolidated financial statements. These statements have been audited by KPMG LLP, independent certified public accountants. KPMG's report contains a paragraph stating that we have not begun operations and are dependent upon additional debt or equity financing, 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.
December 15, 1992 (Date of Years Ended December 31, Inception) -------------------------------- to December 31, 1997 1998 1999 1999 (1) --------- --------- ---------- --------------- (In thousands, except share data) Consolidated Statements of Operations Data: Revenue...................... $ -- $ -- $ -- $ -- --------- --------- ---------- -------- Operating expenses: Research and development.... -- 6,941 4,274 11,215 Professional fees........... 1,090 5,242 9,969 16,301 General and administrative.. 20 4,010 16,448 20,478 --------- --------- ---------- -------- Total operating expenses.... 1,110 16,193 30,691 47,994 --------- --------- ---------- -------- Operating loss............... (1,110) (16,193) (30,691) (47,994) Other expense--interest income (expense), net....... (549) 26 (6,205) (6,728) --------- --------- ---------- -------- Net loss..................... $ (1,659) $ (16,167) $ (36,896) $(54,722) ========= ========= ========== ======== Net loss per share--basic and diluted..................... $(0.26) $(2.42) $(2.40) ========= ========= ========== Weighted average shares used in computing net loss per share--basic and diluted.... 6,368,166 6,689,250 15,344,102
December 31, -------------------------- 1997 1998 1999 ------- -------- -------- (In thousands) Consolidated Balance Sheets Data: Cash, cash equivalents and short-term investments........................... $ 1 $ 310 $120,170 System under construction.............. 91,932 169,029 362,358 Total assets........................... 91,933 170,485 515,189 Total debt............................. 82,504 140,332 212 Total liabilities...................... 82,949 177,668 30,172 Stockholders' equity (deficit)......... 8,984 (7,183) 485,017
- -------- (1) Business activity for the period from December 15, 1992, which was our date of inception, through December 31, 1996 was insignificant. 21 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information which we believe is relevant to an assessment and understanding of our financial condition and consolidated results of operations. This discussion should be read together with our consolidated financial statements and related notes beginning on page F-1 of this report. Introduction XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly- owned subsidiary of American Mobile. XM Satellite Radio Holdings Inc. became a holding company for XM Satellite Radio Inc. in connection with a strategic investment by a former shareholder in early 1997. In July 1999, following our repayment of $75.0 million in debt owed to the former shareholder, it conveyed all of its interest in us to a trust. American Mobile then acquired all of that interest from the trust, making American Mobile our only stockholder at that time. Also, in July, we issued $250.0 million of Series A subordinated convertible notes. In October 1999, we completed an initial public offering and exercised an overallotment option for a cumulative total of 10,241,000 shares of Class A common stock, yielding net proceeds of $114.1 million. Concurrent with the closing of our initial public offering, the $250.0 million of Series A subordinated convertible notes, together with associated accrued interest of $6.8 million, converted into 10,786,504 shares of Series A convertible preferred stock and 16,179,755 shares of Class A common stock. Additionally, the $21.4 million and $81.7 million of convertible notes issued to American Mobile, together with associated accrued interest of $3.8 million, converted into 11,182,926 shares of Class B common stock. In the first quarter of 2000, we completed a follow-on offering of 4,370,000 shares of Class A common stock, yielding net proceeds of $132.2 million, a concurrent offering of 2,000,000 shares of our Series B convertible redeemable preferred stock, which yielded net proceeds of $96.3 million, and a private placement of 325,000 units, each consisting of $1,000 principal amount of 14% senior secured notes due 2010 and one warrant to purchase 8.024815 shares of Class A common stock at $49.50 per share that provided net proceeds of $191.0 million excluding $123.0 million for an interest reserve. We are in the development stage. Since our inception in December 1992, we have devoted our efforts to establishing and commercializing the XM Radio system. Our activities were fairly limited until 1997, when we pursued and obtained regulatory approval from the FCC to provide satellite radio service. Our principal activities to date have included . designing and developing the XM Radio system; . negotiating contracts with satellite and launch vehicle operators, specialty programmers, radio manufacturers and car manufacturers; . developing technical standards and specifications; . conducting market research; and . securing financing for working capital and capital expenditures. We have incurred substantial losses to date and expect to continue to incur significant losses for the foreseeable future as we continue to design, develop and deploy the XM Radio system and for some period following our commencement of commercial operations. We intend to capitalize all costs related to our satellite contract and our FCC license, including all applicable interest. These capitalized costs will be depreciated over the estimated useful lives of the satellites and ground 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. 22 Results of Operations Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 Research and Development. Research and development expenses decreased to $4.3 million in 1999, compared with $6.9 million in 1998. The decrease in research and development expenses resulted from the completion of the development of some of our system technology during 1998. Professional Fees. Professional fees increased to approximately $10.0 million in 1999, compared with $5.2 million in 1998. The increase primarily reflects additional legal, regulatory and marketing expenses. General and Administrative. General and administrative expenses increased to $16.4 million in 1999, compared with $4.0 million in 1998. The increase primarily reflects increased headcount and facility expenses to begin program management and operations. We also commenced the amortization of our goodwill and intangibles resulting from American Mobile's acquisition of a former investor's interest in us during 1999. We have granted certain key executives stock options and incurred a non-cash compensation charge of approximately $4.1 million in the fourth quarter of 1999 primarily for performance-based stock options. We will continue to incur quarterly non-cash compensation charges over the vesting period depending on the market value of our Class A common stock. Interest Income. Interest income increased to $2.9 million in 1999, compared with 1998, which was insignificant. The increase was the result of higher average balances of cash and short-term investments during 1999 due to the proceeds from the issuance of Series A convertible notes in the third quarter of 1999 exceeding the amounts of expenditures for satellite and launch vehicle construction, other capital expenditures and operating expenses. Interest Expense. As of December 31, 1999 and 1998, we owed $0 and $140.2 million, respectively, including accrued interest, under various debt agreements which we entered into for the purpose of financing the XM Radio system. Our capitalized interest costs were $15.3 million and $11.8 million associated with our FCC license and the XM Radio system during 1999 and 1998, respectively. We expensed interest costs of $9.1 million and $0 during 1999 and 1998, respectively. We incurred a one-time $5.5 million charge to interest due to the beneficial conversion feature of the new American Mobile note. We also exceeded our interest capitalization threshold by $3.6 million. Net Loss. The net loss for 1999 and 1998 was $36.9 million and $16.2 million, respectively. The increase in net losses for 1999, compared with 1998, primarily reflects an increase in net interest expense as discussed above and additional general and administration expenses, primarily due to increased headcount and facility expenses, in preparation for commercial operations and the commencement of amortization of goodwill and intangibles. Year Ended December 31, 1998 Compared with Year Ended December 31, 1997 Research and Development. Research and development expenses amounted to approximately $6.9 million for the year ended December 31, 1998. Research and development expenses for the year ended December 31, 1997 were insignificant. The increase in research and development expenses resulted from the development of some of our system technology during 1998. Professional Fees. Professional fees increased to approximately $5.2 million for the year ended December 31, 1998, compared with $1.1 million for the year ended December 31, 1997. The increase primarily reflects legal, regulatory and marketing expenses. General and Administrative. General and administrative expenses increased to $4.0 million for the year ended December 31, 1998, compared with $20,000 for the year ended December 31, 1997. The increase primarily reflects increased headcount and facility expenses to begin program management and operations. Interest Expense. As of December 31, 1998 and 1997, we owed $140.2 million and $82.5 million, respectively, including accrued interest, under various debt agreements which we entered into for the purpose of 23 financing the XM Radio system. We capitalized interest costs of $11.8 million and $1.9 million associated with our FCC license and the XM Radio system during the year ended December 31, 1998 and 1997, respectively. We expensed interest costs of $0.5 million during the year ended December 31, 1997. Net Loss. The net loss for the years ended December 31, 1998 and 1997 was $16.2 million and $1.7 million, respectively, primarily reflecting research and development activities, professional fees and general and administrative expenses. Liquidity and Capital Resources At December 31, 1999, we had a total of cash, cash equivalents and short- term investments of $120.2 million and working capital of $94.7 million, compared with cash and cash equivalents of $0.3 million and working capital of $(130.3) million at December 31, 1998. The increases in the respective balances are due primarily to the proceeds from the issuance of Series A subordinated convertible notes in July 1999 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Funds Required for XM Radio Through Commencement of Commercial Operations--Sources of Funds") exceeding capital expenditures and operating expenses for 1999, which was off-set by a $75 million payment to retire loans payable, and the conversion of current loans payable to a former shareholder into the non-current American Mobile new convertible note. In October 1999, we successfully completed an initial public offering, which raised $114.1 million in net proceeds, and converted the Series A subordinated convertible notes into Series A convertible preferred stock and Class A common stock. Funds Required for XM Radio Through Commencement of Commercial Operations We estimate that we will require approximately $1.1 billion to develop and implement the XM Radio system from our inception through the commencement of commercial operations, which we are targeting for the second quarter of 2001. We will have raised an aggregate of $865.0 million since our inception net of expenses, interest reserve and repayment of debt. We will require substantial additional funding, approximately $235.0 million, to finish building the XM Radio system, to provide working capital and fund operating losses until we commence commercial operations. The funds raised to date are expected to be sufficient in the absence of additional financing to cover our funding needs into the third quarter of 2000. We currently expect to satisfy our funding requirements by selling debt or equity securities and by obtaining loans or other credit lines from banks or other financial institutions. In addition, we plan to raise funds through vendor financing arrangements associated with our terrestrial repeater project. If we are successful in raising additional financing, we anticipate that a significant portion of future financing will consist of debt. We are actively considering possible financings, and because of our substantial capital needs we may consummate one or more financings at any time. Often, high yield debt securities are issued as part of units with warrants to purchase common stock. If warrants were issued in any debt placement by us, the amount of common stock that may be purchased and the price at which stock would be purchased under the warrants would depend upon market conditions at that time. American Mobile is our controlling stockholder. American Mobile has certain rights regarding the election of persons to serve on our board of directors and as of the date of this report, holds 61.0% of the voting power of Holdings, or 50.5% giving effect to the conversion of all of Holdings' outstanding common stock equivalents. American Mobile cannot relinquish its position as our controlling shareholder without obtaining the prior approval of the FCC. Accordingly, prior to our obtaining FCC approval of the transfer of control from American Mobile, we will only be able to issue a limited amount of voting securities or securities convertible into voting securities unless certain of our stockholders holding nonvoting convertible securities agree not to convert them into voting securities or we take other steps to permit voting securities on a basis consistent with FCC rules. Certain holders of our nonvoting securities have agreed not to convert their securities if it would cause American Mobile not to hold a majority of our voting stock or a lesser percentage approved by the FCC, 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 issued on March 15, 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 non-voting securities. We intend to seek appropriate FCC approvals in the near future. We may not be able to obtain FCC 24 approval or it may take a long period of time to obtain such approval and there may be conditions imposed in connection with such approval which may be unfavorable to us. The inability to raise capital opportunistically, or at all, could adversely affect our business plan. We may not be able to raise any funds or obtain loans on favorable terms or at all. Our ability to obtain the required financing depends on several factors, including future market conditions; our success or lack of success in developing, implementing and marketing our satellite radio service; our future creditworthiness; and restrictions contained in agreements with our investors or lenders. If we fail to obtain any necessary financing on a timely basis, a number of adverse effects could occur. Our satellite construction and launch and other events necessary to our business could be materially delayed or their costs could materially increase. We could default on our commitments to our satellite construction or launch contractors, creditors or others, leading to termination of construction or inability to launch our satellites. Finally, we may not be able to launch our satellite radio service as planned and may have to discontinue operations or seek a purchaser for our business or assets. Our expected sources and uses of funds through commencement of commercial operations are as follows: Inception Through Commercial Launch (in millions) Sources of Funds Total funds raised to date.......................................... $ 865.0 Future capital requirements......................................... 235.0 -------- Total sources..................................................... $1,100.0 ======== Uses of Funds Satellites and launch............................................... $ 472.6 Launch insurance.................................................... 50.0 Terrestrial repeater system......................................... 263.3 Ground segment...................................................... 65.9 -------- Total system...................................................... 851.8 FCC license......................................................... 90.0 Operating expenses and working capital requirements................. 158.2 -------- Total uses........................................................ $1,100.0 ========
The sources and uses chart for inception through commercial launch assumes that we will commence full commercial operations in the second quarter of 2001 and does not include net interest income or expense of any future offerings or other financings. We anticipate that we will need substantial further funding after commencement of operations to cover our cash requirements before we generate positive cash flow from operations. Many factors, including our ability to generate significant revenues, could affect this estimate. See "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Total funds raised to date in the chart above include proceeds of . $9.2 million in equity contributions and an additional $157.8 million in equity from converted debt instruments funded by American Mobile and by a former investor who sold its investment to American Mobile. . $238.7 million in net proceeds from convertible notes which were converted to Class A common stock and Series A convertible preferred stock on October 8, 1999 as a result of our initial public offering. $75 million of these proceeds were used to repay outstanding debt. . $114.1 million in net proceeds from our initial public offering. . $132.2 million in net proceeds from a Class A common stock offering in the first quarter of 2000. 25 . $96.3 million in net proceeds from a Series B convertible preferred stock offering in the first quarter of 2000. . $191.0 million in net proceeds from a private placement on March 15, 2000, of 325,000 units, each unit consisting of $1,000 principal amount of 14% senior secured notes due 2010 and one warrant to purchase 8.024815 shares of Class A common stock at $49.50 per share, excluding $123.0 million for an interest reserve. . $0.4 million in proceeds from the sale of stock under the employee stock purchase plan and the exercise of stock options. The use of funds for satellites and launch in the chart above includes $472.6 million for satellites, launch and long-lead items, including certain financing costs associated with the satellites, and for an option to complete the ground spare satellite under our satellite contract with Hughes. As of December 31, 1999, $183.9 million has been paid under the satellite contract. The anticipated $65.9 million in costs for ground segment are intended to cover the satellite control facilities, programming production studios and various other equipment and facilities. As of December 31, 1999, we had incurred 7.6 million in costs in deploying the ground segment. Other operating expenses and working capital requirements in the chart above include cumulative historical operating losses through December 31, 1999 of $54.7 million. Sources of Funds. To date, we have raised approximately $865.0 million of equity proceeds, net of expenses, interest reserve and repayment of debt. These funds have been used to acquire our FCC license, make required payments under our satellite contract with Hughes, and for working capital and operating expenses. Of the $865.0 million raised to date, approximately $167.0 million, excluding the Class A common stock acquired as part of our initial public offering, has been raised through the issuance of equity to, and receipt of loans from, our current stockholder, American Mobile, and a former stockholder. Of this amount, approximately $90.7 million and $46.0 million was raised in 1997 and 1998, respectively, and $30.3 million was raised in January 1999. In July 1999, we issued $250.0 million of Series A subordinated convertible notes to six strategic and financial investors--General Motors, $50.0 million; Clear Channel Communications, $75.0 million; DIRECTV, $50.0 million; and Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0 million in the aggregate. Using part of the proceeds from the issuance of the Series A subordinated convertible notes, we paid a former stockholder $75.0 million in July 1999 to redeem an outstanding loan. We incurred fees and expenses totalling $11.3 million in connection with these transactions. In October 1999, we raised $114.1 million from the issuance of 10.2 million shares of Class A common stock at a price of $12 per share less $8.8 million in underwriting discounts and commissions and estimated expenses. The Series A convertible notes, together with related accrued interest, automatically converted into 16,179,755 shares of our Class A common stock and 10,786,504 shares of our Series A preferred stock. Also, the American Mobile notes, together with related accrued interest, automatically converted into 11,182,926 shares of our Class B common stock. As a result of these transactions, substantially all of our indebtedness converted into equity. In the first quarter of 2000, we completed a follow-on offering of 4,370,000 shares of Class A common stock, yielding net proceeds of $132.2 million. At the same time, we completed an offering of 2,000,000 shares of our Series B convertible redeemable preferred stock, which yielded net proceeds of $96.3 million. We also completed a private placement on March 15, 2000 of 325,000 units, each unit consisting of $1,000 principal amount of 14% senior secured notes due 2010 and one warrant to purchase 8.024815 shares of Class A common stock at $49.50 per share that provided net proceeds of $191.0 million, excluding $123.0 million for an interest reserve. Uses of Funds. Of the approximately $1.1 billion of funds to be used through commencement of commercial operations, an estimated $569.4 million are expected to be incurred under contracts presently in place and for our FCC license, which has already been paid for in full. Total capital expenditures from our inception to December 31, 1999, totaled $295.5 million. 26 Satellite Contract. Under our satellite contract, Hughes will deliver two satellites in orbit and if we exercise our option, complete construction of a ground spare satellite. Hughes will also provide ground equipment and software to be used in the XM Radio system and certain launch and operations support services. We expect that by commencement of commercial operations in the second quarter of 2001, we will have had to pay an aggregate amount of approximately $472.6 million for these items and for Hughes to complete the optional ground spare satellite. This amount does not include incentive payments, which will depend in part on projected satellite performance at the acceptance date. Such payments could total up to an additional $68.7 million over the useful lives of the satellites. As of December 31, 1999, we had paid approximately $183.9 million under our satellite contract and recognized an additional $15.5 million in accrued milestone payments which were paid subsequently. Launch Insurance. Based on current industry estimates, we expect that launch insurance for both satellites will cost an aggregate of approximately $50.0 million. As of December 31, 1999, we had not incurred any costs with respect to launch insurance. Terrestrial Repeater System. Based on the current design of the XM Radio system and preliminary bids, we estimate that through our expected commencement of operations in the second quarter of 2001 we will incur aggregate costs of approximately $263.3 million for a terrestrial repeater system. We expect these costs to cover the capital cost of the design, development and installation of a system of terrestrial repeaters to cover approximately 70 cities and metropolitan areas. As of December 31, 1999, we had incurred costs with respect to the terrestrial repeater buildout of $10.1 million which we paid. In August 1999, we signed a contract calling for payments of approximately $115.0 million for engineering and site preparation. We entered into a contract effective October 22, 1999, with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. Payments under this contract are expected to be approximately $128.0 million. As of December 31, 1999, we have paid $3.5 million under this contract. Ground Segment. Based on the design of the XM Radio system, available research, preliminary bids and actual contract costs, we expect to incur aggregate ground segment costs through the expected commencement of operations in the second quarter of 2001 of approximately $65.9 million. We expect these costs will cover the satellite control facilities, programming production studios and various other equipment and facilities. As of December 31, 1999, we had incurred $5.6 million in costs with respect to the ground segment. FCC License. In October 1997, we received one of two satellite radio licenses issued by the FCC. We have paid approximately $90.0 million for this license, including the initial bid right. No additional payments have been made relating to the license. Operating Expenses and Working Capital Requirements. In addition to the above capital needs, we will require funds for working capital, operating expenses and royalty payments currently estimated to be approximately $158.2 million through our targeted commercial launch in the second quarter of 2001. From our inception through December 31, 1999, we have incurred total expenses of $36.9 million. Total cash used in operating activities was $18.8 million. The difference between the loss incurred to date and cash used in operations is principally due to a $5.5 million beneficial conversion charge, $12.5 million in amounts due to related parties and $3.6 million in accrued interest. Joint Development Agreement Funding Requirements. In addition to the above capital needs, we may require funds to pay license fees or make contributions towards the development of the technologies used to develop a unified standard for satellite radios under our joint development agreement with Sirius Radio. Each party is obligated to fund one half of the development cost for such technologies. Each party will be entitled to license fees or a credit towards its one half of the cost based upon the validity, value, use, importance and available alternatives of the technology it contributes. The amounts of these fees or credits will be determined over time by agreement of the parties or by arbitration. We cannot predict at this time the amount of license fees or contribution payable by XM or 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. 27 Funds Required for XM Radio Following Commencement of Commercial Operations Even after commencement of commercial operations, we expect to need significant additional funds to cover our cash requirements before we generate sufficient cash flow from operations to cover our expenses. We cannot accurately estimate the amount of additional funds needed, since it will depend on business decisions to be made in the future and revenues received from operations, but we expect the amount to be substantial. Funds will be needed to cover operating expenses, marketing and promotional expenses including an extensive marketing campaign in connection with the launch of our service, distribution expenses, programming costs and any further development of the XM Radio system that we may undertake after operations commence. Marketing and distribution expenses are expected to include joint advertising and joint development with and manufacturing subsidies of certain costs of some of our manufacturers and distribution partners. We cannot estimate accurately the total amount of these operational, promotional, subscriber acquisition, joint development and manufacturing costs and expenses, but they are expected to be substantial. We will have significant payment obligations after commencement of operations under our distribution agreement with General Motors. We will pay an aggregate of approximately $35 million in the first four years following commencement of commercial service. After that, through 2009, we will have additional fixed annual payments ranging from less than $35 million to approximately $130 million, aggregating approximately $400 million. In order to encourage the broad installation of XM radios, we have agreed to subsidize a portion of the cost of XM radios and to make incentive payments to General Motors when the owners of General Motors vehicles with installed XM radios become subscribers for the XM Radio service. We must also share with General Motors a percentage of the subscription revenue attributable to General Motors vehicles with installed XM radios. This percentage increases until there are more than eight million General Motors vehicles with installed XM radios. This agreement is subject to renegotiation if General Motors does not achieve and maintain specified installation levels, starting with 1.24 million units after four years and thereafter increasing by the lesser of 600,000 units per year and amounts proportionate to our share of the satellite digital radio market. We currently expect to satisfy our funding requirements for the period following commencement of commercial operations in substantially the same manner as our requirements prior to commencement of commercial operations. Year 2000 Readiness Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. Many such systems will need to accept four-digit entries in order to distinguish 20th century dates from 21st century dates. As a result, by the end of 1999, computer systems and software used by many companies have been upgraded to comply with these Year 2000 requirements. Otherwise these systems may cause miscalculations that will interfere with business activities or simply fail to work. When we use the terms "Year 2000 Ready" or "Year 2000 Readiness," we mean that customers will not experience any material difference in performance and functionality of our networks as a result of the date being prior to, during or after the Year 2000. We began to assess our Year 2000 Readiness in mid-1998. We have completed the identification, necessary modification and testing of all our current systems, which we believe are Year 2000 compliant. This required no significant expense. Because we are a development stage company and do not expect to commence commercial operations until the second quarter of 2001, as of the date of this report, we have not experienced and do not expect any significant operational or financial problems for our company as a result of Year 2000 issues. Our existing technology development contracts require Year 2000 Readiness, and we require Year 2000 Readiness in all new contracts that we enter. In addition to our internal review process, we have had communications with certain significant third parties with which we do business to . evaluate their Year 2000 Readiness and state of compliance; and 28 . determine the extent to which our systems may be affected if they fail to remediate their own Year 2000 issues. To date, we have not identified any system which demonstrates symptoms of not being Year 2000 Ready or for which a suitable alternative cannot be implemented. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 1999, we do not have any derivative financial instruments and do not intend to use derivatives. We invest our cash in short-term commercial paper and investment-grade corporate and government obligations and money market funds. All of our indebtedness was automatically converted into equity upon completion of our initial public offering. As a result, we believe that our exposure to interest rate risk is not material to our results of operations. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of XM Satellite Radio Holdings Inc., including our consolidated balance sheets as of December 31, 1998 and 1999, and consolidated statements of operations, consolidated statements of cash flows, and consolidated statements of stockholders' equity (deficit) 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 notes to the consolidated financial statements, together with a report thereon of KPMG LLP, dated February 16, 2000, except for Note 14 which is as of March 15, 2000, are attached hereto as pages F-1 through F-25. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 29 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information is incorporated herein by reference to our definitive 2000 Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION The information is incorporated herein by reference to our definitive 2000 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information is incorporated herein by reference to our definitive 2000 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information is incorporated herein by reference to our definitive 2000 Proxy Statement. 30 PART IV ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1)The following Consolidated Financial Statements of and report of independent public accountants are included in Item 8 of this Form 10-K: Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1998 and 1999. Consolidated Statements of Operations for the years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999. Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999. Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999. Notes to Consolidated Financial Statements. (a)(2)The following consolidated financial statement schedule is filed as part of this report and is attached hereto as page S-1: Schedule I--Valuation and Qualifying Accounts. All other schedules for which provision is made in the applicable accounting regulations of the Commission either have been included in the Consolidated Financial Statements of XM Satellite Radio Holdings Inc. or the notes thereto, are not required under the related instructions or are inapplicable, and therefore have been omitted. (a)(3)The following exhibits are either provided with this Form 10-K or are incorporated herein by reference: Exhibit Index
Exhibit No. Description ------- ----------- 3.1+ Restated Certificate of Incorporation of XM Satellite Radio Holdings Inc. 3.2+ Restated Bylaws of XM Satellite Radio Holdings Inc. 4.1+ Form of Certificate for our Class A common stock (incorporated by reference to Exhibit 3 to the XM Satellite Radio Holdings Inc. Registration Statement on Form 8-A, filed with the SEC on September 23, 1999). 4.2++ Form of Certificate for our 8.25% Series B Convertible Redeemable Preferred Stock. 4.3 Certificate of Designation Establishing the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of 8.25% Series B Convertible Redeemable Preferred Stock due 2012. 10.1+ Shareholders' Agreement, dated as of July 7, 1999, by and among XM Satellite Radio Holdings Inc., American Mobile Satellite Corporation, Baron Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio Partners, LLC, DIRECTV Enterprises, Inc., General Motors Corporation, Madison Dearborn Capital Partners III, L.P., Special Advisors Fund I, LLC, Madison Dearborn Special Equity III, L.P., and Telcom-XM Investors, L.L.C. 10.2+ Registration Rights Agreement, dated July 7, 1999, by and among XM Satellite Radio Holdings Inc., American Mobile Satellite Corporation, the Baron Asset Fund series of Baron Asset Fund, and the holders of Series A subordinated convertible notes of XM Satellite Radio Holdings Inc.
31
Exhibit No. Description ------- ----------- 10.3+ Note Purchase Agreement, dated June 7, 1999, by and between XM Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear Channel Communications, Inc., DIRECTV Enterprises, Inc., General Motors Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio Partners, LLC, Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P., and Special Advisors Fund I, LLC (including form of Series A subordinated convertible note of XM Satellite Radio Holdings Inc. attached as Exhibit A thereto). 10.4+* Technology Licensing Agreement by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management Corporation and American Mobile Satellite Corporation, dated as of January 1, 1998, amended by Amendment No. 1 to Technology Licensing Agreement, dated June 7, 1999. 10.5+* Technical Services Agreement between XM Satellite Radio Holdings Inc. and American Mobile Satellite Corporation, dated as of January 1, 1998, as amended by Amendment No. 1 to Technical Services Agreement, dated June 7, 1998. 10.6+* Satellite Purchase Contract for In-Orbit Delivery, by and between XM Satellite Radio Inc. and Hughes Space and Communications International Inc., dated July 21, 1999. 10.7+* Amended and Restated Agreement by and between XM Satellite Radio, Inc and STMicroelectronics Srl, dated September 27, 1999. 10.8+* Distribution Agreement, dated June 7, 1999, between OnStar, a division of General Motors Corporation, and XM Satellite Radio Inc. 10.9+* Operational Assistance Agreement, dated as of June 7, 1999, between XM Satellite Radio Inc. and DIRECTV, INC. 10.10+* Operational Assistance Agreement, dated as of June 7, 1999, between XM Satellite Radio Inc. and Clear Channel Communication, Inc. 10.11+* Operational Assistance Agreement, dated as of June 7, 1999, between XM Satellite Radio Inc. and TCM, LLC. 10.12+ Agreement, dated as of July 16, 1999 between XM Satellite Radio Holdings Inc. and Gary Parsons. 10.13+ Employment Agreement, dated as of June 1, 1998, between XM Satellite Radio Holdings Inc. and Hugh Panero. 10.14+ Letter Agreement with Lee Abrams dated May 22, 1998. 10.15+ Letter Agreement with Stelios Patsiokas dated September 14, 1998 10.16+ Letter Agreement with Heinz Stubblefield dated May 22, 1998. 10.17+ Form of Indemnification Agreement between XM Satellite Radio Holdings Inc. and each of its directors and executive officers. 10.18+ 1998 Shares Award Plan (incorporated by reference to the Registrant's Registration Statement on Form S-8, File No. 333-92049). 10.19+ Form of Employee Non-Qualified Stock Option Agreement. 10.20+ Firm Fixed Price Contract #001 between XM Satellite Radio Inc. and the Fraunhofer Gesellschaft zur Foderung Der angewandten Forschung e.V., dated July 16, 1999. 10.21+* Contract for Engineering and Construction of Terrestrial Repeater Network System by and between XM Satellite Radio Inc. and LCC International, Inc., dated August 18, 1999. 10.22 Employee Stock Purchase Plan (Incorporated by reference to the Registrant's Registration Statement on Form S-8, File No. 333-92049). 10.23+ Non-Qualified Stock Option Agreement between Gary Parsons and XM Satellite Radio Holdings Inc., dated July 16, 1999.
32
Exhibit No. Description ------- ----------- 10.24+ Non-Qualified Stock Option Agreement between Hugh Panero and XM Satellite Radio Holdings Inc., dated July 1, 1998, as amended. 10.25+ Form of Director Non-Qualified Stock Option Agreement. 10.26+ Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio Inc., dated September 29, 1999 10.27++ Letter Agreement with Stephen Cook dated January 12, 1999 10.28** Contract for the Design, Development and Purchase of Terrestrial Repeater Equipment by and between XM Satellite Radio Inc. and Hughes Electronics Corporation, dated February 14, 2000. 21.1++ Subsidiaries of XM Satellite Radio Holdings Inc. 23.1 Consent of KPMG LLP. 27.1 Financial Data Schedule.
- -------- + Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-83619. ++ Incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-93529. * Pursuant to the 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. ** Certain portions of this Exhibit were omitted by means of redacting a portion of the text. This Exhibit has been filed separately with the Secretary of the Commission with such text pursuant to our Application Requesting Confidential Treatment under Rule 246-2 under the Securities Exchange Act of 1934. (b)Reports on Form 8-K. On February 25, 2000, the Company filed a Current Report on Form 8-K that contained audited, consolidated financial statements substantially the same as those contained herein. The Company also filed certain other information with respect to its business and financial condition that the Company deemed of importance to its stockholders. (c)Exhibits. XM Satellite Radio Holdings Inc. hereby files as part of this Form 10-K the Exhibits listed in the Index to Exhibits. (d)Consolidated Financial Statement Schedule. The following consolidated financial statement schedule is filed herewith: Schedule I--Valuation and Qualifying Accounts. Schedules not listed above have been omitted because they are inapplicable or the information required to be set forth therein is provided in the Consolidated Financial Statements of XM Satellite Radio Holdings Inc. or notes thereto. 33 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in the District of Columbia, on the 16th day of March, 2000. XM Satellite Radio Holdings Inc. By: /s/ Hugh Panero ---------------------------------- Name: Hugh Panero Title: President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Hugh Panero President Chief Executive March 16, 2000 ______________________________________ Officer, and Director Hugh Panero (Principal Executive Officer) /s/ Heinz Stubblefield Senior Vice President and March 16, 2000 ______________________________________ Chief Financial Officer Heinz Stubblefield (Principal Financial and Accounting Officer) /s/ Gary M. Parsons Chairman of the Board of March 16, 2000 ______________________________________ Directors Gary M. Parsons /s/ Nathaniel A. Davis Director March 16, 2000 ______________________________________ Nathaniel A. Davis /s/ Thomas J. Donohue Director March 16, 2000 ______________________________________ Thomas J. Donohue /s/ Randall T. Mays Director March 16, 2000 ______________________________________ Randall T. Mays /s/ Randy S. Segal Director March 16, 2000 ______________________________________ Randy S. Segal /s/ Ronald L. Zarrella Director March 16, 2000 ______________________________________ Ronald L. Zarrella
34 Independent Auditors' Report on Consolidated Financial Statement Schedule The Board of Directors XM Satellite Radio Holdings Inc. and Subsidiaries: Under date of February 16, 2000, except for Note 14 which is as of March 15, 2000, we reported on the consolidated balance sheets of XM Satellite Radio Holdings Inc. and Subsidiaries (a development stage company) as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1999 and for the period from December 15, 1992 (date of inception) to December 31, 1999, which are included in this Annual Report on Form 10-K. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedule. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this consolidated financial statement schedule based on our audits. In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. The audit report on the consolidated financial statements of XM Satellite Radio Holdings Inc. and Subsidiaries referred to above contains an explanatory paragraph that states that 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. The consolidated financial statement schedule included in the registration statement does not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP McLean, VA February 16, 2000, except for Note 14, which is as of March 15, 2000 S-1 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Additions (Deductions) --------- ---------------------------------------------------- Charged to Charged to Write-Offs/ Balance Costs and Other Accounts -- Payments/ Balance Description January 1 Expenses Describe Other December 31 ----------- --------- ---------- ----------------- ----------- ----------- Year Ended December 31, 1997 Deferred Tax Assets-- Valuation allowance... $ -- 746 -- -- 746 Year Ended December 31, 1998 Deferred Tax Assets-- Valuation allowance... $ 746 7,232 -- -- 7,978 Year Ended December 31, 1999 Deferred Tax Assets-- Valuation allowance... $7,978 (3,159) -- -- 4,819
S-2 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Independent Auditors' Report................................................ F-2 Consolidated Balance Sheets................................................. F-3 Consolidated Statements of Operations....................................... F-4 Consolidated Statements of Stockholders' Equity (Deficit)................... F-5 Consolidated Statements of Cash Flows....................................... F-6 Notes to Consolidated Financial Statements.................................. F-8
F-1 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders XM Satellite Radio Holdings Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of XM Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XM Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as of December 31, 1998 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999 and for the period from December 15, 1992 (date of inception) to December 31, 1999, in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 11 to the consolidated financial statements, the Company has not commenced operations and is dependent upon additional debt or equity financing, which raises substantial doubt about its ability to continue as a going concern. Management's plan in regard to these matters is also described in note 11. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP McLean, VA February 16, 2000, except for Note 14, which is as of March 15, 2000 F-2 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1999
1998 1999 ---------- ---------- (in thousands, except share data) ASSETS Current assets: Cash and cash equivalents.............................. $ 310 $ 50,698 Short-term investments................................. -- 69,472 Prepaid and other current assets....................... 172 1,077 ---------- ---------- Total current assets................................. 482 121,247 Other assets: System under construction.............................. 169,029 362,358 Property and equipment, net of accumulated depreciation and amortization of $57 and $347...................... 449 2,551 Goodwill and intangibles, net of accumulated amortization of $0 and $1,220......................... -- 25,380 Other assets........................................... 525 3,653 ---------- ---------- Total assets......................................... $ 170,485 $ 515,189 ---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable......................................... $ 23,125 $ 23,338 Accrued expenses......................................... 444 1,514 Due to related parties................................... 13,767 62 Accrued interest on loans payable........................ 1,907 -- Loans payable due to related parties..................... 91,546 -- Royalty payable.......................................... -- 1,646 Term loan................................................ 34 -- -------- -------- Total current liabilities.............................. 130,823 26,560 Term loan, net of current portion.......................... 53 -- Subordinated convertible notes payable due to related party..................................................... 45,583 -- Accrued interest on subordinated convertible notes payable due to related party...................................... 1,209 -- Royalty payable, net of current portion.................... -- 3,400 Capital lease, net of current portion...................... -- 212 -------- -------- Total liabilities...................................... 177,668 30,172 -------- -------- Stockholders' equity (deficit): Preferred stock, par value $0.01; 60,000,000 shares authorized, 15,000,000 shares designated Series A, no shares and 10,786,504 issued and outstanding at December 31, 1998 and 1999....................................... -- 108 Class A common stock, par value $0.01; 180,000,000 shares authorized, no and 26,465,333 shares issued and outstanding at December 31, 1998 and 1999............... -- 265 Class B common stock, par value $0.01; 30,000,000 shares authorized, 125 (6,689,250 post split) and 17,872,176 shares issued and outstanding at........................ -- 179 December 31, 1998 and 1999 Class C common stock, par value $0.01; 30,000,000 shares authorized, no shares issued and outstanding at December 31, 1998 and 1999............................. -- -- Additional paid-in capital............................... 10,643 539,187 Deficit accumulated during development stage............. (17,826) (54,722) -------- -------- Total stockholders' equity (deficit)................... (7,183) 485,017 -------- -------- Commitments and contingencies (notes 11 and 12) Total liabilities and stockholders' equity (deficit)... $170,485 $515,189 ======== ========
See accompanying notes to consolidated financial statements. F-3 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999
December 15, 1992 (date of inception) 1997 1998 1999 to December 31, 1999 --------- --------- ----------- -------------------- (in thousands, except share data) Revenue................. $ -- $ -- $ -- $ -- --------- --------- ----------- -------- Operating expenses: Research and development.......... -- 6,941 4,274 11,215 Professional fees..... 1,090 5,242 9,969 16,301 General and administrative....... 20 4,010 16,448 20,478 --------- --------- ----------- -------- Total operating expenses........... 1,110 16,193 30,691 47,994 --------- --------- ----------- -------- Operating loss...... (1,110) (16,193) (30,691) (47,994) Other income (expense): Interest income....... -- 26 2,916 2,942 Interest expense...... (549) -- (9,121) (9,670) --------- --------- ----------- -------- Net loss............ $ (1,659) $ (16,167) $ (36,896) $(54,722) ========= ========= =========== ======== Net loss per share: Basic and diluted..... $ (0.26) $ (2.42) $ (2.40) ========= ========= =========== Weighted average shares used in computing net loss per share-basic and diluted............ 6,368,166 6,689,250 $15,344,102 ========= ========= ===========
See accompanying notes to consolidated financial statements. F-4 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) Years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999
Deficit Series A Class A Class B Class C Accumulated Preferred Stock Common Stock Common Stock Common Stock Additional During Total ----------------- ----------------- ----------------- ------------- Paid-in Development Stockholders' Shares Amount Shares Amount Shares Amount Shares Amount Capital Stage Equity (Deficit) ---------- ------ ---------- ------ ---------- ------ ------ ------ ---------- ----------- ---------------- (in thousands, except share data) Issuance of common stock (December 15, 1992)........... -- $ -- -- $ -- 100 $ -- -- $-- $ -- $ -- $ -- ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1992............ -- -- -- -- 100 -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1993............ -- -- -- -- 100 -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1994............ -- -- -- -- 100 -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1995............ -- -- -- -- 100 -- -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1996............ -- -- -- -- 100 -- -- -- -- -- -- Contributions to paid-in capital......... -- -- -- -- -- -- -- -- 143 -- 143 Issuance of common stock and capital contributions... -- -- -- -- 25 -- -- -- 9,000 -- 9,000 Issuance of options......... -- -- -- -- -- -- -- -- 1,500 -- 1,500 Net loss........ -- -- -- -- -- -- -- -- -- (1,659) (1,659) ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1997............ -- -- -- -- 125 -- -- -- 10,643 (1,659) 8,984 Net loss........ -- -- -- -- -- -- -- -- -- (16,167) (16,167) ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1998............ -- -- -- -- 125 -- -- -- 10,643 (17,826) (7,183) 53,514-for-one stock split..... -- -- -- -- 6,689,125 67 -- -- (67) -- -- Initial public offering........ -- -- 10,241,000 102 -- -- -- -- 114,032 -- 114,134 Conversion of Series A convertible debt............ 10,786,504 108 16,179,755 162 -- -- -- -- 246,079 -- 246,349 Conversion of subordinated convertible notes payable to related party... -- -- -- -- 11,182,926 112 -- -- 106,843 -- 106,955 Issuance of shares to key executive....... -- -- 14,716 -- -- -- -- -- 140 -- 140 Issuance of shares through exercise of stock options... -- -- 1,071 -- -- -- -- -- 10 -- 10 Issuance of shares through the employee stock purchase plan............ -- -- 28,791 1 -- -- -- -- 293 -- 294 Increase in FCC license, goodwill and intangibles from WorldSpace Transaction..... -- -- -- -- -- -- -- -- 51,624 -- 51,624 Charge for beneficial conversion feature of note issued to Parent.......... -- -- -- -- -- -- -- -- 5,520 -- 5,520 Non-cash stock compensation.... -- -- -- -- -- -- -- -- 4,070 -- 4,070 Net loss........ -- -- -- -- -- -- -- -- -- (36,896) (36,896) ---------- ---- ---------- ---- ---------- ---- --- --- -------- -------- -------- Balance at December 31, 1999............ 10,786,504 $108 26,465,333 $265 17,872,176 $179 -- $-- $539,187 $(54,722) $485,017 ========== ==== ========== ==== ========== ==== === === ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999
December 15, 1992 (date of inception) to 1997 1998 1999 December 31, 1999 -------- -------- --------- ----------------- (in thousands) Cash flows from operating activities: Net loss..................... $ (1,659) $(16,167) $ (36,896) $ (54,722) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization............... 33 57 1,987 2,077 Non-cash stock compensation............... -- -- 4,210 4,210 Non-cash charge for beneficial conversion feature of note issued to Parent..................... -- -- 5,520 5,520 Changes in operating assets and liabilities: Increase in prepaid and other current assets...... -- (212) (905) (1,117) Decrease in other assets... -- -- 43 43 Increase in accounts payable and accrued expenses.................. -- 1,701 7,519 9,220 Increase (decrease) in amounts due to related parties................... 445 13,322 (1,316) 12,451 Increase (decrease) in accrued interest.......... 517 (2) 3,053 3,568 -------- -------- --------- --------- Net cash used in operating activities............... (664) (1,301) (16,785) (18,750) -------- -------- --------- --------- Cash flows from investing activities: Purchase of property and equipment................... -- (506) (2,008) (2,514) Additions to system under construction................ (90,031) (43,406) (159,510) (292,947) Purchase of short-term investments................. -- -- (69,472) (69,472) Other investing activities... -- -- (3,422) (3,422) -------- -------- --------- --------- Net cash used in investing activities............... (90,031) (43,912) (234,412) (368,355) -------- -------- --------- --------- Cash flows from financing activities: Proceeds from sale of common stock and capital contribution................ 9,143 -- 114,428 123,571 Proceeds from issuance of loan payable to related party....................... 80,053 337 -- 80,390 Proceeds from issuance of options..................... 1,500 -- -- 1,500 Proceeds from issuance of subordinated convertible notes to related parties.... -- 45,583 22,966 68,549 Proceeds from issuance of convertible notes........... -- -- 250,000 250,000 Repayment of loan payable.... -- -- (75,000) (75,000) Payments for deferred financing costs............. -- (393) (10,725) (11,118) Other investing activities... -- (5) (84) (89) -------- -------- --------- --------- Net cash provided by financing activities..... 90,696 45,522 301,585 437,803 -------- -------- --------- --------- Net increase in cash and cash equivalents.................. 1 309 50,388 50,698 Cash and cash equivalents at beginning of period.......... -- 1 310 -- -------- -------- --------- --------- Cash and cash equivalents at end of period................ $ 1 $ 310 $ 50,698 $ 50,698 ======== ======== ========= =========
(Continued) F-6 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued) Years ended December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1999
December 15, 1992 (date of inception) to 1997 1998 1999 December 31, 1999 ------ ------- -------- ----------------- (in thousands) Supplemental cash flow disclosure: Increase in FCC license, goodwill and intangibles from WorldSpace Transaction........................ $ -- $ -- $ 51,624 $ 51,624 Liabilities exchanged for new convertible note to Parent......... -- -- 81,676 81,676 Non-cash interest capitalized....... 1,901 11,824 15,162 28,887 Interest converted into principal note balance....................... 501 9,157 4,601 14,259 Accrued expenses transferred to loan balance............................ -- -- 7,405 7,405 Accrued system milestone payments... -- 21,867 15,500 15,500 Property acquired through capital leases............................. -- -- 470 470 Conversion of debt to equity........ -- -- 353,315 353,315
See accompanying notes to consolidated financial statements. F-7 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the period from December 15, 1992 (date of inception) to December 31, 1999 (1) Summary of Significant Accounting Policies and Practices (a) Nature of Business XM Satellite Radio Inc. ("XMSR"), formerly American Mobile Radio Corporation, was incorporated on December 15, 1992 in the State of Delaware as a wholly owned subsidiary of American Mobile Satellite Corporation ("AMSC" or "Parent") for the purpose of procuring a digital audio radio service ("DARS") license. Business activity for the period from December 15, 1992 through December 31, 1996 was insignificant. Pursuant to various financing agreements entered into in 1997 between AMSC, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent interest in XMSR. On May 16, 1997, AMSC and WSI formed XM Satellite Radio Holdings Inc. (the "Company"), formerly AMRC Holdings Inc., as a holding company for XMSR in connection with the construction, launch and operation of a domestic communications satellite system for the provision of DARS. AMSC and WSI exchanged their respective interests in XMSR for equivalent interests in the Company, which had no assets, liabilities or operations prior to the transaction. On July 7, 1999, AMSC acquired WSI's 20 percent interest in the Company, which is discussed in note 4. (b) Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of XM Satellite Radio Holdings Inc. and its subsidiaries, XM Satellite Radio Inc. and XM Radio Inc. All significant intercompany transactions and accounts have been eliminated. The Company's management has devoted substantially all of its time to the planning and organization of the Company, obtaining its DARS license, and to the process of addressing regulatory matters, initiating research and development programs, conducting market research, initiating construction of the satellite system, securing content providers, and securing adequate debt and equity capital for anticipated operations and growth. The Company has not generated any revenues and planned principal operations have not commenced. Accordingly, the Company's financial statements are presented as those of a development stage enterprise, as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises. As discussed in Note 6, on September 9, 1999, the Company effected a 53,514-for-1 stock split. The effect of the stock split has been reflected as of December 31, 1999 in the consolidated balance sheet and consolidated statement of stockholders' equity (deficit); however, the activity in prior periods was not restated in those statements. All references to the number of common shares and per share amounts in the consolidated financial statements and notes thereto have been restated to reflect the effect of the split for all periods presented. (c) Cash and Cash Equivalents The Company considers short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had the following cash and cash equivalents balances (in thousands):
December 31, ------------ 1998 1999 ---- ------- Cash on deposit.............................................. $ 28 $ 66 Money market funds........................................... 282 10,620 Commercial paper............................................. -- 40,012 ---- ------- $310 $50,698 ==== =======
F-8 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (d) Short-term Investments The Company holds commercial paper with maturity dates of less than one year that is stated at amortized cost, which approximates fair value. (e) Property and Equipment Property and equipment are carried at cost less accumulated depreciation and amortization. Depreciation and amortization is calculated using the straight- line method over the following estimated useful lives: 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................................... 13,725 29,068 -------- -------- $169,029 $362,358 ======== ========
F-9 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 The Company's policy is to review its long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (g)Goodwill and Intangible Assets Goodwill and intangible assets, which represents the excess of purchase price over fair value of net assets acquired, is amortized on a straight-line basis over the expected periods to be benefited, generally 15 years. The Company assesses the recoverability of its intangible assets by determining whether the amortization of the goodwill and intangible assets balance over its remaining life can be recovered through undiscounted future operating cash flows. The amount of goodwill and intangible assets impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (h)Stock-Based Compensation The Company accounts for stock-based compensation arrangements in accordance with the provisions of Accounting Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations, and complies with the disclosure provisions of SFAS No. 123, Accounting for Stock-Based Compensation. Under APB 25, compensation expense is based upon the difference, if any, on the date of grant, between the fair value of the Company's stock and the exercise price. All stock-based awards to non-employees are accounted for at their fair value in accordance with SFAS No. 123. (i) Research and Development Research and development costs are expensed as incurred. (j) Net Income (Loss) Per Share The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is computer by dividing the net income (loss) available to common stockholders (after deducting preferred dividend requirements) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) available per share is computed by dividing the net income (loss) available to common stockholders for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. The Company has presented historical basic and diluted net income (loss) per share in accordance with SFAS No. 128. As the Company had a net loss in each of the periods presented, basic and diluted net income (loss) per share is the same. (k) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and the financial reporting amounts at each year-end, based on enacted tax laws F-10 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of tax payable for the period and the change during the period in deferred tax assets and liabilities. (l) Comprehensive Income In December 1998, the Company adopted SFAS No. 130, Reporting Comprehensive Income (SFAS 130). This statement establishes standards for reporting and displaying comprehensive income and its components in the financial statements. This statement is effective for all interim and annual periods with the year ended December 31, 1998. The Company has evaluated the provisions of SFAS 130 and has determined that there were no transactions that have taken place during the years ended December 31, 1997, 1998 and 1999 that would be classified as other comprehensive income. (m) Accounting Estimates The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The estimates involve judgments with respect to, among other things, various future factors which are difficult to predict and are beyond the control of the Company. Significant estimates include valuation of the Company's investment in the DARS license, goodwill and intangible assets, and the valuation allowances against deferred tax assets. Accordingly, actual amounts could differ from these estimates. (n)Reclassifications Certain fiscal year 1997 and 1998 amounts have been reclassified to conform to the fiscal 1999 consolidated financial statement presentation. (o)Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. The new standard establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities. This statement, as amended, is effective for all fiscal quarters beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have a material affect on its financial position or results of operations. (2) Related Party Transactions The Company had related party transactions with the following shareholders: (a)AMSC In 1997, AMSC contributed $143,000 for the Company to establish the original application for the FCC license. On March 28, 1997, the Company received $1,500,000 as a capital contribution from AMSC. During 1998 and 1999, AMSC incurred general and administrative costs and professional fees for the Company and established an intercompany balance of $458,000 and $62,000, respectively, (see note 3). Effective January 15, 1999, the Company issued a convertible note maturing on September 30, 2006 to AMSC for $21,419,000. (See note 4(d)). F-11 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (b)WSI On March 28, 1997, the Company received $1,500,000 as a capital contribution from WSI. The Company issued WSI 25 (6,689,250 post split) shares of common stock for this consideration. On April 16, 1997, the Company received $15,000,000 from WSI, which represented $6,000,000 as an additional capital contribution and $9,000,000 as a six-month bridge loan (see note 4). On May 16, 1997, the Company obtained a $1,000,000 working capital loan facility from WSI. During 1997, the Company drew down $663,000 against the facility with the remaining $337,000 drawn in 1998 (see note 4). On October 16, 1997, the Company received $71,911,000 from WSI, which represented an additional $13,522,000 under the bridge loan and $58,389,000 under the additional amounts loan (see note 4). On April 1, 1998, the Company entered into an agreement with WSI to issue $54,536,000 in subordinated convertible notes. During 1998 and 1999, the Company drew down $45,583,000 and $8,953,000, respectively, under the agreement (see note 4). As discussed in note 4(c) all amounts due to WSI under the debt agreements were acquired by AMSC or repaid on July 9, 1999. In July 1998, the Company acquired furniture and equipment from WSI for $104,000 and established a due to WSI for the balance (see note 3). In addition to financing, the Company has relied upon certain related parties for legal and technical services. Total expenses incurred in transactions with related parties are as follows (in thousands):
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-12 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 Additionally, during 1998 and 1999 the Company incurred $925,000 and $0, respectively, of WSI project management costs that were capitalized to the satellite system. With the WorldSpace Transaction, which is discussed in note 4, on July 7, 1999, WSI ceased to be a related party; therefore, the expenses reflected for WSI are representative of the period from January 1, 1999 through July 7, 1999. (3) Due to Related Parties Due to related parties included the following amounts (in thousands):
December 31, ------------ 1998 1999 ------- ---- Advances from WSI............................................ $ 7,405 $-- Due to WSI................................................... 5,904 -- Due to AMSC.................................................. 458 62 ------- ---- $13,767 $ 62 ======= ====
Advances represented funding provided by WSI for 30 days. If amounts were not repaid within this time period, additional subordinated convertible notes were issued. (4) Debt (a)Loans Payable Due to Related Party In March 1997, XMSR entered into a series of agreements (the "Participation Agreement") with AMSC and WSI in which both companies provided various equity and debt funding commitments to XMSR for the purpose of financing the activities of XMSR in connection with the establishment of a DARS satellite system in the United States. On May 16, 1997, certain portions of the Participation Agreement were subsequently ratified with substantially the same terms and conditions under the Bridge Loan, Additional Amounts Loan and Working Capital Credit Facility (the "Loan Agreement"). The Company had loans payable of $91,546,000 at December 31, 1998 outstanding with WSI as follows (in thousands):
1998 ------- Bridge loan...................................................... $25,556 Additional amounts loan.......................................... 64,875 Working capital loan............................................. 1,115 ------- $91,546 =======
As discussed in note 4(c) all amounts due to WSI under the debt agreements were acquired by AMSC or repaid on July 7, 1999. Bridge Loan The Company executed the bridge loan with WSI in two tranches. On April 16, 1997, the Company received proceeds of $8,479,000 for a loan with a face amount of $9,000,000. On October 16, 1997, the F-13 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 Company received proceeds of $12,771,000 for a loan with a face amount of $13,522,000. The first tranche was a six-month loan at LIBOR plus five percent per annum, equaling 11.03 percent. The first tranche was rolled over with the establishment of the second tranche, which is a six-month loan at LIBOR plus five percent per annum, equaling 9.94 percent at December 31, 1998. Interest of $3,034,000 had been converted into additional loan balance through December 31, 1998. Additional Amounts Loan On October 16, 1997, the Company executed the additional amounts loan with WSI and received proceeds of $58,219,000 for a loan with a face amount of $58,389,000. This loan is a six-month loan at LIBOR plus five percent per annum, equaling 9.94 percent at December 31, 1998. Interest of $6,486,000 had been converted into additional loan balance through December 31, 1998. Working Capital Loan On May 16, 1997, the Company executed the working capital loan with WSI whereby the Company would receive proceeds of $920,000 for a loan with a face amount of $1,000,000. The Company drew down $663,000 and $337,000 against the line of credit through December 31, 1997 and 1998, respectively. This loan is a six-month loan at LIBOR plus five percent per annum, with an interest rate of 10.19 percent at December 31, 1998. Interest of $115,000 had been converted into additional loan balance through December 31, 1998. (b)Subordinated Convertible Notes Payable Due to Related Party Effective April 1, 1998, the Company entered into a convertible note agreement maturing on September 30, 2006 with WSI that provided for a maximum of $54,536,000 through the issuance of subordinated convertible notes. The notes carried an interest rate of LIBOR plus five percent per annum, which was 10.15 percent as of December 31, 1998. Under the terms of the note agreement, WSI shall have the right to convert all or a portion of the aggregate principal amount of the notes into shares of common stock at a conversion price of $16.35 per share. As of December 31, 1998 and July 7, 1999, $45,583,000 and $54,536,000, respectively, had been drawn through the issuance of subordinated convertible notes. As discussed in note 4(c), all amounts due to WSI under the debt agreements were acquired by AMSC or repaid on July 7, 1999. (c)Exchange of WSI's Interest in the Company (WorldSpace Transaction) On July 7, 1999, AMSC acquired WSI's remaining debt and equity interests in the Company in exchange for approximately 8.6 million shares of AMSC's common stock. Additionally, the Company issued an aggregate $250.0 million of Series A subordinated convertible notes (see note 4(e)) to several new investors and used $75.0 million of the proceeds it received from the issuance of these notes to redeem certain outstanding loan obligations owed to WSI. As a result of these transactions, as of July 7, 1999, AMSC owned all of the issued and outstanding stock of the Company. Concurrent with AMSC's acquisition of the remaining interest in the Company, the Company recognized goodwill and intangibles of $51,624,000, which has been allocated as follows (in thousands): FCC license...................................................... $25,024 Goodwill......................................................... 13,738 Programming agreements........................................... 8,000 Receiver agreements.............................................. 4,600 Other intangibles................................................ 262 ------- $51,624 =======
F-14 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (d)Notes to Related Party On January 15, 1999, the Company issued a convertible note maturing on September 30, 2006 to AMSC for $21,419,000. This note carried an interest rate of LIBOR plus five percent per annum and was convertible at a price of $16.35 per share. On July 7, 1999 the Company amended the convertible note agreement with AMSC to change the maturity date to December 31, 2004, modified the conversion provisions to Class B common stock at a price of $16.35 per share and the conversion of the accrued interest in Class B common stock at a price of $9.52 per share. Following the WorldSpace Transaction, the Company issued a convertible note maturing December 31, 2004 to AMSC for $81,676,000 in exchange for the $54,536,000 subordinated convertible notes payable, $6,889,000 in demand notes, $20,251,000 in accrued interest and all of WSI's outstanding options to acquire the Company's common stock. This note bore interest at LIBOR plus five percent per annum. The note was convertible at AMSC's option at $8.65 per Class B common share. The Company took a one-time $5,520,000 charge to interest due to the beneficial conversion feature of the new AMSC note. These notes, along with $3,870,000 of accrued interest were converted into 11,182,926 shares of Class B common stock upon the initial public offering. (e)Issuance of Series A Subordinated Convertible Notes of the Company to New Investors At the closing of the WorldSpace Transaction, the Company issued an aggregate $250.0 million of Series A subordinated convertible notes to six new investors--General Motors Corporation, $50.0 million; Clear Channel Investments, Inc., $75.0 million; DIRECTV Enterprises, Inc., $50.0 million; and Columbia Capital, Telcom Ventures, L.L.C. and Madison Dearborn Partners, $75.0 million. The Series A subordinated convertible notes issued by the Company are convertible into shares of the Company's Series A convertible preferred stock (in the case of notes held by General Motors Corporation and DIRECTV) or Class A common stock (in the case of notes held by the other investors) at the election of the holders or upon the occurrence of certain events, including an initial public offering of a prescribed size. The conversion price is $9.52 aggregate principal amount of notes for each share of the Company's stock. These notes, along with $6,849,000 of accrued interest, were converted into 16,179,755 shares of Class A common stock and 10,786,504 shares of Series A preferred stock upon the initial public offering. (5) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term investments, receivables, accounts payable, accrued expenses, royalty payable and the term loan approximate their fair market value because of the relatively short duration of these instruments as of December 31, 1998 and 1999, in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. The fair value of the loans and subordinated convertible notes due to related party at December 31, 1998 could not be estimated as such amounts are due to the Company's stockholders. (6) Equity (a)Recapitalization Concurrent with the WorldSpace Transaction discussed in note 4, the Company's capital structure was reorganized. The Company's common stock was converted into the newly authorized Class B common stock, F-15 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 which has three votes per share. The Company also has authorized Class A common stock, which is entitled to one vote per share and non-voting Class C common stock. The Class B common stock is convertible into Class A common stock on a one for one basis, as follows: (1) at any time at the discretion of AMSC, (2) following the Company's initial public offering, at the direction of the holders of a majority of the then outstanding shares of Class A common stock (which majority must include at least 20 percent of the public holders of Class A common stock), and (3) on or after January 1, 2002, at the direction of the holders of a majority of the then outstanding shares of the Company's Class A common stock. Such conversion will be effected only upon receipt of FCC approval of AMSC's transfer of control of the Company to a diffuse group of shareholders. The Company also authorized 60,000,000 shares of preferred stock, of which 15,000,000 shares are designated Series A convertible preferred stock, par value $0.01 per share. The Series A convertible preferred stock is convertible into Class A common stock at the option of the holder. The Series A preferred stock is non-voting and receives dividends, if declared, ratably with the common stock. On September 9, 1999, the board of directors of the Company effected a stock split providing 53,514 shares of stock for each share owned. (b)Initial Public Offering On October 8, 1999, the Company completed an initial public offering of 10,000,000 shares of Class A common stock at $12.00 per share. The offering yielded net proceeds of $111,437,000. On October 17, 1999, the underwriters of the Company's initial public offering exercised the over-allotment option for an additional 241,000 shares of Class A common stock at $12.00 per share. This exercise yielded net proceeds of $2,697,000. F-16 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (c)Stock-Based Compensation The Company operates two separate stock option plans, the details of which are described below. 1998 Shares Award Plan On June 1, 1998, the Company adopted the 1998 Shares Award Plan (the "Plan") under which employees, consultants, and non-employee directors may be granted options to purchase shares of Class A common stock of the Company. The Company initially authorized 1,337,850 shares of common stock under the Plan, which was increased to 2,675,700 in July 1999. The options are exercisable in installments determined by the compensation committee of the Company's board of directors. The options expire as determined by the committee, but no later than ten years from the date of grant. On July 8, 1999, the Company's board of directors voted to reduce the exercise price of the options outstanding in the shares award plan from $16.35 to $9.52 per share, which represented the fair value of the stock on the date of repricing. Transactions and other information relating to the Plan for the year ended December 31, 1998 and 1999 are summarized below:
Outstanding Options ------------------- Weighted- Average Number of Exercise Shares Price --------- --------- Balance, January 1, 1998.................................... -- -- Options granted........................................... 787,297 $16.35 Options canceled or expired............................... -- -- Options exercised......................................... -- -- --------- ------ Balance, December 31, 1998.................................. 787,297 $16.35 Options granted........................................... 2,188,988 10.50 Option repricing.......................................... 818,339 16.35 Options canceled or expired............................... 57,786 13.91 Options exercised......................................... 1,071 9.52 --------- ------ Balance, December 31, 1999.................................. 2,099,089 $10.32 ========= ======
The following table summarizes information about stock options outstanding at December 31, 1998 and 1999:
Options Outstanding Options Exercisable ------------------------------------ -------------------- Weighted- Average Weighted Weighted- Remaining Average Average Exercise Number Contractual Exercise Number Exercise Price Outstanding Life Price Exercisable Price ------------ ----------- ----------- -------- ----------- --------- 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
There were no and 416,294 stock options exercisable at December 31, 1998 and 1999, respectively. There were 575,540 shares available under the plan for future grants at December 31, 1999. At December 31, 1999, all options have been issued to employees, officers and directors. F-17 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 The per share weighted-average fair value of employee options granted during the year ended December 31, 1998 and 1999 was $10.54 and $6.21, respectively, on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
December 31, ----------------------------- 1998 1999 -------------- -------------- 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
Employee Stock Purchase Plan In 1999, the Company established an employee stock purchase plan that provides for the issuance of 300,000 shares of Class A common stock. All employees whose customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to participate in the stock purchase plan, provided that any employee who would own five percent or more of the Company's total combined voting power immediately after an offering date under the plan is not eligible to participate. Eligible employees must authorize the Company to deduct an amount from their pay during offering periods established by the compensation committee. The purchase price for shares under the plan will be determined by the compensation committee but may not be less than 85 percent of the lesser of the market price of the common stock on the first or last business day of each offering period. As of December 31, 1999, 28,791 shares had been issued by the Company under this plan. The per share weighted-average fair value of purchase rights granted during the year was $3.30 for the year ended December 31, 1999. The estimates were calculated at the grant date using the Black-Scholes Option Pricing Model with the following assumptions at December 31, 1999: Expected dividend yield.............................................. 0% Volatility........................................................... 63.92% Risk-free interest rate range........................................ 4.73% 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. During 1999, the Company incurred $4,070,000 in compensation cost for these options. Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS 123, the Company's net loss and net loss per share would have been increased to the pro forma amounts indicated below (in thousands):
Year ended December 31, ------------------------ 1998 1999 ----------- ----------- Net loss; As reported............. $ 16,167 $ 36,896 Pro forma............... 17,508 37,706 As reported--net loss per share--basic and diluted................ (2.42) (2.40) Pro forma--net loss per share--basic and diluted................ (2.62) (2.46)
F-18 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (7) WSI Options In 1997, the Company issued WSI three options. Under the first option, WSI could have purchased 5,202,748 shares of common stock at $4.52 per share to acquire common stock. The option could have been exercised in whole or in incremental amounts between April 16, 1998 and October 16, 2002. Under certain circumstances, AMSC could have required WSI to exercise the option in whole. The Company allocated $1,250,000 to the option. Under the second option, WSI could have purchased 6,897,291 shares at $8.91 per share. The option could have been exercised between October 16, 1997 and October 16, 2003. The Company allocated $170,000 to the option. Under the third option, WSI could have purchased 187,893 shares of common stock at $5.32 per share. The option could have been exercised between October 16, 1997 and October 17, 2002. The Company allocated $80,000 to the option. The options were acquired by AMSC and exchanged for the $81,676,000 note to AMSC as part of the WorldSpace Transaction (see note 4(d)). (8) Profit Sharing and Employee Savings Plan On July 1, 1998, the Company adopted a profit sharing and employee savings plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer up to 15 percent of their compensation on a pre-tax basis through contributions to the savings plan. The Company contributed $0.50 in 1998 and 1999 for every dollar the employees contributed up to 6 percent of compensation, which amounted to $14,000 and $164,000, respectively. (9) Interest Cost The Company capitalizes a portion of interest cost as a component of the cost of the FCC license and satellite system under construction. The following is a summary of interest cost incurred during December 31, 1997, 1998 and 1999, and for the period from December 15, 1992 (date of inception) to December 31, 1998 (in thousands):
December 15, 1992 (date of inception) to 1997 1998 1999 December 31, 1999 ------ ------- ------- ---------------------- Interest cost capitalization.... $1,901 $11,824 $15,343 $29,068 Interest cost charged to expense........................ 549 -- 9,120 9,669 ------ ------- ------- ------- Total interest cost incurred.. $2,450 $11,824 $24,463 $38,737 ====== ======= ======= =======
Interest costs incurred prior to the award of the license were expensed in 1997. During 1999, the Company exceeded its capitalization threshold by $3,600,000 and incurred a charge to interest of $5,520,000 for the beneficial conversion feature of the new AMSC note. (10) Income Taxes For the period from December 15, 1992 (date of inception) to October 8, 1999, the Company filed consolidated federal and state tax returns with its majority stockholder AMSC. The Company generated net operating losses and other deferred tax benefits that were not utilized by AMSC. As no formal tax sharing agreement has been finalized, the Company was not compensated for the net operating losses. Had the Company filed on a stand-alone basis for the three- year period ending December 31, 1999, the Company's tax provision would be as follows: F-19 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 Taxes on income included in the statements of operations consists of the following (in thousands):
December 31, -------------------- 1997 1998 1999 ------ ------ ------ Current taxes: Federal................................................. $ -- $ -- $ -- State................................................... -- -- -- ------ ------ ------ Total current taxes................................... -- -- -- ------ ------ ------ Deferred taxes: Federal................................................. -- -- -- State................................................... -- -- -- ------ ------ ------ Total deferred 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):
December 31, --------------------------- 1997 1998 1999 ------- -------- -------- Income before taxes on income, as reported in the statements of income............................ $(1,659) $(16,167) $(36,896) ======= ======== ======== Theoretical tax on the above amount at 35%....... (581) (5,658) (12,914) State tax, net of federal benefit................ (165) (1,605) 701 Increase in taxes resulting from permanent differences, net................................ -- 31 2,120 Adjustments arising from differences in the basis of measurement for tax purposes and financial reporting purposes and other.................... -- -- 13,252 Change in valuation allowance.................... 746 7,232 (3,159) ------- -------- -------- Taxes on income for the reported year............ $ -- $ -- $ -- ======= ======== ======== At December 31, 1997, 1998 and 1999, deferred income tax consists of future tax assets/(liabilities) attributable to the following (in thousands): December 31, --------------------------- 1997 1998 1999 ------- -------- -------- Deferred tax assets: Net operating loss/other tax attribute carryovers.................................... $ 36 $ 477 $ 2,650 Start-up costs................................. 710 7,501 17,605 ------- -------- -------- Gross total deferred tax assets.............. 746 7,978 20,255 Valuation allowance for deferred tax assets...... (746) (7,978) (4,819) ------- -------- -------- Net deferred assets.......................... -- -- 15,436 ------- -------- -------- Deferred tax liabilities: Fixed assets................................... -- -- (51) FCC license.................................... -- -- (10,160) Other intangible assets........................ -- -- (5,225) ------- -------- -------- Net deferred tax liabilities................. -- -- (15,436) ------- -------- -------- Deferred income tax, net..................... $ -- $ -- $ -- ======= ======== ========
F-20 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (11) Accumulated Deficit The Company is devoting its efforts to develop, construct and expand a digital audio radio network. This effort involves substantial risk and future operating results will be subject to significant business, economic, regulatory, technical, and competitive uncertainties and contingencies. These factors individually or in the aggregate could have an adverse effect on the Company's financial condition and future operating results and create an uncertainty as to the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. In order to commence satellite-based radio broadcasting services, the Company will require substantial funds to develop and construct the DARS system, develop and launch radio communications satellites, retire debt incurred in connection with the acquisition of the DARS license and to sustain operations until it generates positive cash flow. At the Company's current stage of development, economic uncertainties exist regarding successful acquisition of additional debt and equity financing and ultimate profitability of the Company's proposed service. The Company is currently constructing its satellites and will require substantial additional financing before construction is completed. Failure to obtain the required long-term financing will prevent the Company from realizing its objective of providing satellite-delivered radio programming. Management's plan to fund operations and capital expansion includes the additional sale of debt and equity securities through public and private sources. There are no assurances, however, that such financing will be obtained. (12) Commitments and Contingencies (a) FCC License The FCC has established certain system development milestones that must be met for the Company to maintain its license to operate the system. The Company believes that it is proceeding into the system development as planned and in accordance with the FCC milestones. (b) Application for Review of FCC License One of the losing bidders for the DARS licenses filed an Application for Review by the full FCC of the Licensing Order which granted the Company its FCC license. The Application for Review alleges that WSI had effectively taken control of the Company without FCC approval. The FCC or the U.S. Court of Appeals has the authority to overturn the award of the FCC license should they rule in favor of the losing bidder. Although the Company believes that its right to the FCC license will withstand the challenge as WSI is no longer a stockholder in the Company, no prediction of the outcome of this challenge can be made with any certainty. (c) Technical Services Effective January 1, 1998, the Company entered into agreements with AMSC and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in which AMSC and WorldSpace MC would provide technical support in areas related to the development of a DARS system. Payments for services provided under these agreements are made based on negotiated hourly rates. These agreements may be terminated by the parties on or after the date of the commencement of commercial operation following the launch of the Company's first F-21 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 satellite. There are no minimum services purchase requirements. The Company incurred costs of $413,000 and $224,000 under its agreement with AMSC during 1998 and 1999, respectively. The Company incurred costs of $4,357,000 and $0 under its agreement with WorldSpace MC during 1998 and 1999, respectively. (d) Technology Licenses Effective January 1, 1998, XMSR entered into a technology licensing agreement with AMSC and WorldSpace MC by which as compensation for certain licensed technology currently under development to be used in the XM Radio system, XMSR will pay up to $14,300,000 to WorldSpace MC over a ten-year period. XMSR incurred costs of $6,624,000 and $50,000, payable to WorldSpace MC, under the agreement during 1998 and 1999, respectively. Any additional amounts to be incurred under this agreement are dependent upon further development of the technology, which is at XMSR's option. No liability exists to AMSC or WorldSpace MC should such developments prove unsuccessful. The Company maintains an accrual of $5,046,000, payable to WorldSpace MC, for quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2 percent of quarterly net revenues to WorldSpace MC and a royalty of $0.30 per chipset, payable to WorldSpace MC, for equipment manufactured using certain source encoding and decoding signals technology. (e) Satellite Contract During the first half of 1999, the Company and Hughes Space and Communications, Inc. ("Hughes") amended the satellite contract to construct and launch the Company's satellites to implement a revised work timetable, payment schedule to reflect the timing of the receipt of additional funding, and technical modifications. The Company expects to incur total payment obligations under this contract of approximately $541,300,000, which includes amounts the Company expects to pay pursuant to the exercise of the option to build the ground spare satellite and certain financing costs and in- orbit incentive payments. As of December 31, 1998 and 1999, the Company had paid $40,481,250 and $183,918,000, respectively, under this contract. (f) LCC International Services Contract In August 1999, the Company signed a contract with LCC International, Inc., a related party, for the engineering for its terrestrial repeater network. Payments by the Company under this contract are expected to aggregate approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the Company has paid $6,578,000 under this contract. (g) General Motors Distribution Agreement The Company has signed a long-term distribution agreement with the OnStar division of General Motors providing for the installation of XM radios in General Motors vehicles. During the term of the agreement, which expires 12 years from the commencement date of the Company's commercial operations, General Motors has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The Company will also have a non- exclusive right to arrange for the installation of XM radios included in OnStar systems in non-General Motors vehicles that are sold for use in the United States. The Company has significant annual, fixed payment obligations to General Motors for four years following commencement of commercial service. These payments approximate $35,000,000 in the aggregate during this period. Additional annual fixed payment obligations beyond the initial four years of the contract term range from less than $35,000,000 to approximately $130,000,000 through 2009, aggregating approximately $400,000,000. In order to encourage the broad installation of XM radios in General Motors vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to General Motors when the owners of General Motors F-22 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 vehicles with installed XM radios become subscribers for the Company's service. The Company must also share with General Motors a percentage of the subscription revenue attributable to General Motors vehicles with installed XM radios, which percentage increases until there are more than 8 million General Motors vehicles with installed XM radios. The Company will also make available to General Motors bandwidth on the Company's systems. The agreement is subject to renegotiations at any time based upon the installation of radios that are compatible with a unified standard or capable of receiving Sirius Satellite Radio's (formerly known as CD Radio) service. The agreement is subject to renegotiations if, four years after the commencement of XM Radio's commercial operations and at two-year intervals thereafter GM does not achieve and maintain specified installation levels of General Motors vehicles capable of receiving the Company's service, starting with 1,240,000 units after four years, and thereafter increasing by the lesser of 600,000 units per year and amounts proportionate to target market shares in the satellite digital radio service market. There can be no assurances as to the outcome of any such renegotiations. General Motors' exclusivity obligations will discontinue if, four years after the Company commences commercial operations and at two-year intervals thereafter, the Company fails to achieve and maintain specified minimum market share levels in the satellite digital radio service market. (h) Terrestrial Repeater Contract In February 2000, the Company entered into a contract with Hughes Electronics Corporation, a related party, for the design, development and purchase of terrestrial repeater equipment. The total contract value is $128,000,000 and the Company incurred and paid $3,500,000 under a letter agreement in anticipation of this contract through December 31, 1999. (i) Joint Development Agreement On February 16, 2000, the Company signed an agreement with Sirius Satellite Radio ("Sirius Radio"), a competitor of the Company, to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both the Company's and Sirius Radio's services. The technology relating to the unified standard will be jointly developed, funded and owned by the two companies. As part of the agreement, each company has licensed to the other its intellectual property relating to its system; the value of this license will be considered part of its contribution toward the joint development. In addition, each company has agreed to license its non-core technology, including non-essential features of its system, to the other at commercially reasonable rates. (j) Sony Warrant In February 2000, the Company issued a warrant to Sony exercisable for shares of the Company's Class A common stock. The warrant will vest at the time that we attain our millionth customer, and the number of shares underlying the warrant will be determined by the percentage of XM Radios that have a Sony brand name as of the vesting date. If Sony achieves its maximum performance target, it will receive 2% of the total number of shares of the Company's Class A common stock on a fully-diluted basis upon exercise of the warrant. The exercise price of the Sony warrant will equal 105% of fair market value of the Class A common stock on the vesting date, determined based upon the 20-day trailing average. F-23 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 (k) Leases The Company has three noncancelable operating leases for office space and two noncancelable capital leases for equipment that expire over the next ten years. The future minimum lease payments under noncancelable leases as of December 31, 1999 are (in thousands):
Operating Capital leases leases --------- ------- 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 ====
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 12(i)). However, if this agreement is terminated before the value of the license has been determined due to the Company's failure to perform a material covenant or obligation, then this suit could be refiled. (13) Secondary Offering and Sale of Series B Convertible Redeemable Preferred Stock On January 31, 2000, the Company closed on a secondary offering of its Class A common stock and newly designated Series B convertible redeemable preferred stock. The Company sold 4,000,000 shares of its Class A common stock for $32.00 per share, which yielded net proceeds of approximately $121,000,000. The Company concurrently sold 2,000,000 shares of its Series B convertible redeemable preferred stock for $50.00 per share, which yielded net proceeds of approximately $96,300,000. The Series B convertible redeemable preferred stock F-24 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) For the period from December 15, 1992 (date of inception) to December 31, 1999 provides for 8.25% cumulative dividends that may be paid in Class A common stock or cash. The Series B convertible redeemable preferred stock is convertible into Class A common stock at a conversion price of $40 per share and is redeemable in Class A common stock on February 3, 2003. On February 9, 2000, the underwriters exercised a portion of the over- allotment option for 370,000 shares of Class A common stock, which yielded net proceeds of approximately $11,233,000. (14) Private Units Offering On March 15, 2000 the Company closed a private placement of 325,000 units, each unit consisting of $1,000 principal amount of 14% senior secured notes due 2010 of its subsidiary XM Satellite Radio Inc. and one warrant to purchase 8,024,115 shares of the Company's Class A common stock at a price of $49.50 per share. The Company realized net proceeds of $191.0 million, excluding $123.0 million used to acquire securities which will be used to pay interest payments due under the notes for the first three years. (15)Quarterly Data (Unaudited)
1997 ---------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except for per share data) Revenues....................................... $ -- $ -- $ -- $ -- Operating loss................................. -- 51 185 874 Loss before income taxes....................... -- 270 459 930 Net loss....................................... -- 270 459 930 ------ ------ ------ ------ Net loss per share--basis and diluted........ $ -- $(0.04) $(0.07) $(0.14) ====== ====== ====== ====== 1998 ---------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues....................................... $ -- $ -- $ -- $ -- Operating loss................................. 3,100 5,032 3,865 4,196 Loss before income taxes....................... 3,100 5,032 3,857 4,178 Net loss....................................... 3,100 5,032 3,857 4,178 ------ ------ ------ ------ Net loss per share--basis and diluted........ $(0.46) $(0.75) $(0.58) $(0.62) ====== ====== ====== ====== 1999 ---------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues....................................... $ -- $ -- $ -- $ -- Operating loss................................. 4,421 4,020 9,374 12,876 Loss before income taxes....................... 4,367 3,999 17,402 11,128 Net loss....................................... 4,367 3,999 17,402 11,128 ------ ------ ------ ------ Net loss per share--basis and diluted........ $(0.65) $(0.60) $(2.60) $(0.27) ====== ====== ====== ======
The sum of quarterly per share net losses do not necessarily agree to the net loss per share for the year due to the timing of stock issuances. F-25 EX-4.3 2 EXHIBIT 4.3 Exhibit 4.3 XM SATELLITE RADIO HOLDINGS INC. CERTIFICATE OF DESIGNATION establishing the Voting Powers, Designations, Preferences, Limitations, Restrictions, and Relative Rights of 8.25% Series B Convertible Redeemable Preferred Stock due 2012 _________________________________________ Pursuant to Section 151 of the General Corporation Law of the State of Delaware _________________________________________ XM SATELLITE RADIO HOLDINGS INC., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Issuer"), does hereby certify that (i) pursuant to authority conferred upon the Board of Directors of the Issuer by its Restated Certificate of Incorporation, as amended to date, and pursuant to the provisions of Section 151 of the General Corporation Law of the State of Delaware, the Board of Directors authorized the creation and issuance of the Issuer's 8.25% Series B Convertible Redeemable Preferred Stock (the "Preferred Stock"), and (ii) the following resolution fixing the designations, preferences and rights of such Preferred Stock, which was duly adopted by the Board of Directors, on January 25, 2000, remains in full force and effect. Certain capitalized terms used herein are defined in Article 10. RESOLVED, that pursuant to the authority expressly granted to and vested in the Board of Directors of the Issuer by the provisions of the Restated Certificate of Incorporation, as amended from time to time (the "Certificate of Incorporation"), and pursuant to Section 151(g) of the General Corporation Laws of the State of Delaware, there be from the 60,000,000 shares of preferred stock, $0.01 par value, of the Issuer, authorized to be issued pursuant to the Certificate of Incorporation, a series of preferred stock, consisting of 3,000,000 shares of 8.25% Series B Convertible Redeemable Preferred Stock (referred to herein as the "Preferred Stock"), having the number of shares and, to the extent that the designations, powers, preferences and relative and other special rights and the qualifications, limitations and restrictions of such Preferred Stock are not stated and expressed in the Certificate of Incorporation, the powers, preferences and relative and other special rights and the qualifications, limitations and restrictions thereof, as follows: 1. Designation and Number of Shares 1.1 The series will be known as the 8.25% Series B Convertible Redeemable Preferred Stock. 1.2 The Preferred Stock will be a series consisting of 3,000,000 shares with a liquidation preference of $50 per share of the authorized but unissued preferred stock of the Issuer. 2. Dividends 2.1 Payment of Dividends (a) Holders of Preferred Stock will be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available therefor, cumulative dividends from the issue date of the Preferred Stock (the "Issuance Date") accruing at the rate per annum equal to 8.25% of the liquidation preference per share, payable quarterly in arrears on February 1, May 1, November 1 and August 1 of each year (each such date being referred to herein as a "Dividend Payment Date"), commencing May 1, 2000. All dividends will be cumulative, whether or not earned or declared. (b) Each distribution in the form of a dividend shall be payable in arrears to Holders of record as they appear on the stock books of the Issuer on each record date as established by the Board of Directors of the Issuer (the "Dividend Payment Record Date") not more than 60 nor less than ten days preceding a Dividend Payment Date. (i) Dividends payable on the Preferred Stock for each full dividend period will be computed by dividing the annual dividend rate by four. Dividends payable on the Preferred Stock for any period less than a full dividend period will be computed on the basis of a 360-day year consisting of twelve 30-day months. (ii) The Preferred Stock will not be entitled to any dividends, whether payable in cash, property or securities, in excess of the full cumulative dividends. (iii) No interest, or sum of money in lieu of interest, will be payable in respect of any accumulated and unpaid dividends which may be in arrears. (c) Dividends, to the extent declared by the Issuer's Board of Directors may, at the option of the Issuer, be paid in cash, by delivery of fully paid and nonassessable shares of the Issuer's Class A common stock (the "Common Stock"), or a combination thereof. If the Issuer elects to pay dividends in shares of Common Stock, such shares of Common Stock shall be valued for such purpose: (i) If on the date of such payment, such shares of Common Stock are freely tradable, such shares of Common Stock shall be valued at 95% of Average Market Value. (ii) If on the date of such payment, such shares of Common Stock are not freely tradable, such shares of Common Stock shall be valued at 90% of Average Market Value. 2.2 Declaration of Dividends (a) No dividends or other distributions (other than a dividend or distribution in Junior Securities) may be declared, made or paid or funds set apart for payment on the Junior Securities or Parity Securities, and no Junior Securities or any Parity Securities, including the Preferred Stock, may be repurchased, redeemed or otherwise acquired for any consideration (or any money paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Issuer (except by conversion into or exchange for Junior Securities or in the case that monies for such dividends, distributions, redemptions, purchases, or other acquisitions are derived from the proceeds of a substantially concurrent offering of such securities), unless full cumulative dividends shall have been or contemporaneously are paid or declared and a sum sufficient for the payment thereof is set apart for such payment on all outstanding shares of Preferred Stock for all Dividend Payment Dates on or prior to such declaration, payment, redemption, purchase or acquisition. (b) No dividends may be declared, made or paid or funds set apart for the payment of dividends upon any outstanding share of Preferred Stock with respect to any dividend period unless all dividends for all preceding periods have been paid or declared and a sum sufficient for the payment thereof is set apart for the payment of such dividend upon all outstanding shares of Senior Securities. 2 (c) The holder of record of a share of Preferred Stock at the close of business on a record date with respect to the payment of dividends on the Preferred Stock will be entitled to receive such dividends with respect to such share of Preferred Stock (except that Holders of shares called for redemption or conversion on a Redemption Date or Conversion Date between the record date and a date which is two days after the Dividend Payment Date will be entitled to receive such dividend on such Redemption Date as indicated in Section 5.1 hereof or such Conversion Date as indicated in Section 4 hereof, as applicable) on the corresponding Dividend Payment Date, notwithstanding the conversion of such share after such record date and prior to such Dividend Payment Date. A share of Preferred Stock surrendered for conversion during the period from the close of business on any record date for the payment of dividends to the opening of business of the corresponding Dividend Payment Date must be accompanied by a payment in cash, Common Stock or a combination thereof, depending on the method of payment that the Issuer may choose to pay the dividend, in an amount equal to the dividend payable on such dividend payment date, unless such share of Preferred Stock has been called for redemption on a redemption date occurring during the period from the close of business on any record date for the payment of dividends to the close of business on the business day immediately following the corresponding Dividend Payment Date. The dividend payment with respect to a share of Preferred Stock called for redemption on a date during the period from the close of business on any record date for the payment of dividends to the close of business on the business day immediately following the corresponding dividend payment date will be payable on such Dividend Payment Date to the record holder of such share on such record date, notwithstanding the conversion of such share after such record date and prior to such dividend payment date or the Issuer's default in payment of the dividend due on that Dividend Payment Date. No payment or adjustment will be made upon conversion of shares of Preferred Stock for accumulated and unpaid dividends or for dividends with respect to the Common Stock issued upon such conversion. (d) Except as provided in Section 2.2(b) and in Section 4.2, the Issuer shall make no payment or allowance for unpaid dividends, whether or not in arrears, on converted shares or for dividends on the shares of Common Stock issued upon conversion. (e) The Issuer will take all actions required or permitted under Delaware corporate law to permit the payment of dividends on the Preferred Stock, including, without limitation, through the revaluation of its assets in accordance with Delaware General Corporation Laws. 3. Ranking 3.1 The Preferred Stock will, with respect to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Issuer, rank: (a) senior to all classes of Common Stock, Series A Convertible Preferred Stock and each other class of Capital Stock or series of preferred stock issued by the Issuer, which is established after the date of this Certificate of Designation, the terms of which do not expressly provide that such class or series will rank senior to or on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or 3 dissolution of the Issuer (collectively, with the Common Stock, referred to as the "Junior Securities"); (b) on a parity with any class of Capital Stock or series of preferred stock issued by the Issuer, which is established after the date of this Certificate of Designation by the Board of Directors, the terms of which expressly provide that such class or series will rank on a parity with the Preferred Stock as to dividend distributions and distributions upon the liquidation, winding up or dissolution of the Issuer (collectively referred to as "Parity Securities"); and (c) junior to each class of Capital Stock or series of preferred stock issued by the Issuer, which is established after the date of this Certificate of Designation by the Board of Directors, the terms of which expressly provide that such class or series will rank senior to the Preferred Stock as to dividend distributions and distributions upon liquidation, winding- up or dissolution of the Issuer (collectively referred to as "Senior Securities"). 3.2 Except as otherwise provided herein, the Issuer is entitled to amend its Certificate of Incorporation to authorize one or more additional series of preferred stock, file certificates of designation, and issue without restriction from time to time, any series of Junior Securities, Parity Securities, or Senior Securities. 4. Conversion 4.1 Conversion Rights (a) Each Holder of Preferred Stock shall have the right, at its option, at any time and from time to time to convert, subject to the terms and provisions of this Article 4, any or all of such Holder's shares of Preferred Stock. In such case, the shares of Preferred Stock shall be converted into such whole number of fully paid and nonassessable shares of Common Stock as is equal, subject to Section 4.3, to: the product of the number of shares of Preferred Stock being so converted multiplied by the quotient of (i) the Liquidation Preference divided by (ii) the Conversion Price then in effect, except that with respect to any share which shall be called for redemption such right shall terminate at the close of business on the Business Day prior to the Redemption Date unless the Issuer shall default in making the payment due upon redemption thereof. (b) The conversion right of a Holder of Preferred Stock shall be exercised by the Holder by the surrender of the certificate representing shares to be converted to the Issuer or to the Transfer Agent accompanied by the Conversion Notice. (i) Immediately prior to the close of business on the Conversion Date, each converting Holder of Preferred Stock shall be deemed to be the Holder of record of Common Stock issuable upon conversion of such Holder's Preferred Stock notwithstanding that the share register of the Issuer shall then be closed or that certificates representing such Common Stock shall not then be actually delivered to such person. 4 (ii) Upon notice from the Issuer, each Holder of Preferred Stock so converted shall promptly surrender to the Issuer or the Transfer Agent certificates representing the shares so converted (if not previously delivered), duly endorsed in blank or accompanied by proper instruments of transfer. (iii) On any Conversion Date, all rights with respect to the shares of Preferred Stock so converted, including the rights, if any, to receive notices, will terminate, except the rights of Holders thereof to: (1) receive certificates for the number of shares of Common Stock into which such shares of Preferred Stock have been converted; (2) receive the payment in cash or shares of Common Stock of any accumulated and unpaid dividends accrued thereon pursuant to Section 4.2 hereof; and (3) exercise the rights to which they are entitled as Holders of Common Stock. (c) If the Conversion Date shall not be a Business Day, then such conversion right shall be deemed exercised on the next Business Day. (d) When shares of Preferred Stock are converted pursuant to this Section 4.1, all accumulated and unpaid dividends, including dividends payable on the Conversion Date pursuant to Section 2.2, or liquidated damages (whether or not in arrears or currently payable) on the Preferred Stock so converted to (and not including) the Conversion Date shall immediately be due and payable, at the Issuer's option: (i) in cash; (ii) by delivery of the Issuer's Common Stock; or (iii) a combination thereof. 4.2 The Conversion Price shall be subject to adjustment from time to time as follows: (a) Stock Splits and Combinations. In case the Issuer shall at any ----------------------------- time or from time to time after the Issuance Date (i) subdivide or split the outstanding shares of Common Stock, (ii) combine or reclassify the outstanding shares of Common Stock into a smaller number of shares or (iii) issue by reclassification of the shares of Common Stock any shares of capital stock of the Issuer, then, and in each such case, the Conversion Price in effect immediately prior to such event or the record date therefor, whichever is earlier, shall be adjusted so that the holder of any shares of Preferred Stock thereafter surrendered for conversion shall be entitled to receive the number of shares of Common Stock or other securities of the Issuer which such holder would have owned or have been entitled to receive after the occurrence of any of the events described above, had such shares of Preferred Stock been surrendered for conversion immediately prior to the occurrence of such event or the record date therefor, whichever is earlier. An adjustment made pursuant to this subparagraph (a) shall become effective at the close of business on the day upon which such corporate action becomes effective. Such adjustment shall be made successively whenever any event listed above shall occur. (b) Stock Dividends in Common Stock. In case the Issuer shall at any time or from time to time after the Issuance Date pay a dividend or make a distribution in shares of Common Stock on any class of capital stock of the Issuer other than dividends or distributions of 5 shares of Common Stock or other securities with respect to which adjustments are provided in paragraph (a) above, the Conversion Price shall be adjusted so that the holder of each share of Preferred Stock shall be entitled to receive upon conversion thereof the number of shares of Common Stock determined by multiplying (1) the applicable Conversion Price by (2) a fraction, the numerator of which shall be the number of shares of Common Stock theretofore outstanding and the denominator of which shall be the sum of such number of shares and the total number of shares issued in such dividend or distribution. (c) Issuance of Rights or Warrants. In case the Issuer shall issue ------------------------------ to all holders of Common Stock rights or warrants entitling such holders to subscribe for or purchase Common Stock at a price per share less than the Current Market Price, the Conversion Price in effect immediately prior to the close of business on the record date fixed for determination of shareholders entitled to receive such rights or warrants shall be reduced by multiplying such Conversion Price by a fraction, the numerator of which is the sum of the number of shares of Common Stock outstanding at the close of business on such record date and the number of shares of Common Stock that the aggregate offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase at such Current Market Price, and the denominator of which is the sum of the number of shares of Common Stock outstanding at the close of business on such record date and the number of additional shares of Common Stock so offered for subscription or purchase. For purposes of this subparagraph (c), the issuance of rights or warrants to subscribe for or purchase securities convertible into Common Stock shall be deemed to be the issuance of rights or warrants to purchase the Common Stock into which such securities are convertible at an aggregate offering price equal to the sum of the aggregate offering price of such securities and the minimum aggregate amount (if any) payable upon conversion of such securities into Common Stock. Such adjustment shall be made successively whenever any such event shall occur. (d) Distribution of Indebtedness, Securities or Assets. In case the -------------------------------------------------- Issuer shall distribute to all holders of Common Stock (whether by dividend or in a merger, amalgamation or consolidation or otherwise) evidences of indebtedness, shares of capital stock of any class or series, other securities, cash or assets (other than Common Stock, rights or warrants referred to in subparagraph (c) above or a dividend payable exclusively in cash and other than as a result of a Fundamental Change), the Conversion Price in effect immediately prior to the close of business on the record date fixed for determination of shareholders entitled to receive such distribution shall be reduced by multiplying such Conversion Price by a fraction, the numerator of which is the Current Market Price on such record date less the fair market value (as determined by the Board of Directors of the Issuer, whose determination in good faith shall be conclusive) of the portion of such evidences of indebtedness, shares of capital stock, other securities, cash and assets so distributed applicable to one share of Common Stock and the denominator of which is the Current Market Price. Such adjustment shall be made successively whenever any such event shall occur. (e) Fundamental Changes. In case of any Fundamental Change, the ------------------- holder of each share of Preferred Stock outstanding immediately prior to the occurrence of such Fundamental Change shall have the right upon any subsequent conversion to receive (but only out of legally available funds of the Issuer, to the extent required by applicable law) the kind and 6 amount of stock, other securities, cash and assets that such holder would have received if such share had been converted immediately prior thereto. (f) Anything in the above sections (a)-(e) to the contrary notwithstanding, the Issuer shall not be required to give effect to any adjustment in the Conversion Price unless and until the net effect of one or more adjustments (each of which shall be carried forward until counted toward adjustment), determined as above provided, shall have resulted in a change of the Conversion Price by at least 1%, and when the cumulative net effect of more than one adjustment so determined shall be to change the Conversion Price by at least 1%, such change in the Conversion Price shall thereupon be given effect. In the event that, at any time as a result of the provisions of this Section, the holder of shares of Preferred Stock upon subsequent conversion shall become entitled to receive any shares of capital stock of the Issuer other than Common Stock, the number of such other shares so receivable upon conversion of shares of Preferred Stock shall thereafter be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions contained herein. (g) There shall be no adjustment of the Conversion Price in case of the issuance of any stock of the Issuer in a merger, reorganization, acquisition, reclassification, recapitalization or other similar transaction except as set forth in the above paragraphs (a)-(e). (h) In any case in which the above paragraphs (a)-(e) require that an adjustment as a result of any event become effective from and after a record date, the Issuer may elect to defer until after the occurrence of such event (i) issuing to the holder of any shares of Preferred Stock converted after such record date and before the occurrence of such event the additional shares of Common Stock issuable upon such conversion over and above the shares issuable on the basis of the Conversion Price in effect immediately prior to adjustment and (ii) paying to such holder any amount in cash in lieu of a fractional share of Common Stock. (i) If the Issuer shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, and shall thereafter and before the distribution to shareholders thereof legally abandon its plan to pay or deliver such dividend or distribution, then thereafter no adjustment in the number of shares of Common Stock issuable upon exercise of the right of conversion granted by the above paragraphs (a)-(e) or in the Conversion Price then in effect shall be required by reason of the taking of such record. 4.3 Upon a Change of Control, each Holder of Preferred Stock will have the option, during the period commencing on the date that the applicable notice of such Change of Control is mailed to Holders of Preferred Stock and ending on the close of business on the 45/th/ day thereafter (the "Special Conversion Date") to convert all, but not less than all, of such Holder's shares of Preferred Stock into Common Stock at a conversion rate equal to the Liquidation Preference divided by the Special Conversion Price. (a) Within fifteen days after a Change of Control, notice of such Change of Control shall be given by the Issuer by first-class mail to each record Holder of shares of Preferred Stock, at such Holder's address as the same appears on the books of the Issuer. Each such notice shall state: (i) that a Change of Control has occurred; (ii) the last day on which the Change of Control option may be exercised (the "Expiration Date"); (iii) the name and address of 7 the paying agent; and (iv) the procedures that Holders must follow to exercise the Change of Control option. (b) On or before the Expiration Date, each Holder of shares of Preferred Stock wishing to exercise the Change of Control option shall surrender the certificate or certificates representing the shares of Preferred Stock to be converted, in the manner and at the place designated in the notice described in Section 4.3 and on such date the cash or shares of Common Stock due to such Holder shall be delivered to the person whose name appears on such certificate or certificates as the owner thereof and each surrendered certificate shall be returned to authorized but unissued shares. Upon surrender (in accordance with the notice described in Section 4.3(a)) of the certificate or certificates representing any shares to be so converted (properly endorsed or assigned for transfer, if the Issuer shall so require and the notice shall so state), such shares shall be converted by the Issuer at the Conversion Price as adjusted. (c) Exercise by a holder of such holder's special conversion right following a change of control is irrevocable, except that a holder may withdraw its election to exercise such holder's special conversion right at any time prior to the close of business on the Special Conversion Date by delivering a written or facsimile transmission notice to the transfer agent at the address or facsimile number specified in the change of control notice. Such notice, to be effective, must be received by the transfer agent prior to the close of business on the Special Conversion Date. All shares of Preferred stock tendered for conversion pursuant to holders' special conversion rights as described herein and not withdrawn will be converted at the close of business on the Special Conversion Date. 4.4 If, as a result of any Conversion Price Adjustment Event, a Holder of the Preferred Stock becomes entitled to receive upon conversion shares of two or more classes of Capital Stock, the Issuer shall determine the reasonable allocation of the adjusted Conversion Price between the classes of Capital Stock. After such allocation, the Conversion Price of each class of Capital Stock shall thereafter be subject to adjustment on terms applicable to the Preferred Stock in this Article 4. 4.5 The Issuer shall at all times reserve and keep available for issuance upon the conversion of the Preferred Stock such number of its authorized but unissued shares of Common Stock as will from time to time be sufficient to permit the conversion of all outstanding shares of Preferred Stock, and shall take all action required to increase the authorized number of shares of Common Stock if at any time there shall be insufficient authorized unissued shares of Common Stock to permit such reservation or to permit the conversion of all outstanding shares of Preferred Stock. 4.6 The issuance or delivery of certificates for Common Stock upon the conversion of shares of Preferred Stock shall be made without charge to the converting Holder of shares of Preferred Stock for such certificates or for any tax in respect of the issuance or delivery of such certificates or the securities represented thereby, and such certificates shall be issued or delivered in the respective names of, or in such names as may be directed by, the Holders of the shares of Preferred Stock converted; provided, however, that the Issuer shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificate in a name other than that of the Holder of the shares of Preferred Stock 8 converted, and the Issuer shall not be required to issue or deliver such certificate unless or until the Person or Persons requesting the issuance or delivery thereof shall have paid to the Issuer the amount of such tax or shall have established to the reasonable satisfaction of the Issuer that such tax has been paid. 5. Redemption of Preferred Stock 5.1 Optional Redemption of the Preferred Stock (a) Shares of the Preferred Stock may not be required to be redeemed prior to February 3, 2003. (b) On or after February 3, 2003, the Preferred Stock may be redeemed for cash, in whole or in part, at the option of the Issuer, at the following Redemption Prices per share (expressed as percentages of the Liquidation Preference), in each case, together with accumulated and unpaid dividends (including an amount equal to a prorated dividend for any partial dividend period), if any, to the Redemption Date, upon not less than 30 nor more than 60 days' prior written notice (the "Redemption Notice"), if redeemed during each period set forth below, commencing on each of the dates set forth below: Date Redemption Price Per Share February 3, 2003................... 105.775% February 2, 2004................... 104.950% February 2, 2005................... 104.125% February 2, 2006................... 103.300% February 2, 2007................... 102.475% February 2, 2008................... 101.650% February 2, 2009................... 100.825% February 2, 2010 and thereafter.... 100.000% (c) In the event that fewer than all the outstanding shares of the Preferred Stock are to be redeemed, the shares to be redeemed will be determined pro rata or by lot, as determined by the Issuer. (d) From and after the applicable Redemption Date (unless the Issuer shall be in default of payment of the Redemption Price), dividends on the shares of the Preferred Stock to be redeemed on such Redemption Date shall cease to accumulate, such shares shall no longer be deemed to be outstanding, and all rights of the Holders thereof as stockholders of the Issuer (except the right to receive the Redemption Price and accumulated dividend amounts and liquidation penalties, if any through the Redemption Date) will cease. (e) No such optional redemption may be authorized or made unless, prior to giving the applicable Redemption Notice, all accumulated and unpaid dividends for periods ended prior to the date of such Redemption Notice shall have been paid in cash or Common Stock. 9 5.2 (a) In the event the Issuer shall elect to redeem shares of the Preferred Stock pursuant to Section 5.1 hereof: (i) The Issuer must make a public announcement of the redemption and provide the Holders with the Redemption Notice referred to in Section 5.1(b) not fewer than 30 days nor more than 60 days' prior to the Redemption Date. (ii) On or before any Redemption Date, each Holder of shares of Preferred Stock to be redeemed shall surrender the certificate or certificates representing such shares of Preferred Stock (properly endorsed or assigned, or transferred, if the Issuer shall so require and the Redemption Notice shall so state) to the Issuer or the Redemption Agent (if appointed) in the manner and at the place designated in the Redemption Notice. (iii) On the Redemption Date, the Issuer or the Redemption Agent, as applicable, shall pay or deliver to the Holder whose name appears on such certificate or certificates as the owner thereof, the full Redemption Price due such Holder in cash, in fully paid and nonassessable shares of Common Stock or in a combination thereof. (iv) The shares represented by each certificate to be surrendered shall be automatically (and without any further action of the Issuer or the Holder) canceled as of the Redemption Date whether or not certificates for such shares are returned to the Issuer and returned to authorized but unissued shares of preferred stock of no series. (v) If fewer than all the shares represented by any such certificate are to be redeemed, a new certificate shall be issued representing the unredeemed shares, without cost to the Holder, together with the amount of cash, if any, in lieu of fractional shares. (b) If a Redemption Notice shall have been given as provided in Section 5.1, all rights of the Holders thereof as stockholders of the Issuer with respect to shares so called for redemption (except for the right to receive from the Issuer the Redemption Price) shall cease either (i) from and after the Redemption Date (unless the Issuer shall default in the payment of the Redemption Price, in which case such rights shall not terminate at the Redemption Date) or (ii) if the Issuer shall so elect and state in the Redemption Notice, from and after the time and date (which date shall be the Redemption Date or an earlier date not less than 20 days after the date of mailing of the Redemption Notice) on which the Issuer shall irrevocably deposit in trust for the Holders of the shares to be redeemed with a designated Redemption Agent as paying agent sufficient to pay at the office of such paying agent, on the Redemption Date, the Redemption Price. Any money or shares of Common Stock so deposited with such Redemption Agent which shall not be required for such redemption shall be returned to the Issuer forthwith. Subject to applicable escheat laws, any moneys or shares of Common Stock so set aside by the Issuer and unclaimed at the end of one year from the Redemption Date shall revert to the general funds of the Issuer, after which reversion the Holders of such shares so called for redemption shall look only to the general funds of the Issuer for the payment of the Redemption Price without interest. Any interest accrued on funds held by the Redemption Agent shall be paid to the Issuer from time to time. 10 (c) In the event that fewer than all the outstanding shares of the Preferred Stock are to be redeemed, the shares to be redeemed shall be determined pro rata or by lot, as determined by the Issuer, except that the Issuer may redeem such shares held by any Holder of fewer than 100 shares (or shares held by Holders who would hold fewer than 100 shares as a result of such redemption), as may be determined by the Issuer. 5.3 Mandatory Redemption of Preferred Stock (a) The Issuer will redeem all shares of Preferred Stock on February 1, 2012, at a Mandatory Redemption Price equaling 100% of the Liquidation Preference, together with any accumulated and unpaid dividends to the date of Mandatory Redemption, unless the Preferred Stock has already been redeemed or converted. The Issuer shall send notice of such redemption to Holders upon not less than 30 nor more than 60 days' prior written notice. (b) The Issuer must make mandatory redemption payments on the Preferred Stock by delivery of shares of Common Stock and makes such payments as follows: (i) If on the date of such payment, such shares of Common Stock are freely tradable, such shares of Common Stock shall be valued at 95% of Average Market Value. (ii) If on the date of such payment, such shares of Common Stock are not freely tradable, such shares of Common Stock shall be valued at 90% of Average Market Value. (c) If, as a matter of law, the Issuer is unable to issue Common Stock in payment of the Mandatory Redemption Price, then the Issuer shall cause the Preferred Stock to be converted on the date of such mandatory redemption into the same number of shares of Common Stock as could otherwise have been issued in satisfaction of the Mandatory Redemption Price, provided that the Issuer shall have given the Holders of Preferred Stock notice of the exercise of this option at least 30 days prior to the date of such mandatory redemption. (d) The Issuer shall pay a Cash Adjustment, determined based on the proceeds received by the Transfer Agent from the sale of that number of shares of Common Stock, which the Issuer will deliver to the Transfer Agent for such purpose, equal to the aggregate of all such fractions rounded up to the nearest whole share, to each Holder that would otherwise be entitled to a fraction of a share of Common Stock. (i) The Transfer Agent shall sell such shares of Common Stock at the best available prices and distribute the proceeds to the Holders in proportion to their respective interests therein. (ii) The Issuer will pay the expenses of the Transfer Agent with respect to such sale, including brokerage commissions. Any portion of any such payment that is declared and not paid through the delivery of shares of Common Stock will be paid in cash. The Issuer shall make a public announcement no later than the close of business on the tenth business day prior to the record date for each dividend as to whether the Issuer 11 will pay such dividend and, if so, the form of consideration the Issuer will use to make such payment. 6. Liquidation Preference 6.1 Upon any voluntary or involuntary liquidation, dissolution or winding up of the Issuer or reduction or decrease in its capital stock resulting in a distribution of assets to the holders of any class or series of the Issuer's capital stock, Holders of the Preferred Stock will be entitled to be paid, out of assets of the Issuer available for distribution, the Liquidation Preference per share plus an amount in cash equal to all accumulated and unpaid dividends thereon to the date fixed for liquidation, dissolution or winding up (including an amount equal to a prorated dividend for the period from the last dividend payment date to the date fixed for liquidation, dissolution or winding up), before any distribution is made on any Junior Securities, including, without limitation, the Common Stock. 6.2 If, upon any voluntary liquidation, dissolution or winding-up of the Issuer, the amounts payable with respect to the liquidation performance of the Preferred Stock and all other Parity Securities are not paid in full, the Holders of the Preferred Stock and the Parity Securities will share pro rata in proportion to the full distribution to which each is entitled. 6.3 After payment of the full amount of the Liquidation Preference to which they are entitled, the Holders of shares of the Preferred Stock will have no right or claim to any of the remaining assets of the Issuer. 6.4 Neither the voluntary sale, conveyance, exchange or transfer (for cash, shares of stock, securities or other consideration) of all or substantially all of the property or assets of the Issuer nor the consolidation or merger of the Issuer with or into one or more entities will be deemed to be a voluntary or involuntary liquidation, dissolution or winding-up of the Issuer or reduction or decrease in capital stock, unless such sale, conveyance, exchange or transfer shall be in connection with a liquidation, dissolution or winding-up of the business of the Issuer or reduction or decrease in capital stock. 7. Voting Rights 7.1 Holders of the Preferred Stock have no voting rights with respect to general corporate matters except as provided by law or as set forth herein. 7.2 Special Voting Rights (a) If dividends payable on the Preferred Stock are in arrears and unpaid for six quarterly periods, whether or not consecutive, the Holders of a majority of the outstanding Preferred Stock voting separately as a class with the shares of any other subsequently issued Parity Securities then titled to similar voting rights (the "Voting Rights Class") will be entitled at the next regular or special meeting of stockholders of the Issuer to elect such number of members to the board of directors constituting at least 20% of the then existing board of directors before such election, rounded to the nearest whole number, provided, however, that such number shall be no less than one nor greater than two, and the number of members of the board of directors will be immediately and automatically increased by one or two, as the case may be. 12 (b) Such voting rights may be exercised at a special meeting of the holders of the shares of the Voting Rights Class, called as hereinafter provided, or at any annual meeting of stockholders held for the purpose of electing directors, and thereafter at each such annual meeting until such time as all dividends in arrears on the shares of Preferred Stock shall have been paid in full, at which time or times such voting rights and the term of the directors elected pursuant to Section 7.2(a) shall terminate and such directors shall be deemed to have resigned. (c) At any time when such voting rights shall have vested in holders of shares of the Voting Rights Class described in Section 7.2(a), a proper officer of the Issuer may call, and, upon the written request of the record holders of shares representing twenty-five percent (25%) of the voting power of the shares then outstanding of the Voting Rights Class addressed to the Secretary of the Issuer, shall call a special meeting of the holders of shares of the Voting Rights Class. Such meeting shall be held at the earliest practicable date upon the notice required for annual meetings of stockholders at the place for holding annual meetings of stockholders of the Issuer, or, if none, at a place designated by the Board of Directors. Notwithstanding the provisions of this Section 7.2(c), no such special meeting shall be called during a period within the 60 days immediately preceding the date fixed for the next annual meeting of stockholders, in which such case the election of directors pursuant to Section 7.2(a) shall be held at such annual meeting of stockholders. (d) At any meeting held for the purpose of electing directors at which the holders of the Voting Rights Class shall have the right to elect directors as provided herein, the presence in person or by proxy of the holders of shares representing more than fifty percent (50%) in voting power of the then outstanding shares of the Voting Rights Class shall be required and shall be sufficient to constitute a quorum of such class for the election of directors by such class. (e) Any director elected pursuant to the voting rights created under this Section 7.2 shall hold office until the next annual meeting of stockholders (unless such term has previously terminated pursuant to Section 7.2(b)) and any vacancy in respect of any such director shall be filled only by vote of the remaining director so elected by holders of the Voting Rights Class, or if there be no such remaining director, by the holders of shares of the Voting Rights Class at a special meeting called in accordance with the procedures set forth in this Section 7.2, or, if no such special meeting is called, at the next annual meeting of stockholders. Upon any termination of such voting rights, the term of office of all directors elected pursuant to this Section 7 shall terminate and such directors shall be deemed to have resigned. 7.3 The affirmative vote or consent of the Holders of at least 50% of the outstanding Preferred Stock will be required for the issuance of any class of Senior Securities (or security convertible into Senior Securities or evidencing a right to purchase any shares or any class or series of Senior Securities), and amendments to this Certificate of Designation that would affect adversely the rights of Holders of Preferred Stock or authorize the issuance of any additional shares of Preferred Stock. 7.4 The affirmative vote or consent of the Holders of at least 66 2/3% of the outstanding Preferred Stock will be required for amendments to the Change of Control 13 provisions in this certificate. In all such cases each share of Preferred Stock shall be entitled to one vote. 7.5 Except as set forth in this Certificate of Designation, the creation, authorization or issuance of any shares of Junior Securities or Parity Securities or an increase or decrease in the amount of authorized Capital Stock of any class, including any preferred stock, shall not require the consent of the Holders of the Preferred Stock and shall not be deemed to affect adversely the rights, preferences, privileges or voting rights of Holders of shares of the Preferred Stock. 7.6 The consent of the Holders of Preferred Stock shall not be required to authorize (by way of reclassification or otherwise) or issue any Parity Securities or any obligation or security convertible into or exchangeable into or evidencing a right to purchase shares of any class or series of Parity Securities. 8. Merger, Consolidation and Sale of Assets 8.1 Without the vote or consent of the Holders of at least 50% of the then outstanding shares of Preferred Stock, the Issuer may not consolidate or merge with or into, or sell, assign, transfer, lease, convey or otherwise dispose of all or substantially all of its assets to, any person unless (a) the entity formed by such consolidation or merger (if other than the Issuer) or to which such sale, assignment, transfer, lease, conveyance or other disposition shall have been made (in any such case, the "resulting entity") is a corporation organized and existing under the laws of the United States or any State thereof or the District of Columbia; (b) if the Issuer is not the resulting entity, the Preferred Stock is converted into or exchanged for and becomes shares of such resulting entity, having in respect of such resulting entity the same (or more favorable) powers, preferences and relative, participating, optional or other special rights thereof that the Preferred Stock had immediately prior to such transaction; and (c) immediately after giving effect to such transaction, no dividend arrearages which trigger voting rights have occurred and are continuing. The resulting entity of such transaction shall thereafter be deemed to be the issuer of the Preferred Stock or securities into which it is converted for all purposes of this Certificate of Designation. 9. Amendment, Supplement and Waiver 9.1 Without the consent of any Holder of the Preferred Stock, subject to the requirements of the Delaware General Corporation Law, the Issuer may amend or supplement this Certificate of Designation to cure any ambiguity, defect or inconsistency, to provide for uncertificated Preferred Stock in addition to or in place of certificated Preferred Stock, to provide for the assumption of the Issuer's obligations to Holders of the Preferred Stock in the case of a merger or consolidation, to make any change that would provide any additional rights or benefits to the Holders of the Preferred Stock or that does not adversely affect the legal rights under this Certificate of Designation of any such Holder. 10. Certain Definitions Set forth below are certain defined terms used in this Certificate of Designation. 14 10.1 "Act" means the Securities Act of 1933, as amended, and the rules and regulations thereunder. 10.2 "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" (including, with correlative meanings, the terms "controlling," "controlled by" and "under common control with"), 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 of or otherwise. 10.3 "Average Market Value" of Common Stock means the arithmetic average of the current market value of the Common Stock for the ten trading days ending on the fifth business day prior to (a) in the case of the payment of any dividend, the record date for such dividend and (b) in the case of the mandatory redemption payment, the date of such payment. 10.4 "Business Day" means any day other than a Legal Holiday. 10.5 "Capital Stock" means any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock or partnership or membership interests, whether common or preferred. 10.6 "Cash Adjustment" will be determined based on the proceeds received by the Transfer Agent from the sale of that number of shares of Common Stock, which the Issuer will deliver to the Transfer Agent for such purpose, equal to the aggregate of all such fractions rounded up to the nearest whole share. 10.7 "Closing Price" with respect to the Common Stock on any trading day, means the last reported regular-way sale price of the Common Stock on the NYSE, or if the Common Stock is not then listed on the NYSE, the last reported regular-way sale price of the Common Stock on the principal stock exchange or market of the Nasdaq Stock Market on which the Common Stock is then listed or traded, or if the Common Stock is not then listed or traded on any such stock exchange or market, the average of the closing bid and asked prices in the over- the-counter market as furnished by any NYSE member firm selected from time to time by the Issuer for that purpose. 10.8 "Change of Control" means: (a) the sale, lease, transfer, conveyance or other disposition of all or substantially all of the assets of the Issuer to any "person" or "group" (within the meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing, including any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), in one transaction or a series of related transactions, other than a Permitted Owner or (b) the acquisition of beneficial ownership of shares of the Issuer's Capital Stock by any "person" or "group" (within a meaning of Sections 13(d)(3) and 14(d)(2) of the Exchange Act or any successor provision to either of the foregoing, including any group acting for the purpose of acquiring, holding or disposing of securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act), other a Permitted Owner, by means of an exchange offer, liquidation, tender offer, consolidation, 15 merger, combination, reclassification, recapitalization or otherwise of more than fifty percent (50%) of the total voting power of all classes of the Voting Stock of the Issuer or a successor and/or warrants or options to acquire such Voting Stock, entitled to vote generally in elections of the Issuer's board of directors. Notwithstanding clause (b) above, a merger or consolidation that would otherwise constitute a Change of Control hereunder shall not constitute a Change of Control if (i) the closing price per share of Common Stock for any five trading days within the period of ten consecutive trading days ending immediately after the announcement of such change of control equals or exceeds 105% of the conversion price of the Preferred Stock in effect on each such trading day or (ii) at least 90% of the consideration in the transaction or transactions constituting a change of control pursuant to this clause consists of shares of Common Stock traded or to be traded immediately following such change of control on a national securities exchange or the Nasdaq National Market and, as a result of such transaction or transactions, the Preferred Stock becomes convertible solely into such Common Stock (and any rights attached thereto). However, a transaction of a type described above that results in the Common Stock no longer being listed on a stock exchange or traded on the Nasdaq National Market would also be treated as a change in control even if a Permitted Owner were involved. 10.9 "Common Stock" means the Issuer's authorized $.01 par value Class A Common Stock. 10.10 "Conversion Date" means the date the Issuer or the Transfer Agent receives the Conversion Notice. 10.11 "Conversion Notice" means written notice from the Holder to the Issuer stating that the Holder elects to convert all or a portion of the shares of Preferred Stock represented by certificates delivered to the Issuer or the Transfer Agent contemporaneously. The Conversion Notice will specify or include: (i) The number of shares of Preferred Stock being converted by the Holder, (ii) The name or names (with address and taxpayer identification number) in which a certificate or certificates for shares of Common Stock are to be issued, (iii) A written instrument or instruments of transfer in form reasonably satisfactory to the Issuer or the Transfer Agent, duly executed by the Holder or its duly authorized legal representative, or in blank, and (iv) Transfer tax stamps or funds thereof, if required pursuant to Section 4.6. 10.12 "Conversion Price" shall initially be $40. 10.13 "Conversion Price Adjustment Events" are any of those events specified in Section 4.2. 16 10.14 "Current Market Price" means, as of any date, the average of the daily Closing Price for the five consecutive Trading Days selected by the Board of Directors beginning not more than 20 trading days before, and ending not later than the date of the applicable event described in Section 4.2(c) or 4.2(d) hereof and the date immediately preceding the record date fixed in connection with that event. 10.15 "Current Market Value" of Common Stock means the average of the high and low sale prices of the Common Stock as reported on the Nasdaq National Market or such other SEC-recognized national securities exchange or trading system which the Issuer may from time to time designate upon which the greatest number of shares of the Common Stock is then listed or traded, for the trading day in question. 10.16 "Dividend Payment Date" is as defined in Section 2.1, above. 10.17 "Dividend Payment Record Date" is as defined in Section 2.1, above. 10.18 "Exchange Act" means the Securities Exchange Act of 1934, as amended. 10.19 "Expiration Date" is as defined in Section 4.4(a)(i), above. 10.20 "Fundamental Change" means any transaction or event, including, without limitation, any merger, consolidation, sale of assets, tender or exchange offer, reclassification, compulsory share exchange or liquidation, in which all or substantially all outstanding shares of the Issuer's Common Stock are converted into or exchanged for stock, other securities, cash or assets. 10.21 "Holder" means a Person in whose name shares of Capital Stock is registered. 10.22 "Issuance Date" is as defined in Section 2.1 10.23 "Issuer" means XM Satellite Radio Holdings Inc., a Delaware corporation. 10.24 "Junior Security" is as defined in Section 3.1, above. 10.25 "Legal Holiday" means a Saturday, a Sunday or a day on which banking institutions in the City of New York or at a place payment is to be received are authorized by law, regulation or executive order to remain closed. If a payment date is Legal Holiday at a place of payment, payment may be made at that place on the next succeeding day that is not a Legal Holiday, and no interest shall accrue for the intervening period. 10.26 "Liquidation Preference" means $50 per share of Preferred Stock. 10.27 "Mandatory Redemption Price" is as defined in Section 5.4(a), above 10.28 "Market Capitalization" means the product of the then-current market price times the total number of shares of Common Stock then outstanding. 17 10.29 "Market Value" means the average of the Closing Prices of the Common Stock for the five trading days ending on the last trading day preceding the date of occurrence of a Change of Control. 10.30 "Notice Date" means the tenth day prior to a Deposit Payment Date. 10.31 "Parity Security" is as defined in Section 3.1, above. 10.32 "Permitted Owner" means American Mobile Satellite Corporation, General Motors Corporation, DIRECTV and Clear Channel Communications, Inc. and their respective affiliates. 10.33 "Person" means any individual, corporation, partnership, joint venture, association, joint-stock issuer, interest, trust or unincorporated organization (including any subdivision or ongoing business of any such entity or substantially all of the assets of any such entity, subdivision or business). 10.34 "Preferred Stock" means the Preferred Stock authorized in this Certificate of Designation. 10.35 "Redemption Agent" means that Person, if any, appointed by the Issuer to hold funds deposited by the Issuer in trust to pay to the Holders of shares to be redeemed. 10.36 "Redemption Date" means that certain date set forth in the Redemption Notice on which date the redemption of the Preferred Stock is completed. 10.37 "Redemption Notice" means that notice to be given by the Issuer to the Holders notifying the Holders as to the redemption, in whole or in part, of the Preferred Stock pursuant to Article 5 hereof. The Redemption Notice shall include the following information: (i) the Redemption Date and the time of day on such date; (ii) the total number of shares of Preferred Stock to be redeemed and, if fewer than all the shares held by such Holder are to be redeemed, the number of such shares to be redeemed from such Holder; (iii) the Redemption Price (whether to be paid in cash or shares of Common Stock); (iv) the place or places where certificates for such shares are to be surrendered for payment of the Redemption Price and delivery of certificates representing shares of Common Stock (if the Issuer so chooses); (v) that dividends on the shares to be redeemed will cease to accrue on such Redemption Date unless the Issuer defaults in the payment of the Redemption Price; and (vi) the name of any bank or trust company, if any, performing the duties of Redemption Agent. Redemption Notice shall be given by first-class mail to each record Holder of the shares to be redeemed, at such holder's address as the same appears on the books of the Issuer. 10.38 "Redemption Notice Date" means the date the Redemption Notice is first mailed or delivered to any Holder. 10.39 "Redemption Price" means that price established for redemption of the Preferred Stock established in Section 5.1(b) hereof. 10.40 "Special Conversion Date" is as defined in Section 4.3, above. 18 10.41 "Special Conversion Price" is the higher of (a) the Market Value of the Common Stock and (b) $21.3333 per share, which amount, in the case of this clause (b), shall be adjusted each time that the conversion price is adjusted so that the ratio of such amount (as so adjusted) to the conversion price (as so adjusted) equals the ratio of $21.3333 to the initial conversion price. 10.42 "Subsidiary" means, with respect to any person, 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 such person or a combination thereof. 10.43 The "Transfer Agent" shall be as established pursuant to Article 11 hereof. 10.44 "Trading Day" means any business day on which the Nasdaq National Stock Market (or any U.S. national securities exchange or quotation system on which the Common Stock is then listed) is open for the transaction of business. 10.45 "Voting Stock" means with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of directors, managers or other voting members of the governing body of such Person. 11. Transfer Agent and Registrar The duly appointed Transfer Agent and registrar for the Preferred Stock shall be BankBoston, N.A. The Issuer may, in its sole discretion, remove the Transfer Agent in accordance with the agreement between the Issuer and the Transfer Agent; provided that the Issuer shall appoint a successor transfer agent who shall accept such appointment prior to the effectiveness of such removal. 12. Other Provisions 12.1 With respect to any notice to a Holder of shares of the Preferred Stock required to be provided hereunder, neither failure to mail such notice, nor any defect therein or in the mailing thereof, to any particular Holder shall affect the sufficiency of the notice or the validity of the proceedings referred to in such notice with respect to the other Holders or affect the legality or validity of any distribution, rights, warrant, reclassification, consolidation, merger, conveyance, transfer, dissolution, liquidation or winding up, or the vote upon any such action. Any notice which was mailed in the manner herein provided shall be conclusively presumed to have been duly given whether or not the Holder receives the notice. 12.2 Shares of Preferred Stock issued and reacquired will be retired and canceled promptly after reacquisition thereof and, upon compliance with the applicable requirements of Delaware law, have the status of authorized but unissued shares of preferred stock of the Issuer undesignated as to series and may with any and all other authorized but unissued shares of preferred stock of the Issuer be designated or redesignated and issued or reissued, as the case may be, as part of any series of preferred stock of the Issuer except that any issuance or reissuance of shares of Preferred Stock must be in compliance with this Certificate of Designation. 19 12.3 In the Issuer's discretion, no fractional shares of Common Stock or securities representing fractional shares of Common Stock will be issued upon conversion, redemption, or as dividends payable in the Preferred Stock. Any fractional interest in a share of Common Stock resulting from conversion, redemption, or dividend payment will be paid in cash based on the last reported sale price of the Common Stock on the Nasdaq National Stock Market (or any national securities exchange or authorized quotation system on which the Common Stock is then listed) at the close of business on the trading day next preceding the date of conversion or such later time as the Issuer is legally and contractually able to pay for such fractional shares. 12.4 The shares of Preferred Stock shall be issuable in whole shares. 12.5 All notices periods referred to herein shall commence on the date of the mailing of the applicable notice. 20 IN WITNESS WHEREOF, XM Satellite Radio Holdings Inc. caused this Certificate to be signed this 25/th/ day of January, 2000. XM SATELLITE RADIO HOLDINGS INC. By: /s/ Joseph M. Titlebaum Name: Joseph M. Titlebaum Title: Senior Vice President, General Counsel and Secretary 21 EX-10.28 3 EXHIBIT 10.28 EXHIBIT 10.28 CONFIDENTIAL **** Confidential treatment has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. CONFIDENTIAL TABLE OF CONTENTS CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT Terms and Conditions Exhibit A - Design Specifications Exhibit B - Statement of Work (SOW) Exhibit C - Pricing, Milestones and Payment Plan Exhibit D - Delivery Requirements and Schedule Exhibit E - Test Plans and Procedures Exhibit F - Quality Assurance Plan Exhibit G - Key Contractor Personnel Exhibit H - Technical Materials Escrow Agreement Page i CONFIDENTIAL CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION TERMS AND CONDITIONS Page ii CONFIDENTIAL TABLE OF CONTENTS 1. DEFINITIONS AND CONSTRUCTION................................................. 1 1.1 Certain Definitions........................................................ 1 1.2 Other Terms................................................................ 9 1.3 Integration and Construction............................................... 10 1.4 Headings; Number and Gender................................................ 10 2. SCOPE OF WORK................................................................ 11 2.1 General Scope.............................................................. 11 2.2 Statement of Work.......................................................... 11 2.3 Weight and Size of Standard Repeaters...................................... 11 3. STRATEGIC RELATIONSHIP....................................................... 14 3.1 Roof Rights................................................................ 14 3.2 Marketing Support.......................................................... 14 3.3 Alignment of Interests..................................................... 14 4. EFFECTIVE DATE OF CONTRACT ("EDC"); CONDITIONS PRECEDENT; TERM............... 15 4.1 Effective Date of Contract and Conditions Precedent........................ 15 4.2 ATP........................................................................ 15 4.3 Term....................................................................... 15 5. PRICING...................................................................... 16 5.1 Contract Price............................................................. 16 5.2 Changes in Contract Price.................................................. 16 5.3 Most-Favored Customer...................................................... 16 5.4 Taxes...................................................................... 17 6. INVOICING AND PAYMENT........................................................ 18 6.1 Invoicing.................................................................. 18 6.2 Escrow Account and Payment................................................. 20 6.3 Set Off.................................................................... 21 6.4 Late Payment............................................................... 21 6.5 Withholding of Payment..................................................... 22 7. DELIVERY AND TIME FOR PERFORMANCE............................................ 23 7.1 Repeater Category Selection................................................ 23 7.2 Time and Place of Delivery................................................. 23 7.3 Rescheduling of Production................................................. 25 7.4 Packing, Tracking and Shipping............................................. 25 7.5 Liquidated Damages for Late Delivery of Repeaters.......................... 27 7.6 Incentive for Timely Delivery of the Prototype Repeaters................... 28 7.7 Performance Award.......................................................... 28 7.8 Suspension of Work by Customer............................................. 29 7.9 Excusable Delay Defined.................................................... 29 7.10 Contract Adjustments....................................................... 30 8. TESTING CRITERIA AND ACCEPTANCE.............................................. 31 8.1 Testing.................................................................... 31 8.2 Acceptance of Repeaters.................................................... 31 8.3 Acceptance of the Network Management System................................ 33 8.4 Acceptance of Non-Repeater Deliverables.................................... 35 8.5 Title and Risk of Loss..................................................... 36
Page iii CONFIDENTIAL 9. PROJECT MANAGEMENT........................................................... 38 9.1 Contractor Personnel....................................................... 38 9.2 Material Subcontractors.................................................... 39 9.3 Subcontractor Relations.................................................... 39 9.4 Customer Third-Party Services and Products................................. 40 9.5 Quality Assurance.......................................................... 40 9.6 Accountability............................................................. 40 10. CHANGES IN SCOPE OF WORK..................................................... 41 10.1 Changes Requested by Customer.............................................. 41 10.2 Changes Requested by Contractor............................................ 41 10.3 Pricing of Changes......................................................... 42 11. SECURITY INTEREST............................................................ 43 12. ACCESS TO WORK............................................................... 44 12.1 Access to Work............................................................. 44 12.2 Documentation.............................................................. 44 12.3 Electronic Access.......................................................... 44 12.4 Meetings................................................................... 44 12.5 Financing Entities......................................................... 45 13. TECHNICAL MATERIALS ESCROW................................................... 46 14. INTELLECTUAL PROPERTY RIGHTS................................................. 50 14.1 Ownership of Intellectual Property Rights.................................. 50 14.2 Joint Inventions........................................................... 50 14.3 Intellectual Property Rights License Grant................................. 51 14.4 Third-Party Intellectual Property Rights................................... 51 14.5 Contractor Restriction on Use of Foreground Intellectual Property Rights... 52 15. CONFIDENTIALITY.............................................................. 53 15.1 Confidentiality Obligations................................................ 53 15.2 Exceptions................................................................. 53 15.3 No License................................................................. 54 15.4 Return of Confidential Information......................................... 54 15.5 Inconsistent Legends....................................................... 55 16. RECORDS RETENTION............................................................ 56 17. REPRESENTATIONS AND WARRANTIES............................................... 57 17.1 Work Standards............................................................. 57 17.2 Design and Performance Warranties.......................................... 57 17.3 Documentation.............................................................. 59 17.4 Inducements................................................................ 59 17.5 Viruses.................................................................... 59 17.6 Disabling Code............................................................. 59 17.7 Year 2000.................................................................. 60 17.8 Compliance with Applicable Law............................................. 60 17.9 Warranty Disclaimer........................................................ 60 17.10 Warranty Period............................................................ 60 17.11 Remedies (Repeaters)....................................................... 61 17.12 Remedies (Network Management System)....................................... 63 17.13 Pattern Defect............................................................. 63
Page iv CONFIDENTIAL 18. CONTRACTOR'S ADDITIONAL REPRESENTATIONS AND WARRANTIES........................ 65 19. CUSTOMER'S REPRESENTATIONS AND WARRANTIES..................................... 67 20. INSURANCE..................................................................... 68 20.1 General.................................................................... 68 20.2 Specific Insurance Requirements............................................ 68 20.3 Certificates of Insurance.................................................. 70 21. INDEMNIFICATION............................................................... 71 21.1 Indemnity by Contractor.................................................... 71 21.2 Indemnity by Customer...................................................... 71 21.3 Intellectual Property Infringement Indemnification......................... 71 21.4 Indemnification Procedures................................................. 72 21.5 Waiver of Subrogation...................................................... 73 22. LIABILITY..................................................................... 74 22.1 General Intent............................................................. 74 22.2 Liability Restrictions..................................................... 74 22.3 Contractor Responsibility for Certain Claims............................... 74 23. DISPUTE RESOLUTION............................................................ 76 23.1 Informal Dispute Resolution................................................ 76 23.2 Arbitration................................................................ 76 23.3 Litigation................................................................. 78 23.4 Continued Performance...................................................... 79 24. DEFAULT AND CORRECTION PLAN................................................... 80 24.1 Material Breach............................................................ 80 24.2 Key Tasks.................................................................. 81 25. TERMINATION................................................................... 82 25.1 Termination for Customer's Convenience..................................... 82 25.2 Termination For Contractor's Default....................................... 84 25.3 Termination for Customer's Default......................................... 86 25.4 Termination/Expiration Assistance.......................................... 89 26. OPTIONS....................................................................... 90 26.1 Option to Purchase Additional Repeaters.................................... 90 26.2 Network Management System - Video Wall..................................... 90 26.3 Annual Maintenance of [*****].............................................. 91 26.4 Contract Adjustments....................................................... 91 27. CONTRACTOR GUARANTEE.......................................................... 92 28. GENERAL....................................................................... 93 28.1 Assignment................................................................. 93 28.2 Entire Agreement........................................................... 94 28.3 Amendments................................................................. 94 28.4 Waiver of Breach of Contract............................................... 94 28.5 Remedies Cumulative........................................................ 94 28.6 Severability............................................................... 94 28.7 Applicable Law............................................................. 95 28.8 Notices.................................................................... 95 28.9 Relationship of the Parties................................................ 96
Page v CONFIDENTIAL 28.10 Media Releases............................................................. 96 28.11 Calculation of Interest.................................................... 96 28.12 Survival................................................................... 96 28.13 No Third-Party Beneficiaries............................................... 97 28.14 Consents and Approvals..................................................... 97 28.15 Lender Requirements........................................................ 98 28.16 No Solicitation............................................................ 98 28.17 Time of the Essence........................................................ 98 28.18 Covenant of Good Faith..................................................... 98 28.19 Counterparts............................................................... 98
Page vi CONFIDENTIAL CONTRACTFOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT THIS CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT (the "Contract") is made this 14th day of February 2000 (the "Execution Date") by and between XM SATELLITE RADIO INC. ("Customer"), a Delaware corporation with offices located at 1250 23/rd/ Street, N.W., Suite 57, Washington, D.C. 20037, and HUGHES ELECTRONICS CORPORATION, a Delaware corporation by and through its division, Hughes Network Systems ("Contractor"), having a place of business at 10450 Pacific Center Ct., San Diego, CA 92121. As used in this Contract, "Party" means either Customer or Contractor and "Parties" means Customer and Contractor. WHEREAS, Customer is implementing a satellite system designed to provide digital audio radio services to the continental United States; and WHEREAS, Customer anticipates providing the business referred to above through two (2) geostationary satellites, a network of terrestrial repeaters located in various cities within the continental United States and end-user receivers; and WHEREAS, Contractor has represented that it (together with its Subcontractors) is qualified to design, develop, engineer, manufacture, and deliver the terrestrial repeaters required for such networks and has the necessary skill and experience to perform such other services as described in this Contract in a cost-effective, professional and timely manner; and WHEREAS, the Parties have reached agreement on the terms and conditions of procurement by Customer from Contractor of the design, development, engineering, and manufacturing services related to the terrestrial repeaters and to the other services and activities as set forth and further defined in this Contract. NOW THEREFORE, in consideration of the mutual promises and undertakings contained herein, the Parties, intending to be legally bound, hereby agree as follows: 1. DEFINITIONS AND CONSTRUCTION 1.1 Certain Definitions. (a) "Acceptance" means, with respect to any item to be delivered hereunder, written notification from Customer to Contractor stating that such item has satisfied the testing and acceptance criteria applicable to that item in accordance with Article 8 (Testing Criteria and Acceptance). (b) "Affiliate" means, with respect to an entity, any other entity Controlling or Controlled by or under common Control with such entity. (c) "Amendment to this Contract" or "Amendment" means a written agreement modifying the terms of this Contract executed in accordance with Article 28.3 (Amendments). Terms and Conditions Page 1 CONFIDENTIAL (d) "Approval" means written approval. This term is as defined, whether or not capitalized in this Contract. (e) "Associates" means, with respect to an entity, its directors, officers, employees agents, consultants, and assigns. (f) "Background Intellectual Property Rights" means all Intellectual Property Rights in or to the Work that came into existence prior to and/or apart from this Contract. (g) "Business Day" means any day other than the following: a Saturday, Sunday, and any other day on which national banks are authorized to be closed in New York City, New York. (h) "Calendar Day" means any day. (i) "Change Directive" means a written directive executed by Customer directing Contractor to proceed with a change in the Work pending final determination of the appropriate change, if any, in the Contract Price and/or any applicable delivery dates hereunder. (j) "Change Order" means a written document, executed by both Customer and Contractor, setting forth a change in the Work and agreement between Customer and Contractor as to the change in the Contract Price and/or any applicable delivery dates hereunder associated with such change in the Work. (k) "Confidential Information" means all information, of any nature and in any form, whether written, oral or recorded or transmitted electronically or by tape or other similar manner, regarding the business, finances, operations, prospects, plans, or affairs of the Furnishing Party (including its Affiliates, Subcontractors, or Consultants), and all data, processes, materials, and software in source code and object code form, related documentation, and other technical data that is confidential and embodies trade secrets or other proprietary information of the Furnishing Party, which information is designated in writing by the Furnishing Party as confidential; provided, however, that if disclosed orally, such information must be confirmed and designated in writing in summary form as confidential within five (5) Business Days of the time at which oral disclosure took place. This Contract is deemed Confidential Information of each Party. (l) "Consultant" means a person or organization retained by Customer to provide Customer with technical advice and related services and identified by Customer to Contractor. (m) "Contract" means the written instrument herein dated the day and year first written above, including any Amendments made pursuant to Article 28.3 (Amendments), and Change Orders made pursuant to Article 10 (Changes in Scope of Work), embodying the agreement between Contractor and Customer and including the Terms and Conditions, attachments and Exhibits (and attachments thereto), annexed hereto and made a part of this Contract. (n) "Contractor Facility" means each facility at or from which Contractor or its Subcontractors perform the Work. (o) "Control" and its derivatives mean, with respect to an entity, the legal, beneficial, or equitable ownership, directly or indirectly, of fifty percent (50%) or more of the capital stock (or Terms and Conditions Page 2 CONFIDENTIAL other ownership interest if not a corporation) of such entity ordinarily having voting rights or the power to direct the management policies of such entity, whether through the ownership of voting stock, by contract, or otherwise. (p) "Correction Plan" means a plan submitted by Contractor that details the means by which Contractor shall correct a failure to perform any material duty or obligation under this Contract. (q) "Customer Competitor" means any existing or future Satellite Digital Radio Services (SDARS) licensee, including CD Radio. "Customer Competitor" shall not include Contractor, Contractor's Affiliates or WorldSpace Satellite Company (to the extent Customer sublicenses the Foreground Intellectual Property Rights to WorldSpace). (r) "Customer's Designated Representative" means Jack Wormington, Senior Vice President of Engineering and Operations, or his successor or designee in writing. (s) "Customer Personnel" means Customer's employees, Consultants or representatives, or Customer's Consultants' employees. (t) "Data and Documentation" means that data and documentation to be supplied by Contractor pursuant to the requirements of Exhibit B (Statement of Work). (u) "Defect" and its derivatives (such as "defective") means any failure of any Repeater, the Network Management System or other deliverable item to operate in conformance with its applicable specifications as set forth in Exhibit A (Design Specifications) or in accordance with its applicable acceptance criteria as set forth in Article 8 (Testing Criteria and Acceptance). This term is as defined, whether or not capitalized in this Contract. (v) "Delivery Requirements" means the delivery requirements for the Repeaters and other deliverables set forth in Exhibit D (Delivery Requirements and Schedule). (w) "Detailed Delivery Schedule" means the detailed schedule for delivery of the Repeaters and other deliverables as may be set forth in Exhibit D (Delivery Requirements and Schedule) (x) "Effective Date" or "EDC" has the meaning set forth in Article 4.1 (Effective Date of Contract and Conditions Precedent). (y) "Enclosure Kit" means, in the case of Standard Repeaters, the Repeater enclosure with all equipment contained therein, the enclosure door with air conditioning unit and the plinth (the enclosure and enclosure door with air conditioning unit to be shipped in separate containers for a total of two (2) containers) and the plinths to be shipped, at Contractor's option, in a separate container or in bulk), and, in the case of High-Power Repeaters, the Repeater enclosure, including controller rack, coupler, transmit filter and all other equipment contained therein. (z) "Escrowed Materials" has the meaning set forth in Article 13 (Technical Materials Escrow). Terms and Conditions Page 3 CONFIDENTIAL (aa) "Excusable Delay" has the meaning set forth in Article 7.9 (Excusable Delay Defined). (bb) "Execution Date" means the date first set forth above. (cc) "Financing Agreements" means any and all documents and agreements executed in connection with the debt or equity financing to be obtained by Customer from Financing Entities to provide all or a substantial portion of the funds to finance the Work, and all security instruments, mortgages, assignments and related documentation executed or delivered to secure repayment of such financing. (dd) "Financing Entity" means any financial institution, bank, corporation, partnership or other entity (other than Contractor, its Affiliates or competitors of Contractor or Affiliates of such competitors), providing all or a substantial portion of the debt or equity financing to Customer to provide funds to finance the Work and any insurance companies or financial institutions providing commercial credit insurance in support of such financing. (ee) "Foreground Intellectual Property Rights" means all Intellectual Property Rights in or to the Work which are not Background Intellectual Property Rights (including those Intellectual Property Rights in and to the Work first conceived of or first reduced to practice in the performance, execution and/or completion of the Work). (ff) "Furnishing Party" means the Party who furnishes Confidential Information to the other Party. (gg) "High-Power Installation Testing" has the meaning set forth in Article 8.2 (Acceptance of Repeaters). (hh) "High-Power Redundant Repeater" means a High-Power Repeater that utilizes an omni-directional antenna and has a back-up high-power amplifier (HPA), as further described in Exhibit A (Design Specifications). (ii) "High-Power Repeater" means a terrestrial repeater that has an RF power of 2000 Watts evenly divided between two (2) MCM carriers, as further described in Exhibit A (Design Specifications). High-Power Repeater refers collectively to both High-Power Redundant Repeaters and High-Power Sectored Redundant Repeaters. (jj) "High-Power Sectored Redundant Repeater" means a High Power Repeater that utilizes paneled/phased-array antennas typically in a 120 degree application (e.g., an installation consisting of three paneled/phased-array antennas) and has a redundant high-power amplifier (HPA), as further described in Exhibit A (Design Specifications). (kk) "Including" and its derivatives (such as "include" and "includes") means including without limitation. This term is as defined, whether or not capitalized in this Contract. (ll) "Installation Site" means a building rooftop or other site (e.g., antenna site) located in any of various cities throughout continental United States at which a Repeater is to be installed. Terms and Conditions Page 4 (mm) "Intellectual Property Rights" means any and all common law and statutory proprietary rights, including Patent Rights, Trademark Rights, Trade Secret Rights and Copyrights Rights (each term as defined below), existing from time to time under the intellectual property Laws of the United States, any state or foreign jurisdiction or international treaty regime. The term "Patent Rights" means any and all common law and statutory rights existing from time to time under the Laws of the United States, any state or foreign jurisdiction or international treaty regime with respect to patents, patent applications, and patent registrations. The term "Trademark Rights" means any and all common law and statutory rights existing from time to time under the Laws of the United States, any state or foreign jurisdiction or international treaty regime with respect to trademarks, service marks, trade names and trade dress. The term "Trade Secret Rights" means any and all common law and statutory rights existing from time to time under the Laws of the United States, any state or foreign jurisdiction or international treaty regime with respect to trade secrets and data rights. The term "Copyright Rights" means any and all common law and statutory rights existing from time to time under the Laws of the United States, any state or foreign jurisdiction or international treaty regime with respect to copyrights, mask work rights, moral rights and rights in visual works. (nn) "Joint Intellectual Property Rights" means Foreground Intellectual Property Rights conceived or reduced to practice jointly by one or more employees or contractors of both Parties. (oo) "Joint Inventions" means Joint Intellectual Property Rights for which patent protection may be sought. (pp) "Jointly Owned" means, with respect to Joint Intellectual Property Rights, an equal, undivided interest in and to the Joint Intellectual Property Rights, as well as in and to patent applications and patents thereon in all countries, without any obligation of accounting to the other Party. (qq) "Key Contractor Personnel" has the meaning set forth in Article 9.1 (Contractor Personnel). (rr) "Key Tasks" has the meaning set forth in Article 24 (Default and Correction Plan). (ss) "Klystron Kit" means two (2) Klystron power amplifier ("KPA") units. (tt) "Law" or "Laws" means any and all laws, including rules, regulations, codes, injunctions, judgments, orders, ordinances, decrees, rulings, licenses, authorizations, approvals or consents and charges thereunder, of any federal, state, local or municipal government of any country (and all agencies thereof) having jurisdiction over any portion of the Work or the performance of any portion of the Work. Terms and Conditions Page 5 - -------------------------------------------------------------------------------- ***** Certain information on this page has been with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - -------------------------------------------------------------------------------- CONFIDENTIAL (uu) "Losses" means all losses, liabilities, damages, royalty payments and claims, and all related costs and expenses (including reasonable legal fees and disbursements and costs of investigation, expert fees, litigation, settlement, judgment, interest, and penalties). (vv) "Lowest Replaceable Unit" or "LRU" means each and any of the individual block components composing each Repeater as specified in Exhibit A (Design Specifications) and Exhibit B (Statement of Work). (ww) "Material Adverse Effect" means any material adverse change in (i) the legality, validity, or enforceability of this Contract or (ii) the ability of Customer or Contractor to perform this Contract. (xx) "Material Subcontract" has the meaning set forth in Article 9.2 (Material Subcontractors). (yy) "Milestone" means a portion of the definitive, measurable Work, which shall be completed in accordance with this Contract including Exhibit C (Pricing, Milestones and Payment Plan) and upon completion of which a payment is to be made in accordance with such Exhibit C. (zz) "Milestone Payment" means any of those payments listed as specific milestone payments in Exhibit C (Pricing, Milestones and Payment Plan). (aaa) "Milestone Achievement Criteria" has the meaning set forth in Exhibit C (Pricing, Milestones and Payment Plan). (bbb) "Network Management System" or "NMS" means the system, comprising hardware and Software, to be developed by Contractor to monitor the operation and maintenance of the Repeaters, which system is further described in Exhibit A (Design Specifications) and Exhibit B (Statement of Work). (ccc) "Nominal Order" means Customer's initial order to purchase from Contractor 1,578 Repeaters (excluding Prototype Repeaters) consisting of [*****] High-Power Repeaters and [*****] Standard Repeaters. (ddd) "Notice of Defects" means a written notice executed by Customer and delivered to Contractor identifying any Defects in the Work setting forth in reasonable detail a description of the Defect. (zz) "PA Kit" has the meaning set forth in Article 2.3 (Weight and Size of Repeaters). (eee) "Pattern Defect" has the meaning set forth in Article 17.13 (Pattern Defect). (fff) "Payment Escrow Account" has the meaning set forth in Article 0 (Escrow Account and Payment). (ggg) "Payment Escrow Agent" has the meaning set forth in Article 0 (Escrow Account and Payment). Terms and Conditions Page 6 CONFIDENTIAL (hhh) "Performance Award" has the meaning set forth in Article 7.7 (Performance Award). (iii) "Permitted Lien" means any lien, security interest, mortgage, assignment, pledge, encumbrance or charge of any kind in favor of the Financing Entities under the Financing Agreements. (jjj) "Prototype Repeater" means the terrestrial repeaters, as further described in Exhibit A (Design Specifications) and Exhibit B (Statement of Work), that Contractor shall develop for the test network to be established in Pittsburgh, Pennsylvania. Each Prototype Repeater shall include all working and fully operational LRUs. (kkk) "Project Completion Date" means the date upon which the Network Management System, the last Repeater and all other deliverable items required to be provided hereunder have been delivered and have achieved Acceptance. (lll) "Regional Inventory Storage Facility" means a facility to be maintained by Customer, or its designee(s), for storing an inventory of Lowest Replaceable Units or other components for the Repeaters for use by Customer, or its designee(s), in performing maintenance and repairs on installed Repeaters. As of the Effective Date of Contract, a Regional Inventory Storage Facility will be located in each of the following six (6) cities: San Francisco, California; Los Angeles, California; Dallas/Ft. Worth, Texas; New York, New York; Washington, DC; and Atlanta, Georgia. (mmm) "Repeater" means collectively any Prototype Repeater, Standard Repeater, High-Power Repeater, or other terrestrial repeater, the LRUs and other components, parts and sub-parts contained therein, and any Software, all as required to be delivered by Contractor to Customer hereunder. (nnn) "Repeater Design Verification Testing" has the meaning set forth in Article 8.2 (Acceptance of Repeaters). (ooo) "Repeater In-Factory Testing" has the meaning set forth in Article 8.2 (Acceptance of Repeaters). (ppp) "Rooftop Assembly" has the meaning set forth in Article 2.3 (Weight and Size of Repeaters). (qqq) "Rooftop Testing" has the meaning set forth in Article 2.3 (Weight and Size of Repeaters). Terms and Conditions Page 7 (rrr) "Software" means the machine readable computer code or embedded code, used to instruct a processor to perform a task or series of tasks in object code form including firmware, files, databases, interfaces, documentation and other materials related thereto necessary to make each deliverable item achieve its applicable specifications, as such Software may be revised, updated, corrected and enhanced from time-to-time and provided to Customer pursuant to this Contract. (sss) "Staging Area" means each site to which Contractor shall deliver Repeaters. The cities in which the Staging Areas shall be located are as specified in Exhibit D (Delivery Requirements and Schedule). (ttt) "Standard Non-Redundant Repeater" means a Standard Repeater that utilizes an omni-directional antenna and has no redundant/back-up LRUs, as further described in Exhibit A (Design Specifications). (uuu) "Standard Repeater" means a terrestrial repeater that has an RF power of 200 Watts evenly divided between two (2) MCM carriers, as further described in Exhibit A (Design Specifications). Standard Repeater collectively refers to both Standard Non-Redundant Repeaters and Standard Sectored Non- Redundant Repeaters. (vvv) "Standard Sectored Non-Redundant Repeater" means a Standard Repeater that utilizes paneled/phased-array antennas typically in a 120 degree application (e.g., an installation consisting of three paneled/phased-array antennas) and has no redundant/back-up LRUs, as further described in Exhibit A (Design Specifications). (www) "Start of Production Date" means July 1, 2000, as such date may be adjusted by the Parties in accordance with this Contract. (xxx) "Statement of Work" or "SOW" means the Work described in Exhibit B to this Contract which shall be provided and performed by Contractor. (yyy) "Subcontract" means a contract awarded by Contractor to a Subcontractor or a contract awarded by a Subcontractor for a portion of the Work. (zzz) "Subcontractor" means a person, firm, corporation, or business entity that has been awarded a Subcontract. (aaaa) "Technical Materials" means the detailed technical, engineering and design information and specifications of any kind relating to the Prototype Repeaters, Standard Repeaters, High-Power Repeaters, each LRU, and the Network Management System, including Background and Foreground Intellectual Property, specifications, functional specifications, interface specifications, hardware and circuit diagrams, schematic diagrams, third-party supplier information (including name, address, and parts numbers), and associated documentation. (bbbb) "Terrestrial Repeater Network System" means the two (2) geostationary satellites and the system of terrestrial repeater networks located in various cities within the continental United States owned and operated by Customer. Terms and Conditions Page 8 CONFIDENTIAL (cccc) "Virus" means: (i) program code, programming instruction or set of instructions intentionally constructed with the ability to damage, interfere with or otherwise adversely affect the performance or operation of any deliverable item, including the Repeaters, any LRU, the Network Management System, computer programs, embedded code or chips, data files or operations; or (ii) other code typically designated to be a virus (including, for example, "worms," "Trojan horses" and similar items). (dddd) "Work" means all services (including design, development, engineering, manufacturing, testing and management services), labor, equipment, materials, articles, matters, acts (including tests to be performed), and things to be furnished by Contractor, including Repeaters, and rights to be transferred by Contractor in the performance of this Contract, all as described in Exhibit B (Statement of Work) and Exhibit E (Test Plans and Procedures). "Work" also includes Contractor's warranty obligations set forth herein and any services and things to be furnished pursuant to any options that may be exercised by Customer hereunder. (eeee) "Year 2000 Compliant" means, with respect to the Work, including Repeaters, that the Work (i) is capable of properly accepting, recording, storing, processing, displaying and outputting calendar dates falling before, on or after January 1, 2000, (ii) is either capable of (A) accepting, recording, storing, processing, displaying and outputting data containing a four-digit year date format without any loss of functionality and in a manner that correctly interprets the data or (B) responding to two-digit year inputs in a way that resolves any ambiguity as to the century in a disclosed, defined and pre- determined manner, (iv) includes date data century recognition calculations that accommodate same century and multi-century formulae and date values and date data interface values that reflect the century, and (v) is capable of accounting for the fact that the year 2000 is a leap year, as well as identifying subsequent leap years. 1.2 Other Terms. Other terms in this Contract are defined in the context in which they are used and shall have the meanings there indicated. 1.3 Integration and Construction. (a) The documents listed below in this Article 1.3 (Integration and Construction), including any Exhibits, attachments, and schedules, as amended from time to time in accordance with Article 28.3 (Amendments), constitute this Contract and shall be deemed to constitute one fully integrated agreement between the Parties. In the event of any conflict or inconsistency among the provisions of the various documents of this Contract, such conflict or inconsistency shall be resolved by giving a descending level of precedence to the documents in the order set forth below: (1) Terms and Conditions (2) Exhibit A - Design Specifications (3) Exhibit B - Statement of Work (SOW) Terms and Conditions Page 9 CONFIDENTIAL (4) Exhibit C - Pricing, Milestones and Payment Plan (5) Exhibit D - Delivery Requirements and Schedule (6) Exhibit E - Test Plans and Procedures (7) Exhibit F - Quality Assurance Plan (8) Exhibit G - Key Contractor Personnel (9) Exhibit H - Technical Materials Escrow Agreement (b) Exhibits A, B, C, D, E, F, G and H are attached to and incorporated into these Terms and Conditions. 1.4 Headings; Number and Gender. The article headings are for convenience of reference only and shall not be considered in interpreting the text of this Contract. Words in the singular include the plural and vice versa, and words imputing the masculine gender include the feminine and neuter genders where the context so requires. Terms and Conditions Page 10 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2. SCOPE OF WORK 2.1 General Scope. (a) In accordance with the requirements of this Contract, Contractor shall furnish and perform and Customer shall purchase the Work. (b) Without limiting the generality of the foregoing, Contractor shall furnish the following in accordance with this Contract: (1) Seven (7) Prototype Standard Repeaters; (2) One (1) Prototype High-Power Repeater; (3) [*****] Standard Repeaters; (4) [*****] High-Power Repeaters; (5) Training; (6) Data and Documentation; and (7) Network Management System. 2.2 Statement of Work. The Statement of Work attached hereto as Exhibit B includes descriptions of certain of the Parties' roles and responsibilities with respect to the design, development, manufacture, delivery and testing of the Repeaters. Any role or responsibility not specifically described in Exhibit B (Statement of Work) that is implied by or required for the proper performance of any role or responsibility expressed in the Statement of Work shall be deemed included as part of such expressed role or responsibility. 2.3 Weight and Size of Standard Repeaters. This Article 2.3 (Weight and Size of Standard Repeaters) applies only to Standard Repeaters. (a) The Parties acknowledge and agree that the weight and dimensions for the Standard Repeaters as set forth in Exhibit A (Design Specifications) are heavier and larger than the Parties originally anticipated under the ATP and that each of the Parties has agreed to undertake certain responsibilities relating to the increased weight and dimensions to facilitate the installation of the Standard Repeaters by Customer's Terrestrial Repeater Network System integrator at Installation Sites. Terms and Conditions Page 11 (b) Regarding Standard Repeaters, upon completion of the Repeater In- Factory Testing pursuant to Article 8.2(a)(2), Contractor shall disassemble the Repeaters so that the disassembled Repeaters may be shipped in multiple containers. The Standard Repeaters shall be disassembled into two (2) separate kits as follows: (1) The Enclosure Kit; and (2) The "PA Kit" which shall consist of the power amplifier (to be shipped separately), the filter and the coupler (to be shipped together). (c) Contractor shall ship the plinths to the Staging Areas in accordance with Article 7.4 (Packing, Tracking and Shipping) as reasonably directed by Customer, or its designee, so that the plinths arrive at the Staging Areas on or before five (5) Business Days prior to the arrival of the balance of the Enclosure Kits to the Staging Areas to facilitate the early site preparation work being performed by Customer's Terrestrial Repeater Network System integrator. Contractor shall ship the Enclosure Kits (less the plinths) to the Staging Areas in accordance with Article 7.2 (Time and Place of Delivery) and Article 7.4 (Packing, Tracking and Shipping). (d) Contractor shall ship the PA Kits in accordance with Article 7.4 (Packing, Tracking and Shipping) directly to the Installation Sites. Customer shall inform Contractor in writing on a weekly basis of the Installation Sites where an Enclosure Kit has been installed by Customer's Terrestrial Repeater Network System integrator. Customer shall arrange for such installation to include the assembly of the Repeater enclosure on the plinth and the reattachment of the enclosure door to the enclosure (without connection of the air conditioning unit). Within five (5) Business Days of Contractor's receipt of such notice, Contractor shall deliver the PA Kit to the Installation Site and perform all work necessary to reassemble the PA Kit with the Enclosure Kit (the "Rooftop Assembly") to allow the Repeater to function in accordance with the requirements set forth in Exhibit A (Design Specifications). (e) To ensure that the Repeater functions in accordance with the requirements set forth in Exhibit A (Design Specifications), Contractor shall, immediately upon completion of the Rooftop Assembly, conduct Rooftop Testing. Such Rooftop Testing shall be performed by Contractor in accordance with Exhibit E (Test Plans and Procedures) (to be developed hereunder) and Article 8.2 (Acceptance of Repeaters) and shall be completed within the five (5) Business Day period set forth above. (f) Contractor shall be responsible for the difference, if any, in the cost of a load spreader required to install the Repeater, at its actual weight, over and above the cost that would have been incurred for a load spreader required to install a 180 kg. Repeater. Such amount shall be determined without any mark-up or additional charge to Contractor and shall be treated as a credit pursuant to Article 6.1(b). If Customer believes a credit is due under this paragraph, then Customer shall provide, along with the written notice to Contractor required by Article 6.1(b), such supporting documentation as may be reasonably required to determine the amount of such credit. (g) Contractor shall be responsible for the difference, if any, in the cost required to ship the Enclosure Kit, at its actual weight, from the Staging Areas to the Installation Sites over and Terms and Conditions Page 12 CONFIDENTIAL above the cost that would have been incurred for shipping a 180 kg. Standard Repeater from the Staging Areas to the Installation Sites. Such amount shall be determined without any mark-up or additional charge to Contractor and shall be treated as a credit pursuant to Article 6.1(b). If Customer believes a credit is due under this paragraph, then Customer shall provide, along with the written notice to Contractor required by Article 6.1(b), such supporting documentation as may be reasonably required to determine the amount of such credit. (h) The Parties believe that the need for structural analysis at the Installation Sites due to the increased weight of the Standard Repeaters will be greatly minimized if a proper load spreading device is used. Based on this belief, Customer agrees to assume the costs associated with such structural analyses; provided, however, if, after the first fifty (50) Installation Sites are selected by Customer's Terrestrial Repeater Network System integrator, it is determined that a structural analysis was required on in excess of seventy (70%) of such Installation Sites, the Parties agree to meet and discuss, in good faith, an equitable division of the costs associated with the increased need for such structural analyses. Terms and Conditions Page 13 CONFIDENTIAL 3. STRATEGIC RELATIONSHIP 3.1 Roof Rights. In the event Customer desires to locate a Repeater on the roof of a building owned, leased or managed by Contractor, Customer shall make such request to Contractor in writing, indicating the location of such building. Contractor shall promptly respond in writing to Customer's request to indicate whether Contractor is willing to grant such roof rights to Customer, in which event the Parties shall negotiate reasonable terms and conditions applicable to such roof rights. 3.2 Marketing Support. Where requested by Customer, Contractor will provide reasonable technical marketing support to Customer, in accordance with Exhibit B (Statement of Work), including in support of Customer's business opportunities consistent with Contractor's other obligations. 3.3 Alignment of Interests. Contractor agrees to cooperate with Customer and to take no materially adverse position (in trade associations, regulatory bodies, the press, and otherwise) with respect to the FCC spectrum assigned and designated for use by Customer. Terms and Conditions Page 14 CONFIDENTIAL 4. EFFECTIVE DATE OF CONTRACT ("EDC"); CONDITIONS PRECEDENT; TERM 4.1 Effective Date of Contract and Conditions Precedent. (a) This Contract shall be effective as of October 22, 1999 ("Effective Date or "EDC"). (b) Contractor shall have no obligation to commence the Work until Contractor's receipt of Milestone Payment No. 1. 4.2 ATP. The Parties acknowledge and agree that, as of the Execution Date of this Contract, (i) all Contractor effort in respect of the Work pursuant to the ATP shall be deemed performed under this Contract; (ii) there are no unfulfilled obligations or claims under the ATP; (iii) in the event the ATP has not expired or terminated as of the Execution Date of this Contract, the ATP is hereby terminated; and (iv) the provisions of this Contract shall govern the rights and obligations of the Parties with respect to matters arising under the ATP. 4.3 Term. The term of this Contract shall commence on EDC and continue until all the Work is completed in accordance with this Contract, unless terminated earlier in accordance with Article 25 (Termination) (the "Term"). Terms and Conditions Page 15 CONFIDENTIAL 5. PRICING 5.1 Contract Price. In consideration of Contractor's performance of the Work in accordance with this Contract, Customer shall pay Contractor the amounts determined in accordance with Exhibit C (Pricing, Milestones and Payment Plan) (collectively the "Contract Price") and in accordance with the payment conditions and Milestones set forth therein, as may be adjusted pursuant to this Contract. For the Work provided or to be provided under this Contract, Customer shall not be obligated to pay Contractor any amounts in addition to the Contract Price, except as otherwise specifically provided in this Contract. 5.2 Changes in Contract Price. Except pursuant to Article 10 (Changes in Scope of Work), Exhibit C (Pricing, Milestones and Payment Plan), or as otherwise expressly set forth in this Contract, the Contract Price is not subject to any escalation or to any adjustment or revision. 5.3 Most-Favored Customer. (a) If Contractor provides services to, or performs work for, another customer that are similar to the Work (in nature, scope, volume and duration) to be provided and performed hereunder, and the prices charged to such customer are lower than the prices charged to Customer under this Contract, the prices charged to Customer shall be equitably adjusted to provide to Customer the benefit of such lower prices. Such adjustment shall be retroactive to the first date on which the lower charges to such other customer became effective. (b) Customer may from time to time conduct an audit to examine and assess Contractor's compliance with the provisions of paragraph (a) above, provided Customer engages an external auditor, at Customer's expense, to conduct such audit. Contractor shall cooperate with the audit initiated by Customer and shall provide the information reasonably requested by Customer to verify its compliance with paragraph (a) above, provided (i) Contractor shall only provide such information, including pertinent financial information, to Customer's designated external auditor and (ii) such external auditor shall execute a confidentiality agreement reasonably satisfactory to Contractor. (c) In the event the external auditor determines that Contractor is providing services to, or is performing work for, another customer that are similar to the Work (in nature, scope, volume and duration) and the prices charged for such services or work for the other customer are lower than the prices charged to Customer hereunder, the external auditor shall provide notice, in writing, to both Contractor and Customer of its determination and shall include with such notice any supporting documentation of such pricing discrepancy. Such documentation provided to Customer shall be sufficiently redacted to conceal the identity of Contractor's other customer and shall only include such information as is directly pertinent to the determination made by the external auditor. Upon receipt of notice of such pricing discrepancy, Contractor shall promptly implement the lower price adjustment and provide Customer with appropriate credits in accordance with paragraph (a) above. 5.4 Taxes. Terms and Conditions Page 16 CONFIDENTIAL (a) Contractor shall be responsible for any sales, use, excise, value- added, services, consumption and other taxes payable by Contractor on any goods or services used or consumed by Contractor in providing the Work where such tax is imposed on Contractor's acquisition or use of such goods or services and the amount of such tax is measured by Contractor's costs in acquiring such goods or services. (b) Customer shall be responsible for any applicable sales and use taxes on any deliverable item, including Repeaters. Contractor shall include on each invoice, as a separate line item, any such applicable sales and/or use taxes and Contractor shall remit all such taxes to the appropriate taxing authorities without any mark-up or other additional charge to Customer. All other excise, value-added, services, consumption, export, import and other taxes, duties, fees or charges shall be included in the Contract Price. (c) Contractor agrees to act as the "Importer of Record" for all the Work, if required or as applicable. This includes arranging for a customs broker to record the entry of the goods. As "Importer of Record," Contractor will be responsible for remitting to customs all appropriate duty and excise tax and all such duty and excise taxes are included in the Contract Price. (d) Each Party shall consult and cooperate with the other to minimize the other's tax liability to the extent legally permissible. (e) Each Party shall cooperate with the other in the settlement of any claim for taxes asserted by applicable taxing authorities. Terms and Conditions Page 17 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6. INVOICING AND PAYMENT 6.1 Invoicing. (a) Contractor shall invoice Customer monthly for all Milestones completed in accordance with the applicable Milestone Achievement Criteria and all other applicable requirements of this Contract during the period covered by the invoice and any other charge permitted by this Contract; provided, however, with respect to [*****] Milestones set forth in Table 3.2 of Exhibit C (Pricing, Milestones and Payment Plan), Contractor may invoice Customer [*****] for Milestones completed during the applicable invoicing period. The invoice shall show details and supporting documentation as to amounts invoiced as reasonably required by Customer. Each invoice shall state the number of shipped Enclosure Kits and/or Accepted Repeaters and shall be accompanied by Contractor's written certification that the Milestone(s) to which the invoice relates was/were fully and successfully completed in accordance with the Milestone Achievement Criteria set forth in Exhibit C (Pricing, Milestones and Payment Plan). Such certification for Enclosure Kits shall also specify the applicable waybill number. Each invoice shall also be accompanied by conditional releases of claims and waivers of liens, in form and substance reasonably satisfactory to Customer, executed by Contractor and all Subcontractors with respect to the portion of Work for which payment is sought. With respect to invoices for shipped Enclosure Kits and Accepted Repeaters, each such invoice shall also specify the pertinent bar-coded serial number for the LRUs of each such shipped Enclosure Kit and/or the LRUs of each such Accepted Repeater, pursuant to Article 7.4(b) (Labeling and Electronic Tracking). (b) In the event a Party determines a credit is due Customer pursuant to this Contract, such Party shall notify the other Party in writing. To the extent the Parties agree on the amount of the credit, if any, due to Customer, Contractor shall provide Customer with such credit against amounts then due and owing; if no further payments are due to Contractor, Contractor shall pay the amount of such credit to Customer within thirty (30) Calendar Days after such credit becomes due. To the extent the Parties do not agree on the amount of the credit due to Customer, the matter shall be resolved pursuant to Article 23 (Dispute Resolution). (c) Contractor shall deliver a copy of each invoice and all details and supporting documentation to: XM Satellite Radio Inc. 1250 23rd Street, NW Suite 57 Washington, DC 20037 Tel: 202-969-7100 Fax: 202-969-7050 Attention: Chief Financial Officer Copy to: Royce Kincaid Terms and Conditions Page 18 CONFIDENTIAL Vice President, Terrestrial Repeater Program Terms and Conditions Page 19 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 6.2 Escrow Account and Payment. (a) On or before [*****], Customer shall establish an interest-bearing escrow account (the "Payment Escrow Account") with a bank or other financial institution of Customer's choice, and Customer, Contractor and the agent (the "Payment Escrow Agent") for the Payment Escrow Account shall enter into an escrow agreement pursuant to which Customer shall pay amounts into the Payment Escrow Account in accordance with the schedule of escrow payments set forth in Exhibit C (Pricing, Milestones and Payment Plan). Customer shall maintain such escrow account until the earlier to occur of the following: (i) all amounts required to be deposited therein by Customer have been drawn down by Contractor, (ii) termination of this Contract and payment of Customer's obligations hereunder, or (iii) July 31, 2001. The costs of establishing and maintaining the Payment Escrow Account shall be shared equally by the Parties. Customer shall be entitled to retain all interest and income earned on amounts deposited into the escrow account. (b) Customer shall pay Contractor [*****] Milestone Payment No. 1 within five (5) Business Days after the Execution Date provided Contractor first furnishes Customer with an invoice therefor. Subject to Article 6.5 (Withholding of Payment), with respect to [*****] Milestone Payment Nos. 2-5 set forth in Table 3.1 of Exhibit C (Pricing, Milestones and Payment Plan) and [*****] Milestone Payments 1-2 in Table 3.3 of Exhibit C, Customer shall pay Contractor within thirty (30) Calendar Days after receipt from Contractor of an invoice in accordance with the requirements of Article 6.1 (Invoicing). With respect to the [*****] Milestone Payments set forth in Table 3.2 of Exhibit C, and subject to Article 6.5 (Withholding of Payment), within three (3) Business Days after receipt of an invoice (and required supporting documentation) meeting the requirements of Article 6.1 (Invoicing) and, with respect to Accepted Repeaters, Article 8.2 (Acceptance of Repeaters), Customer shall authorize the Payment Escrow Agent to permit Contractor to draw down from the Payment Escrow Account the amount invoiced. With respect to invoices for any other charges hereunder, Customer shall pay Contractor within thirty (30) Calendar Days after receipt from Contractor of an invoice in accordance with the requirements of Article 6.1 (Invoicing). Notwithstanding the foregoing, all payments made under the Authorization to Proceed (ATP), executed by the Parties and dated October 22, 1999, shall be credited in full against the Milestone Payments set forth in Exhibit C (Pricing, Milestones and Payment Plan) until such ATP payments have been exhausted. Contractor may deliver its invoices and supporting documentation to Customer via facsimile. (c) To secure Contractor's interest in Customer's payment of its obligations hereunder, Customer hereby grants to Contractor a security interest, which Customer represents and warrants is and shall at all times be a first priority security interest, in Customer's right, title and interest in and to amounts deposited by Customer into the Payment Escrow Account (but not interest or income thereon). Customer hereby agrees to take, at Contractor's expense, all such actions as may be reasonably requested by Contractor to create, perfect, maintain and preserve Terms and Conditions Page 20 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. such security interest, including the execution and delivery of such uniform commercial code financing statements, continuation statements, if any, and similar documents or instruments as may be required by applicable law as Contractor may reasonably request. The security interest created herein shall terminate upon the earlier to occur of the following: (i) all amounts required to be deposited therein by Customer have been drawn down by Contractor, (ii) termination of this Contract and payment of Customer's obligations hereunder, or (iii) July 31, 2001. Upon termination of such security interest, Contractor shall release and terminate such security of record by filing termination statements or similar documents in accordance with applicable law. Customer hereby acknowledges and agrees that the provisions of this paragraph constitute a security agreement under the provisions of the uniform commercial code in effect in the jurisdiction applicable to this transaction pursuant to which Customer has granted a security interest in the Payment Escrow Account. Notwithstanding the foregoing, Contractor agrees that any security interest granted hereunder shall be structured in a manner reasonably satisfactory to the Financing Entities. (d) Customer shall make, or shall instruct the Payment Escrow Agent to make, as applicable, payments on account of invoices by wire transfer to the following bank account (or to such other account as Contractor shall request by written instruction to Customer signed by Contractor's Chief Executive Officer or President): Bank: Allfirst (to the account of Hughes Network Systems) Address: Baltimore, MD 21203 Account No.: [*****] ABA No.: [*****] (e) No payment by Customer shall constitute an Acceptance of any Work not in accordance with this Contract. (f) Customer shall have no obligation to pay or be responsible in any way for payment to a Subcontractor. Contractor shall pay each Subcontractor all undisputed amounts in accordance with the applicable Subcontract. 6.3 Set Off. In the event Contractor has not paid Customer any amount due and payable to Customer under this Contract, or if Customer is entitled to a credit under this Contract (for example, for overcharges that have been paid by Customer), Customer shall have the right to set off such amount against payments due to Contractor. 6.4 Late Payment. For any payment under this Contract that is overdue, the Party entitled to such payment shall also be entitled to interest on such payment for each Calendar Day the payment is overdue Terms and Conditions Page 21 CONFIDENTIAL until the date payment is made, such interest to be calculated in accordance with Article 28.11 (Calculation of Interest), unless expressly provided otherwise in this Contract. 6.5 Withholding of Payment. If Customer, in good faith, does not agree that a Milestone associated with an invoice has been completed in accordance with this Contract or that such invoice is otherwise inaccurate, (i) Customer shall pay or authorize payment of, as the case may be, the undisputed part of such invoice in the time period required by this Contract and (ii) Customer shall have the right to withhold payment or authorization of payment, as the case may be, of the disputed portion of such invoice provided Customer gives to Contractor written notice stating in reasonable detail the reason for withholding such amount within ten (10) Business Days after receipt by Customer of the applicable invoice. Upon receipt of such notice, the Parties shall initiate Dispute Resolution in accordance with Article 23 (Dispute Resolution). Terms and Conditions Page 22 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 7. DELIVERY AND TIME FOR PERFORMANCE 7.1 Repeater Category Selection. (a) On or before [*****], Customer shall provide to Contractor, in writing, a baseline estimate of the distribution of the Nominal Order over the four (4) categories of Repeaters (i.e., an estimate of how many of the total number of Standard Repeaters will be Standard Non-Redundant Repeaters and Standard Sectored Non-Redundant Repeaters and an estimate of how many of the total number of High-Power Repeaters will be High-Power Redundant Repeaters and High-Power Sectored Redundant Repeaters) (the "Initial Baseline Estimate"). (b) On or before [*****], Customer shall provide to Contractor, in writing, an update of the Initial Baseline Estimate, which updated Initial Baseline Estimate will reflect the definitive distribution of the Nominal Order over the four (4) categories of Repeaters (the "Definitive Baseline Estimate"). For each category of Repeater, the Definitive Baseline Estimate may differ from the Initial Baseline Estimate by up to plus or minus [*****]. By way of illustration and as an example only, if the Initial Baseline Estimate requires Contractor to manufacture and deliver [*****] Standard Sectored Non-Redundant Repeaters, Customer may increase or decrease that estimate in the Definitive Baseline Estimate by up to [*****], such that the Definitive Baseline Estimate may range from and including [*****] to and including [*****] Standard Sectored Non-Redundant Repeaters. 7.2 Time and Place of Delivery. (a) Set forth in Exhibit D (Delivery Requirements and Schedule) are Customer's Delivery Requirements. The Parties acknowledge that as of the Effective Date of Contract, however, Customer is unable to establish a detailed Delivery Schedule for the Enclosure Kits that specifies the timing, quantity and type of Enclosure Kits to be delivered to each Staging Area in the case of Standard Repeaters and Installation Sites in the case of High-Power Repeaters. Accordingly, the Parties are attaching to Exhibit D (Delivery Requirements and Schedule) a model Delivery Schedule, which model Delivery Schedule shall be completed and updated from time to time as Customer is able to refine its Enclosure Kit delivery requirements. As Customer completes and updates the model Delivery Schedule, it shall provide a copy to Contractor and each such completed and updated Delivery Schedule shall be called the Detailed Delivery Schedule, be added to Exhibit D and become a part of and modify this Contract; provided, however, (i) except as expressly provided in this Contract, including Article 7.3 (Rescheduling of Production), for each month, the total number of Enclosure Kits to be delivered in such month shall not exceed the total quantity of Enclosure Kits set forth in the Delivery Requirements for such month and (ii) in no month will the total number of Enclosure Kits for Standard Sectored Non- Redundant Repeaters and Enclosure Kits for High-Power Sectored Redundant Repeaters included in Customer's Monthly Delivery Notice (as defined in paragraph (b) below) to Terms and Conditions Page 23 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Contractor exceed in the aggregate [*****] for such month ((i) and (ii) together the "Delivery Schedule Restrictions"). With respect to any calendar month, the Detailed Delivery Schedule shall apply to that month provided Customer furnished the Detailed Delivery Schedule to Contractor not less than thirty (30) Calendar Days prior to the beginning of such month. (b) Unless and until a Detailed Delivery Schedule is established with respect to the Nominal Order, Customer shall provide prior written notice to Contractor of not less than thirty (30) Calendar Days prior to the beginning of each month in which Enclosure Kits are to be delivered by Contractor pursuant to this Contract (each a "Monthly Delivery Notice"). Such notice shall specify the quantity of Enclosure Kits to be delivered to each of the specified Staging Areas in the case of Standard Repeaters and Installation Sites in the case of High-Power Repeaters in such month; provided, however, the notice shall comply with the Delivery Schedule Restrictions set forth in paragraph (a) above. (c) Contractor shall use its best commercial efforts to deliver the Enclosure Kits in accordance with the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule) and, as applicable, the Detailed Delivery Schedule and each Monthly Delivery Notice provided by Customer pursuant to paragraph (b) above. In the case of Standard Repeaters, Contractor shall deliver the PA Kits in accordance with Article 2.3(d) above and in accordance with the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule). In the case of High-Power Repeaters, within thirty (30) Calendar Days after receipt of the Detailed Delivery Schedule or Monthly Delivery Notice provided by Customer pursuant to paragraph (b) above, Contractor shall (i) ship to, and install at, the Installation Sites identified in such schedule or notice the Enclosure Kit and Klystron Kit and (ii) successfully complete High-Power Installation Site Testing of the complete High-Power Repeater installed at such Installation Sites. Contractor shall deliver the Network Management System and other deliverables to be provided pursuant to this Contract in accordance with the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule). The Parties acknowledge and agree that the delivery times set forth in Exhibit D (Delivery Requirements and Schedule), as may be amended, are firm and time is of the essence. (d) In the event Contractor is prepared to deliver Enclosure Kits earlier than required by the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule) or, as applicable, the Detailed Delivery Schedule or a Monthly Delivery Notice, Contractor shall promptly provide prior notice to Customer as to the quantity of Enclosure Kits available for early delivery by Contractor and the proposed delivery dates therefor. Customer shall, within five (5) Business Days following receipt of Contractor's notice, provide written notice to Contractor of Customer's agreement with or rejection of the early delivery of such Enclosure Kits, which agreement or rejection shall be in Customer's sole discretion. If Customer agrees to accept early delivery of such Enclosure Kits, Customer shall also specify in its notice to Contractor the Staging Area(s) and Installation Site(s) to which such Enclosure Kits should be delivered. Terms and Conditions Page 24 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. (e) Contractor shall deliver the Enclosure Kits, in the case of Standard Repeaters, to the loading dock or other such delivery receiving area of each Staging Area as specified in the Detailed Delivery Schedule or each Monthly Delivery Notice, as applicable, and in the case of High-Power Repeaters, to the Installation Site specified in the Detailed Delivery Schedule or each Monthly Delivery Notice, as applicable. Contractor shall deliver the PA Kits to each of the Installation Sites as specified in Customer's notice as provided in Article 2.3(d). Contractor shall deliver the Klystron Kits as set forth in paragraph (c) above. Contractor shall deliver all other deliverables to the persons and at the address indicated in Article 28.8 (Notices), except as may otherwise be required and directed by Customer or specified in the Detailed Delivery Schedule. 7.3 Rescheduling of Production. (a) Subject to paragraph (c) below and also in recognition of the potential for changes in Customer's business or logistical requirements, Contractor agrees to accommodate a rescheduling of the Start of Production Date for the Nominal Order of Repeaters to allow for a delay of the start of production of the Repeaters and an extension of the Start of Production Date for a period, at Customer's election, of one (1) to three (3) months, provided: (1) Customer provides Contractor with prior written notice of its desire to delay the Start of Production Date, such notice to be given by no later than [*****]; and (2) Customer takes delivery of the entire Nominal Order by no later than the last day of the [*****] month following the original Start of Production Date. (b) Subject to paragraph (c) below, upon thirty (30) Calendar Days prior notice, Customer may direct Contractor to defer delivery of up to [*****] of the total number of Repeaters to be delivered in any month during the Term, provided that Customer agrees to take delivery of such deferred Repeaters by no later than the last day of the [*****] month following the Start of Production Date. (c) Contractor shall in no event be required to manufacture or deliver to Customer in excess of [*****] Repeaters in any month during the Term of this Contract. (d) In the event Customer exercises its right under this Article 7.3 (Rescheduling of Production) to delay the Start of Production Date, the applicable delivery dates hereunder and dates of Key Tasks shall be adjusted on a day-for-day basis, and the date of July 31, 2001 set forth in paragraphs (a) and (c) of Article 0 (Escrow Account and Payment) shall be adjusted on a day- for-day basis. 7.4 Packing, Tracking and Shipping. (a) Packing. All deliveries pursuant to this Contract shall be preserved, ------- packed and crated by Contractor to ensure safe delivery to their destinations without damage due to shipment. Terms and Conditions Page 25 CONFIDENTIAL (b) Labeling and Electronic Tracking. -------------------------------- (1) On or before February 4, 2000, the Parties will agree upon appropriate labeling and electronic asset-tracking requirements and procedures. Such requirements and procedures will include at a minimum the labeling of Repeaters and LRUs with bar-coded serial numbers consistent with the Parties' business requirements and asset tracking practices. Contractor shall label each Repeater and LRU, container and packing documentation in accordance with such requirements and procedures. (2) Contractor shall notify Customer at least thirty (30) Calendar Days in advance of any administrative changes with respect to any Repeater or LRU, such as changes in product part numbers or descriptions, product discontinuances or substitutions, and newly compatible or substitute components. (c) Shipping. Unless otherwise instructed by Customer, Contractor shall: -------- (1) Arrange for the transportation and shipment of the Repeaters and other deliverables required to be delivered by Contractor pursuant to this Contract, such shipments to be made using fully licensed, bonded and insured common carriers, which carriers shall have substantial experience in the shipment of electronic equipment; (2) Fully insure each Repeater against all risks, in accordance with Article 20 (Insurance), and maintain such insurance until the following times: in the case of Standard Repeaters, (i) until delivery of the Enclosure Kits to the loading dock or other such delivery receiving area of each Staging Area and (ii) during the period of Rooftop Assembly and Rooftop Testing until Acceptance; in the case of PA Kits, until Acceptance of the Standard Repeater in which the PA Kit is incorporated; and in the case of High- Power Repeaters, until Acceptance of such Repeaters; (3) Enclose packing documentation with each shipment and, when more than one package is shipped, identify the one that contains the memorandum; (4) Render invoices in duplicate or as otherwise specified by Customer; (5) Verify that bills of lading match corresponding shipping invoices; and (6) Forward applicable bills of lading and shipping notices with items shipped. Terms and Conditions Page 26 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL 7.5 Liquidated Damages for Late Delivery of Repeaters. (a) The Parties acknowledge and agree that failure to meet the Liquidated Damages Schedule, as defined and set forth below, on or before the last day of the month in which delivery of Enclosure Kits is required pursuant to that Schedule will cause substantial financial loss to, or damage sustained by, Customer. The Parties further acknowledge and agree that the following liquidated damages are believed to represent a genuine estimate of the loss (due to non-productive time and increased cost of money) that would be suffered by Customer by reason of any such delay (which losses are difficult or impossible to calculate with reasonable certainty). (b) Notwithstanding the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule) and for purposes of calculating liquidated damages only, in the event the sum of Enclosure Kits for Standard Repeaters Contractor delivers to Staging Areas plus Enclosure Kits with Klystron Kits for High-Power Repeaters Contractor ships to Installation Sites is less than the total number required by the monthly schedule set forth below (the "Liquidated Damages Schedule"), then, for each such Enclosure Kit in the case of Standard Repeaters and Enclosure Kit together with Klystron Kit in the case of High-Power Repeaters not so delivered or shipped, as applicable, Contractor shall pay Customer, as liquidated damages and not as a penalty, the daily amounts set forth in the Liquidated Damages Schedule for each Calendar Day following the last day of the month in which such Enclosure Kit in the case of Standard Repeaters and Enclosure Kit together with Klystron Kit in the case of High-Power Repeaters was to be delivered or shipped, as applicable, in accordance with the Liquidated Damages Schedule below until the date such Enclosure Kit in the case of Standard Repeaters and Enclosure Kit together with Klystron Kit in the case of High-Power Repeaters is delivered or shipped, as applicable. - -------------------------------------------------------------------------------- Liquidated Damages Schedule - -------------------------------------------------------------------------------- Month Total Quantity of Enclosure Daily Amount of the Kits and Enclosure Kits with Liquidated Damages for Each Klystron Kits Subject to Enclosure Kit Delivered/ Liquidated Damages for Late Shipped after the Last Day Delivery/ of such Month Shipment if not delivered/ shipped by the last day of such Month - -------------------------------------------------------------------------------- [*****] [*****] [*****] - -------------------------------------------------------------------------------- (c) The monthly quantities of Enclosure Kits subject to liquidated damages shall not include (i) any Enclosure Kits in excess of the Nominal Order as may be ordered by Customer pursuant to Article 0 (Options) and (ii) any Enclosure Kits Customer requires to be delivered or shipped, as applicable, on an accelerated schedule as against the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule), provided that, in any event, the liquidated Terms and Conditions Page 27 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL damages associated with the quantities set forth in the Liquidated Damages Schedule shall continue to apply with respect to any Enclosure Kits delivered/shipped late, as determined under such Liquidated Damages Schedule. (d) The total amount of liquidated damages for which Contractor may be liable under paragraph (b) above shall not exceed Three Million Dollars ($3,000,000) in the aggregate. (e) Customer may deduct any liquidated damages from any amounts due Contractor, or Customer may require Contractor to pay any liquidated damages that exceed amounts due Contractor, within thirty (30) Calendar Days after such request. (f) As soon as Contractor anticipates or becomes aware of a delay in the delivery of any Enclosure Kit in the case of Standard Repeaters and/or shipment of Enclosure Kit together with Klystron Kit in the case of High-Power Repeaters, Contractor shall, as promptly as possible in the circumstances, notify Customer by telephone, to be followed by written notice, of such anticipated or actual delay in the delivery/shipment of any such Enclosure Kit. Such notice shall indicate the cause of the delay and the expected delivery date of the Enclosure Kit in the case of Standard Repeaters and shipment date for Enclosure Kit together with Klystron Kit in the case of High-Power Repeaters. Following delivery of such notice, Contractor shall provide frequent (e.g., daily) updates as to the status of and timeframe for delivery/shipment. Such notice of anticipated or actual delay shall in no way reduce Contractor's liability for liquidated damages, nor shall it reduce, eliminate, or modify any other rights or remedies available to Customer pursuant to this Contract or at law or equity. 7.6 Incentive for Timely Delivery of the Prototype Repeaters. In the event that Contractor achieves timely delivery and Acceptance of all of the Prototype Repeaters in accordance with the requirements of this Contract on or before [*****], Customer shall award to Contractor an additional amount of [*****]. 7.7 Performance Award. (a) In Customer's reasonable discretion, Customer may pay to Contractor a monetary award in recognition of Contractor's exceptional performance under this Contract (the "Performance Award"). Such Performance Award may be in an amount up to, but shall not exceed, the sum of [*****] (the "Available Award Amount"). (b) In making its determination as to whether Contractor shall receive a Performance Award, Customer shall give consideration to certain factors with respect to Contractor's performance hereunder, including the following: (1) Contractor's delivery of high quality Repeaters, Network Management System and other deliverables; (2) Contractor's timely performance; (3) Contractor's efforts and success in recovering from its failure to meet the applicable delivery dates hereunder; Terms and Conditions Page 28 CONFIDENTIAL (4) Contractor's flexibility, creativity, support, accommodation and reasonableness in working with Customer and its third-party service providers (including the Terrestrial Repeater Network System integrator) to meet the applicable delivery dates hereunder or Customer's accelerated program requirements and to adapt to changes in the requirements of Customer's program; (5) Contractor's demonstrated commitment to Customer's program; and (6) Contractor's exceptional performance hereunder. (c) Customer shall make its determination as to whether to make a Performance Award to Contractor promptly after the Project Completion Date. Contractor acknowledges and agrees that it is within Customer's sole reasonable discretion to award any or all of the Available Award Amount and Contractor has no contractual or legal right to receive a Performance Award. Customer shall pay to Contractor the Performance Award, if any, within sixty (60) Calendar Days after the Project Completion Date. 7.8 Suspension of Work by Customer. Customer, in its sole discretion, may suspend performance of the Work, in whole or in part, upon written notice to Contractor, and Contractor shall suspend performance of the Work to the extent specified in such notice within twenty-four (24) hours thereof. If, within four (4) months of Customer's notice to suspend the Work, Customer fails to notify Contractor to resume performance of the Work suspended, Contractor may, at any time thereafter, terminate the Contract, but only to the extent the Work was suspended, upon ten (10) Business Days written notice to Customer and shall be entitled to the remedies set forth in Article 25.3(c) only to the extent of the Work so terminated. In the event of a suspension under this Article 7.8 (Suspension of Work by Customer), the Parties shall work together to minimize the impact of such suspension on the Contract Price, applicable delivery dates hereunder and Contractor's performance hereunder (and Customer's liability in the event of termination) and Contractor shall be entitled to an equitable adjustment in the Contract Price and applicable delivery dates hereunder. 7.9 Excusable Delay Defined. (a) With respect to Contractor's performance of its obligations under this Contract, an "Excusable Delay" shall be any delay in the performance of the Work, in whole or in part, caused by an event that is beyond the reasonable control of Contractor, its Subcontractors or their respective Affiliates, including (i) war (whether declared or undeclared), outbreak of national hostilities, invasion or sabotage; (ii) fire, earthquake, flood, hurricane, tornado, cyclone, monsoon, epidemic, explosion, or quarantine restriction; (iii) strike or work slow-down (other than by the employees of Contractor or any Subcontractor at any Contractor Facility) not reasonably within Contractor's control; (iv) freight embargoes; (v) acts of God; (vi) governmental action in its sovereign capacity; and (vii) Customer's failure to perform its obligations hereunder; provided, however, that no delay shall be an Excusable Delay unless Contractor gives Customer prompt written notice of the delay and the reasons therefor and such Terms and Conditions Page 29 CONFIDENTIAL delay could not have been either (x) avoided by Contractor, its Subcontractors or their respective Affiliates through the exercise of reasonable foresight or reasonable precautions or (y) circumvented by Contractor, its Subcontractors or their respective Affiliates through the use of reasonable efforts to establish work-around plans, alternate sources, or other means. Upon Customer's written request, Contractor shall provide Customer a Correction Plan. Contractor shall also provide Customer prompt written notice when the event constituting an Excusable Delay has ended. (b) In the event Customer disputes any Excusable Delay asserted by Contractor, Customer shall notify Contractor in writing within ten (10) Business Days from the date of notice thereof and, if the Parties have not resolved the dispute within ten (10) Business Days of Contractor's receipt of written notice from Customer, the dispute shall be resolved pursuant to Article 23 (Dispute Resolution). 7.10 Contract Adjustments. In the event of an Excusable Delay under Article 7.9 (Excusable Delay Defined), there shall be an equitable adjustment to the applicable delivery dates hereunder. Contractor acknowledges and agrees the occurrence of an Excusable Delay shall not entitle Contractor to an increase in the Contract Price, except for those Excusable Delays caused by Customer's failure to perform its obligations hereunder, in which case there shall be an equitable adjustment to the Contract Price. Terms and Conditions Page 30 CONFIDENTIAL 8. TESTING CRITERIA AND ACCEPTANCE 8.1 Testing. Contractor shall develop and provide test plans and procedures in accordance with Exhibit B (Statement of Work) for Prototype Repeaters on or before February 28, 2000 and for all other Repeaters (i.e., production Repeaters) on or before March 31, 2000. Upon Customer's approval of the applicable test plans and procedures in accordance with Exhibit B, such test plans and procedures shall be attached hereto and incorporated herein as Exhibit E (Test Plans and Procedures). Contractor shall test each LRU, Repeater, the Network Management System and other deliverable items to be provided hereunder in accordance with such Exhibit E (Test Plans and Procedures). 8.2 Acceptance of Repeaters. (a) A Repeater shall be deemed to have achieved Acceptance only upon the occurrence of the following events with respect to such Repeater ("Repeater Acceptance Criteria"): (1) With respect to Standard and High-Power Repeaters (including all Prototype Repeaters), successful completion of Repeater design verification testing and review ("Repeater Design Verification Testing") in accordance with the requirements of Exhibit E (Test Plans and Procedures) (to be developed hereunder). Within five (5) Business Days following successful completion of the Repeater Design Verification Testing, Contractor shall provide to Customer its written certification, in accordance with Exhibit E, that the Repeater Design Verification Testing has been successfully completed, together with all test data, results and reports generated as a result of such Repeater Design Verification Testing. Unless subsequent design Defects or Pattern Defects are detected, once the Design Verification Testing has been successfully completed in accordance with Exhibit E and Contractor has provided its written certification pursuant to the preceding sentence, such Repeater Design Verification Testing shall be deemed to apply to each Repeater of the same type thereafter delivered by Contractor to Customer pursuant to this Contract and such Testing need not be re-performed on an individual basis for each Repeater of the same type; (2) With respect to Standard Repeaters only (including Prototype Repeaters), successful completion of (i) a functionality test of each LRU incorporated in the Repeater and (ii) an overall, integrated system functionality test of the Repeater. Such functionality testing shall be performed by Contractor in accordance with Exhibit E (Test Plans and Procedures) (to be developed hereunder) prior to shipment of the Repeater from a Contractor Facility ("Repeater In-Factory Testing"). Contractor shall deliver with the applicable invoice, its written certification that Repeater In-Factory Testing has been successfully completed, together with all test data, results and reports generated as a result of such In-Factory Testing. Contractor's certification shall also indicate the pertinent Repeater's serial or other tracking number, as Terms and Conditions Page 31 CONFIDENTIAL well as the serial or other tracking number of each LRU incorporated within that Repeater; and (3) With respect to Standard Repeaters (including Prototype Repeaters) delivery of the Enclosure Kit and PA Kit relating to such Repeater as provided in Article 7.2 (Time and Place of Delivery) and successful completion of the Rooftop Assembly in accordance with Article 2.3 (Weight and Size of Repeaters) and successful completion of Rooftop Testing in accordance with Exhibit E (Test Plans and Procedures) (to be developed hereunder). Contractor shall provide to Customer with the applicable invoice its written certification that the Rooftop Testing has been successfully completed, together with all test data, results and reports generated as a result of such Rooftop Testing. Contractor's certification shall also include the pertinent Repeater's serial or other tracking number, as well as the serial or other tracking number of each LRU incorporated within that Repeater. (4) With respect to High-Power Repeaters, delivery of the High-Power Repeater's kits (i.e., the Enclosure Kit and Klystron Kit) to the Installation Site, assembly of such kits at the Installation Site and successful completion of testing at the Installation Site ("High-Power Installation Site Testing") in accordance with Exhibit E (Test Plans and Procedures) (to be developed hereunder). Contractor shall provide to Customer with the applicable invoice its written certification that the High-Power Installation Site Testing has been successfully completed, together with all test data, results and reports generated as a result of such Testing. Contractor's certification shall also include the pertinent Repeater's serial or other tracking number, as well as the serial or other tracking number of each LRU incorporated within that Repeater. (b) Customer may, at its election and expense, have its Associates, Consultants, or other designees attend the Repeater Design Verification Testing, any Repeater In-Factory Testing, any Rooftop Testing and any High-Power Installation Site Testing. Attendance by Customer shall be for purposes of monitoring and observation and shall be on a non-interference basis; provided, however, Customer may ask questions, make suggestions, or otherwise comment on the proceedings. Contractor shall notify Customer reasonably in advance of the time and place for any such testing activities and Customer shall promptly inform Contractor of its intent to attend the testing. Contractor shall make arrangements for Customer's entrance and access into Contractor Facility(ies) for purposes of attending the testing. Customer attendance at any such test shall in no way be construed or deemed to represent Customer's acceptance of the items being tested or Customer's waiver of any claims or rights hereunder. (c) For each Repeater, Customer or its designee shall provide Contractor written notification of its acceptance or rejection of such Repeater within five (5) Business Days after receipt of Contractor's written certification that the Rooftop Testing or High-Power Installation Site Testing, as applicable, has been successfully completed in accordance with Exhibit E (Test Plans and Procedures) and provision of all certifications required by paragraph (a) above. Customer shall accept each Repeater if the Repeater meets the Repeater Acceptance Criteria as set forth in paragraph (a) above. In the event Customer provides to Contractor a notice of Terms and Conditions Page 32 CONFIDENTIAL Customer's Acceptance of a Repeater, the Accepted Repeater shall be deemed Accepted as of the date of such notice. (d) In the event Customer rejects a Repeater, Customer shall provide Contractor with a Notice of Defects. If Contractor disputes the contents of a Notice of Defects, Contractor shall notify Customer in writing of the basis for its dispute within five (5) Business Days of receipt of Customer's Notice of Defects. (e) Where Customer fails to provide Contractor written Acceptance or Notice of Defects within the five (5) Business-Day Period specified in paragraph (c) above, that Repeater shall be deemed to have achieved Acceptance as of the date Contractor delivered the certifications required by paragraph (a) above. (f) In the event Contractor does not dispute such Notice of Defects, Contractor shall promptly (but within no more than forty-eight (48) hours after receipt of the applicable Notice of Defects) ship the conforming replacement for the defective Repeater or defective LRU, as applicable, and all delivery dates hereunder shall remain in effect. The replacement Repeater shall be subject to the Repeater Acceptance Criteria and procedures set forth in this Article 8.2 (Acceptance of Repeaters). Any Repeater repaired or reconstructed with a replacement LRU shall also be subject to the Repeater Acceptance Criteria and procedures set forth in this Article 8.2 (Acceptance of Repeaters) (except the requirements of paragraph (a)(1) shall not apply). Such procedures shall be repeated until such time as Contractor delivers a Repeater that meets the Repeater Acceptance Criteria set forth herein. Contractor shall be responsible, at its expense, for packing, crating and shipping the defective Repeater or defective LRU for return to Contractor. Contractor shall be responsible for costs related to delivering any replacement Repeaters or LRUs to the appropriate Staging Area or Installation Site, as appropriate, including the costs of packing, crating, transportation, shipping and insurance. Upon receipt of a returned defective Repeater, Contractor may elect to correct its Defects, if possible, and deliver such corrected Repeater to Customer in satisfaction of a subsequent Repeater delivery requirement, subject to the Repeater Acceptance Criteria and procedures set forth in this Article 8.2 (Acceptance of Repeaters). 8.3 Acceptance of the Network Management System. (a) Contractor shall test the Network Management System to be provided hereunder in accordance with Exhibit E (Test Plans and Procedures). (b) The Network Management System shall be deemed to have achieved Acceptance only upon the occurrence of the following events with respect to such System ("NMS Acceptance Criteria"): (1) Successful completion of NMS design verification testing ("NMS Design Verification Testing"), which testing shall be performed by Contractor in accordance with the requirements of Exhibit E (Test Plans and Procedures). Within five (5) Business Days following successful completion of the NMS Design Verification Testing, Contractor shall provide to Customer its written certification that the NMS Design Verification Testing has been successfully Terms and Conditions Page 33 CONFIDENTIAL completed, together with all data, results and reports generated as a result of such NMS Design Verification Testing, also as specified in Exhibit E. (2) Successful completion of system functionality test for the Network Management System to be performed by Contractor in accordance with Exhibit E (Test Plans and Procedures) prior to shipment of the Network Management System (the "NMS In-Factory Testing"). Contractor shall also deliver with the Network Management System its written certification that the NMS In- Factory Testing has been successfully completed, together with all test data, results and reports generated as a result of such NMS In-Factory Testing; (3) Delivery of the Network Management System to the place and in the manner specified in Exhibit D (Delivery Requirements and Schedule), as may be amended in accordance with Article 7.2 (Time and Place of Delivery); and (4) Successful completion of an overall, integrated system functionality test of the Network Management System following delivery of the System to Customer at the designated location and successful installation by Contractor (the "NMS Acceptance Testing"), which testing shall be performed by Customer or its designee in accordance with Exhibit E (Test Plans and Procedures); provided, however, that Contractor may, at its election and expense, have its representative present during such NMS Acceptance Testing. (c) Customer shall provide Contractor written notification of its Acceptance or rejection of the Network Management System within fourteen (14) Calendar Days after delivery of the Network Management System and provision of all certifications required by paragraph (b) above. Customer shall accept the Network Management System if the System meets the NMS Acceptance Criteria set forth in paragraph (b) above. In the event Customer provides to Contractor a notice of Customer's Acceptance of the Network Management System, the accepted System shall be deemed accepted as of the date of such notice. (d) In the event Customer rejects the Network Management System, Customer shall provide Contractor with a Notice of Defects. If Contractor disputes the contents of a Notice of Defects, Contractor shall notify Customer in writing of the basis for its dispute within fourteen (14) Calendar Days of receipt of Customer's Notice of Defects. (e) Where Customer fails to provide Contractor written Acceptance or Notice of Defects within the said fourteen (14) Calendar-Day Period specified in paragraph (c) above, the Network Management System shall be deemed accepted as of the date Contractor delivered and installed the Network Management System in accordance with this Article 8.3 (Acceptance of the Network Management System). (f) In the event Contractor does not dispute such Notice of Defects, Contractor shall repair or replace the defective Network Management System promptly after receipt of the Notice of Defects and all delivery dates hereunder shall remain in effect. The repaired or replaced Network Management System shall be subject to the NMS Acceptance Criteria and procedures Terms and Conditions Page 34 CONFIDENTIAL set forth in this Article 8.3 (Acceptance of the Network Management System) and such procedure shall be repeated until such time as Contractor delivers a Network Management System that meets the NMS Acceptance Criteria set forth herein. Contractor may repair the defective NMS at the location in which the NMS is installed, subject to advance notice to Customer so that Customer may make reasonable arrangements for access by Contractor. In the event the NMS is not repaired on site, Customer shall be responsible for packing and crating the Network Management System and making such System available to the common carrier or other shipper that delivered such System to Customer for return to Contractor, all at Contractor's expense, including the costs of de-installation, packing, crating, transportation, shipping and insurance. Contractor shall also be responsible for costs related to delivering the replacement or repaired NMS to Customer, including the costs of packing, crating, transportation, shipping, insurance and re-installation of the NMS. 8.4 Acceptance of Non-Repeater Deliverables. (a) Customer shall provide Contractor written notification of its acceptance or rejection of each item to be furnished by Contractor to Customer pursuant to this Contract, but excluding Repeaters and the Network Management System (each, a "Non-Repeater Deliverable"), within fourteen (14) Calendar Days after Customer has received such item from Contractor. Customer shall accept each Non-Repeater Deliverable if such item is in a condition fully conforming to the provisions of this Contract. In the event Customer provides Contractor a written notice of Acceptance with respect to such Non-Repeater Deliverable, such item shall be deemed accepted as of the date of such notice. (b) In the event Customer rejects a Non-Repeater Deliverable, Customer shall provide Contractor with a Notice of Defects. If Contractor disputes the contents of a Notice of Defects, Contractor shall notify Customer in writing of the basis for its dispute within fourteen (14) Calendar Days of receipt of Customer's Notice of Defects. (c) Where Customer fails to provide Contractor written Acceptance or a Notice of Defects within the fourteen (14) Calendar-Day Period specified in paragraph (a) above, that Non-Repeater Deliverable shall be deemed accepted as of the date Contractor furnished such item to Customer in accordance with Article 7.2 (Time and Place of Delivery). (d) In the event Contractor does not dispute such Notice of Defects, Contractor shall promptly correct any Defects in the Non-Repeater Deliverable and all delivery dates hereunder shall remain in effect. Upon correcting such Defect(s), Contractor shall re-submit the Non-Repeater Deliverable to Customer and the provisions of this Article 8.3 (Acceptance of Non-Repeater Deliverables) shall apply again. 8.5 Title and Risk of Loss. (a) For each item of Work, title, free and clear of all liens and encumbrances of any kind (except for Permitted Liens), shall pass to Customer as provided below: Terms and Conditions Page 35 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL (1) For each Enclosure Kit, upon shipment from Contractor's Facility in accordance with the Milestone Achievement Criteria applicable to [*****] set forth in Exhibit C (Pricing, Milestones and Payment Plan); (2) For each PA Kit, upon Customer's Acceptance of the Repeater in which such PA Kit is incorporated in accordance with Article 8.2 (Acceptance of Repeaters); (3) For each Klystron Kit, upon Customer's Acceptance of the Repeater in which such Klystron Kit is incorporated in accordance with Article 8.2 (Acceptance of Repeaters); (4) For the Network Management System, upon Customer's Acceptance of the NMS in accordance with Article 8.3 (Acceptance of the Network Management System); and (5) For any Non-Repeater Deliverables, upon Customer's Acceptance in accordance with Article 8.4 (Acceptance of Non-Repeater Deliverables). (b) For each item of the Work, risk of loss or damage shall pass to Customer as provided below: (1) For each Enclosure Kit for a Standard Repeater, upon delivery to the loading dock or other such delivery receiving area of the applicable Staging Area in accordance with Article 0 (Delivery and Time for Performance) until such time that Contractor performs the Rooftop Assembly and Rooftop Testing, during which time the risk of loss or damage shall pass back to Contractor and then the risk of loss or damage shall again pass to Customer upon completion of the Rooftop Assembly and Rooftop Testing by Contractor; (2) For each PA Kit for a Standard Repeater, upon delivery to the appropriate Installation Site in accordance with Article 2.3 (Weight and Size of Repeaters) and Acceptance of the Repeater in which such PA Kit is incorporated in accordance with Article 8.2 (Acceptance of Repeaters); (3) For each High-Power Repeater, upon delivery to the appropriate Installation Site in accordance with Article 0 (Delivery and Time for Performance) and Acceptance of such Repeater in accordance with Article 8.2 (Acceptance of Repeaters); (4) For the Network Management System, upon Acceptance in accordance with Article 8.3 (Acceptance of the Network Management System); and (5) For Non-Repeater Deliverables, upon delivery of such item to Customer, all deliveries in accordance with this Contract. Terms and Conditions Page 36 CONFIDENTIAL 9. PROJECT MANAGEMENT 9.1 Contractor Personnel. (a) As of the Effective Date, Contractor shall appoint: (1) a project executive with responsibility for Customer's account and who shall (i) be an officer of Contractor and (ii) have authority to act for and bind Contractor in connection with all aspects of this Contract (the "Contractor Project Executive"); (2) a business line manager with responsibility for Customer's account and who shall be the primary executive level contact point for Customer communications ("Contractor Business Line Manager"); (3) a project manager whose primary responsibility shall be to Customer's account and who shall (i) remain dedicated to managing Contractor's responsibilities under this Contract, (ii) serve as the single point of accountability for Contractor's performance under this Contract, (iii) serve as the point of contact for all Customer communications, (iv) have authority to act for Contractor in connection with all aspects of this Contract, and (v) have day-to-day authority for undertaking to ensure Customer satisfaction (the "Contractor Project Manager"); and (4) a technical manager whose primary responsibility shall be to Customer's account and who shall (i) serve as the point of accountability for technical, design and operational issues, working in coordination with the Contractor Project Manager and (ii) have authority to act for Contractor with respect to technical issues (the "Contractor Technical Manager"). (b) The individuals filling the positions identified in paragraph (a) above shall be deemed to be "Key Contractor Personnel." The Key Contractor Personnel that have been approved as of the Effective Date are listed in Exhibit G (Key Contractor Personnel). (c) In the event of any conflict between the commitments and responsibilities to Customer and the commitments or responsibilities to any other customers, the Contractor Business Line Manager, Contractor Project Manager and Contractor Technical Manager shall each give priority to his or her commitments and responsibilities to Customer. (d) Before assigning an individual to any position described in Exhibit G (Key Contractor Personnel), whether as an initial assignment or a subsequent assignment, Contractor shall notify Customer of the proposed assignment, shall introduce the individual to appropriate Customer representatives, and shall provide Customer with a resume and other information about the individual as reasonably requested by Customer. If Customer in good faith objects to the proposed assignment, the Parties shall attempt to resolve Customer's concerns on a mutually agreeable basis. If the Parties have not been able to resolve Customer's concerns after engagement of senior management within five (5) Business Days, Contractor shall not assign the Terms and Conditions Page 37 CONFIDENTIAL individual to that position and shall propose to Customer the assignment of another individual of suitable ability and qualifications. Key Contractor Personnel may not be transferred or re-assigned until a suitable replacement has been approved by Customer. Contractor shall conduct an exit interview with all Key Contractor Personnel who terminate their employment with Contractor to review their confidentiality and non-disclosure obligations as provided herein. 9.2 Material Subcontractors. (a) Contractor has represented that in the performance of the Work, it will be necessary for Contractor to enter into the Subcontracts ("Material Subcontracts") listed below: - -------------------------------------------------------------------------------- Name of Material Subcontractor Description of Work - -------------------------------------------------------------------------------- Unique Broadband Systems High-Power Amplifier (HPA) development and manufacture - -------------------------------------------------------------------------------- Unique Broadband Systems Transcoder development and manufacture - -------------------------------------------------------------------------------- Unique Broadband Systems Filters - -------------------------------------------------------------------------------- (b) Contractor shall provide Customer a copy of the technical content of all Material Subcontracts (with financial details redacted). Customer shall treat the information contained in such Subcontracts confidentially and shall execute any reasonable confidentiality agreement requested by the relevant Subcontractor. (c) In the event Contractor desires to replace a Material Subcontractor, Contractor shall provide Customer with reasonable prior notice thereof, and shall consult with Customer concerning the selected replacement. (d) Customer's consultation with Contractor concerning any Material Subcontractor shall not relieve Contractor from any obligations or responsibilities under this Contract. 9.3 Subcontractor Relations. (a) Nothing in this Contract shall be construed as creating any contractual relationship between Customer and any Subcontractor, including Material Subcontractors. Contractor acknowledges and agrees that it is the prime contractor under this Contract and as such, assumes full responsibility and liability for the performance of all suppliers, Subcontractors, or third parties used by Contractor hereunder to the same extent as if such obligations were performed by Contractor. Further, Contractor is fully responsible to Customer for the acts or omissions of Subcontractors and all persons used by Contractor or a Subcontractor in connection with performance of the Work. Any failure by a Subcontractor to meet its obligations to Contractor shall not constitute a basis for Excusable Delay, except as expressly permitted in Article 7.9 (Excusable Delay Defined), and shall not relieve Contractor from meeting any of its obligations under this Contract. Without limiting the generality of the foregoing, Contractor shall be responsible for discharging any liens (including Subcontractor mechanic liens) or encumbrances placed by any Subcontractor on any component or part purchased by Customer hereunder. (b) Contractor shall include in each of the Material Subcontracts and shall use commercially reasonable efforts to include in all other Subcontracts, that any such Subcontract Terms and Conditions Page 38 CONFIDENTIAL include provisions substantially similar to Article 12 (Access to Work), Article 14 (Intellectual Property Rights), Article 15 (Confidentiality), and Article 23 (Dispute Resolution). 9.4 Customer Third-Party Services and Products. Contractor agrees that during the Term of this Contract it shall provide all necessary and reasonable cooperation with the agents, Consultants, subcontractors and third-party suppliers of Customer as requested by Customer to achieve functional compatibility of the Repeaters with Customer's Terrestrial Repeater Network System. 9.5 Quality Assurance. Contractor shall perform the Work in accordance with Exhibit F (Quality Assurance Plan) and all applicable industry standards, including applicable US Federal Communications Commission (FCC) regulations, NEBS (1, 2 and 3), Underwriters Laboratory, EIA/TIA, Bellcore, ANSI, IEEE, ATM-Forum, NESC, ITU-T, NEC, and ISO 9000 requirements, all as may be amended from time to time. 9.6 Accountability. Notwithstanding anything to the contrary contained in this Contract, Customer's participation in, or approval of, the design or testing of Repeaters hereunder shall not be construed or interpreted as Customer having accountability for the Repeaters to perform in accordance with this Contract. Without limiting the generality of the preceding sentence, Contractor shall remain responsible for designing, developing, manufacturing, and delivering Repeaters that are compliant with this Contract. Terms and Conditions Page 39 CONFIDENTIAL 10. CHANGES IN SCOPE OF WORK 10.1 Changes Requested by Customer. (a) Subject to Article 7.2 (Time and Place of Delivery) and paragraphs (b), (c) and (d) below, Customer shall be entitled to direct, during the performance of this Contract, any change within the general scope of this Contract, including any change that will add, delete, or change the Work, affect the design or construction of any Repeater, the time for performance of the Work and/or the delivery dates hereunder. (b) Any changes directed by Customer as described in paragraph (a) above shall be submitted in writing to Contractor. Contractor shall respond to such directed change in writing to Customer within fourteen (14) Calendar Days after receipt of such directed change and shall include in such response the details of the impact of such change in the Work on the Contract Price and/or the delivery dates hereunder. (c) If Customer and Contractor agree upon the change in the Contract Price and/or the delivery dates hereunder caused by the change in Work, Contractor shall proceed with the performance of this Contract as changed immediately upon the execution by both Parties of a Change Order reflecting such change. (d) If the Parties cannot agree on a change to the Contract Price and/or the delivery dates hereunder, as occasioned by the additions or changes in the Work directed by Customer pursuant to paragraph (a) above, Customer may issue a Change Directive for such additions or changes. Contractor shall proceed with the Work in accordance with the Change Directive and Customer may dispute the reasonableness of Contractor's determination with respect to the appropriate change to the Contract Price and/or the delivery dates hereunder pursuant to Article 23 (Dispute Resolution). Pending resolution of such dispute, Customer shall pay Contractor a reasonable amount. If it is determined by written agreement of the Parties or pursuant to Article 23 (Dispute Resolution) that Contractor is entitled to an amount other than the amount paid by Customer, Customer shall pay to Contractor the amounts of the shortfall or Contractor shall refund to Customer the amount of the excess, as the case may be, with interest on such amount running from the date of initial payment by Customer to the date of additional payment or refund, as the case may be, at the interest rate set forth in Article 28.11 (Calculation of Interest). 10.2 Changes Requested by Contractor. (a) Subject to paragraphs (b) and (c) below, Contractor may request, during the performance of this Contract, any change within the general scope of this Contract, including any change that will add or delete Work, cause a revision to the delivery dates hereunder or affect any other requirement of this Contract. (b) Any changes as described in paragraph (a) above requested by Contractor shall be submitted in writing to Customer at least thirty (30) Calendar Days prior to the proposed date of the change. If such Contractor- requested change causes an increase or decrease or other impact on the Work, Contract Price, or delivery dates hereunder or other terms of this Contract, Terms and Conditions Page 40 CONFIDENTIAL Contractor shall submit, with such request, a written proposal identifying such change and the impact thereof on the Contract Price, delivery dates hereunder, or other terms of this Contract. (c) Customer may accept or reject such request in Customer's sole discretion. Customer shall notify Contractor in writing, within fourteen (14) Calendar Days after receipt of the requested change proposal. If Customer agrees with and accepts Contractor's requested change and such impact thereof, Contractor shall proceed with the performance of this Contract as changed upon the execution by both Parties of a written Change Order reflecting such changes. If Customer does not agree to the requested change, Contractor shall continue performance in accordance with this Contract without regard to such requested change. 10.3 Pricing of Changes. (a) When calculating the change in the Contract Price caused by changes in the Work pursuant to this Article 10 (Changes in Scope of Work), such calculation shall be consistent with general administrative and overhead rates then in effect at the time of the change and Contractor's labor rates, which labor rates shall be subject to the most favored customer provisions of Article 5.3 (Most Favored Customer). (b) Any adjustment made pursuant to this Article 10 (Changes in the Scope of Work) shall be set forth in an Amendment to this Contract in accordance with Article 28.3 (Amendments). Terms and Conditions Page 41 CONFIDENTIAL 11. SECURITY INTEREST (a) To secure Customer's interest in the Work arising from Customer's payment of NRE Milestone Payment Nos. 1, 2, 3, 4 and 5 and all amounts due Customer under this Contract in the event of Contractor's default, Contractor hereby grants to Customer a security interest, which Contractor represents and warrants is and shall at all times be a first priority security interest, in Contractor's right, title and interest in, to and under this Contract and the Work. Contractor hereby agrees to take, at Customer's expense, all such actions as may be reasonably requested by Customer to create, perfect, maintain and preserve such security interest, including the execution and delivery of such uniform commercial code financing statements, continuation statements, if any, and similar documents or instruments as may be required by applicable law as Customer may reasonably request. (b) The security interest created herein shall terminate upon Acceptance of the Work by Customer. Upon termination of such security interest, Customer shall release and terminate such security of record by filing termination statements or similar documents in accordance with applicable law. (c) Contractor hereby acknowledges and agrees that the provisions of this Article 11 (Security Interest) constitute a security agreement under the provisions of the uniform commercial code in effect in the jurisdiction applicable to this transaction pursuant to which Contractor has granted a security interest in the collateral described in paragraph (a) above. Terms and Conditions Page 42 CONFIDENTIAL 12. ACCESS TO WORK 12.1 Access to Work. Contractor shall provide Customer Personnel access to all Work (including Work-in-progress, documentation, and testing) at each Contractor Facility on a non-interference basis during business hours. 12.2 Documentation. (a) Subject to Article 12.1 (Access to Work), Customer Personnel will at all times have access to (i) the Data and Documentation and (ii) Work-in- progress, technical and schedule data and documentation relevant to the Work. To facilitate Customer's rights hereunder, Contractor will allow Customer Personnel access to all indices related to the materials referenced in this paragraph (a). (b) Where the materials described in paragraph (a) are necessary for evaluation of designs, performance considerations, assessment of test plans and test results, or for any other purpose connected with the design, qualification, testing, acceptance, or operation of the Work, or any part thereof, Contractor will, subject to Article 15 (Confidentiality), make available to Customer Personnel copies of such documentation on the reasonable request of Customer Personnel. (c) Any data provided by a Party to the other Party in electronic form shall be embodied in, or be in a form compatible with, commercially available software. 12.3 Electronic Access. With respect to electronically generated information, Contractor will provide Customer with a copy of and/or electronic access (via the Internet, Contractor's email, or as agreed upon) to such information as is necessary to keep Customer advised, on a current basis, of program issues, decisions, and problems. 12.4 Meetings. (a) Contractor shall hold progress meetings in accordance with the requirements of Exhibit B (SOW). (b) Customer Personnel shall be entitled, at Customer's expense, to participate in the meetings (including in person, or through teleconference, video conference or internet) of Contractor and of Contractor with any Subcontractor(s) where such meetings (or portions of such meetings) are related to the Work, and shall have the right to participate in and make recommendations, but not to control, give directions or assign actions, in all such meetings. Contractor shall provide Customer with reasonable prior written notice of the date and time of scheduled meetings. Terms and Conditions Page 43 CONFIDENTIAL (c) In the event a meeting is convened at a Contractor Facility or another Contractor or Subcontractor controlled site, Contractor shall make appropriate arrangements to ensure the entry of Customer Personnel to the meeting place. 12.5 Financing Entities. Each Financing Entity shall have access to the Work in the same manner and to the same extent as Customer Personnel under this Article 12 (Access to Work). Terms and Conditions Page 44 CONFIDENTIAL 13. TECHNICAL MATERIALS ESCROW (a) Within thirty (30) Calendar Days following the Execution Date, Contractor, Customer and Escrow Agent will enter into a written escrow agreement substantially in the form attached hereto in Exhibit H (Technical Materials Escrow Agreement) pursuant to which Contractor will deposit with Escrow Agent all the Technical Materials available at that time (the "Escrowed Materials"). Customer shall pay the applicable escrow fees to Escrow Agent. Contractor represents and warrants that the Escrowed Materials shall, immediately upon the Start of Production Date, be sufficient for an individual reasonably experienced in the design and manufacture of terrestrial repeaters or similar electronic equipment technology to understand and utilize such materials to construct, manufacture, support and/or maintain the Repeaters, Network Management System and other deliverables as contemplated herein. During the Term, Contractor will maintain such Escrowed Materials current and provide updates thereto to Escrow Agent as appropriate. Escrow Agent will make the Escrowed Materials available to Customer upon Customer's notice to Escrow Agent that one of the following has occurred: (1) the institution by Contractor of insolvency, receivership or bankruptcy proceedings; (2) a general assignment by Contractor for the benefit of creditors; (3) the appointment of a receiver for Contractor; (4) the filing by creditors of Contractor of a petition in bankruptcy against Contractor that is not stayed or dismissed within sixty (60) Calendar Days; or (5) Customer's termination of this Contract for cause in accordance with Article 25.2 (Termination for Contractor's Default). (items (1) through (5) hereinafter referred to as the "Release Conditions"). (b) In accordance with Exhibit H (Technical Materials Escrow Agreement), Escrow Agent will give written notice to Contractor prior to the delivery of the Escrowed Materials to Customer. Notwithstanding the provisions of Article 23 (Dispute Resolution) of this Contract, disputes concerning whether or not the Release Condition set forth in paragraph (a)(5) (i.e., with respect to Article 25.2 (Termination for Contractor's Default)) has occurred shall be subject exclusively to the arbitration provisions and processes set forth below. Disputes and remedies relating to Article 25.2 (Termination for Contractor's Default) other than as set forth in the preceding sentence will remain subject to Article 23 (Dispute Resolution). (1) In the event Customer is of the opinion that the Release Condition set forth in paragraph (a)(5) above has occurred, and Customer has given notice to Escrow Agent in accordance with the Technical Materials Escrow Agreement that Customer desires release of the Escrowed Materials from escrow upon the occurrence of that Release Condition, Escrow Agent shall deliver a notice to that effect to Contractor in accordance with the requirements of the Technical Materials Escrow Agreement. Terms and Conditions Page 45 CONFIDENTIAL (2) If Contractor is of the opinion that it has a reasonable basis to challenge Customer's request for release of the Escrowed Materials, it shall deliver a notice ("Notice of Objection") setting out its objections to Customer's request to Customer and Escrow Agent simultaneously in accordance with the time limits set forth in the Technical Materials Escrow Agreement. (3) Upon receipt of the Notice of Objection by Customer, an expedited arbitration process ("Escrow Arbitration") shall immediately be commenced for the purpose of establishing whether or not the alleged Release Condition pursuant to paragraph (a)(5) above has occurred. Customer shall be entitled to select any of the following arbitrators as the sole arbitrator ("Arbitrator") conducting the Escrow Arbitration: ----------------------------------------------------------------- Arbitrator 1 Arbitrator 2 Arbitrator 3 Kenneth R. Feinberg Jonathan B. Marks John E. Nolan The Feinberg Group LLP MarksADR, LLC Steptoe & Johnson Washington, DC Washington, DC Washington, DC ----------------------------------------------------------------- (4) If none of these three individuals is immediately available to conduct the Escrow Arbitration, Customer may ask any one of the said three individuals to appoint another individual as Arbitrator. However, under no circumstance shall any person be appointed as Arbitrator of the Escrow Arbitration unless the person: (A) has not previously been engaged by Customer, Contractor or any affiliate of either one of those two parties in any capacity (other than as a mediator or arbitrator for a third- party dispute); (B) has not had any relationship with Customer, Contractor or any affiliate of either of those two parties (other than as a mediator or arbitrator of a third-party dispute); and (C) has had a significant degree of prior experience in conducting commercial arbitration. (5) respect to the Escrow Arbitration: (i) If Contractor and Customer ("Arbitration Parties") cannot agree on a procedural matter on a timely basis to ensure completion of the arbitration within thirty (30) Calendar Days after Customer's selection of the Arbitrator, the matter shall be resolved expeditiously by the Arbitrator at the request of either Arbitration Party; (ii) The Arbitrator's fees shall be paid for equally by the Arbitration Parties, unless otherwise ordered or directed by the Arbitrator; (iii) The procedural rules and rules of evidence adopted for the Escrow Arbitration shall be determined by the Arbitrator with a view to affording both Arbitration Parties a fair hearing and always Terms and Conditions Page 46 CONFIDENTIAL observing the strict timeframe for the completion of the Escrow Arbitration set out herein; (iv) Article 28.7 (Applicable Law) shall apply to the Escrow Arbitration; (v) The Escrow Arbitration hearing(s) shall take place at such time(s) and place(s) in Washington, DC as the Arbitrator determines; (vi) The Arbitrator shall have all of the powers required to determine whether or not the pre-conditions for the conduct of the Escrow Arbitration have been met, to conduct the Escrow Arbitration, and he or she shall be empowered to make any necessary procedural or substantive rulings and may proceed with the Escrow Arbitration if an Arbitration Party refuses to participate or co-operate in the conduct of the Escrow Arbitration. (vii) The Arbitrator's decision ("Award") shall be in writing, shall be accompanied by written reasons, shall be made within thirty (30) Calendar Days after the date that the Arbitrator is appointed to conduct the Escrow Arbitration, and shall be evidenced by a dated certificate bearing the signature of the Arbitrator issued within the same timeframe specifying whether or not the Release Condition specified in Customer's request for the release of the Escrowed Materials has occurred ("Escrow Arbitration Award Certificate"); (viii) The Arbitrator's Award shall be final and binding on the Arbitration Parties; and (ix) The Arbitration proceedings are private and confidential, unless an appeal is taken to a court of competent jurisdiction. (c) In any event, if it is determined that a Release Condition did not occur, Customer shall promptly return the Escrowed Materials to Escrow Agent; provided, however, Customer may retain any portion of the Technical Materials for which Customer has ownership or license rights as granted pursuant to Article 14 (Intellectual Property Rights). (d) In the event a Release Condition has occurred (including as determined pursuant to Escrow Arbitration above), Customer shall be entitled to use, or have used, the Escrowed Materials as necessary to support and maintain its purchased Repeaters, Network Management System and other deliverables hereunder and to construct or manufacture, or have constructed or manufactured, such Repeaters, Network Management System and other deliverables. Such use shall include the right to copy, disclose, modify, enhance, upgrade, revise, and create derivative works of such Escrowed Materials. Customer shall be entitled to permit its Associates, Consultants, and third-party service providers to use the Escrowed Materials on behalf of Customer. With respect to Customer disclosures to third parties, Customer agrees to disclose the Escrowed Materials only to third parties that are working for Customer pursuant to a Terms and Conditions Page 47 CONFIDENTIAL confidentiality agreement. Subject to Article 14 (Intellectual Property Rights), Customer will immediately return the Escrowed Materials, including all copies thereof, to Escrow Agent when Customer no longer requires the Escrowed Materials for the purposes permitted hereunder. Terms and Conditions Page 48 CONFIDENTIAL 14. INTELLECTUAL PROPERTY RIGHTS 14.1 Ownership of Intellectual Property Rights. (a) All Background Intellectual Property Rights of Contractor shall remain the sole and exclusive property of Contractor. (b) All Background Intellectual Property Rights of Customer shall remain the sole and exclusive property of Customer. (c) Notwithstanding the definition of "Joint Intellectual Property Rights", all Foreground Intellectual Property Rights first conceived or first reduced to practice solely by Contractor or Customer as part of the Work or otherwise pursuant to the Statement of Work, shall become Joint Intellectual Property Rights and shall be Jointly Owned. 14.2 Joint Inventions. (a) An assignment of rights in all Joint Inventions shall be executed in the names and for the benefit of both Contractor and Customer, or their designees. (b) With respect to Joint Inventions first conceived or reduced to practice by Contractor as part of the Work, Contractor shall have the first right of election to file patent applications in any country, including the selection of the attorney or agent to prepare the patent application, and Customer shall have a second right of election. Each Party in turn shall make its election at the earliest practicable time, and shall notify the other Party, in writing, of its decision. (c) With respect to Joint Inventions first conceived or reduced to practice by Customer as part of the Work, Customer shall have the first right of election to file patent applications in any country, including the selection of the attorney or agent to prepare the patent application, and Contractor shall have a second right of election. Each party in turn shall make its election at the earliest practicable time, and shall notify the other Party, in writing, of its decision. (d) The expenses for preparing, filing and securing each Joint Invention patent application subject to paragraphs (b) or (c) above, and for issuance of the respective patent, shall be borne by the Party that prepares and files the application. The other Party shall furnish the filing Party with all documents or other assistance that may be necessary for the filing and prosecution of each application. Where such Joint Invention application for patent is filed by either Party in a country that requires the payment of taxes, annuities or maintenance fees on a pending application or on an issued patent, the Party that files the application shall, prior to filing, request the other Party to indicate whether it will agree to pay one-half of such taxes, annuities or maintenance fees. If, within sixty (60) Calendar Days of receiving such request, the non-filing Party fails to assume in writing the obligation to pay its proportionate share of such taxes, annuities or maintenance fees, or if either Party subsequently fails to continue such payments within sixty (60) Calendar Days of demand, it shall forthwith relinquish to the other Party, providing that said other Party continues such payments, its share of the title to such application and patent, subject, however, to retention of an irrevocable, fully paid-up, non-exclusive, non-assignable, non-sublicensable license in favor of the relinquishing Party and its Terms and Conditions Page 49 CONFIDENTIAL Affiliates to make, have made, use, lease and sell, apparatus and/or methods under said application and patent. (e) With respect to Joint Inventions first conceived or reduced to practice jointly by Customer and Contractor, the Parties shall determine, on a case-by-case basis, the priority of election rights with respect to the filing of patent applications and responsibility for expenses therefor. 14.3 Intellectual Property Rights License Grant. (a) Contractor hereby grants to Customer a non-transferable, perpetual, irrevocable, fully paid-up, royalty-free, non-exclusive, world wide license in and to Contractor's Background Intellectual Property Rights solely as necessary for Customer, its Affiliates or their respective designee(s) (only on Customer's or its Affiliates' behalf): (i) to use, copy, modify and/or prepare derivative works of the Work in connection with Customer's business as such is constituted from time to time; and (ii) to make, use, sell, import and export, operate, maintain, modify, prepare derivative works of, offer, market, display, reproduce and license the Repeaters, Network Management System and other deliverables hereunder and related equipment and services similar to such Repeaters, Network Management System and other deliverables hereunder, all in connection with Customer's business as such is constituted from time to time. Customer may sublicense its Affiliates and Customer and its Affiliates' respective designees, and Customer may not otherwise sublicense the rights granted under this paragraph (a) without the express written authorization of Contractor. Subject to Article 13 (Technical Materials Escrow) and notwithstanding anything to the contrary contained in this paragraph (a), the license in and to Contractor's Background Intellectual Property Rights shall not extend to the manufacturing for the marketing or sale by Customer or its Affiliates of Repeaters, the Network Management System and the other deliverable items hereunder, to any unrelated third parties. (b) Customer hereby grants to Contractor a royalty-free, non-exclusive, world wide license to use Customer's Background Intellectual Property Rights and Customer's Foreground Intellectual Property Rights solely as necessary for Contractor's performance and/or execution of the Work, and solely as necessary to make, use, have made, sell, import and export the Repeaters, Network Management System and other deliverables hereunder on Customer's behalf. Contractor may not otherwise sublicense the rights granted under this paragraph without the express written authorization of Customer, which authorization may be granted or withheld at Customer's sole discretion. 14.4 Third-Party Intellectual Property Rights. (a) Each Party hereby represents and warrants to the other that it will not knowingly design or otherwise incorporate any third-party Intellectual Property Rights into the Work, without: (i) a license to do so from the third party; and (ii) the express written authorization of the other Party. Customer hereby authorizes Contractor to incorporate into the Work the repeater design developed by Unique Broadband Systems, Inc. pursuant to the Interim Services Agreement by and between Customer and Unique Broadband Systems, Inc. dated August 9, 1999 to the extent Contractor obtains license rights from Unique Broadband Systems, Inc. to so incorporate such design. Terms and Conditions Page 50 CONFIDENTIAL (b) In the event that either Party has secured a license to any third- party Intellectual Property Rights that are designed or otherwise incorporated into the Work, that Party shall offer to the other Party any such license rights that it is legally or contractually permitted to offer at terms no less favorable than its own license grant. 14.5 Contractor Restriction on Use of Foreground Intellectual Property Rights. Notwithstanding any provision herein to the contrary, without the prior written approval of Customer, which approval Customer may grant or withhold in its sole discretion, neither Contractor, nor any Affiliate of Contractor, nor any other entity in which Contractor has an ownership interest, shall: (i) (A) license, lease or otherwise transfer, furnish or convey any of the Foreground Intellectual Property Rights to, (B) provide any equipment or services that use or require any of the Foreground Intellectual Property Rights to, or (C) otherwise provide any other benefits of use of the Foreground Intellectual Property Rights to, any existing or future Customer Competitor; or (ii) directly, or indirectly through any third party, contact, negotiate with or contract with any person, corporation, partnership, limited liability company or other entity for the purpose of (A) licensing, leasing or otherwise transferring, furnishing or conveying any of the Foreground Intellectual Property Rights to, (B) providing any equipment, services or other materials that use or require any of the Foreground Intellectual Property Rights to, or (C) otherwise providing any other benefits of use of the Foreground Intellectual Property Rights to, any existing or future Customer Competitor. Terms and Conditions Page 51 CONFIDENTIAL 15. CONFIDENTIALITY 15.1 Confidentiality Obligations. (a) Any Confidential Information shall be maintained in strict confidence by the Receiving Party. Except as provided in this Article 15 (Confidentiality), the Receiving Party shall not use, or disclose in any manner to any third party, Confidential Information of the Furnishing Party without the prior express written consent of the Furnishing Party. The obligation of confidentiality shall not be limited in time except to the extent the Receiving Party can establish one of the exceptions set forth in Article 15.2 (Exceptions) below by clear and convincing evidence. (b) Access to and use of the Furnishing Party's Confidential Information shall be restricted to those employees and persons within the Receiving Party's organization (including its Consultants, attorneys, Subcontractors, shareholders, representatives, and Financing Entities) with a need to use such Confidential Information for the purpose of performing this Contract or any transaction contemplated hereby or, in the case of Customer, obtaining debt or equity financing. The Receiving Party's Consultants, Subcontractors, shareholders and representatives and the Financing Entities may be included within the meaning of "persons within the Receiving Party's organization," provided that such persons have executed a non-disclosure or confidentiality agreement no less stringent than this Article 15 (Confidentiality). In addition, all information provided is to be subject to the provisions of paragraph (c) below. (c) Each Party shall use the other's Confidential Information solely for the purpose of performing this Contract or any transaction contemplated hereby or, in the case of Customer, obtaining debt or equity financing. (d) Data and Documentation shall be deemed Confidential Information and shall be subject to the obligations of this Article 15 (Confidentiality) with respect thereto. 15.2 Exceptions. (a) Subject to paragraph (b) below, the obligations set forth in Article 15.1 (Confidentiality Obligations) shall not apply to information that is: (1) Already known to or otherwise in the possession of the Receiving Party at the time of receipt from the Furnishing Party and that was not so known or received in violation of any confidentiality; (2) Publicly available or otherwise in the public domain prior to disclosure by the Receiving Party or becomes publicly available or otherwise in the public domain after receipt by the Receiving Party without breach of this Contract; (3) Rightfully obtained by the Receiving Party from any third party without restriction and without breach of any confidentiality obligation by such third party; Terms and Conditions Page 52 CONFIDENTIAL (4) Developed by the Receiving Party independent of any disclosure hereunder, as evidenced by written records; or (5) Disclosed pursuant to the order of a court or administrative body of competent jurisdiction or a government agency or required to be released pursuant to Law, or as the Receiving Party may reasonably determine advisable or necessary under the Securities Act of 1933, as amended, the Securities Act of 1934, as amended, NASDAQ, NYSE or any other national securities exchange, provided the Receiving Party shall notify the Furnishing Party prior to such disclosure and shall cooperate with the Furnishing Party in the event the Furnishing Party elects to contest legally, request confidential treatment, or otherwise avoid such disclosure. (b) The burden shall be on the Receiving Party to demonstrate the applicability of one or more of the foregoing exceptions by documentary evidence in the event the Furnishing Party questions the applicability of any such exceptions. 15.3 No License. Except as expressly provided in this Contract, nothing in this Contract shall be construed as granting the Receiving Party, whether by implication, estoppel, or otherwise, any license or any right to use any Confidential Information received from the Furnishing Party, or use any Intellectual Property Right now or hereafter owned or controlled by the Furnishing Party. 15.4 Return of Confidential Information. All Confidential Information disclosed pursuant to this Contract is considered loaned for use solely in connection with this Contract. All Confidential Information in tangible form of expression that has been disclosed to or thereafter created, whether by copy or reproduction, by the Receiving Party shall be and remain the property of the Furnishing Party, except to the extent the Receiving Party has ownership or license rights in such Confidential Information pursuant to Article 14 (Intellectual Property Rights). All such Confidential Information and any and all copies and reproductions thereof shall, within thirty (30) Calendar Days of written request by the Furnishing Party, be either promptly returned to the Furnishing Party or destroyed at the Furnishing Party's direction, except to the extent the Receiving Party has ownership or license rights in such Confidential Information pursuant to Article 14 (Intellectual Property Rights). In the event of such requested destruction, the Receiving Party shall provide to the Furnishing Party written certification of compliance therewith within thirty (30) Calendar Days of such written request. Terms and Conditions Page 53 CONFIDENTIAL 15.5 Inconsistent Legends. This Article 15 (Confidentiality) shall control in lieu of and notwithstanding any proprietary or restrictive legend or statements inconsistent with this Article that may be printed on or associated with any particular information disclosed pursuant to this Contract. Terms and Conditions Page 54 CONFIDENTIAL 16. RECORDS RETENTION Contractor will maintain and provide access upon request to the records, documents and other information required to meet Customer's access to work and audit rights under this Contract until the later of (i) three (3) years after expiration or termination of this Contract, (ii) all pending matters relating to this Contract (e.g., disputes) are closed, or (iii) such records, documents and other information are no longer required to meet Customer's records retention policy as such policy may be adjusted from time to time, which Customer record retention policy shall not exceed seven (7) years. Terms and Conditions Page 55 CONFIDENTIAL 17. REPRESENTATIONS AND WARRANTIES 17.1 Work Standards. Contractor represents and warrants that it shall perform the Work hereunder in a manner to ensure that such Work is rendered with promptness and diligence and shall be executed in a workmanlike manner, in accordance with the practices and high professional standards used in well-managed operations performing Work similar to the Work performed hereunder. Contractor agrees that it shall use adequate numbers of qualified individuals with suitable training, education, experience, and skill to perform the Work. 17.2 Design and Performance Warranties. (a) Contractor hereby represents and warrants for the benefit of Customer as follows: (1) that the Work shall be free from Defects in design, material and workmanship; (2) that the Network Management System and each Repeater shall conform to and operate in accordance with this Contract, including without the need for any additional equipment, software or other materials, except as expressly specified in Exhibit A (Design Specifications) or Exhibit B (Statement of Work); (3) that the Network Management System and the Repeaters shall perform at normal levels with no more than the levels of standard and preventive maintenance as may be specified in Exhibit B (Statement of Work); (4) that the Network Management System, Repeaters and LRUs provided hereunder (excluding as warranty replacements) shall be new and of recent manufacture, not refurbished; (5) that each replacement Repeater, LRU or other component, part or sub-part supplied by Contractor in the performance of its warranty obligations hereunder shall conform to the requirements of this Contract as if it were an original part; (6) subject to paragraphs (b) and (c) below, that it shall maintain the availability of LRUs, components, parts and sub-parts for a period of seven (7) years after the Project Completion Date and that replacement Repeaters and such replacement LRUs, parts and sub-parts shall be made available as needed in accordance with the requirements of Article 17.11 (Remedies (Repeaters)); (7) that all upgrades to the Network Management System, Repeaters and LRUs shall be backward compatible to the then-existing Repeaters in use by Customer; and Terms and Conditions Page 56 CONFIDENTIAL (8) that the Technical Materials shall, at all times, be sufficient for an individual reasonably experienced in the design and manufacture of terrestrial repeaters or similar electronic equipment technology to understand and utilize such materials to support and/or manufacture the Repeaters. (b) In the event Contractor (and not its suppliers or Subcontractors) is the manufacturer of any LRUs, components, parts and sub-parts of the Repeaters, Contractor shall continue to manufacture, and make available to Customer, such LRUs, components, parts and sub-parts for a period of seven (7) years as set forth in paragraph (a)(6) above; provided such items shall be available to Customer, without additional charge, during the Warranty Period in accordance with Article 17.11 (Remedies (Repeaters)). (c) In the event an LRU, component, part or sub-part is manufactured or otherwise available by an entity other than Contractor, including Contractor's suppliers and Subcontractors, Contractor shall: (1) Use best commercial efforts to include in each supplier agreement or Subcontract an obligation that the supplier or Subcontractor provide to Contractor reasonable advance notice of its decision to cease production, or otherwise limit or eliminate the availability, of the LRU, component, part or sub-part that such supplier or Subcontractor provides, including due to obsolescence of such item; (2) Upon receipt of notice from a supplier or Subcontractor pursuant to paragraph (c)(1) above, Contractor shall promptly, but in no event later than the third (3/rd/) Business Day following the date of receipt of such notice from its supplier or Subcontractor, provide written notice to Customer of the impending unavailability of the LRU, component, part or sub-part related to the Repeaters, such notice to also include any other pertinent information related to the availability of such items prior to the impending date of unavailability; (3) Advise Customer, in writing and at no charge to Customer, of commercially available alternatives to the LRUs, components, parts or sub-parts of the Repeaters, which commercially available alternative is technically and functionally compatible with the Repeaters and will cause the Repeaters to function in accordance with requirements specified in this Contract. Contractor shall so advise Customer from time to time during the Term of this Contract as it becomes aware of such alternatives, but also at the time Contractor gives notice to Customer pursuant to paragraph (c)(2) above of the impending unavailability of an LRU, component, part or sub-part; (4) In the event there is no viable commercially available alternative to replace the unavailable LRU, component, part or sub-part, at Customer's request, Contractor shall design, engineer, develop and manufacture (or have manufactured) a viable alternative or other work-around solution to the unavailable LRU, component, part or sub-part, subject to the Parties' Terms and Conditions Page 57 CONFIDENTIAL negotiation and agreement as to reasonable terms and conditions and charges therefor (except where such situation arises prior to the expiration of the applicable Warranty Period for the Repeaters). (d) The warranties provided under this Article 17.2 (Design and Performance Warranties) do not cover defects or damage resulting from (i) the use of any Work in any manner which is not normal or customary; (ii) misuse, accident or neglect including dropping or spills of liquid; (iii) improper testing, operation, maintenance, installation or adjustment (unless performed by or on behalf of Contractor); or (iv) any alteration or modification of any kind (unless performed by or on behalf of Contractor). 17.3 Documentation. Contractor represents and warrants that all Documentation provided by Contractor pursuant to this Contract shall be accurate, complete and written in a manner understood by Customer, and shall be updated from time to time to reflect any changes in the Work or to the Repeaters. 17.4 Inducements. Contractor represents and warrants that it has not violated any applicable laws or regulations or any Customer policies of which Contractor has been given notice regarding the offering of unlawful inducements in connection with this Contract. If at any time during the Term of this Contract, Customer determines that the foregoing warranty is inaccurate, then, in addition to any other rights Customer may have at law or in equity, Customer shall have the right to terminate this Contract for cause without affording Contractor an opportunity to cure. 17.5 Viruses. Contractor represents and warrants that it shall use its best commercial efforts to ensure that no Viruses are coded or introduced into the Work or in any systems used to perform the Work. Contractor agrees that, in the event a Virus is found to have been introduced into the systems used to perform the Work, Contractor shall use its best commercial efforts at no additional charge to eliminate the effects of the Virus and, if the Virus causes a loss of operational capability or efficiency of any Repeater, to use best efforts to mitigate and restore such losses. 17.6 Disabling Code. Contractor represents and warrants that, without the prior written consent of Customer, Contractor shall not insert into the Work any code that would have the effect of disabling or otherwise shutting down the NMS or any Repeater. Contractor further represents and warrants that, with respect to any disabling code that may be part of any code (embedded or otherwise) to Terms and Conditions Page 58 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL be delivered hereunder, Contractor shall not invoke such disabling code at any time, including upon expiration or termination of this Contract for any reason, without Customer's prior written consent. 17.7 Year 2000. Contractor represents and warrants that the Work and all items to be delivered hereunder, including Repeaters, are and shall continue to be Year 2000 Compliant. 17.8 Compliance with Applicable Law. Contractor represents and warrants that it shall perform its obligations in a manner that complies with all applicable Laws, including export, import and foreign controls, the Foreign Corrupt Practices Act, the U.S. Export Administration Act, and requirements of the FCC (including RF human exposure emission requirements and harmful interference standards), EPA, and OSHA, all as may be amended from time to time. If Contractor is charged with the failure to comply with any of such laws, Contractor shall promptly notify Customer of such charges in writing. 17.9 Warranty Disclaimer. EXCEPT AS SPECIFICALLY SET FORTH IN THIS CONTRACT, NEITHER PARTY MAKES ANY OTHER WARRANTIES, WHETHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR ANY WARRANTY OF INTELLECTUAL PROPERTY NON-INFRINGEMENT. 17.10 Warranty Period. (a) Subject to Article 17.11 (Remedies (Repeaters)) and Article 17.12 (Remedies (Network Management System)), Contractor shall be liable to Customer for a breach of the warranties set forth in Article 17.2 (Design and Performance Warranties) only if written notice of such alleged breach is given to Contractor prior to the expiration of the [*****] period following the Project Completion Date (the "Warranty Period"). (b) Upon Customer's written notice given to Contractor at least thirty (30) Calendar Days prior to the expiration of the applicable Warranty Period for each Repeater, Customer may elect to extend the Warranty Period for each Repeater for an additional [*****] period, subject to payment by Customer of the charges for such optional extended coverage as set forth in Exhibit C (Pricing, Milestones and Payment Plan). In the event Customer notifies Contractor of its interest in purchasing from Contractor additional extended warranty coverage for any period following the expiration of the [*****] optional warranty coverage period specified in the preceding sentence, Contractor shall propose, in writing within thirty (30) Calendar Days following the date of Customer's notice, a price for such extended warranty coverage, such price to take into account the actual annual failure rates in the deployed Repeaters experienced prior to Customer's request for additional extended warranty coverage. Terms and Conditions Page 59 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL 17.11 Remedies (Repeaters). (a) In the event a Repeater requires maintenance or repair, Customer, or its designee(s), shall perform such maintenance or repair. (b) Customer, or its designee(s), shall maintain, at the Regional Inventory Storage Facilities, an inventory of the Lowest Replaceable Units with respect to Repeaters, such inventory to be utilized by Customer, or its designee(s), to maintain or repair Repeaters. Customer, or its designee(s), shall be responsible, at Customer's expense, for returning to Contractor, in a reasonably prompt manner, any defective LRU, provided that Contractor, at Contractor's expense, shall provide Customer with all necessary and appropriate packing and crating materials. In the event Contractor tests the returned LRU and is able to demonstrate, to Customer's reasonable satisfaction, that the returned LRU is in good working order in accordance with its specifications (or, "no trouble found" ("NTF")), Customer shall pay Contractor the amount of [*****] for each returned LRU demonstrated to be NTF and shall reimburse Contractor for the actual costs incurred by Contractor with respect to the round-trip shipment of the LRU, as established by supporting shipping invoices. (c) During the Warranty Period for each Repeater (as such period may be extended), Contractor shall provide the following items or perform the following services at no additional charge to Customer: (1) Training in accordance with Exhibit B (Statement of Work); (2) Subject to paragraph (d) below, an initial written inventory plan for inventories of replacement LRUs to be maintained by Customer, or its designee(s), pursuant to paragraph (b) above. Contractor shall propose such inventory plan to Customer on or before the ninetieth (90th) Calendar Day following EDC, and shall reasonably consider incorporating Customer's reasonable comments thereto. In no event shall Contractor's proposed inventory plan provide for a sparing level that is less than the preliminary sparing level set forth in Exhibit B (Statement of Work). Such plan shall specify the total number of LRUs to be maintained in Customer's inventory of spare LRUs, which Customer shall reasonably allocate among each of its Regional Inventory Storage Facilities. The total sparing level proposed by Contractor shall be sufficient so that appropriate LRUs are immediately available to Customer, or its designee, as they perform maintenance and repair on the Repeaters. Such inventory plan shall also specify the environmental and maintenance requirements for the proper storage of such LRUs; (3) Replacement LRUs as may be actually required by Customer to repair defective Repeaters, even if the number of LRUs provided by Contractor exceeds the sparing levels indicated in the inventory plan; (4) Re-stock of the LRU inventory on an as-needed basis to maintain the sparing levels indicated in the inventory plan, as it may be updated from time to time; CONFIDENTIAL (5) On-going consultation services and advice to Customer, or its designee(s), on the proper methods of performing maintenance and repair functions for the Repeaters, including telephonic trouble- shooting of defective units and, if necessary, on-site diagnostic and remedial services; (6) Repair or disposal of a defective LRU returned to Contractor by Customer or its designee(s). If Contractor repairs the returned LRU such that the LRU performs in accordance with its applicable technical specifications, Contractor may use such repaired LRU for inventory re- stocking purposes; and (7) Replacement of Repeaters, if it is reasonably determined by Customer, or its designee(s), after consultation with Contractor, that repair of a Repeater cannot be accomplished using the LRUs or other components or parts available at the Regional Inventory Storage Facility. In such event, Customer may, at its option: (i) require Contractor to ship a replacement Repeater, at its expense, within twenty-four (24) hours after receipt of notice of such determination so that the replacement Repeater shall arrive at the interior of its designated place of installation as soon as commercially practicable, but in no event later than fourteen (14) Calendar Days after the date of Customer's notice to Contractor; or (ii) require Contractor to ship a replacement Repeater within twenty-four (24) hours after receipt of notice of such determination and use air shipment for delivery of such replacement Repeater so that the replacement Repeater is received by Customer as soon as commercially possible, provided that Customer shall reimburse Contractor for the incremental difference in the shipping charges incurred by Contractor for air shipment over Contractor's reasonable expenses for surface delivery; or (iii) assemble a complete Repeater using the LRU's in stock at Customer's Regional Inventory Storage Facilities. Customer, or its designee, shall install the replacement Repeater and arrange for the return of the replaced Repeater to Contractor, subject to reimbursement by Contractor to Customer for the costs of shipping (including packing, crating, shipping, transportation and insurance). (d) Following implementation of the inventory plan specified in paragraph (c)(2) above, Customer may, from time to time, propose changes to the inventory plan, provided such changes are based upon the actual failure rates experienced with respect to Repeaters or LRUs. Contractor shall revise the inventory plan to incorporate and accommodate Customer's proposed reasonable changes and shall promptly implement the revised inventory plan. Similarly, following Customer's initial allocation of spare LRUs among the Regional Inventory Storage Facilities, Contractor may, from time to time, propose changes to the manner in which Customer Terms and Conditions Page 61 CONFIDENTIAL allocates such spare LRUs, provided such proposed changes are based upon actual LRU replacement requirements experienced with respect to the Repeaters. Customer shall revise the method of allocating spare LRUs among the Regional Inventory Storage Facilities to incorporate Contractor's proposed reasonable changes and shall promptly implement the revised allocation scheme. (e) Customer may, in addition to the remedies provided by Contractor hereunder and at no additional charge to Customer, (1) seek recourse pursuant to such other warranties as may be provided by the original equipment manufacturers (O.E.M.), Subcontractors, or other warranties on any materials or equipment furnished by Contractor, all in accordance with the respective terms of such warranties; and (2) request Contractor and/or its Subcontractors to provide, and Contractor shall provide, reasonable on-site support at Customer's facilities or other system-related sites as necessary to complete the Work ("Field Support"), including to assist Customer in the identification and remediation of significant systems engineering problems relating to the Work and with respect to installed Repeaters. 17.12 Remedies (Network Management System). Contractor shall maintain, repair or replace the Network Management System during the Warranty Period so that the Network Management System shall at all times be fully operational in accordance with all applicable specifications and warranties and available for use by Customer at all times. If circumstances arise where Contractor is unable to maintain or repair the NMS, or any part or portion thereof, so that it operates in accordance with the above standard, Contractor shall replace such item at Contractor's expense. Subject to Article 14 (Intellectual Property Rights), Customer shall own any such replacement item. For purposes hereof, Contractor shall be deemed to be unable to maintain or repair the NMS, or any part or portion thereof, if it fails more than three (3) times during any three (3) consecutive month period during the Warranty Period. 17.13 Pattern Defect. (a) In addition to the other warranties and remedies set forth herein, in the event that any LRU is determined to have a Pattern Defect during the applicable Warranty Period, as may be extended, Contractor will promptly modify the design, material and/or manufacturing process such that the Pattern Defect is eliminated and deliver, at its expenses (including packing, crating, transportation, shipping and insurance) replacements for all affected LRUs to eliminate such Pattern Defect. During the period that any LRU is determined to have a Pattern Defect, Contractor shall regularly advise Customer of the status of remedial efforts being undertaken with respect to such problem. A "Pattern Defect" will be determined to exist in any LRU when three percent (3%) or more of the total number of Repeaters purchased hereunder experience failures with respect to such LRUs within any rolling three (3) month period, due to the same Defect in design, material or manufacturing process carried out by Contractor or its Subcontractors Terms and Conditions Page 62 CONFIDENTIAL (b) Customer, or its designee, at Customer's expense, shall install the replacement LRU and shall pack and crate for return to Contractor the replaced LRU, provided that Contractor, at Contractor's expense, shall provide Customer with all necessary and appropriate packing and crating materials. Terms and Conditions Page 63 CONFIDENTIAL 18. CONTRACTOR'S ADDITIONAL REPRESENTATIONS AND WARRANTIES (a) Contractor additionally represents and warrants: (1) Contractor is a corporation duly organized, validly existing and in good standing under the Laws of Delaware; (2) it has all requisite power and authority to own and operate its material properties and assets and to carry on its respective business as now conducted in all material respects; (3) it is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect; (4) it is, or at the time of performance of the Work will be, fully licensed and authorized to perform the Work in each jurisdiction in which the Work is to be performed; (5) it has all requisite corporate power and authority to enter into this Contract and to carry out the transactions contemplated by this Contract; (6) the execution, delivery, and performance of this Contract and the consummation of the transactions contemplated by this Contract have been duly authorized by all requisite corporate action of Contractor; (7) this Contract is a valid and binding obligation of Contractor, enforceable in accordance with its terms, except Contractor makes no representation or warranty as to the enforceability of remedies due to applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws relating to or affecting the enforcement of creditor's rights or by reason of general principles of equity; (8) in the event Contractor becomes a party to any legal, administrative, arbitral, investigatory or other proceeding or controversy pending or, to the best of its knowledge, threatened, which reasonably would be expected to have a Material Adverse Effect, Contractor will notify Customer as soon as practicable; and (9) it is not subject to any contractual or other obligation that would prevent it from entering into this relationship and the execution and delivery of this Contract by Contractor and the performance by Contractor of its obligations hereunder will not result in or constitute a breach or violation of, or a default under, any provision of any lease, license, contract, agreement or any other document to which it is a party or by which it is bound. Terms and Conditions Page 64 CONFIDENTIAL (b) Contractor represents that it is not a party to any legal, administrative, arbitral, investigatory or other proceeding or controversy pending or, to the best of its knowledge, threatened, which reasonably would be expected to have a Material Adverse Effect. Terms and Conditions Page 65 CONFIDENTIAL 19. CUSTOMER'S REPRESENTATIONS AND WARRANTIES (a) Customer represents and warrants: (1) it is duly organized, validly existing and in good standing under the Laws of the State of Delaware; (2) it has all requisite power and authority to own and operate its material properties and assets and to carry on its respective business as now conducted in all material respects; (3) it is duly qualified to transact business and is in good standing in each jurisdiction in which the failure to so qualify would have a Material Adverse Effect; (4) it has all requisite corporate power and authority to enter into this Contract and to carry out the transactions contemplated by this Contract; (5) the execution, delivery, and performance of this Contract and the consummation of the transactions contemplated by this Contract have been duly authorized by the requisite corporate action of Customer and do not conflict with any other agreement or obligation to which it is a party or which binds its assets; (6) this Contract is a valid and binding obligation of Customer, enforceable in accordance with its terms, except Customer makes no representation or warranty as to the enforceability of remedies due to applicable bankruptcy, insolvency, moratorium, reorganization, or similar laws relating to or affecting the enforcement of creditor's rights or by reason of general principles of equity; and (7) in the event Customer becomes a party to any legal, administrative, arbitral, investigatory or other proceeding or controversy pending, or to the best of its knowledge threatened, which reasonably would be expected to have a Material Adverse Effect, Customer will notify Contractor as soon as practicable. (b) Customer represents that as of the Effective Date, except as otherwise set forth in the filing of the Registration Statement on Form S-1 by XM Satellite Radio Inc. with the U.S. Securities and Exchange Commission on July 23, 1999, Registration No. 333-38619, Customer is not a party to any legal, administrative, arbitral, investigatory or other proceeding or controversy pending or, to the best of its knowledge, threatened, which reasonably would be expected to have a Material Adverse Effect. Terms and Conditions Page 66 CONFIDENTIAL 20. INSURANCE 20.1 General. (a) Contractor shall purchase and maintain primary insurance coverage from a company or companies licensed to do business in each state in which the Work shall be performed and such company or companies shall carry at least an A.M. Best's rating of A-/VIII; provided, however, Contractor's insurer, Lloyds of London, shall be deemed to meet the foregoing standard notwithstanding that Lloyds of London may not be so rated in each state in which the Work may be performed. Such insurance shall protect Contractor from claims set forth below that may arise out of or result from Contractor's operations under the Contract, whether due to sole or passive negligence or arising from a Subcontractor or by anyone directly or indirectly employed by any of them or by anyone for whose acts any of them are liable: (1) claims for damages because of bodily injury, occupational sickness or disease, or death of its employees arising under workers' or workmen's compensation, disability benefit and/or other employee benefit acts; (2) claims for damages because of bodily injury, sickness or disease, or death of any persons other than its employees; (3) claims for damages insured by usual personal injury liability coverage; (4) claims for damages, other than to the Work itself, because of injury to or destruction of tangible property, including loss of use resulting therefrom; and (5) claims for damages because of bodily injury or death of any person or property damage arising out of the ownership, maintenance or use of any motor vehicle. (b) Compliance by Contractor with the foregoing insurance requirements shall not limit Contractor's liability or relieve it of liability under this Contract or any Law. 20.2 Specific Insurance Requirements. The insurance required by this Article 20 (Insurance) shall be written for not less than the limits of liability specified in this Contract, or required by Law, whichever is greater. Before commencement of the Work and until the last payment made hereunder (except that product liability coverage shall continue in force until two years after the date of the last payment made hereunder), Contractor shall procure, deposit, and maintain for Customer's benefit, insurance satisfactory to Customer, as set forth in this Article 20.2 (Specific Insurance Requirements). (a) Worker's Compensation as required by the Worker's Compensation Laws of the state(s) in which the Work is performed and Employer's Liability Insurance in an amount not less than $100,000/$500,000/$500,000 each accident, bodily injury by accident/policy limit, bodily injury by disease/each employee, bodily injury by disease. Terms and Conditions Page 67 CONFIDENTIAL (b) Commercial General Liability Insurance, including products liability insurance, covering Bodily Injury, Personal Injury, Property Damage, and Advertising Injury, as follows: (1) Minimum Limits: Such insurance shall be written for a combined single limit not less than the following: General aggregate per project $2,000,000 Products-Completed Operations Aggregate $2,000,000 Personal & Advertising Injury $1,000,000 Each occurrence $1,000,000 (2) This insurance shall be written on an occurrence basis and on a coverage form at least equal to that provided under ISO CG 00 01, latest available edition, without overly restricting endorsements that reduce coverage. (c) Automobile Liability Insurance covering Bodily Injury and Property Damage as follows: (1) Minimum Limits: The Combined Single Limit for Bodily Injury and Property Damage shall be not less than $1,000,000 per accident. (2) This insurance shall be written on a coverage form at least equal to that provided under ISO CA 00 01, latest available edition, without restricting endorsements that reduce coverage and shall cover all owned, operated and hired vehicles of Contractor and non-ownership protection for all employees of Contractor engaged in the performance of this Contract. (d) Excess Liability Insurance, written on an occurrence basis, in the amount of not less than a combined single limit for Bodily Injury and Property Damage and Personal and Advertising Injury of $25,000,000 per occurrence or each offense/$25,000,000 in the aggregate following the form and amounts of the primary insurance described in paragraphs (a), (b) and (c) of this Article 20.2 (Specific Insurance Requirements). (e) Contractor shall procure cargo/transit insurance adequate to cover the value of the Work. Contractor shall assume the risk of goods in transit. Such coverage shall be written on an "all risk" basis. (f) All insurance maintained by Contractor shall provide: (1) A Certificate of Insurance signed by the insurance broker stating the limits of liability and coverage effective dates shall be filed in triplicate with Customer before operations are begun. Such certificates not only shall name the types of policies provided, but also shall refer specifically to this Contract and Article. If the initial insurance expires prior to completion of the Work, renewal certificates shall be furnished by the date of expiration. (2) Customer, its Affiliates and Associates shall be included in the Commercial General Liability and Excess Liability policies as "additional insureds" with Terms and Conditions Page 68 CONFIDENTIAL the understanding that the liability to pay premiums shall be the sole obligation of Contractor and not that of any other insured. (3) Except in the case of Worker's Compensation Insurance, proceeds for first party losses, if any, shall be adjusted by and payable to the party purchasing the insurance, except property insurance purchased by Contractor for the benefit of Contractor, Subcontractors and Customer, which shall be adjusted with and payable to Contractor, Subcontractors and Customer, as their interest may appear. (4) The insurer thereunder waives all rights of subrogation against Customer, its Affiliates and Associates, as well as any rights of setoff and counterclaim and any other right to deduction whether by attachment or otherwise. (5) Such insurance shall be primary without any right of contribution of any other insurance carried by or on behalf of Customer, its Affiliates and Associates. (g) Contractor shall require each of its Subcontractors to procure and maintain, until the completion of that Subcontractor's work, adequate insurance in a form similar to the above. 20.3 Certificates of Insurance. Certificates of Insurance in the "ACORD" form shall be provided to Customer on or before the Execution Date plus ten (10) Business Days; provided, however, the words "endeavor to" must be deleted from the cancellation section of the form. These Certificates, as well as insurance policies required by this Article 20 (Insurance), shall contain a provision that coverage shall not be canceled or allowed to expire until at least ninety (90) Calendar Days' prior written notice has been given to Customer; provided, however, ten (10) Calendar Days notice is permitted if the insurance is cancelled for non-payment reasons. Such Certificates shall also indicate that the Commercial General Liability and Excess Liability insurance policies have been endorsed to name Customer, its Affiliates and Associates as additional insureds as respects work performed by Contractor on their behalf. Terms and Conditions Page 69 CONFIDENTIAL 21. INDEMNIFICATION 21.1 Indemnity by Contractor. Subject to Article 21.4 (Indemnification Procedures), Contractor shall indemnify, defend and hold harmless Customer and its Affiliates and their respective Associates, from any and all Losses arising from, in connection with, or based on allegations of, any of the following: (a) any claims made by third parties for injury to person (including death) or loss or damage to tangible property arising out of any error, omission or negligent act of Contractor or its Subcontractors; and (b) any claims arising out of or related to occurrences Contractor is required to insure against pursuant to Article 20 (Insurance). 21.2 Indemnity by Customer. Subject to Article 21.4 (Indemnification Procedures), Customer shall indemnify, defend and hold harmless Contractor and its Affiliates and their respective Associates, from any and all Losses arising from, in connection with, or based on allegations of any of the following: (a) any claims made by third parties for injury to person (including death) or loss or damage to tangible property arising out of any error, omission or negligent act of Customer; and (b) any third-party allegations of infringement of any Intellectual Property Right, alleged to have occurred because of systems, designs, instructions, specifications or other resources provided by Customer directly or indirectly to Contractor for incorporation into the Repeaters, Network Management System or other deliverables; provided, however, Customer's total liability to Contractor or any third party with respect to such indemnity shall not, in the aggregate, exceed Seven Million, Five Hundred Thousand Dollars ($7,500,000). 21.3 Intellectual Property Infringement Indemnification. (a) Contractor shall indemnify, defend, and hold harmless Customer from any and all Losses arising from, in connection with, or based on any allegations made by third parties (including Subcontractors of Contractor) that Customer's possession or use of the Work, or any part thereof, infringes any third-party Intellectual Property Right; provided, however, (i) Contractor's total liability to Customer or any third party with respect to such intellectual property infringement indemnity shall not exceed (A) Seven Million, Five Hundred Thousand Dollars ($7,500,000) with respect to claims related to Work performed by Contractor or any of its Subcontractors (except Unique Broadband Systems) hereunder and (B) One Million Dollars ($1,000,000) with respect to claims related to Work performed by Contractor's Material Subcontractor Unique Broadband Systems under this Contract, and (ii) Contractor's total aggregate liability under (i) shall not exceed Seven Million, Five Hundred Thousand Dollars ($7,500,000). Notwithstanding the foregoing, Contractor shall not be liable under this paragraph (a) to the extent Losses are caused by (i) the contributory infringement by Customer as described in paragraph (b) of Article 21.2 (Indemnity by Customer) or are based on claims related to work or deliverable items furnished by Unique Broadband Systems pursuant to the Interim Services Agreement with Customer, dated August 9, 1999; or (ii) modifications to the Work by any Terms and Conditions Page 70 CONFIDENTIAL person other than Contractor or its Subcontractors unless otherwise directed by Contractor or its Subcontractors; or (iii) Customer's use of the Work in combination with items not provided by Contractor or its Subcontractors unless such non-deliverables are identified in Exhibit A (Design Specifications) as items with which the deliverables hereunder will be used in combination. (b) If the use of the Work or any part thereof is enjoined, Contractor shall, or, if in Contractor's reasonable opinion the Work or any part thereof is likely to be enjoined, Contractor may, in either case at its expense, either procure for Customer the right to use the Work or infringing part thereof, as the case may be, or substitute an equivalent product reasonably acceptable to Customer, or modify the Work or infringing part thereof to render them non- infringing without materially affecting their utility or functionality. If Contractor determines that none of these alternatives is reasonably available or feasible, Contractor shall meet with Customer to address the matter and reach an equitable solution reasonably acceptable to Customer. (c) Contractor's obligations under this Article 21.3 (Intellectual Property Infringement Indemnification) shall be subject to Article 21.4 (Indemnification Procedures). 21.4 Indemnification Procedures. (a) Promptly after receipt by the indemnified Party of notice of the commencement or threatened commencement of any civil, criminal, administrative, or investigative action or proceeding involving a claim in respect of which the indemnified Party will seek indemnification pursuant to this Article 21 (Indemnification), the indemnified Party shall notify the indemnifying Party of such claim in writing. Failure to so notify the indemnifying Party shall not relieve the indemnifying Party of its obligations under this Contract except to the extent it can demonstrate it was prejudiced by such failure. Within fifteen (15) Calendar Days following receipt of written notice from the indemnified Party relating to any claim, but no later than ten (10) Calendar Days before the date on which any response to a complaint or summons is due, the indemnifying Party shall notify the indemnified Party in writing if the indemnifying Party elects to assume control of the defense or settlement of that claim (a "Notice of Election"). (b) If the indemnifying Party delivers a Notice of Election relating to any claim within the required notice period, so long as it is actively defending such claim, the indemnifying Party shall be entitled to have sole control over the defense and settlement of such claim; provided that (i) the indemnified Party shall be entitled to participate in the defense of such claim and to employ counsel at its own expense to assist in the handling of such claim; (ii) where the indemnified Party is so represented, the indemnifying Party shall keep the indemnified Party 's counsel informed of each step in the handling of any such claim; (iii) the indemnified Party shall provide, at the indemnifying Party's request and expense, such assistance and information as is available to the indemnified Party for the defense and settlement of such claim; and (iv) the indemnifying Party shall obtain the prior written approval of the indemnified Party before entering into any settlement of such claim or ceasing to defend against such claim. After the indemnifying Party has delivered a Notice of Election relating to any claim in accordance with the preceding paragraph, the indemnifying Party shall not be liable to the indemnified Party for any legal expenses incurred by the indemnified Party in connection with the defense of that claim; provided, however, the indemnifying Party shall be liable to the indemnified Party for Terms and Conditions Page 71 CONFIDENTIAL such legal expenses if the indemnified Party chooses to participate in the defense and settlement of such claim because the indemnified Party reasonably concluded that the indemnifying Party had a conflict of interest and could not adequately represent the indemnified Party. In addition, the indemnifying Party shall not be required to indemnify the indemnified Party for any amount paid or payable by the indemnified Party in the settlement of any claim for which the indemnifying Party has delivered a timely Notice of Election if such amount was agreed to without the prior written consent of the indemnifying Party. (c) If the indemnifying Party does not deliver a Notice of Election relating to any claim within the required notice period or fails actively to defend such claim, the indemnified Party shall have the right to defend and/or settle the claim in such manner as it may deem appropriate, at the cost and expense of the indemnifying Party. Provided that the indemnified Party acts in good faith, it may settle such claim on any terms it considers appropriate under the circumstances without in any way affecting its right to be indemnified hereunder. The indemnifying Party shall promptly reimburse the indemnified Party for all such costs and expenses. 21.5 Waiver of Subrogation. If a Party insures against any loss or damage it may suffer in respect of which it is required to indemnify the other Party, its Affiliates and their respective Associates pursuant to this Article 21 (Indemnification), it shall be a condition that the insuring Party arrange for the insurer to waive its right of subrogation against such other Party and such other Party's Affiliates and their respective Associates. Each Party shall be entitled to require proof from time to time that the other Party has complied with its obligations under this Article 215 (Waiver of Subrogation). In the event a Party does not comply with such obligations, the indemnities referred to in Articles 21.1 (Indemnity by Contractor), 21.2 (Indemnity by Customer) and 21.3 (Intellectual Property Infringement Indemnification) shall extend to any claim that may be made by an insurer pursuant to an alleged right of subrogation. Terms and Conditions Page 72 CONFIDENTIAL 22. LIABILITY 22.1 General Intent. Subject to the specific provisions of this Article 22 (Liability), it is the intent of the Parties that each Party shall be liable to the other Party for any actual damages incurred by the non-breaching Party as a result of the breaching Party's failure to perform its obligations in the manner required by this Contract. 22.2 Liability Restrictions. (a) SUBJECT TO PARAGRAPH (c) BELOW, IN NO EVENT, SHALL A PARTY BE LIABLE IN CONTRACT, WARRANTY, STRICT LIABILITY, TORT OR OTHERWISE FOR INDIRECT, CONSEQUENTIAL, EXEMPLARY, PUNITIVE OR SPECIAL DAMAGES ARISING OUT OF, RESULTING FROM , OR IN ANY WAY CONNECTED TO THE PERFORMANCE OR BREACH OF THIS CONTRACT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE. (b) SUBJECT TO PARAGRAPH (c) BELOW, EACH PARTY'S TOTAL CUMULATIVE LIABILITY TO THE OTHER PARTY HEREUNDER, WHETHER IN CONTRACT, WARRANTY, STRICT LIABILITY, TORT OR OTHERWISE, SHALL BE LIMITED TO AN AMOUNT EQUAL TO TEN MILLION DOLLARS ($10,000,000). (c) The limitations set forth in paragraphs (a) and (b) above shall not apply with respect to claims that are the subject of indemnification pursuant to Articles 21.1(a), 21.1(b) and 21.2(a). In addition, the limitations set forth in paragraph (b) above shall not apply with respect to the Parties' respective liabilities specified in Article 25 (Termination). In addition, the limitations set forth in paragraph (a) above shall not apply to the liquidated damages remedy set forth in Article 7.5 (Liquidated Damages for Late Delivery of Repeaters). (d) Each Party shall have a duty to mitigate damages for which the other Party is responsible. 22.3 Contractor Responsibility for Certain Claims. (a) In the event any Subcontractor asserts a claim of non-payment against Customer, Contractor shall assume full responsibility for such claims and shall reimburse Customer for any settlements or judgments incurred by or assessed against Customer with respect to such claims and all related costs and expenses (including reasonable legal fees and disbursements), provided that Contractor is (i) given prompt notice of such claims (provided that failure to so notify Contractor shall not relieve Contractor of its responsibilities hereunder except to the extent it can demonstrate it was prejudiced by such failure) and (ii) permitted (but without obligation) to control the defense of such claims. (b) With respect to any claims made by third parties arising out of Contractor's breach of the warranties set forth in Article 17.8 (Compliance with Applicable Law) and any claims by Customer or any third party with respect to a breach of the warranties and representations set Terms and Conditions Page 73 CONFIDENTIAL forth in Article 18 (Contractor's Additional Representations and Warranties), Contractor shall assume full responsibility for such claims and shall reimburse Customer for any settlements or judgments incurred by or assessed against Customer with respect to such claims and all related costs and expenses (including reasonable legal fees and disbursements), provided that Contractor is (i) given prompt notice of such claims ((provided that failure to so notify Contractor shall not relieve Contractor of its responsibilities hereunder except to the extent it can demonstrate it was prejudiced by such failure) and (ii) permitted (but without obligation) to control the defense of such claims. (c) Notwithstanding anything to the contrary herein, any liability arising pursuant to paragraphs (a) or (b) above shall not be subject to the limitation on Contractor's liability set forth in Article 22.2(b) hereof. Terms and Conditions Page 74 CONFIDENTIAL 23. DISPUTE RESOLUTION Any dispute, claim, or controversy between the Parties arising out of or relating to this Contract ("Dispute"), including any Dispute with respect to the interpretation, performance, termination, or breach of this Contract or any provision thereof shall be resolved as provided in this Article 23 (Dispute Resolution). 23.1 Informal Dispute Resolution. Prior to the initiation of formal dispute resolution procedures, the Parties shall first attempt to resolve their Dispute informally, in a timely and cost-effective manner, as follows: (a) If, during the course of the Work, a Party believes it has a Dispute with the other Party, the disputing Party shall give written notice thereof, which notice will describe the Dispute and may recommend corrective action to be taken by the other Party. Contractor's Project Manager shall promptly consult with Customer's Project Manager in an effort to reach an agreement to resolve the Dispute. (b) In the event agreement cannot be reached within five (5) Calendar Days of receipt of written notice, either Party may request the Dispute be escalated, and the respective positions of the Parties shall be forwarded to an executive level higher than that under paragraph (a) above for resolution of the Dispute, which in the case of Contractor, shall be the Contractor Business Line Manager identified in Article 9.1 (Contractor Personnel) above. (c) In the event agreement cannot be reached under paragraphs (a) or (b) above within a total of ten (10) Calendar Days after receipt of the written notice described in paragraph (a) above, either Party may request the Dispute be escalated, and the respective positions of the Parties shall be forwarded to the Chief Executive Officer (CEO) of each Party, and such executives shall meet (in person or via telephone or video conference) during such time to resolve the Dispute. (d) In the event agreement cannot be reached under paragraphs (a), (b) or (c) above within a total of twenty (20) Calendar Days after receipt of the written notice described in paragraph (a) above, either Party may proceed with arbitration in accordance with Article 232 (Arbitration). 23.2 Arbitration. (a) Subject to the provisions of Article 23.1 (Informal Dispute Resolution) and Article 23.3 (Litigation), any Dispute shall be resolved by mandatory and binding arbitration in accordance with the then-effective Center for Public Resources Rules for Nonadministered Arbitration of Business Disputes, as may be amended from time to time (the "CPR Rules"), which are incorporated herein by reference. Notwithstanding the foregoing, to the extent any provision of this Article 23.2 (Arbitration) modifies, adds to, or is inconsistent with any provision of the CPR Rules, the provisions of this Article shall control. Terms and Conditions Page 75 CONFIDENTIAL (b) The arbitration shall be conducted by a three-arbitrator tribunal (the "Tribunal"). Within thirty (30) Calendar Days after the commencement of the arbitration, each Party shall appoint one arbitrator, and those two arbitrators shall together appoint the third arbitrator as provided in CPR Rule 5.2. Each arbitrator appointed by the Parties shall be knowledgeable and experienced in contracting for technical systems and shall have senior management and/or legal/judicial experience. (c) Unless otherwise limited by the Tribunal or the agreement of the Parties, the Parties shall be permitted to take discovery, if and as needed, by deposition upon oral examination, requests for production of documents and things, and requests for entry upon land for inspection and other purposes, as those discovery methods are described and defined in the Federal Rules of Civil Procedure; provided, however, that any limitations in the Federal Rules on the number, timing, or sequence of such discovery requests shall not apply. The scope of permissible discovery shall generally be as described in Federal Rule of Civil Procedure Rule 26(b)(1), but the Parties shall use their best efforts to focus and limit their discovery in accordance with the nature of the dispute and the need for expedited resolution. The Tribunal may expand or limit the scope of permissible discovery, establish the time period within which discovery responses must be served, and expand or limit the type and number of discovery methods and requests as it shall determine is appropriate in the circumstances, taking into account the needs of the Parties and the desirability of making discovery expeditious and cost-effective. The Tribunal may issue orders to protect the confidentiality of proprietary information, trade secrets, and other similar information disclosed in discovery and may order that discovery not be had or that discovery may be had only on specific terms and conditions. (d) Time is of the essence in the initiation and completion of the arbitration. The arbitral hearing shall be commenced and conducted expeditiously. Unless the Tribunal orders otherwise, the Dispute should be submitted to the Tribunal for decision within three (3) months after the commencement of the arbitration, and the final award shall be rendered within one (1) month thereafter. The Parties and the Tribunal shall use their best efforts to comply with this schedule, and the Tribunal may impose any remedy it deems just for any Party's effort to unnecessarily delay, complicate or hinder the proceedings. (e) The arbitration shall be held in Washington, D.C., USA. (f) Any arbitration proceeding held pursuant to this Article shall be governed by the United States Arbitration Act, 9 U.S.C. (S)(S) 1 et seq., and judgment upon the award rendered by the Tribunal may be entered in any court having jurisdiction thereof. (g) The Tribunal's award may grant any remedy or relief that the Tribunal deems just and equitable and within the scope of this Contract, including specific performance or other equitable relief. Notwithstanding the foregoing, the Tribunal shall have no power or authority to amend or disregard any provision of this Article 23.2 (Arbitration) or any other provision of this Contract; in particular, but without limiting the generality of the foregoing, the Tribunal shall not have the power or authority to exclude the right of a Party to terminate this Contract when a Party would otherwise have such right. The Tribunal also shall have no power or authority to award punitive or exemplary damages to any Party. Terms and Conditions Page 76 CONFIDENTIAL (h) The non-prevailing Party, as determined by the Tribunal, shall pay the costs of the arbitration and the prevailing Party's fees and expenses incurred with respect to the arbitration, including reasonable attorneys' fees as determined by the Tribunal. In the event of an arbitration involving multiple claims with different Parties prevailing on each claim, the Tribunal shall apportion the expenses and fees between or among the Parties in such manner as it deems reasonable, taking into account the circumstances of the case, the nature of the claims, and the result of the arbitration. (i) At any time more than ten (10) Calendar Days before the commencement of the hearing, any Party defending against any claim may serve upon the adverse Party an offer to allow an award to be entered against the defending Party on any claim for the money or property or to the effect specified in the offer. If within ten (10) Calendar Days after the service of the offer, the adverse Party serves written notice that it accepts the offer, either Party may file the offer and acceptance with the Tribunal, which will thereupon promptly enter an award on the claim as provided in the offer. An offer not accepted shall be deemed withdrawn and shall not be admissible into evidence except with respect to a determination of fees and expenses. If the award finally made on the claim is not equal to or more favorable than the offer, then for the purpose of apportioning expenses and fees pursuant to this Article 23.2 (Arbitration), the Party making the offer shall be deemed the Prevailing Party with respect to such claim. (j) If at the time any Dispute arises, the Center for Public Resources no longer provides rules or services with respect to the arbitration of business disputes, then the Parties hereto agree that the arbitration shall be conducted before the American Arbitration Association ("AAA"). Such arbitration shall be conducted pursuant to the AAA's Commercial Arbitration Rules then effective, provided, however, that in the event of any inconsistency with the AAA rules and this Article, the provisions of this Article shall control. 23.3 Litigation. (a) Notwithstanding the provisions of Article 23.1 (Informal Dispute Resolution) and Article 23.2 (Arbitration) above, if the Dispute requires that immediate equitable relief or relief in aid of arbitration be obtained, either Party shall have the right to bring suit at any time to obtain preliminary or temporary injunctive relief, including specific performance, but requests for permanent injunctive relief shall be arbitrated pursuant to Article 23.2 (Arbitration). (1) Any such suit shall be brought in a court of competent jurisdiction in the State of Delaware and the Parties hereby waive any objection to venue in such court. The Parties hereby irrevocably consent to personal jurisdiction in the state and federal courts in the State of Delaware concerning any Dispute between the Parties. If, for any reason, the state and federal courts of Delaware do not have or refuse to exercise jurisdiction over the Dispute, then litigation as permitted herein may be brought in any court of competent jurisdiction in the United States of America, or if there is no such court, in any other nation. (2) In the event a Party files a lawsuit pursuant to this Article 23.3 (Litigation), the Prevailing Party is entitled to an award of its costs and fees, including Terms and Conditions Page 77 CONFIDENTIAL reasonable attorney's fees, incurred with respect to the lawsuit. The defendant in such litigation shall be regarded as the Prevailing Party if either the court denies the equitable relief sought on the merits or the court otherwise decides that equitable relief is not warranted or the matter should be resolved by arbitration. (b) In the event an entity or person not subject to the provisions of this Article 23 (Dispute Resolution) commences any litigation or proceeding against any Party hereto in which the other Party hereto is an indispensable party, the Party against which the litigation or proceeding is brought may join or attempt to join the other Party in such litigation or proceeding notwithstanding the provisions of Article 23.2 (Arbitration). For the purposes of this provision, the other Party is an indispensable party in the lawsuit or proceeding if (i) in its absence, complete relief could not be accorded among those already a party to the lawsuit or proceeding; (ii) its absence may as a practical matter impair or impede its ability to protect its interests relating to the subject of the lawsuit or proceeding; or (iii) its absence may leave the Party against which the litigation or proceeding is brought subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations by reason of the interest of the other Party relating to the subject of the lawsuit or proceeding. (c) Nothing in this Contract precludes a Party prevailing on any claim, whether in arbitration or litigation, from initiating litigation in any appropriate forum to enter or enforce a judgment based on the Tribunal's or court's award on that claim. 23.4 Continued Performance. Pending final resolution of any Dispute, each Party shall, unless directed otherwise by the other Party in writing, fulfill all of its obligations under this Contract, including the obligation to take all steps necessary during the pendency of the Dispute to ensure the Work will be performed within the time stipulated or within such extended time as may be allowed under this Contract, provided Customer shall continue to make payments of undisputed sums therefore in accordance with this Contract (including the dispute resolution provisions hereof). Terms and Conditions Page 78 CONFIDENTIAL 24. DEFAULT AND CORRECTION PLAN 24.1 Material Breach. (a) In the event Contractor fails to complete a Key Task on or before the date identified or referenced in Article 0 (Key Tasks) or fails to perform a material obligation hereunder (in either case a "Failure"), Customer shall be entitled to deliver to Contractor a written demand that it correct such Failure. Contractor shall acknowledge receipt of Customer's demand within one (1) Business Day and shall submit to Customer, for Customer's review, comment and approval, a Correction Plan within ten (10) Business Days after the date of Customer's demand (or such longer time as Customer may establish, including as a result of Contractor's reasonable request for an extension of time to provide a Correction Plan). (b) If the Correction Plan does not set forth a reasonable manner in which, or reasonable date by which, Contractor will correct or offset the Failure, Customer may reject the Correction Plan upon written notice to Contractor, which notice shall include, in reasonable detail, the deficiencies in the Correction Plan noted by Customer, and other relevant comments. Contractor shall revise the Correction Plan, including by incorporating Customer's reasonable comments, and shall re-submit the revised Correction Plan to Customer for its approval within seven (7) Business Days after receipt of Customer's comments. This process may be repeated until such time as Contractor provides a Correction Plan acceptable to Customer. (c) If Customer approves the Correction Plan (or revision thereof) or does not reject the Correction Plan (or revision thereof) within thirty (30) Calendar Days after receipt thereof, this Contract shall be deemed modified in accordance with the Correction Plan (or revision thereof) and the Failure shall be deemed cured so long as Contractor complies with the terms of such Correction Plan (or revision thereof). Nothing herein shall be construed to release Contractor from its obligation to make liquidated damages payments as applicable in accordance with Article 7.5 (Liquidated Damages for Late Delivery of Repeaters). (d) In the event Contractor does not submit a Correction Plan to Customer within fifteen (15) Business Days after receipt of a demand therefor, or if Contractor fails to submit a revised Correction Plan within seven (7) Business Days after receipt of Customer's notice of rejection of the original Correction Plan, or if Contractor fails to provide an acceptable Correction Plan within three (3) iterations thereof (including the first draft), or if Contractor fails to complete the Customer-approved Correction Plan within thirty (30) Calendar Days after Customer's approval of the Correction Plan (or such period as otherwise specified in the Correction Plan), Customer shall be entitled to terminate this Contract in accordance with the provisions of Article 25.2 (Termination for Contractor's Default). Terms and Conditions Page 79 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 24.2 Key Tasks. (a) For purposes of this Agreement, each of the following shall be a "Key Task": - -------------------------------------------------------------------------------- Completion Date: Key Task: - -------------------------------------------------------------------------------- [*****] [*****] - -------------------------------------------------------------------------------- (b) A Key Task shall be deemed "completed" when each item of such Key Task has been completed in accordance with the requirements of this Contract. Terms and Conditions Page 80 CONFIDENTIAL 25. TERMINATION 25.1 Termination for Customer's Convenience. (a) Customer may, upon written notice to Contractor, at any time, reduce the Nominal Order to the amounts indicated in paragraphs (d) and (e) below and Contractor shall immediately cease performance of the Work on the date specified in the notice to the extent reduced in the manner and to the extent specified below. Notwithstanding the foregoing, as long as Contractor provides the Work in accordance with the requirements of this Contract, Customer intends to obtain the Nominal Order of Repeaters from Contractor, except for reasons due to changes in its financial, technical or business needs. (b) In the event of partial termination of the Work in accordance with this Article 25.1 (Termination for Customer's Convenience), Customer's notice of termination will specify the portion of the Work terminated and the remaining provisions of this Article 25.1 (Termination for Customer's Convenience) shall apply to such terminated portion. All other portions of the Work shall continue unaffected. (c) Upon receipt of a notice of termination, as provided in paragraph (a) above, Contractor shall take the following actions: (1) stop Work under this Contract on the date and to the extent specified in the notice of termination, except those services that are reasonably necessary to be provided in connection with a termination of this Contract; (2) place no further orders or Subcontracts for materials, services, or facilities to the extent they relate to the performance of the Work terminated; (3) terminate Subcontracts to the extent they relate to the performance of the Work terminated; (4) settle all outstanding liabilities and all claims arising out of any termination of Subcontracts for materials, services, or facilities provided Customer pays amounts due under paragraph (e) below; (5) take such action as may be reasonably necessary, or as Customer may direct, for the protection and preservation of the property related to this Contract that is in the possession of Contractor or any Subcontractor and in which Customer has or may acquire an interest; and (6) complete wind-down activities within thirty (30) Calendar Days of the effective date of termination. Terms and Conditions Page 81 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. (d) From EDC up to and including [*****], Customer may reduce the Nominal Order to no less than [*****] Repeaters ([*****] High Power Repeaters and [*****] Standard Repeaters) with no impact on the unit pricing therefor (as set forth in Exhibit C (Pricing, Milestones and Payment Plan)) or the Delivery Requirements set forth in Exhibit D (Delivery Requirements and Schedule). (e) Beginning [*****] and continuing throughout the Term of this Contract, Customer may reduce the Nominal Order without impact on the unit pricing therefor as follows: (1) to no less than [*****] Repeaters ([*****] High-Power and [*****] Standard Repeaters), in which case Customer shall pay Contractor for Contractor's costs (if any) actually incurred, with respect to that part of the Nominal Order terminated, for termination of work-in-progress and termination of contracts for material supplies, plus [*****] of such costs (Customer's maximum liability for such costs (including the [*****] markup) shall not exceed [*****] for termination effective on or before [*****], [*****] for termination effective on or before [*****], [*****] for termination effective on or before [*****] and, [*****] for termination effective any date on or after [*****]); and (2) to zero (that is, cancel the entire Nominal Order), in which case Customer shall pay Contractor (i) the amounts set forth in paragraph (1) above, (ii) plus the amounts set forth in the following table, (iii) less the sum of any amounts paid pursuant to the ATP and amounts paid under this Contract in respect of NRE Milestone Payment Nos. 1-5: ------------------------------------------------------------ Termination Date Amount ------------------------------------------------------------ [*****] [*****] ------------------------------------------------------------ [*****] [*****] ------------------------------------------------------------ Feb. 1, 2000-Mar. 31, 2000 $8.0 million ------------------------------------------------------------ Apr. 1, 2000 and thereafter $14.0 million ------------------------------------------------------------ (f) Contractor agrees to use best commercial efforts to minimize costs described in paragraph (e)(1) above. Contractor will provide Customer with documentation and audit rights with respect to such costs. (g) Contractor shall submit an invoice to Customer for amounts due under this Article 25.1 (Termination for Customer's Convenience) within sixty (60) Calendar Days after the effective date of termination specified in the notice thereof. Contractor shall be entitled to payment by Customer of undisputed amounts in such invoice within thirty (30) Calendar Days after Customer's receipt of the invoice. Payment of such amount by any Financing Entity on behalf of Customer shall relieve Customer from its obligation to make such payment. (h) Payment of the amount payable by Customer to Contractor pursuant to this Article 25.1 (Termination for Customer's Convenience) shall constitute a total discharge of Customer's Terms and Conditions Page 82 CONFIDENTIAL liabilities to Contractor for termination pursuant to this Article 25.1 (Termination for Customer's Convenience). (i) Upon payment in full of all amounts outstanding under this Contract, Customer may require Contractor immediately to transfer to Customer in the manner and to the extent directed by Customer, title to and possession of any items comprising all or any part of the Work terminated (including all Work-in- progress, parts and materials, and all inventories, Subcontracts and associated warranties) free and clear of all liens and encumbrances of any kind. Contractor shall, upon direction of Customer, use commercially reasonable efforts to protect and preserve property in the possession of Contractor or its Subcontractors in which Customer has an interest arising out of this Contract and shall facilitate access to and possession by Customer of items comprising all or part of the Work terminated; Customer shall be responsible for costs reasonably incurred by Contractor in protecting and preserving such property. In the event Customer neither takes possession of, nor directs Contractor to protect and preserve the Work, Customer shall be responsible for costs reasonably incurred by Contractor in storing the Work. Upon Customer's request, Contractor shall make a reasonable, good-faith effort to sell such items and to remit any sales proceeds to Customer, less a deduction for costs of disposition reasonably incurred by Contractor for such efforts provided the selling price shall be subject to Customer's prior written approval. 25.2 Termination For Contractor's Default. (a) Customer may terminate this Contract upon service of written notice of default to Contractor at any time after the occurrence of any of the following: (1) Contractor fails to deliver the Prototype Repeaters in accordance with the applicable delivery dates hereunder, and Contractor fails to cure such breach within thirty (30) Calendar Days of such delivery dates; (2) Any of the conditions set forth in paragraph (d) of Article 24 (Default and Correction Plan); (3) Contractor commits a material breach of any of its duties or obligations hereunder and, except as provided in paragraph (a)(4) below, Contractor fails to cure such breach within thirty (30) Calendar Days of notice thereof; or (4) with respect to a breach that cannot with due diligence be cured within thirty (30) Calendar Days notice thereof, Contractor fails to proceed promptly and diligently to correct the breach (in which case Contractor shall notify Customer, in writing, within ten (10) Calendar Days of receipt of notice of the breach, describing in reasonable detail the reason such breach cannot be cured in such thirty (30) Calendar-Day period and setting forth a Correction Plan to cure such breach) or fails to cure the breach within sixty (60) Calendar Days of notice of breach or as otherwise agreed in such plan; or (5) the breach is not subject to cure with due diligence within sixty (60) Calendar Days notice of the breach; or Terms and Conditions Page 83 CONFIDENTIAL (6) Contractor commences a voluntary proceeding concerning itself under any applicable bankruptcy, insolvency, reorganization, adjustment of debt, relief of debtors, or similar law ("Insolvency Law"); or any involuntary proceeding commences against Contractor under an Insolvency Law and the petition has not been dismissed within ninety (90) Calendar Days after commencement of the proceeding; or a receiver or custodian is appointed for or takes charge of all or a substantial portion of the property of Contractor and such custodian or receiver has not been dismissed or discharged within sixty (60) Calendar Days; or Contractor has taken action toward the winding-up, dissolution, or liquidation of Contractor or its business; or Contractor has been adjudicated insolvent or bankrupt or an order for relief or any other order approving a case or proceeding under any Insolvency Law has been entered; or Contractor has made a general assignment for the benefit of creditors or becomes unable to pay its debts generally as they become due. Should Contractor become a debtor in any bankruptcy proceeding, Contractor shall move to assume or reject this Contract within forty-five (45) Calendar Days after the entry of any order for relief; or (7) Contractor has purported to assign or transfer this Contract in violation of the provisions of Article 28.1 (Assignment) and Contractor fails to cure such unauthorized purported assignment or transfer within thirty (30) Calendar Days after receiving written notice from Customer of the unauthorized purported assignment or transfer. (b) In the event Customer terminates this Contract pursuant to paragraph (a) above, (i) Customer shall be entitled to have the Work completed by another party or parties and Contractor shall be liable to Customer for damages resulting from such termination, including any reasonable re-procurement costs and commercially reasonable costs of "cover" incurred in connection therewith in excess of the Contract Price, such damages to be actually incurred and invoiced to Contractor in reasonable detail, and for all liquidated damages then due pursuant to Article 7.5 (Liquidated Damages for Late Delivery of Repeaters), and (ii) Customer shall be liable to Contractor for unpaid amounts invoiced hereunder for Milestones completed in accordance with this Contract through the effective date of termination. Nothing contained in this Contract shall be construed so as to obligate Customer to exercise such right to terminate for Contractor's benefit. (c) Each Party shall submit an invoice to the other Party for amounts due under this Article 25.2 (Termination for Contractor's Default) within sixty (60) Calendar Days after the effective date of termination specified in the notice thereof, which invoice shall state the amounts due from such other Party. Each such invoice shall be deemed accepted by the Party receiving such invoice, unless written notice disputing such invoice is provided to the Party furnishing the invoice within fifteen (15) Business Days after receipt of such invoice. The amounts payable by a Party under this Article 25.2 (Termination for Contractor's Default) shall be verified at such Party's request and expense by a nationally recognized firm of certified public accountants appointed by such Party and reasonably acceptable to the other Party. Each Party's right to verification shall be without prejudice to the rights of either Party under Article 23(Dispute Terms and Conditions Page 84 CONFIDENTIAL Resolution). Each Party shall be entitled to payment of all undisputed amounts within thirty (30) Business Days after the other Party's receipt of such invoice. (d) Customer may require Contractor to transfer to Customer in the manner and to the extent directed by Customer, title to and possession of any items comprising all or any part of the Work terminated (including all Work-in- progress, parts and materials, and all inventories, Subcontracts and warranties) free and clear of any liens and encumbrances of any kind. Contractor shall, upon direction of Customer and at Customer's expense, protect and preserve property in the possession of Contractor or its Subcontractors in which Customer has an interest arising out of this Contract and shall facilitate access to and possession by Customer of items comprising all or part of the Work terminated, such expenses to be reimbursed in accordance with the terms of Exhibit C (Pricing, Milestones and Payment Plan). In the event Customer neither takes possession nor directs Contractor to protect the Work, Customer shall be responsible for costs reasonably incurred by Contractor in restoring the Work. Upon Customer's request, Contractor shall make a reasonable good-faith effort to sell such items and to remit any sales proceeds to Customer, less a deduction for costs of disposition reasonably incurred by Contractor for such efforts, provided the selling price shall be subject to Customer's prior written approval. (e) If, after termination of this Contract under the provisions of paragraph (a) above, it is determined by dispute resolution, pursuant to Article 23 (Dispute Resolution), or admitted in writing by Customer, that Contractor was not in default under the provisions of paragraph (a), or that any delay giving rise to the default was excusable under the provisions of Article 7.9 (Excusable Delay Defined), such termination shall be considered a Termination for Convenience by Customer and the provisions of Article 25.1 (Termination for Customer's Convenience) shall apply. 25.3 Termination for Customer's Default. (a) Contractor may terminate this Contract upon service of written notice of default to Customer at any time after the occurrence of any of the following events of default: (1) Customer fails to pay undisputed amounts due hereunder and fails to cure such nonpayment within thirty (30) Calendar Days of written notice thereof; or (2) Customer commences a voluntary proceeding concerning itself under any applicable bankruptcy, insolvency, reorganization, adjustment of debt, relief of debtors, or similar law ("Insolvency Law"); or any involuntary proceeding commences against Customer under an Insolvency Law and the petition has not been dismissed within ninety (90) Calendar Days after commencement of the proceeding; or a receiver or custodian is appointed for or takes charge of all or a substantial portion of the property of Customer and such custodian or receiver has not been dismissed or discharged within sixty (60) Calendar Days; or Customer has taken action toward the winding-up, dissolution, or liquidation of Customer or its business; or Customer has been adjudicated insolvent or bankrupt or an order for relief or any other order approving a case Terms and Conditions Page 85 CONFIDENTIAL or proceeding under any Insolvency Law has been entered; or Customer has made a general assignment for the benefit of creditors or becomes unable to pay its debts generally as they become due. Should Customer become a debtor in any bankruptcy proceeding, Customer shall move to assume or reject this Contract within forty-five (45) Calendar Days after the entry of any order for relief; or (3) Customer has purported to assign or transfer this Contract in violation of the provisions of Article 28.1 (Assignment) and Customer fails to cure such purported unauthorized assignment or transfer within thirty (30) Calendar Days after receiving written notice. (b) Upon the occurrence of an event of default under paragraph (a) above, Contractor shall take the following actions: (1) stop Work immediately under this Contract and all obligations of Contractor shall terminate hereunder, except those services that are reasonably necessary to be provided in connection with a termination of this Contract; (2) place no further orders or Subcontracts for materials, services, or facilities to the extent they relate to the performance of the Work; (3) terminate orders and Subcontracts to the extent they relate to the performance of the Work; (4) settle all outstanding liabilities and all claims arising out of such termination of orders and Subcontracts for materials, services, or facilities provided Customer pays amounts due under paragraph (c) below; and (5) take such action as may be reasonably necessary, for the protection and preservation of the property related to this Contract that is in the possession of Contractor or any Subcontractor and in which Customer has or may acquire an interest. (c) In the event Contractor terminates this Contract as provided in paragraph (a) above, Contractor shall be entitled to payment of the following amounts: (i) all unpaid amounts hereunder for Milestones completed in accordance with this Contract through the effective date of termination; (ii) all unpaid amounts for Work-in-progress on any Milestone that has not been completed as of the effective date of termination, with the payment equal to a percentage of the applicable Milestone Payment that is equal to the percentage of Work actually completed on the applicable Milestone; (iii) reasonable wind-down expenses incurred by Contractor as a result of early termination, including costs associated with terminating Subcontractor and other supplier agreements; and (iv) an amount equal to Contractor's profit reasonably allocable to the Work completed and the Work-in-progress as of the effective date of termination, provided (A) profits shall be reasonably allocable only to the extent Contractor can reasonably demonstrate the amount of profit it would have earned had the Work under the Contract been completed (excluding Work related to any unexercised option hereunder) and the portion of total profits Terms and Conditions Page 86 CONFIDENTIAL claimed is in direct proportion to the amount of Work completed and Work-in- progress as of the effective date of termination compared to the total amount of Work under the Contract (excluding Work related to any unexercised option hereunder) and (B) such allocable profits have not been, or will not be, otherwise recovered by Contractor hereunder (for example, through amounts previously paid by Customer or amounts payable under (i) and (ii) above). In no event shall the amounts payable pursuant to this Article 25.3 (Termination for Customer's Default) exceed the Contract Price less amounts paid prior to termination. (d) In the event Contractor terminates this Contract as provided in paragraph (a) above, the invoicing and payment provisions of paragraph (g) of Article 25.1 (Termination for Customer's Convenience) shall apply. (e) Payment of the amount payable by Customer to Contractor pursuant to paragraph (c) above shall constitute a total discharge of Customer's liabilities to Contractor for termination pursuant to this Article 25.3 (Termination for Customer's Default). (f) Upon payment in full of all amounts outstanding under this Contract, Customer may require Contractor immediately to transfer to Customer in the manner and to the extent directed by Customer, title to and possession of any items comprising all or any part of the Work terminated (including all Work-in- progress, parts and materials, and all inventories, Subcontracts and warranties) free and clear of any liens and encumbrances of any kind, and Contractor shall, upon direction of Customer, protect and preserve property in the possession of Contractor or its Subcontractors in which Customer has an interest arising out of this Contract and shall facilitate access to and possession by Customer of items comprising all or part of the Work terminated; Customer shall be responsible for costs reasonably incurred by Contractor in protecting and preserving such property. In the event Customer neither takes possession nor directs Contractor to protect the Work, Customer shall be responsible for costs reasonably incurred by Contractor in storing the Work. Upon Customer's request and at Customer's expense, Contractor shall make a reasonable, good-faith effort to sell such items and to remit any sales proceeds to Customer less a deduction for costs of disposition reasonably incurred by Contractor for such efforts. (g) Except as expressly stated in this Article 25.3 (Termination for Customer's Default), Contractor shall have no right to terminate or suspend this Contract. 25.4 Termination/Expiration Assistance. (a) Commencing upon notice of termination and continuing through the effective date of termination or expiration of this Contract, as applicable, Contractor shall provide to Customer, or at Customer's request to Customer's designee, the reasonable termination/expiration assistance requested by Customer to allow the Work to continue without interruption or adverse effect and to facilitate the orderly transfer of the Work to Customer or its designee; provided, however, that Customer has paid all outstanding invoices. Such assistance shall include the following: (1) Contractor shall continue to perform all warranty services as set forth in Article 17 (Representations and Warranties) with respect to all materials and equipment furnished by Contractor hereunder; Terms and Conditions Page 87 CONFIDENTIAL (2) Contractor shall assign, to the extent assignable, to Customer all O.E.M. (Original Equipment Manufacturers') component warranties, and Subcontractors', or other warranties on all materials or equipment furnished by Contractor hereunder. Where non-assignable, Contractor shall use its best commercial efforts to obtain for Customer's benefit all such warranties; and (3) except in the case of termination pursuant to Article 25.1 (Termination for Customer's Convenience), upon Customer's request, Contractor shall assign to Customer or its designee the Material Subcontracts, as well as any and all Subcontracts requested by Customer, provided that such Material Subcontracts and other Subcontracts are assignable. (b) Customer shall pay Contractor for termination/expiration assistance in accordance with the pricing set forth in Exhibit C (Pricing, Milestones and Payment Plan), provided, however, that in the event Contractor terminates the Contract due to Customer's failure to pay undisputed amounts, Contractor shall be entitled to payment in advance for termination/expiration assistance. Terms and Conditions Page 88 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 26. OPTIONS 26.1 Option to Purchase Additional Repeaters. (a) In addition to the total number of Repeaters Contractor shall deliver and Customer shall purchase pursuant to this Contract, Customer may, at its sole option and discretion, elect to purchase additional Repeaters from Contractor for delivery following the Project Completion Date. (b) Customer may exercise this option to purchase additional Repeaters at any time commencing at EDC and continuing up to and including the [*****] anniversary of the Project Completion Date (the "Repeater Option Period"). (c) The unit price for optional Repeaters shall be determined in accordance with Exhibit C (Pricing, Milestones and Payment Plan). (d) Upon exercise of any such option, (i) the Parties shall mutually agree upon a reasonable delivery schedule and (ii) Customer shall indicate in writing the number of Standard Repeaters and High-Power Repeaters to comprise the total number of optional additional Repeaters ordered. The warranty terms, including the applicable Warranty Period, set forth in Article 17 (Representations and Warranty) shall also apply to any optional Repeaters purchased by Customer; provided, however, the Warranty Period shall commence upon acceptance by Customer of each optional Repeater in accordance with Article 8 (Testing Criteria and Acceptance). 26.2 Network Management System - Video Wall. At any time commencing at EDC and continuing up to and including the [*****] anniversary of EDC (the "NMS Video Wall Option Period"), Customer may, at its sole option and discretion, elect to purchase a full-motion "video wall" for use in conjunction with the Network Management System. The charge for such "video wall" is set forth in Exhibit C (Pricing, Milestones and Payment Plan). The warranty coverage, including the applicable Warranty Period, for the full- motion "video wall" shall be consistent with the warranty coverage applicable to the Network Management System, as set forth in Article 17.12 (Remedies (Network Management System)); provided, however, the Warranty Period shall commence upon Customer's acceptance of the full-motion "video wall." If Customer elects to exercise this option, Customer shall provide written notice thereof to Contractor and the Parties shall mutually agree upon a reasonable delivery schedule for the optional "video wall" as well as applicable test plans and procedures and acceptance criteria. Terms and Conditions Page 89 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 26.3 Annual Maintenance of NMS. On or before [*****], Contractor shall provide Customer with a proposal for annual maintenance of the NMS, such proposal to include a firm fixed price not to exceed [*****], a description of services, standards of performance and response times, payment plan and renewal procedures. 26.4 Contract Adjustments. Should Customer exercise any of the options described in this Article 0 (Options), the Parties shall execute Amendment(s) as soon as is reasonably possible after option exercise to incorporate the schedule adjustments, price adjustments, payment schedule adjustments, and changes to the Exhibits and other terms and conditions as made necessary by such exercise. Except as otherwise provided in this Article 0 (Options), the terms of this Contract shall apply to any such options. Terms and Conditions Page 90 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 27. [*****] The Parties recognize that this program may be [*****] and that some form [*****] may be requested from Contractor in connection with such [*****]. In the event that Customer desires Contractor to [*****], Customer will submit a detailed description of such [*****] for Contractor's review and consideration. Contractor agrees to promptly review such request and notify Customer if [*****] after considering the terms thereof, the status of the program, the risks associated with the [*****] and financial, economic and other information as Contractor may deem reasonable or desirable. The parties further agree that the above statements do not [*****] or the terms thereof. Terms and Conditions Page 91 CONFIDENTIAL 28. GENERAL 28.1 Assignment. (a) Contractor shall not, without the prior written approval of Customer and except on such terms and conditions as shall be reasonably acceptable to Customer, assign, mortgage, charge, or encumber this Contract or any part thereof, any of its rights, duties, or obligations hereunder, or the Work to any person or entity, provided that: (i) nothing in this Article shall be construed as limiting Contractor's right to enter into Subcontracts in respect of the Work and (ii) Contractor shall have the right to assign or transfer this Contract or all of its rights, duties, or obligations hereunder to: (x) any Affiliate of Contractor, or (y) any corporation in connection with the sale, transfer or assignment of all or substantially all of Contractor's assets or capital stock, whether by way of merger, consolidation or otherwise, subject to the following conditions: (A) in the case of a transfer to an Affiliate, the net worth of such Affiliate is not less than the net worth of Contractor immediately prior to such transfer and, in the reasonable discretion of Customer, such Affiliate has the experience, resources, and personnel required to perform the Work in accordance with this Contract; (B) in the case of a transfer or assignment contemplated in clause (y), immediately after giving effect to such transaction or series of related transactions, the net worth of Contractor (or in the event Contractor is not the continuing person, the net worth of the person or entity formed by such consolidation or into which Contractor is merged or to which its properties are transferred substantially as an entirety) shall be no less than the net worth of Contractor immediately before such transaction or series of related transactions, and in the case of the sale of all or substantially all of the assets of Contractor, the assignee or transferee, in the reasonable discretion of Customer, has the experience, resources and personnel required to perform the Work in accordance with this Contract; and (C) the assignee, transferee or successor to Contractor has expressly assumed all the obligations of Contractor and all terms and conditions applicable to Contractor under this Contract pursuant to an assumption agreement (between Contractor and assignee or transferee) in form and substance reasonably satisfactory to Customer. (b) Customer shall not, without the prior written approval of Contractor, assign, transfer, mortgage, charge, or encumber this Contract, any part thereof, or any of Customer's rights, duties or obligations hereunder, provided that Contractor hereby agrees that Customer may make any assignment or transfer of this Contract to (i) any or all Financing Entities in connection with obtaining financing for the payment of Contractor's invoices and any and all other fees, charges or expenses payable under this Contract under any Financing Agreement, (ii) as part of any collateral pool in favor of other senior lenders providing financing to Customer in connection with completion of the Terrestrial Repeater Network System facility and related equipment and (iii) any Affiliate of Customer provided that in the case of a transfer to an Affiliate, the Affiliate has sufficient financial resources to fulfill its obligations under this Contract. Customer hereby agrees that, prior to entering into any contract or agreement to sell or transfer this Contract, the acquirer shall agree to assume this Contract and all of Customer's rights, duties and obligations hereunder pursuant to an assumption agreement (between Customer and assignee or transferee) in form and substance reasonably satisfactory to Contractor. Terms and Conditions Page 92 CONFIDENTIAL (c) The assigning Party shall reimburse the other Party for all reasonable expenses incurred by the other Party (and invoiced in reasonable detail) in obtaining advice from its external financial and legal advisors relating to the assigning Party's proposed assignment or transfer. (d) This Contract shall be binding on the Parties and their successors and permitted assigns. Except as otherwise expressly agreed in writing, assignment of this Contract shall not relieve the assigning Party of any of its obligations nor confer upon the assigning Party any rights except as provided in this Contract. 28.2 Entire Agreement. This Contract contains the entire agreement between the Parties regarding the Work hereunder and supersedes all communications, negotiations, and other agreements either written or oral, relating to the Work and made prior to EDC, unless the same are expressly incorporated by reference into this Contract. Without limiting the generality of the foregoing, this Contract supersedes and replaces the Authorization to Proceed, executed by Customer and Contractor on October 22, 1999, and the rights, liabilities and obligations of the Parties with respect to the Work performed under such Authorization to Proceed shall be governed by this Contract and deemed performed hereunder. 28.3 Amendments. Except as otherwise expressly permitted in Article 7.2 (Time and Place of Delivery), this Contract, including any and all its Attachments, Exhibits and Schedules, may not be modified except by written instrument of subsequent date signed by a duly authorized representative of Contractor and a Senior Vice President or the President of Customer. 28.4 Waiver of Breach of Contract. A waiver of any provision or any breach of a provision of this Contract shall not be binding upon either Party unless the waiver is in writing, signed by a duly authorized representative of the Party, as applicable, and such waiver shall not affect the rights of the Party not in breach with respect to any other or future breach. No course of conduct by a Party shall constitute a waiver of any provision or any breach of a provision of this Contract unless a written waiver is executed in accordance with the provisions of this Article 28.4 (Waiver of Breach of Contract). 28.5 Remedies Cumulative. All remedies provided for in this Contract shall be cumulative and in addition to and not in lieu of any other remedies available to either Party at law, in equity and/or otherwise. 28.6 Severability. In the event any one or more of the provisions of this Contract shall for any reason be held to be invalid or unenforceable, the remaining provisions of this Contract shall be unimpaired and the invalid or unenforceable provision shall be replaced by a mutually acceptable provision, Terms and Conditions Page 93 CONFIDENTIAL which, being valid and enforceable, comes closest to the intention of the Parties underlying the invalid or unenforceable provision. 28.7 Applicable Law. Except as provided in Article 23 (Dispute Resolution), this Contract and performance under it shall be governed by, construed and enforced in accordance with the Laws in force in the State of New York, without regard to conflict of laws provisions thereof other than Section 5-1401 of the General Obligations Law of the State of New York or to the United Nations Convention on Contracts for the International Sale of Goods. 28.8 Notices. (a) All notices, requests, demands, and determinations under this Contract, including any required under Article 28.1 (Assignment) (other than routine operational communications) shall be in writing and shall be deemed duly given (i) if delivered by hand, when delivered, (ii) if delivered by express courier, two (2) Business Days after being given to an express courier with a reliable system for tracking delivery, or (iii) if delivered by facsimile, when sent by facsimile (confirmed by the specific individual to whom the facsimile is transmitted) with a copy sent by another means specified in this Article 28.8 (Notices), and addressed as follows: If to Customer: XM Satellite Radio Inc. 1250 23rd Street, NW Suite 57 Washington, DC 20037 Tel. No.: 202-969-7074 Fax No.: 202-969-7124 Attention: Joseph M. Titlebaum, Esq. Copy to: John R. Wormington Senior Vice President Engineering and Operations If to Contractor: Hughes Electronics Corporation c/o Hughes Network Systems 10450 Pacific Center Ct. San Diego, CA 92121 Tel. No.: 858-452-4717 Fax No.: 858-457-4994 Attention: Neil Wilson Terms and Conditions Page 94 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. CONFIDENTIAL Copy to: Site Counsel 10450 Pacific Center Ct. San Diego, CA 92121 (b) A Party may from time to time change its address or designee for notification purposes by giving the other Party prior written notice of the new address or designee and the date upon which it will be effective. 28.9 Relationship of the Parties. (a) Contractor, in performing the Work hereunder, is acting as an independent Contractor, and Contractor has the sole right and obligation to supervise, manage, contract, direct, procure, perform, or cause to be performed, all Work to be performed by Contractor under this Contract. (b) None of the provisions of this Contract or of any of its Attachments, Exhibits or Schedules shall be construed to mean that either Party is appointed or is in any way authorized to act as an agent of the other Party or that there exists a joint venture, partnership, agency or formal business organization of any kind between the Parties. 28.10 Media Releases. All media releases, public announcements, and public disclosures by either Party relating to this Contract or the subject matter of this Contract, including promotional or marketing material (both internal and external), but not including announcements intended solely for internal distribution or to meet legal or regulatory requirements beyond the reasonable control of the disclosing Party, shall be coordinated with and approved by the other Party prior to release. 28.11 Calculation of Interest. Except as otherwise specified in this Contract, any interest due to either Party under this Contract shall be calculated at the annual rate equal to the three (3) month London Interbank Offer Rate (LIBOR) for U.S. Dollars plus [*****]. 28.12 Survival. The following Articles, and the provisions contained therein, shall be deemed to survive the termination (for any reason) or expiration of this Contract, and, accordingly, such Articles shall remain applicable and enforceable in accordance with their terms: (a) Article 1 (Definitions); (b) Article 7.5 (Liquidated Damages for Late Delivery of Repeaters); Terms and Conditions Page 95 CONFIDENTIAL (c) Article 7.9 (Excusable Delay Defined); (d) Article 8.5 (Title and Risk of Loss); (e) Article 13 (Technical Materials Escrow); (f) Article 14 (Intellectual Property Rights); (g) Article 15 (Confidentiality); (h) Article 17 (Representations and Warranties); (i) Article 18 (Contractor's Additional Representations and Warranties); (j) Article 19 (Customer's Representations and Warranties); (k) Article 21 (Indemnification); (l) Article 23 (Dispute Resolution); (m) Article 24 (Termination); (n) Article 28.7 (Applicable Law); (o) Article 28.11 (Calculation of Interest); and (p) Article 28.18 (Covenant of Good Faith). 28.13 No Third-Party Beneficiaries. This Contract is entered into solely between, and may be enforced only by, Customer and Contractor and their permitted assigns, and this Contract shall not be deemed to create any rights in third parties, including suppliers and owners of a Party, or to create any obligations of a Party to any such third parties. 28.14 Consents and Approvals. Except where expressly provided as being in the sole discretion of a Party, where agreement, approval, acceptance, consent, or similar action by either Party is required under this Contract, such action shall not be unreasonably delayed or withheld. An approval or consent given by a Party under this Contract shall not relieve the other Party from responsibility for complying with the requirements of this Contract, nor shall it be construed as a waiver of any rights under this Contract, except as and to the extent otherwise expressly provided in such approval or consent. 28.15 Lender Requirements. (a) The Parties recognize Customer may obtain financing for the amounts due in respect of this Contract and the construction of its Terrestrial Repeater Network and related equipment Terms and Conditions Page 96 CONFIDENTIAL facilities and services through external sources. Contractor shall provide to any Financing Entity any project information or certification that such Financing Entity reasonably requires (subject to confidentiality agreements governing such project information). (b) Contractor agrees to work cooperatively with Customer in connection with Customer's efforts to obtain financing for the Work, including the financing described in Article 27 (Contractor Guarantee). (c) Contractor agrees to execute such documents as may be reasonably required by any Financing Entity, including such documents, instruments, contracts, agreements and amendments to this Contract that may be required in connection with Customer's assignment of this Contract to such Financing Entity under terms that are customary in the secured financing of Work of this nature, provided Contractor's rights and obligations with respect to the Contract Price, time of performance and/or other economic terms under this Contract are not materially adversely affected by any such amendment to this Contract or, in the event of such material adverse effect, the Parties execute a Change Order resolving such material adverse effect. 28.16 No Solicitation. During the period of performance of the Work and for one (1) year following the Project Completion Date, neither Party shall, directly or indirectly, solicit for employment, employ or engage for consulting services any employee or consultant of the other Party, or any individual who was an employee or consultant of the other Party during the six (6) month period immediately preceding such hiring or solicitation. 28.17 Time of the Essence. Time is of the essence in this Contract, including with respect to the resolution of any Disputes between the Parties under Article 25 (Termination). 28.18 Covenant of Good Faith. Each Party agrees that, in respective dealings with the other Party under or in connection with this Contract, it shall act in good faith. 28.19 Counterparts. This Contract may be executed in two (2) or more counterparts, which taken together constitute one single contract between the Parties. Terms and Conditions Page 97 CONFIDENTIAL IN WITNESS WHEREOF, the Parties have made and executed this Contract effective as of the Effective Date of this Contract. XM SATELLITE RADIO INC. HUGHES ELECTRONICS CORPORATION By: /s/ John R. Wormington By: /s/ James F. Gandolfi ------------------------------ ------------------------------ (Signature) (Signature) Name: John R. Wormington Name: James F. Gandolfi ------------------------------ ------------------------------ (Print) (Print) Title: Senior Vice President-- Title: Vice President Engineering and Operations ------------------------------ ------------------------------ Terms and Conditions Page 98 *****Confidential treatments has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT BY AND BETWEEN XM SATELLITE RADIO INC. AND HUGHES ELECTRONICS CORPORATION EXHIBIT A TECHNICAL SPECIFICATIONS CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [*****] This entire Exhibit A has been redacted for confidentiality reasons. CONFIDENTIAL *****Confidential treatments has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION EXHIBIT B STATEMENT OF WORK (SOW) CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. CONFIDENTIAL EXHIBIT B STATEMENT OF WORK TABLE OF CONTENTS
1. INTRODUCTION.......................................................... 1 1.1 Purpose and Scope.................................................. 1 1.2 Applicable Documents............................................... 1 1.3 Glossary........................................................... 2 1.4 Responsibility..................................................... 2 2. SCHEDULE.............................................................. 2 3. EQUIPMENT AND TOOLS................................................... 2 3.1 Introduction....................................................... 2 3.2 Repeater Description............................................... 2 3.3 Standard Prototype Repeaters....................................... 3 3.4 High-Power Prototype Repeater...................................... 3 3.5 Standard Production Repeaters...................................... 3 3.6 High-Power Production Repeaters.................................... 3 3.7 Network Management System.......................................... 4 3.8 Test Equipment..................................................... 4 3.9 Special Tools...................................................... 4 4. DATA AND DOCUMENTATION................................................ 4 4.1 General............................................................ 4 4.2 Deliverable Documents.............................................. 5 4.3 Language........................................................... 8 4.4 Documents Categories............................................... 8 4.5 System Documentation............................................... 9 4.6 Maintenance Documentation.......................................... 10 4.7 Operations Documentation........................................... 10 4.8 Quality Assurance and CADM Documentation........................... 10 4.9 Progress Reporting................................................. 10 5. SERVICES.............................................................. 11 6. PROGRAM MANAGEMENT................................................... 12 6.1 Responsibilities................................................... 12 6.2 Program Management Plan............................................ 12 6.3 Data and Documentation Management.................................. 14 7. MEETINGS.............................................................. 14 7.1 General............................................................ 14 7.2 Contractor Review Meetings......................................... 14 7.3 Program Kick-Off Meeting........................................... 15 7.4 Final Design Review Meeting (FDR).................................. 15 7.5 Design Verification Testing Review (Prototype Repeaters)........... 16 7.6 Design Verification Testing Review (Production Repeaters).......... 17
CONFIDENTIAL 7.7 Subcontractor Status and Design Reviews............................ 17 7.8 Progress Meetings.................................................. 17 7.9 Contract Review Meetings........................................... 17 7.10 Attendance at Meetings............................................. 18 7.11 Action Item Control................................................ 18 8. PRODUCT ASSURANCE REQUIREMENTS........................................ 19 8.1 Scope.............................................................. 19 8.2 Product Assurance Program Objectives............................... 19 8.3 Quality Assurance Plan............................................. 19 8.4 Planning........................................................... 19 8.5 Design Control..................................................... 20 8.6 Document Control................................................... 20 8.7 Purchasing......................................................... 21 8.8 Traceability....................................................... 22 8.9 Compliance with Laws, Regulations and Certificates................. 22 9. TESTING ACTIVITIES.................................................... 22 9.1 Test Plans and Procedures.......................................... 22 9.2 Test Reports....................................................... 23 9.3 Access to Testing Activities....................................... 23 10. TRAINING............................................................. 23 11. WARRANTY SUPPORT..................................................... 24 12. NMS MAINTENANCE...................................................... 25
CONFIDENTIAL Revision Log - -------------------------------------------------------------------------------- Rev Author Summary of changes to previous versions Date Approval - -------------------------------------------------------------------------------- - - Initial Release - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CONFIDENTIAL EXHIBIT B STATEMENT OF WORK 1. INTRODUCTION 1.1 Purpose and Scope. (a) This Statement of Work (SOW) defines the Work to be performed by Contractor in support of Customer's Terrestrial Repeater Network System program. This Work includes the design, development, engineering, manufacture, testing, and delivery of Prototype Standard and High Power Repeaters and Production Standard and High Power Repeaters, together with the Network Management System (NMS) and other deliverable equipment, hardware, software, services and documentation. Contractor shall complete this Work in accordance with the terms and conditions of the Contract and the requirements specified herein. (b) Defined terms herein shall have the meaning set forth in the Contract, unless otherwise specified herein. (c) In the event that Customer elects to exercise any option set forth in the Contract, Contractor shall provide or perform such option as required by the Contract. 1.2 Applicable Documents. The following documents are applicable to this Statement of Work to the extent specified in the Contract. Unless otherwise specified, the latest issue of each of the following documents shall be applicable. (a) Exhibit A (Design Specifications); (b) ISO9001-1994, Quality Systems - Model for Quality Assurance in Design/Development, production, Installation and Servicing International Standards Organization; (c) DARS System: Waveform Requirements - Transport Layer (DARS-FHG-FDSC- 602-110000), Edition 05, Revision 01) XM-SYS-0-0001-RD Revision 1.1; (d) DARS System: Waveform Requirements - Satellite Physical Layer (DARS-FHG-FDSC-608-110000, Edition 03, Revision 01) XM-SYS-0-0004-RD Revision 0; and (e) DARS System: Waveform Requirements - Terrestrial Physical Layer (DARS-FHG-FDSC-601-110000, Edition 03, Revision 01), XM-SYS-0-0004-RD Revision 0. CONFIDENTIAL 1.3 Glossary. A glossary of acronyms and other terms is attached hereto as Attachment No. 1 to this Exhibit B (Statement of Work). 1.4 Responsibility. Contractor is fully responsible for the performance of all other tasks identified herein, unless otherwise expressly stated herein. Contractor shall also deliver the Data and Documentation data specified herein. 2. SCHEDULE The Contract shall be performed in accordance with Exhibit D (Delivery Schedule) and the Milestone schedules set forth in Exhibit C (Pricing, Milestones and Payment Plan). 3. EQUIPMENT AND TOOLS 3.1 Introduction. (a) This Section 3 (Equipment and Tools) defines the hardware and equipment to be delivered by Contractor hereunder, including the Repeaters, the NMS and related hardware, Software and other deliverable items. (b) The Work to be performed with respect to such hardware and equipment deliverables includes: (1) Design, development, engineering, manufacture, testing, and delivery of all such deliverables identified in the Contract; (2) provision of warranty support and training. 3.2 Repeater Description. (a) The Repeaters shall provide terrestrial re-broadcasting of Customer's DARS programming and include the following key subsystems: (1) A High-Powered Amplifier (HPA) subsystem, which amplifies the signal received from Customer's satellites for re-transmission by each Repeater; (2) A Signal Processing System (SPS), which converts the QPSK signal received from Customer's satellites into the MCM signal, which signal is then re-transmitted by each Repeater; (3) A controller which monitors the operations of the amplifier, the SPS, environmental sensors, etc., and interfaces with the NMS in reporting the status of the various components; and CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. (4) A transmit filter which limits the out-of-band emissions of the transmitter. (b) The Repeaters and the NMS each shall be capable of satisfactory operation for a period of seven (7) years commencing upon the Project Completion Date. (c) Contractor shall design, develop, engineer, manufacture, test, and deliver the types of Repeaters specified below to meet the technical and operational requirements of the Contract. 3.3 Standard Prototype Repeaters. Contractor shall design, develop, engineer, manufacture and test (in accordance with Exhibit E (Test Plans and Procedures)) seven (7) Prototype Standard Repeaters and shall deliver such fully-operational Prototype Standard Repeaters to the location(s) specified in Exhibit D (Delivery Schedule), all in conformance with the requirements of Exhibit A (Design Specifications). 3.4 High-Power Prototype Repeater. Contractor shall design, develop, engineer, manufacture and test (in accordance with Exhibit E (Test Plans and Procedures)) one (1) Prototype High- Power Repeater and shall deliver such fully-operational Prototype High-Power Repeater to the location specified in Exhibit D (Delivery Schedule), all in conformance with the requirements of Exhibit A (Design Specifications). 3.5 Standard Production Repeaters. Contractor shall design, develop, engineer, manufacture and test (in accordance with Exhibit E (Test Plans and Procedures)) [*****] Standard Repeaters and shall deliver such Standard Repeaters to the location(s) specified in Exhibit D (Delivery Schedule), all in conformance with the requirements of Exhibit A (Design Specifications). Of this total number of Standard Repeaters, Customer shall notify Contractor, in accordance with Article 7.1 (Repeater Category Selection) of the Contract, how many Standard Repeaters shall be Standard Non-Redundant Repeaters and how many shall be Standard Sectored Non- Redundant Repeaters. 3.6 High-Power Production Repeaters. Contractor shall design, develop, engineer, manufacture and test (in accordance with Exhibit E (Test Plans and Procedures)) [*****] High-Power Repeaters and shall deliver such High-Power Repeaters to the location(s) specified in Exhibit D (Delivery Schedule), all in conformance with the requirements of Exhibit A (Design Specifications). Of this total number of High- Power Repeaters, Customer shall notify CONFIDENTIAL Contractor, in accordance with Article 7.1 (Repeater Category Selection) of the Contract, how many High-Power Repeaters shall be High-Power Redundant Repeaters and how many shall be High-Power Sectored Redundant Repeaters. 3.7 Network Management System Contractor shall design, develop, engineer, manufacture and test (in accordance with Exhibit E (Test Plans and Procedures)) the fully operational NMS and shall deliver and install such NMS to and at the location specified in Exhibit D (Delivery Schedule), all in conformance with the requirements of Exhibit A (Design Specifications). 3.8 Test Equipment. (a) Contractor shall provide a list of test equipment for the purpose of performance verification and field troubleshooting and maintenance of accepted Repeaters. (b) Routine calibration of the test equipment shall be performed in accordance with the manufacturer's recommendations that are contained in the operation and maintenance manuals for that equipment. (c) Contractor shall, at its expense, provide all necessary test facilities for fault diagnosis and repair of faulty Repeaters and LRUs, which are returned to Contractor during the applicable warranty periods, as such periods may be extended. 3.9 Special Tools. Contractor shall identify all special tools required to operate, adjust, tune, maintain, replace or repair the Repeaters or any LRUs. Where routine calibration of special tools is required, adequate calibration instruction shall be provided. 4. DATA AND DOCUMENTATION 4.1 General. (a) Customer shall have access as needed to all non-financial Data and Documentation and other information related to the Contract that is generated under or in the performance of this Contract by Contractor and its Subcontractors. Certain specific items of information shall be produced and formally submitted to Customer by Contractor as specified herein. (b) Contractor agrees to furnish and convey, at no charge, all Documents pertaining to the Repeaters, the NMS and other items to be delivered under this Contract as is necessary to permit Customer to use, operate and maintain the Repeaters, NMS and other deliverable items. For purposes of this Statement of Work, "Documents" includes specifications, drawings, procedures, reports (including inspection, test or incident reports), certificates, training documentation, user manuals, or other materials, CONFIDENTIAL documents, reports, lists, procedures, data, or similar items. All Documents specified herein are a subset of Data and Documentation. (c) Contractor shall deliver to Customer at least five (5) sets of such Documents, and Customer may make copies of such Documents for its use, including use in connection with the use, operation and maintenance of Repeaters (including at each location to which such Repeaters may be deployed), the NMS and other deliverable items; provided that all such copies shall contain the legends placed on the original versions thereof. (d) In addition to the rights set forth in paragraph (c), Contractor hereby grants to Customer the right to modify and enhance such Documents. Customer also has the right to make copies of such modifications and enhancements and distribute the same. In the event Customer modifies the Documents in a manner not directed or approved by Contractor, Contractor will not be responsible for Customer's use of such Documents to the extent it is modified by Customer. Contractor may review Customer's modifications and enhancements to such Documents. (e) Contractor shall supply Data and Documentation in each of the following categories for the items to be delivered hereunder: (1) System; (2) Maintenance; (3) Operations; and (4) Quality Assurance (QA) and Configuration and Data Management (CADM). 4.2 Deliverable Documents. (a) All Data and Documentation to be delivered under the Contract to Customer shall be in the version of tools and/or file formats specified in Table 4-A (Tool/File Format Requirements) below: - -------------------------------------------------------------------------------- Table 4-A Tool/File Format Requirements - -------------------------------------------------------------------------------- Project Schedules MS Project 95 - -------------------------------------------------------------------------------- Written Documents MS Word 97 - -------------------------------------------------------------------------------- Spreadsheets MS Excel 97 - -------------------------------------------------------------------------------- Presentations MS PowerPoint 97 - -------------------------------------------------------------------------------- CONFIDENTIAL - -------------------------------------------------------------------------------- Diagrams Visio 5.0 - -------------------------------------------------------------------------------- Graphics GIF or JPEG format - -------------------------------------------------------------------------------- (b) Contractor shall provide Customer with five (5) sets of each type of Document specified in Table 4-B (Document Requirements List) related to the Repeaters, the NMS and other deliverable items and services to be delivered or provided pursuant to the Contract. Contractor shall be responsible for maintaining the currency of the Documents, and shall forward copies of all changes and revisions to Customer. The submission requirements of these Documents shall be in accordance with Table 4-B (Document Requirements List). In addition, Contractor shall provide Customer with one (1) copy of each Document, upon its initial issue and at each formal re-issue, on suitable magnetic media designated by Customer. (c) The Documents shall include, at a minimum, those Documents described in the following Table 4-B and shall be subject to the approval or review of Customer, as specified in such Table.
- ------------------------------------------------------------------------------------------------- Table 4-B Document Requirements List - ------------------------------------------------------------------------------------------------- Item Submission Submission No of Comments Requirements Criteria Copies - ------------------------------------------------------------------------------------------------- Management Plan EDC Approval 5 - ------------------------------------------------------------------------------------------------- Interface Control EDC, FDR Approval 5 Detailed at EDC Documents Final at FDR - ------------------------------------------------------------------------------------------------- Power and Thermal EDC, FDR Review 5 Detailed at EDC Budgets Final at FDR - ------------------------------------------------------------------------------------------------- Unit Performance FDR Review 5 Requirements - ------------------------------------------------------------------------------------------------- Glossary EDC, FDR Information 5 - ------------------------------------------------------------------------------------------------- Progress Report Monthly Information 5 - ------------------------------------------------------------------------------------------------- Design Review 2 weeks before review Information 2 Notification - ------------------------------------------------------------------------------------------------- Design Review 1 week before review Review 5 See relevant Documents section for detailed description - -------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------- *****Confidential information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to to the omitted portions. - ----------------------------------------------------------------------------------------------------
Table 4-B Document Requirements List - ---------------------------------------------------------------------------------------------------- Item Submission Submission No of Comments Requirements Criteria Copies - ---------------------------------------------------------------------------------------------------- Detailed Repeater system FDR Approval 5 specification(s) and descriptions of all Repeaters and the NMS to be delivered hereunder - ---------------------------------------------------------------------------------------------------- Interface Requirements 1 week before review Approval 5 - ---------------------------------------------------------------------------------------------------- Prototype Test Plan and [*****] Approval 5 Shall address Design Procedures (including Verification, In- for individual LRUs) Factory, Rooftop, and High-Power Installation Site Testing of Repeaters. - ---------------------------------------------------------------------------------------------------- Production Test Plan and [*****] Approval 5 Shall address Design Procedures (including Verification, In- for individual LRUs) Factory, Rooftop, and High-Power Installation Site Testing of Repeaters Shall address Design Verification, In- Factory, and Site Installation Testing of NMS. - ---------------------------------------------------------------------------------------------------- Notification of 2 weeks before test Approval 5 Acceptance Test start - ---------------------------------------------------------------------------------------------------- Final Test Report Within one week of Approval 5 test completion - ---------------------------------------------------------------------------------------------------- Notification of Shipment 15 days before Information 5 shipment - ---------------------------------------------------------------------------------------------------- System documentation [*****] Approval 5 (user & maintenance - ----------------------------------------------------------------------------------------------------
CONFIDENTIAL
- -------------------------------------------------------------------------------------------------------- Table 4-B Document Requirements List - -------------------------------------------------------------------------------------------------------- Item Submission Submission No of Comments Requirements Criteria Copies - -------------------------------------------------------------------------------------------------------- manuals) - -------------------------------------------------------------------------------------------------------- Training Program FDR Approval 5 - -------------------------------------------------------------------------------------------------------- QA Plan EDC, FDR Approval 5 - -------------------------------------------------------------------------------------------------------- CADM Plan EDC, FDR Approval 5 - -------------------------------------------------------------------------------------------------------- QA Procedures As Requested Information 0 These procedures will be made available for review at Contractor's facility - -------------------------------------------------------------------------------------------------------- List of Spares FDR Approval 5 - --------------------------------------------------------------------------------------------------------
4.3 Language. (a) All documents shall be in the English language. (b) Contractor shall maintain consistency in nomenclature in all documentation. Contractor shall use and update as necessary the standard glossary of terms attached hereto. 4.4 Documents Categories. All documents shall be classified into the following categories. Documents for approval or review shall be submitted in five (5) copies plus a single copy on suitable magnetic media and in a format as listed in Table 4-A (Tool/File Format Requirements). (a) Approval. -------- (1) A Document requiring Customer approval shall be received, reviewed and approved by Customer prior to its planned use and/or implementation by Contractor. (2) If Customer approves such Document, Customer shall sign the Document and notify Contractor in writing of its approval within ten (10) Business Days after its receipt of such Document from Contractor. Such Document shall be deemed approved if Customer fails to deliver its written approval or a notice of disapproval (pursuant to paragraph (a)(3) below) to Contractor within such ten (10) Business Day period. CONFIDENTIAL (3) If the Document is not approved by Customer, Customer shall notify Contractor within ten (10) Business Days after its receipt of the Document from Contractor of those parts of the Document which cannot be approved, together with the reasons for the disapproval, and instructions concerning the submission of the revised Document. (4) The use by Contractor of a document in the "Approval" category, prior to receipt by Contractor of Customer's written approval, shall be at Contractor's own risk and expense. (b) Review. ------ (1) A Document required to be submitted by Contractor for review by Customer, shall be delivered to Customer prior to its planned use and/or implementation by Contractor. (2) If Customer's review reveals inadequacies in the Document, Customer shall, within ten (10) Business Days after receipt of the Document by Customer, inform Contractor of such inadequacies and the part(s) of the Document to be altered. Customer may also recommend actions and give re-submission instructions according to the character of the inadequacies. (3) The use or implementation by Contractor of a document in the "Review" category prior to the lapse of the ten (10) Business Day period referenced above or prior to the incorporation of Customer's comments or the completion of other corrective action acceptable to both Parties shall be at Contractor's own risk and expense. (c) Information. ----------- A Document required to be submitted for information purposes only shall be sent to Customer promptly upon issuance and approval of the Document by Contractor. 4.5 System Documentation. (a) Ten (10) Business Days prior to commencement of In-Factory Testing of the Prototype Repeaters, Contractor shall provide a complete set of documentation for all deliverable items to be tested by Contractor. The "System Documentation" shall include the following elements: (1) An Operations Manual shall cover the functions of the Repeaters and the NMS, describing and interrelating the major features, and shall consist of a description, the operating parameters, operations and maintenance, and recommended troubleshooting procedures at system level. CONFIDENTIAL (2) Documentation for all Software and firmware contained within or related to each Repeater and the NMS, together with listings of self-documented source code. Software source code delivered on magnetic medium may be substituted for software listings. (3) For all equipment that includes a high-level graphic interface, details concerning each elementary function that an operator can perform by detailing the successive selection of Graphic Unit Interfaces (GUIs). 4.6 Maintenance Documentation. Contractor shall specify and describe routine and preventive maintenance guidelines and procedures and troubleshooting procedures in the Operations Manual. A corrective maintenance manual shall also be provided, in which the failure and maintenance reporting procedures and philosophy are indicated. 4.7 Operations Documentation. Ten (10) copies of "Station Operator's Manuals" shall be provided by Contractor with respect to the Repeaters, NMS and other hardware, Software or related equipment to be provided by Contractor hereunder, including: (a) equipment configuration and functional settings; (b) manual operation of Contractor-supplied equipment; and (c) recommended maintenance schedules and procedures. 4.8 Quality Assurance and CADM Documentation. The QA and CADM documentation shall consist of: (a) A Quality Assurance Plan, as set forth in Exhibit F (Quality Assurance Plan). (b) Quality Assurance Reports, which reports shall be generated as required by Exhibit F (Quality Assurance Plan), and shall include descriptions of failures, repairs, re-tests, and the results of the required audits. The QA report may be delivered as part of the weekly progress report. (c) CADM Documentation, including a CADM Plan and Procedures which describes Contractor's methodology of referencing documents, format of documents and control of updating documents. A current list of the latest approved versions of all Documentation issued shall be maintained and provided to Customer. 4.9 Progress Reporting. Contractor shall prepare and submit to Customer's Program Manager reports on the progress of the program, at monthly intervals ("Progress Reports"). Contractor shall submit five (5) sets of each Progress Report to Customer, which reports shall include the following: (a) progress made since the previous report; (b) resolution of previous problems and action items; (c) newly identified technical problems and action items; (d) work plan for the upcoming month; (e) overall schedule progression and the impact of problems on the schedule; (f) action items requiring Customer assistance; (g) details on Subcontractor schedules; (h) action items in progress; and (i) tests planned for the upcoming month, including tests planned by any Subcontractor. 5. SERVICES (a) Testing. Contractor shall perform all required testing, including ------- Design Verification, In-Factory , and Rooftop Testing for the Prototype and Production Standard Repeaters; Design Verification, In-Factory, and High-Power Installation Site Testing for the Prototype and Production High-Power Repeaters; and Design Verification, In-Factory, and Site Installation Testing for the NMS, as specified in Exhibit E (Test Plans and Procedures) (to be developed hereunder). (1) Rooftop Testing of the Standard Repeaters shall demonstrate successful mating and operation of all LRUs and associated hardware; successful operation of the Repeater controller and its interface with the NMS; and successful operation of the complete Repeater in accordance with Exhibit A (Design Specifications). (2) High-Power Installation Site Testing of the High Power Repeaters shall demonstrate successful mating and operation of the Enclosure Kit and the Klystron Kit and associated hardware; successful operation of the Repeater controller and its interface with the NMS; and successful operation of the complete Repeater in accordance with Exhibit A (Design Specifications). (3) Site Installation Testing of the NMS shall demonstrate successful integration and operation of the NMS with the Repeater network in accordance with Exhibit A (Design Specifications). CONFIDENTIAL (4) Performance of all Rooftop Testing shall include Rooftop Assembly of LRUs and all associated hardware. Performance of High-Power Installation Site Testing shall include assembly of all associated hardware. (5) Performance of all testing and preparation and submission of required test-related documentation shall be in accordance with the Contract (b) Training. Contractor shall provide training courses and materials as -------- specified herein. (c) Warranty Coverage. Contractor shall provide warranty services as ----------------- specified in the Contract. (d) Marketing Support. At Contractor's expense, Contractor shall provide, ----------------- during the Term of the Contract, reasonable technical marketing support to Customer by telephone during Contractor's normal business hours, in support of Customer's business opportunities consistent with Contractor's other obligations hereunder. In the event Customer requires other marketing support beyond telephone support, Customer shall submit its request to Contractor for such additional marketing support and Contractor shall provide such additional support, subject to the Parties' mutual agreement on reasonable terms and conditions to governs such additional marketing support. 6. PROGRAM MANAGEMENT 6.1 Responsibilities. (a) Contractor shall manage all matters relating to the performance of this Contract, and shall ensure that the personnel and facilities necessary for the performance of the Contract are assigned and made available at the times and places necessary to meet the schedule established by the Contract. (b) Contractor shall designate a person responsible for Quality Assurance for the duration of the Contract who has an independent reporting chain from the project management. Customer shall have access to all QA aspects of the Contract, without restriction on time or location of access. 6.2 Program Management Plan. (a) Contractor shall provide a Program Management Plan. This Plan shall be provided within ten (10) Calendar Days after EDC and shall thereafter be updated as required to maintain a full description of the program structure and management methods. (b) The Program Management Plan shall provide a "Program Control System," which monitors all program activities and clearly identifies all milestones, reporting CONFIDENTIAL dates, completion dates, deliveries, design reviews, and critical paths. This Program Control System shall cover the period from EDC to the Project Completion Date. (c) The Program Management Plan shall include a schedule showing the significant events of the program. The events on this schedule shall include factory testing, expected delivery by Subcontractors of major subsystem equipment, on-site acceptance testing, Milestones, and progress reports. CONFIDENTIAL 6.3 Data and Documentation Management. Contractor shall provide a "Configuration and Data Management Plan," which shall detail the system to be adopted for Document management, defining the issue status designation system for controlled Documents, and the registration, handling, filing, and archiving system for controlled and uncontrolled, baseline and non-baseline Documents. The plan shall also define the specified forms to be used in the project management and to control the status of Documents. Within this Configuration and Data Management Plan, reference shall be made to Customer Document submission and review criteria, specified in Table 4-B (Document Requirements List), and to the delivery requirements specified in Exhibit D (Delivery Schedule). This Plan complements the Quality Assurance Plan (set forth in Exhibit F) to ensure that up-to-date technical information is available at all times. 7. MEETINGS. 7.1 General. (a) Contractor shall keep Customer currently informed, and shall meet with Customer to discuss and review the status and the progress of the Work being performed. In particular, the meetings specified in this Section 7 (Meetings) shall be arranged in accordance herewith. (b) For all meetings, except as otherwise specified herein, Contractor shall provide an agenda (at least two (2) Business Days in advance of each meeting), all supporting material (as required in Table 4-B (Document Requirements List)), and minutes of the meetings (to be delivered by Contractor to Customer by no later than five (5) Business Days following the meeting for Customer's approval). 7.2 Contractor Review Meetings. (a) Contractor shall plan and execute major program reviews as follows (each a "Review"): (1) Program Kick-Off Meeting, to be held at Contractor's premises; (2) Final Design Review (FDR), to be held at Contractor's premises; (3) Design Verification Testing Review (Prototypes), to be held at Contractor's premises; and (4) Design Verification Testing Review (Production), to be held at Contractor's premises. (b) These Reviews shall be scheduled so as to allow a thorough and comprehensive evaluation of the design, test readiness, and other significant elements of the program, as applicable, and shall act as major decision milestones before proceeding CONFIDENTIAL to the next phase of the program. Other technical and/or management Reviews shall be scheduled when required at Contractor's premises, or at a venue to be mutually agreed. (c) Five (5) Business Days prior to each Review, Contractor shall provide the whole of the Data and Documentation package to be discussed at or relevant to such Review. (d) "Successful Completion" of each Review shall be deemed to occur when (1) Contractor has provided all required Data and Documentation to Customer, (2) Customer has reviewed and approved the Data and Documentation, and (3) the Parties have reviewed all Action Items and agreed to a closure plan therefor. (e) The Data and Documentation provided shall be self-contained, of sufficiently high quality and properly structured, such that it provides all of the information necessary to a reviewer experienced in signal processing and telecommunications systems, and having access to the Contract but not to reports of previous presentations or other, non-contractual documents. 7.3 Program Kick-Off Meeting. The objective of the Program Kick-Off Meeting is to review the Program Management Plan, meet key personnel, review manufacturing facilities, and finalize and delineate responsibilities between and among Contractor and the Customer's network integration contractor. 7.4 Final Design Review Meeting (FDR). (a) The objective of the FDR is to conduct a formal technical review of the Repeaters and the NMS and any related hardware or software after the detailed design of each item is completed. The FDR establishes: (1) the completeness and integrity of the detailed design; (2) that the design complies with all the requirements of this Contract and of all applicable documents, and that the presented analyses and/or test data demonstrate such compliance; and (3) that the external interfaces of the Repeaters comply with the interface control documents (ICDs). (b) To this end, the FDR will cover the technical, operational and maintenance material, which shall include the following: (1) detailed overall description of the Repeaters, including interconnections between racks, and grounding requirements; CONFIDENTIAL (2) a detailed Repeater system specification(s) and descriptions of all Repeaters and the NMS to be delivered hereunder, which is subject to the approval of Customer; (3) detailed specifications, descriptions and final schematic drawings of all LRUs, including the DSP Block Assembly, the RF Down- Converter, the RF Up-Converter, the Power Amplifier, the Output Filter, the Controller Assembly, and the NMS; (4) complete overall and subsystem block and level diagrams for the Repeaters, each LRU and the NMS; (5) detailed analyses, showing compliance with Exhibit A (Design Specifications); (6) operation and maintenance plans; (7) MTBF by LRU and overall Repeater availability and reliability; (8) finalization of ICDs and detailed descriptions of all interfaces; (9) tests plans, procedures, and schedules for all required testing, including sufficient detail to permit evaluation of the proposed test methods; (10) updated project planning documentation for the remainder of the Contract; (11) QA Reports, detailing QA activities through FDR and schedule of QA activities to the end of the program; and (12) a list of all deliverable items. 7.5 Design Verification Testing Review (Prototype Repeaters). (a) Contractor shall convene a meeting to review the results of the Design Verification Tests conducted on the Prototype Repeaters in the factory environment, prior to shipment to the designated installation sites specified in Exhibit D (Delivery Schedule), with the purpose of verifying that these tests have been completed satisfactorily and in accordance with the Test Plans and Procedures (Exhibit E). This meeting shall be held at Contractor's premises. Contractor shall supply Customer with five (5) copies of the test results, at the completion of each applicable test. (b) If deficiencies are observed with the test methods or results in demonstrating compliance with the requirements, Customer will have the right to request additional testing, with alternative test methods as appropriate, to be performed by Contractor. CONFIDENTIAL (c) In addition to the requirements of Section 7.2(d), Successful Completion of this Review shall be deemed to occur upon satisfactory completion of all outstanding actions and solution of all discrepancies identified by Customer. Customer shall provide notice to Contractor in writing upon such Successful Completion of this Review. 7.6 Design Verification Testing Review (Production Repeaters). (a) Contractor shall convene a meeting to review the results of the Design Verification Tests conducted on the Repeaters (manufactured during the production phase of the Contract) in the factory environment, prior to shipment to the installation sites specified in Exhibit D (Delivery Schedule), with the purpose of verifying that these tests have been completed satisfactorily in accordance with the Test Plans and Procedures (Exhibit E). This meeting shall be held at Contractor's premises. Contractor shall supply Customer with five (5) copies of the test results, at the completion of each test. (b) If deficiencies are observed with the test methods or results in demonstrating compliance with the requirements, Customer will have the right to request additional testing, with alternative test methods as appropriate, to be performed by Contractor. (c) In addition to the requirements of Section 7.2(d), Successful Completion of this Review shall be deemed to occur upon satisfactory completion of all outstanding actions and solution of all discrepancies identified by Customer. Customer shall provide notice to Contractor in writing upon such Successful Completion of this Review. 7.7 Subcontractor Status and Design Reviews. Customer, at its discretion, may attend and observe all status and design reviews which Contractor may require of its Subcontractors. Contractor shall supply Customer with documentation on all matters relating to such reviews one (1) week prior to each scheduled review. 7.8 Progress Meetings. (a) Customer may, at its discretion, convene meetings to discuss and review Repeater and NMS design and to discuss progress of the Contract at least twice each month during the period from EDC through Project Completion Date (the "Progress Meetings"). For all such Progress Meetings, Customer shall provide an agenda to Contractor by no later than two (2) Business Days prior to the scheduled meeting date. (b) These Progress Meetings shall be organized either through teleconferences, video conference, or in person at a location to be mutually agreed. 7.9 Contract Review Meetings. In addition to the Progress Meetings, Customer shall be advised by Contractor of and shall have the option of attending, any regularly scheduled internal meetings that Contractor may establish to assess progress and problems. Customer shall be provided with the agenda relevant to these meetings two (2) Business Days prior to the meetings CONFIDENTIAL taking place. 7.10 Attendance at Meetings. In the event that a meeting is convened at Contractor's or any Subcontractor's plant, Contractor shall make all necessary arrangements to facilitate entry to the meeting place by Customer Personnel and Customer's Associates. 7.11 Action Item Control. (a) Contractor, in consultation with Customer, shall maintain a register of all actions items identified in each meeting or Review and shall uniquely identify each action item. This register shall include the action item description, the person(s) responsible for the resolution of each action item, the date the action item was raised, the completion due date, and the actual completion date. (b) Copies of this register shall be provided to Customer at the regular Progress Meetings. CONFIDENTIAL 8. PRODUCT ASSURANCE REQUIREMENTS 8.1 Scope. This Section 8 (Product Assurance Requirements) defines the minimum product assurance requirements for the Repeater and NMS. These requirements are the principal elements that Contractor shall satisfy in the establishment and implementation of the product assurance program under this Contract. The requirements of this section shall also be applicable to Work performed by all Subcontractors. 8.2 Product Assurance Program Objectives. (a) A comprehensive product assurance program shall be established and maintained to ensure that all Repeaters, the NMS, and other deliverable items, including Software, are designed, manufactured, tested, stored and delivered to meet the specified performance requirements of the Contract (the "Product Assurance Program"). The Product Assurance Program shall include detailed requirements, policies, objectives, plans and methods of implementation relative to reliability, parts and materials, processes control, non-conforming material control, configuration and data management, and safety which are to be applied throughout the design, development, fabrication, integration, testing, storage, delivery and operations phases of the Contract. Contractor's Product Assurance Program shall ensure that these requirements are effectively implemented throughout the duration of the Contract. (b) The Product Assurance Program shall provide for the early and prompt detection of actual and potential deficiencies, system incompatibilities, marginal quality, trends, and any other conditions which could result in unsatisfactory performance. It shall provide for the effective action to correct all such conditions. (c) The program shall provide full visibility of Contractor and Subcontractor activities to Customer. 8.3 Quality Assurance Plan. Contractor shall comply with the Quality Assurance Plan set forth in Exhibit F. 8.4 Planning. Contractor shall formally plan the Work, and implement internal controls, so that: (a) requirements are adequately defined to the participants; (b) characteristics crucial to safe and proper functioning are identified; (c) statutory and safety requirements are identified; (d) Work is sub-divided into units and resources needed are defined; CONFIDENTIAL (e) interface responsibilities are defined; (f) a program of work is established; and (g) procedures to be followed are specified. 8.5 Design Control. (a) Contractor shall document feasibility, outline and detailed designs as appropriate to the circumstances. All designs, drawing and calculations shall be checked and shall be traceable to information sources, assumptions choices made, designer and verifier. (b) Designs shall be reviewed by Contractor and any corrections needed made, before submission to Customer. Such reviews shall include examination of all interfacing features and of testing requirements. (c) Changes to designs shall be controlled according to the CADM Plan. (d) Practices in the development of Software shall conform to a recognized code of practice and shall include: (1) a software requirements definition; (2) an architectural design document; (3) standardized procedures and practices for detailed design; (4) a test plan; (5) a reporting system for performance and discrepancies; (6) a program of reviews at key points; (7) a history record; and (8) timely preparation of user documentation. (e) Records shall be maintained suitably for audit. 8.6 Document Control. (a) Document procedures shall be supervised by Contractor's Configuration Manager according to the CADM Plan, which is subject to Customer's approval pursuant to Table 4-B. (b) The CADM Plan shall cover: CONFIDENTIAL (1) methods of registration of Data and Documentation, both internally generated and from outside sources; (2) method of approval and issuing of Data and Documentation; (3) method of revision of Data and Documentation and withdrawal/cancellation of superseded items; (4) system for requesting and approving changes to materials, equipment, Software, and the overall program; (c) The CADM Plan shall also reference: (1) Document defining system architecture (2) Documents defining the configuration items (3) Document schedules; and (4) The filing system. (d) Changes to the Data and Documentation that do not affect any interface with other Customer contractors, the applicable technical, performance or design specifications, including as set forth in Exhibit A, or the Contract Price shall be subject to Contractor's change control system; provided that Customer may have access to the change control system and may ask questions and provide suggestions and comments, all of which shall be reasonably addressed by Contractor. All other Data and Documentation changes shall be referred to Customer for approval. (e) All submitted Data and Documentation affected by changes are to be re- issued as a subsequent revision number. (f) Copies of previously issued Data and Documentation shall be retained by Contractor, and available to Customer upon request, for archival and reference purposes, but suitably identified as superseded. 8.7 Purchasing. Contractor shall be responsible for ensuring that any subcontracted supplies conform to project requirements with particular regard to: (a) The Design Specifications (Exhibit A); (b) The Delivery Schedule (Exhibit D); and (c) The Quality Assurance Plan (Exhibit F). CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 8.8 Traceability. All equipment, including Repeaters, the NMS and LRUs, shall be bar-coded with serial numbers and shall carry nameplates on which modification numbers can be marked by service engineers when implemented, in order that all such equipment in its current state is traceable to its record documents. 8.9 Compliance with Laws, Regulations and Certificates. (a) Contractor shall perform the Work in accordance with site safety practices and all applicable Laws. (b) Measurement and test equipment shall have relevant calibration certificates traceable to applicable standards, including those issued by governmental authorities, and the calibration status of each piece of equipment shall be readily visible when using equipment. Instruments used in tests shall be identified on the test records. 9. TESTING ACTIVITIES 9.1 Test Plans and Procedures. (a) Contractor shall perform testing of the Prototype and Production Repeaters and the NMS in accordance with Test Plans and Procedures set forth in Exhibit E (Test Plans and Procedures). (b) Contractor shall deliver to Customer the Prototype Repeater Test Plan and Procedures on or before [*****] and such plan and procedures shall address Design Verification, In-Factory, Rooftop, and High-Power Installation Site Testing. (c) Contractor shall deliver to Customer the Production Repeater Test Plan and Procedures on or before [*****] and such plan and procedures shall address Design Verification, In-Factory, Rooftop, and Site Installation Testing. (d) Contractor shall deliver to Customer the NMS Test Plan and Procedures on or before [*****] and such plan and procedures shall address Design Verification, In-Factory, and Site Installation Testing of the NMS. (e) Finalization of all Test Plans and Procedures shall be subject to Customer approval. (f) The test plans and procedures for the Rooftop Testing shall be designed to demonstrate successful mating and operation of all LRUs and associated hardware; successful operation of the Repeater controller and its interface with the NMS; and CONFIDENTIAL successful operation of the complete Repeater in accordance with Exhibit A (Design Specifications). (g) The test plans and procedures for the High-Power Installation Site Testing shall be designed to demonstrate successful mating and operation of the Enclosure Kit and the Klystron Kit and associated hardware; successful operation of the Repeater Controller and its interface with the NMS; and successful operation of the complete Repeater in accordance with Exhibit A (Design Specifications) (h) The test plans and procedures for the Site Installation Testing for the NMS shall be designed to demonstrate successful integration and operation of the NMS with the Repeater network in accordance with Exhibit A (Design Specifications). 9.2 Test Reports. Following completion of any required testing, Contractor shall prepare and submit to Customer for approval, reports detailing the tests performed and the results obtained and the related certifications, all in accordance with Exhibit E (Test Plan and Procedures) and the Contract. 9.3 Access to Testing Activities. Customer may, at its election and expense, have its Associates, Consultants, or other designees attend each test as required to be performed by Contractor pursuant to the Contract, including Design Verification Testing of the Repeaters, each LRU and the NMS and any other testing conducted by Contractor or its Subcontractors with respect to the Work to be performed hereunder. Attendance by Customer shall be for purposes of monitoring and observation and shall be on a non-interference basis; provided, however, Customer may ask questions, make suggestions, or otherwise comment on the proceedings. Contractor shall notify Customer reasonably in advance of the time and place for any such testing activities and Customer shall promptly inform Contractor of its intent to attend the testing. Contractor shall make arrangements for Customer's entrance and access into Contractor Facility(ies) for purposes of attending the testing. Customer attendance at any such test shall in no way be construed or deemed to represent Customer's acceptance of the items being tested or Customer's waiver of any claims or rights hereunder. 10. TRAINING Contractor will provide training to Customer, Customer Personnel and Customer's designees in accordance with the following: (a) Contractor shall provide appropriate training on each aspect of the Repeaters and NMS and other deliverables (including installation, operation, maintenance, repair, provisioning, monitoring and control), using the training approach as specified below. Contractor shall provide Customer, at no additional tuition cost or expense (other than Customer's own travel expenses to Contractor' training facility), three (3) one-week training sessions for no more than twelve (12) trainees per session. Additional training desired by Customer will be mutually agreed upon. CONFIDENTIAL (b) Contractor shall develop all training materials and shall provide such training materials, together with documentary background material and other course notes to each attendee at the beginning of each course. (c) Contractor agrees to offer training courses during each one-week session which address the following areas: (1) overview, installation, administration and operations, testing, maintenance, trouble-shooting, repair and safety procedures with respect to the Repeaters, including assembly of an entire Repeater using a pre-wired rack and applicable LRUs.; (2) overview, installation, administration and operations, testing, maintenance, trouble-shooting, repair and safety procedures with respect to the NMS; (3) "train the trainer" training, so that individuals reasonably experienced in the electronic telecommunications equipment operations or maintenance industries, or other related industries, will be capable of performing operational and maintenance functions related to the NMS, Repeaters or other deliverables in a safe, efficient, and effective manner. (d) Such training courses will be available at Contractor or other designated training facilities and will consist of formal and informal classroom instruction and actual hands-on training in laboratory or simulated or actual installation environments. Contractor also reserves the right to subcontract the training to a designated third party vendor, which subcontract shall be deemed a Material Subcontract and shall be subject to the terms of Article 10.2 (Material Subcontracts) of the Terms and Conditions. (e) Contractor shall provide all remedial training and training on any changes, updates and enhancements to the Repeaters, NMS or other deliverable items as otherwise necessary for Customer, or its designee(s), to be capable of performing all necessary services, including installation, operation, maintenance, repair, provisioning, monitoring and control of the Repeaters and the NMS. 11. WARRANTY SUPPORT (a) Contractor shall perform warranty activities in accordance with the Contract. (b) As of the Effective Date of the Contract, the LRUs are those items set forth in Table 11-A below. (c) In accordance with Article 17.11 (Remedies (Repeaters)) of the Terms and Conditions, Contractor shall submit for Customer's review and comment LRU sparing levels, together with the associated availability calculations. The sparing levels shall be sufficient to cover anticipated failure rates for Repeaters and the individual LRUs, and CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. the sparing levels shall be updated in accordance with Article 17.11 (Remedies (Repeaters)) of the Terms and Conditions to reflect actual failure rates. (d) The preliminary sparing level is as set forth below. In no event shall Contractor's proposed inventory plan provide for sparing levels of less than the quantities set forth in this preliminary sparing level. [*****] *All Racks provided by Contractor to Customer pursuant to each Inventory Plan shall be pre-wired and ready for LRU installation (in the event Customer elects to assemble a replacement Repeater pursuant to Article 17.11 (Remedies (Repeaters)) of the Terms and Conditions). 12. NMS MAINTENANCE On or before [*****], Contractor shall provide Customer with a proposal for annual maintenance of the NMS in accordance with Article 26 of the Terms and Conditions. * END OF DOCUMENT * CONFIDENTIAL **** Confidential treatment has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION EXHIBIT C PRICING, MILESTONES AND PAYMENT PLAN CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 1 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EXHIBIT C PRICING, MILESTONES AND PAYMENT PLAN TABLE OF CONTENTS
1. GENERAL................................................................ 3 2. CONTRACT PRICE......................................................... 3 2.1 Contract Price................................................... 3 2.2 Repeater Unit Pricing............................................ 3 2.3 Network Management System........................................ 6 3. MILESTONE PAYMENT PLAN AND MIlESTONE ACHIEVEMENT CRITERIA.............. 6 3.1 [*****] MILESTONES............................................... 6 3.2 [*****] MILESTONES............................................... 7 3.3 [*****] MILESTONES............................................... 8 3.4 ESCROW ACCOUNT AND PAYMENT....................................... 8 4. OPTION PRICING......................................................... 9 4.1 PRICING FOR OPTIONAL REPEATERS................................... 9 4.2 NMS VIDEO WALL................................................... 11 4.3 EXTENDED WARRANTY ON REPEATERS................................... 11 4.4 ANNUAL MAINTENANCE OF NMS........................................ 12
- -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 2 CONFIDENTIAL EXHIBIT C PRICING, MILESTONES AND PAYMENT PLAN 1. GENERAL (a) This Exhibit C (Pricing, Milestones and Payment Plan) describes the applicable charges for the Work. The Contract Price (as defined below) and other charges indicated in this Exhibit C shall compensate Contractor for the Work to be performed and provided pursuant to the Contract, including the resources used therefor. (b) The Contract Price will be paid for in accordance with Section 3 (Milestone Payment Plan and Milestone Achievement Criteria) below. All invoicing and payment terms shall be in accordance with Article 6 (Invoicing and Payment) of the Terms and Conditions. (c) Contractor acknowledges that, except as may be otherwise provided in the Contract, expenses and costs that Contractor incurs in the performance of the Work (including expenses related to travel and lodging, document production, and long-distance telephone) are included in the Contract Price. Accordingly, such Contractor expenses are not separately reimbursable by Customer. (d) All charges set forth herein are in United States Dollars and shall be paid by Customer in the same currency. (e) All capitalized terms used and not defined in this Exhibit C shall have the same meanings given them in the Terms and Conditions or its other Exhibits. 2. CONTRACT PRICE 2.1 Contract Price. (a) For the Work to be performed pursuant to the Contract, Customer shall pay Contractor the firm fixed prices as set forth in, and in accordance with, this Exhibit C (such firm fixed prices to be referred to collectively as the "Contract Price"). (b) The Contract Price may be amended from time to time only in accordance with the Terms and Conditions and this Exhibit C, including as a result of Customer's exercise of the options specified herein. - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 3 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 2.2 Repeater Unit Pricing. (a) Repeaters to be purchased pursuant to the Contract are priced on a per unit basis in accordance with Table 2.2 below: -------------------------------------------------------------- Table 2.2 -------------------------------------------------------------- Repeater Category Firm Fixed Price per Repeater $/Repeater -------------------------------------------------------------- Standard Non-Redundant [*****] Repeater -------------------------------------------------------------- Standard Sectored Non- [*****] Redundant Repeater -------------------------------------------------------------- High-Power Redundant Repeater [*****] -------------------------------------------------------------- High-Power Sectored Redundant [*****] Repeater -------------------------------------------------------------- (b) The firm fixed prices set forth in Table 2.2 above include charges for the following services and deliverables: (1) costs for performance of all design, development, engineering and manufacturing work, including non-recurring engineering costs; (2) development, manufacture and delivery of all Repeaters (including Prototype Repeaters) and Rooftop Assembly of Standard Repeaters and assembly of High-Power Repeaters at the Installation Sites; (3) custom ASIC chip development or, alternatively, development and implementation of Field Programmable Gate Array (FPGA) for the digital signal processing; (4) taxes and duties (including all import duties and related assessments, but excluding sales and use taxes, which Contractor will invoice to Customer and collect and remit on behalf of Customer without mark-up in accordance with Article 5.4(b) of the Terms and Conditions); (5) all testing required in accordance with the Terms and Conditions and Exhibit E (Test Plans and Procedures); (6) delivery of Enclosure Kits to the Staging Areas (including packing, crating, shipping, handling, and insurance therefor) and delivery of PA Kits to the Installation Sites and delivery of High-Power Repeaters to - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 4 - -------------------------------------------------------------------------------- ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - -------------------------------------------------------------------------------- the Installation Sites (including packing, crating, shipping, handling, and insurance therefor); (7) training as set forth in Exhibit B (Statement of Work); (8) Data and Documentation; (9) warranty coverage during the applicable Warranty Periods (including sparing and Field Support) as set forth in the Terms and Conditions; (10) insurance coverage as required in accordance with Article 20 (Insurance) of the Terms and Conditions; and (11) other services, responsibilities, equipment, products and materials not specifically described in Exhibit B (Statement of Work) that are incidental to and reasonably required for the proper provision and performance of the Work. (c) As set forth in paragraph (b) above, the Contract Price includes charges related to the shipping of the Repeaters. Such charges are based upon the following estimation: approximately [*****] of the Repeaters will be delivered to the Eastern region of the United States, [*****] of the Repeaters will be delivered to the Central region of the United States, and the remaining [*****] of the Repeaters will be delivered to the Western region of the United States. Customer may, at its option, elect to alter this allocation of delivery of the Repeaters among the Eastern, Central and Western regions of the United States without any impact to the per unit Repeater pricing set forth in Table 2.2 above; provided, however, if Customer requires a substantial change to these delivery projections (i.e., [*****] or more change in the allocation of Repeaters within the Eastern, Central and Western regions), Contractor and Customer shall negotiate in good faith an equitable adjustment (either up or down) to the component of the Contract Price allocable to shipping charges, depending upon the net impact of the directed change. In order to validate any adjustment to the portion of the Contract Price allocable to shipping, Contractor shall provide Customer with access to all pertinent shipping documentation and invoices, including such information utilized by Contractor in formulating the initial charge for shipping expenses, and Customer may review and audit such documentation. (d) In the event the Nominal Order is decreased or increased by Customer in accordance with the Terms and Conditions, then the firm fixed prices for each category of Repeater set forth in Table 2.2 shall be adjusted as follows: (1) the amount of [*****] shall be deducted from the per unit prices for each category of Repeater (such sum represents the amount of [*****] Milestone Payment No. 1 (i.e., [*****] of [*****]) amortized over the Nominal Order of Repeaters (i.e., 1578 Repeaters); and (2) the amount of Milestone Payment No. 1 (i.e., [*****]) shall then be amortized over the revised Nominal Order proportionately (i.e., [*****] divided by the number of Repeaters in the revised Nominal - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 5 - -------------------------------------------------------------------------------- ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - -------------------------------------------------------------------------------- Order), which amount will then be added to the per unit price for each Repeater (as reduced per paragraph (d)(1) above) and Table 2.2 shall be updated accordingly. (e) In the event Customer requires Field Support following completion of the Work or Field Support that is materially unrelated to the Work, Contractor shall, upon Customer's request, provide such additional Field Support at the rate of [*****] per day for each Contractor or Subcontractor technical support personnel assigned to perform the Field Support. Customer shall pay such daily rate and shall reimburse Contractor, at cost and without a mark-up, for the direct reasonable expenses incurred by such personnel in performing additional Field Support. Charges for additional Field Support shall be invoiced by Contractor in accordance with the Terms and Conditions and shall be accompanied by supporting documentation concerning the direct expenses (i.e., receipts). 2.3 Network Management System. Customer shall pay Contractor a not to exceed price of [*****] for the Work related to the design, development, construction, delivery and installation of the Network Management System, including the provision of the NMS servers/computers and other equipment, and operator training, as such Work is more fully described in the Contract. Contractor shall propose a firm fixed price for the NMS on or before [*****]. 3. Milestone Payment Plan and MIlestone Achievement Criteria 3.1 [*****] Milestones. (a) The Contract Price with respect to the [*****] for Repeaters shall be earned by Contractor in installments based upon Contractor's satisfactory completion of the [*****] Milestones set forth in Table 3.1 below in accordance with the corresponding Milestone Achievement Criteria. Completed [*****] Milestones shall be invoiced by Contractor and paid by Customer in accordance with Article 6 (Invoicing and Payment) of the Terms and Conditions.
- -------------------------------------------------------------------------------- Table 3.1 [*****] Milestone Payment Plan and Milestone Achievement Criteria - -------------------------------------------------------------------------------- [*****] Milestone Milestone Achievement Milestone Payment Milestone Achievement Date Criteria - -------------------------------------------------------------------------------- 1 On or before 5 Not Applicable [*****] Business Days following Execution Date - -------------------------------------------------------------------------------- 2 [*****] [*****] [*****] - -------------------------------------------------------------------------------- 3 [*****] [*****] [*****] - -------------------------------------------------------------------------------- 4 [*****] [*****] [*****] - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 6 - -------------------------------------------------------------------------------- ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Table 3.1 [*****] Milestone Payment Plan and Milestone Achievement Criteria - -------------------------------------------------------------------------------- [*****] Milestone Milestone Achievement Milestone Payment Milestone Achievement Date Criteria - -------------------------------------------------------------------------------- 5 [*****] [*****] [*****] - --------------------------------------------------------------------------------
(b) With respect to [*****] Milestone Nos. 2, 3 and 5, the Milestone Achievement Criteria shall be deemed to be achieved by Contractor upon Contractor's delivery to Customer of Contractor's written certification that the Milestone has been achieved, such certification to be accompanied by copies of Contractor's purchase orders issued with respect to such Milestones (with financial information redacted). The certification shall show the applicable purchase order numbers, supplier names, quantity of material released in such purchase orders, and quantity of Repeater units that such ordered materials represent. Upon Customer's reasonable request, Contractor shall provide Customer with additional related information. (c) Subject to paragraph (d) below, [*****] Milestone Payment Nos. 1-5 (totaling [*****]) are included in the firm fixed unit price for each category of Repeaters, as such prices are set out in Table 2.2 above. Accordingly, for each of the 1,578 Repeaters included in the Nominal Order, a credit in the amount of [*****] shall be given toward the price of each Repeater. The credit shall appear on the applicable invoices as follows: [*****] for each shipped Enclosure Kit and [*****] for each Accepted Repeater. (d) In the event the Nominal Order is increased or decreased by Customer in accordance with the Terms and Conditions, the Parties shall calculate a revised credit amount with respect to each Repeater, such credit equal to the quotient of the total amount of [*****] Milestone Payment Nos. 1-5 (i.e., [*****]) divided by the number of Repeaters in the revised Nominal Order. Such revised credit shall be applied to the applicable invoices as follows: [*****] for each shipped Enclosure Kit and [*****] for each Accepted Repeater. 3.2 Production Milestones. (a) The Contract Price with respect to production and Acceptance of Repeaters shall be earned by Contractor in installments based upon Contractor's satisfactory completion of the [*****] Milestones set forth in Table 3.2 below in accordance with the corresponding Milestone Achievement Criteria. Completed [*****] Milestones shall be invoiced by Contractor and paid by Customer in accordance with Article 6 (Invoicing and Payment) of the Terms and Conditions. (b) Invoices for [*****] Milestones shall be subject to the credit and revised credit described in paragraphs (c) and (d) of Section 3.1 ([*****] Milestones) above. - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 7 - -------------------------------------------------------------------------------- ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- Table 3.2 [*****] Milestone Payment Plan and Milestone Achievement Criteria - -------------------------------------------------------------------------------- [*****] Milestone Milestone Achievement Milestone Payment Milestone Achievement Date Criteria - -------------------------------------------------------------------------------- [*****] [*****] [*****] [*****] - --------------------------------------------------------------------------------
3.3 [*****] Milestones. (a) The Contract Price with respect to the [*****] shall be earned by Contractor in installments based upon Contractor's satisfactory completion of the [*****] Milestones set forth in Table 3.3 below in accordance with the corresponding Milestone Achievement Criteria. Completed Milestones shall be invoiced by Contractor in accordance with Article 6 (Invoicing and Payment) of the Terms and Conditions.
- -------------------------------------------------------------------------------- Table 3.3 [*****] Milestone Payment Plan and Milestone Achievement Criteria - -------------------------------------------------------------------------------- Milestone Milestone Milestone Achievement Milestone Payment Achievement Date Criteria - -------------------------------------------------------------------------------- [*****] [*****] [*****] [*****] - --------------------------------------------------------------------------------
3.4 Escrow Account and Payment. (a) Set forth below is a schedule of payments to be made by Customer into the Payment Escrow Account to be established, maintained and terminated pursuant to Article 6.2 (Escrow Account and Payment) of the Terms and Conditions. With respect to Escrow Payment Nos. 1-6 in Table 3.4, Customer shall make the applicable payment into such account on or before ten (10) Business Days following the date upon which Contractor furnishes Customer with an aged materials report showing that Contractor has ordered the supplies required by the applicable event in Table 3.4, but in no event earlier than the earliest date of payment identified in Table 3.4. In the event the aged materials report shows that Contractor has ordered less than the amount required for that event, the amount Customer is required to pay into the Payment Escrow Account shall be proportionately reduced. With respect to Escrow Payment Nos. 7-11 in Table 3.4, Customer shall make the applicable payment into the Payment Escrow Account on or before ten (10) Business Days following the date upon which Contractor furnishes Customer with a report showing the cumulative number of Enclosure Kits shipped by Contractor and received at the Staging Areas in the case of Standard Repeaters and Installation Sites in the case of High-Power Repeaters, but in no event earlier than the earliest date of payment identified in Table 3.4. In the event the report shows that fewer Enclosure Kits have been received at the Staging Areas/Installation Sites than the amount required for that event, the amount Customer is required to pay into the Payment Escrow - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 8 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Account shall be proportionately reduced. Contractor may withdraw funds from such account in accordance with Article 6.2 of the Terms and Conditions.
- -------------------------------------------------------------------------------- Table 3.4 Schedule of Escrow Payments - -------------------------------------------------------------------------------- Escrow Event Earliest Date of Amount to be Payment Payment Paid into Escrow No. - -------------------------------------------------------------------------------- [*****] [*****] [*****] [*****] - --------------------------------------------------------------------------------
(b) In the event the per unit price of Repeaters set forth in Section 2.2 (Repeater Unit Pricing) above is increased, then the schedule of escrow payments set forth in Table 3.4 above shall be increased as follows: the increase in the Contract Price resulting from the increase in the per unit price of Repeaters shall be spread proportionately over those payments of Escrow Payment Nos. 7-11 remaining to be paid by Customer and the amount of such payments shall be increased by the applicable proportion of the increase in the Contract Price. Likewise, in the event the per unit price of Repeaters set forth in Section 2.2 (Repeater Unit Pricing) above is decreased, then the schedule of escrow payments set forth in Table 3.4 above shall be decreased as follows: the decrease in the Contract Price resulting from the decrease in the per unit price of Repeaters shall be spread proportionately over those payments of Escrow Payment Nos. 7-11 remaining to be paid by Customer and the amount of such payments shall be decreased by the applicable proportion of the decrease in the Contract Price. (c) The Parties agree that the schedule of payments set forth in Table 3.4 above shall be adjusted on account of sales taxes as follows. Within ten (10) Business Days following the end of each month, Contractor will furnish Customer with a report setting forth the sales taxes applicable for Repeaters shipped during the month just ended. Customer will deposit an amount equal to such sales taxes into the Payment Escrow Account with the next Escrow Payment due, except in the case of Escrow Payment No. 10, within fifteen (15) Business Days of receipt of Contractor's report. Customer will assist Contractor in identifying the ultimate destination of the Repeaters on a weekly basis. 4. OPTION PRICING 4.1 Pricing for Optional Repeaters. In the event Customer exercises its option to purchase additional Repeaters in accordance with Article 26 (Options) of the Terms and Conditions, the following pricing terms shall apply to such optional Repeaters: - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 9 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. (a) Subject to paragraphs (b) and (e) below, the firm fixed price per Repeater as set forth in Section 2.1(b) (Repeater Unit Pricing) above shall apply with respect to any Customer order for optional Repeaters, provided such order complies with the following requirements: (1) Customer orders such optional Repeaters prior to [*****] (the "Initial Option Period"); and (2) each order for optional Repeaters is for at least [*****] Repeaters. (b) Contractor requires an adequate minimum Repeater production order for each month following the Project Completion Date to assure a continuous supply from Subcontractors of LRUs and other Repeater components, parts and subparts. Accordingly, on a monthly basis beginning March 2000, Contractor will advise Customer as to the minimum monthly Repeater production rates required to maintain the Repeater manufacturing facilities on-line to accommodate Customer's future orders of optional additional Repeaters (if any) without incurring additional production costs. The minimum monthly production requirement will be subject to mutual agreement by the Parties (which agreement shall not be unreasonably withheld), but in no event will the minimum monthly production requirement exceed [*****] Standard Repeaters per month. If a follow-on order falls below the minimum monthly production requirement, Contractor will provide Customer with proof of additional production costs (if any) relating to such smaller order and the Parties will negotiate an equitable adjustment to the per unit prices set forth in Table 2.2 to account for such additional costs. (c) Contractor will use best commercial efforts to minimize any price increase for Customer orders of less than [*****] optional Repeaters. (d) In the event Customer orders optional Repeaters before the expiration of the Repeater Option Period, but after the last day of the Initial Option Period, Contractor shall use its best commercial efforts to propose the lowest price possible for such optional additional Repeaters. (e) As part of the initial procurement of LRUs and other Repeater components, parts or sub-parts to be used with respect to the Nominal Order, Contractor shall use commercially reasonable efforts to negotiate competitive pricing terms and price protection on LRUs, components, parts and sub-parts with its suppliers and Subcontractors, such competitive pricing terms or price protections to apply, to the degree commercially reasonable, to subsequent orders of optional Repeaters. Such competitive pricing terms shall include a mechanism to limit the amount of any price increases in such LRUs, components, parts or sub-parts from year to year following the Project Completion Date, such mechanism to apply a commercially reasonable and appropriate economic index or cost-of-living adjustment index to be determined by - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 10 CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Contractor and its suppliers and Subcontractors. In any event, if a cost increase occurs with respect to any order for optional Repeaters, the option price for such optional Repeaters will be adjusted on a dollar-for-dollar basis to account for increases in the costs of the LRUs, components, parts and sub- parts. Customer will have the right to review all supplier and Subcontractor documentation connected with any change to the Repeater unit prices set forth herein with respect to any Customer order for optional Repeaters. 4.2 NMS Video Wall. If Customer elects, at its sole discretion, to exercise the option set forth in Article 26 (Options) of the Terms and Conditions to purchase the full- motion "video wall" for use in conjunction with the Network Management System, Contractor agrees to provide the optional "video wall" to Customer for a not to exceed price of [*****], which firm fixed price includes design, development, manufacture, delivery, installation, insurance and warranty coverage for such optional video wall. Contractor shall propose to Customer a firm fixed price on or before [*****]. 4.3 Extended Warranty on Repeaters. In the event Customer elects to exercise its option, pursuant to Article 17.10(b) of the Terms and Conditions, to extend the applicable Warranty Period for any Repeater, Customer shall pay Contractor the amount of [*****] Dollars for each Repeater for the [*****] month optional extended Warranty Period. - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 11 ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. 4.4 Annual Maintenance of NMS. In the event Customer elects to exercise its option, pursuant to Article 26.4 (Annual Maintenance of NMS) of the Terms and Conditions, to purchase annual maintenance of the NMS, Customer shall pay Contractor an annual amount not to exceed [*****]. - -------------------------------------------------------------------------------- Exhibit C - Pricing, Milestones and Payment Plan Page 12 CONFIDENTIAL **** Confidential treatment has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION EXHIBIT D DELIVERY REQUIREMENTS AND SCHEDULE CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. Exhibit D Delivery Requirements and Schedule Delivery Requirements
- -------------------------------------------------------------------------------- Deliverable Item/Event Delivery Requirement - -------------------------------------------------------------------------------- [*****] [*****] - --------------------------------------------------------------------------------
* To be completed in accordance with the applicable Milestone Achievement Criteria set forth in Article 3.1 of Exhibit C (Pricing, Milestones and Payment Plan) on or before the applicable Delivery Requirement date set forth in the table above. ** To be completed in accordance with the requirements of Article 2.3 (Weight and Size of Standard Repeaters) and Article 7 (Delivery and Time for Performance) of the Terms and Conditions. *** To be completed in accordance with the requirements of Article 2.3 (Weight and Size of Standard Repeaters), Article 7 (Delivery and Time for Performance) and Article 8 (Testing Criteria and Acceptance) of the Terms and Conditions. **** To be completed in accordance with the requirements of Article 7 (Delivery and Time for Performance) and Article 8 (Testing Criteria and Acceptance) of the Terms and Conditions. CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. FORM OF DELIVERY SCHEDULE Contractor shall use its best commercial efforts to deliver the Work to Customer in accordance with the requirements of the Contract. This Delivery Schedule shall be updated from time to time in accordance with Article 7 (Delivery and Time for Performance) of the Contract. The delivery schedule for deliverable items pursuant to this Contract are listed in the table below. Such items shall be delivered by Contractor to the destinations indicated, during the range of dates specified in such table (each a "Delivery Period"), as such Delivery Periods or other terms of delivery may be adjusted in accordance with the Contract. Contractor understands and agrees that, with respect to the applicable Delivery Period for each deliverable item, whether such item is set out in this Contract or subsequent Amendments to this Contract, time is of the essence. Nothing in the foregoing sentence shall in any way modify either the specific remedies for default specified elsewhere in this Contract, including Article 7.3 (Liquidated Damages for Late Delivery of Repeaters) and Article 25.2 (Termination for Contractor's Default).
- ------------------------------------------------------------------------------------------ Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------ 1. [*****] [*****] [*****] - ------------------------------------------------------------------------------------------ 2. ___ Standard Repeaters No earlier than ________ Staging Area __* (Enclosure Kits for ___ 2000 and no later than Standard Non-Redundant ________ 2000 Installation Site: ________* Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 3. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 4. Enclosure Kits for___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ Installation Site: _________ Standard Non-Redundant 2000 Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 5. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ Installation Site: ________ Standard Non-Redundant 2000 Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 6. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 7. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 8. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 9. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 10. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2000 and no (Enclosure Kits for ___ later than ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 11. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 12. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 13. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 14. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 15. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 16. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 17. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 18. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2001 and no later than (Enclosure Kits for ___ ________ 2001 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 19. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 20. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2000 and no later than (Enclosure Kits for ___ ________ 2000 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
CONFIDENTIAL
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 21. ___ Standard Repeaters No earlier than ________ Staging Area __ (Enclosure Kits for ___ 2000 and no later than Standard Non-Redundant ________ 2000 Installation Site: ________ Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------- 22. Enclosure Kits for ___ No earlier than ________ Staging Area __ Standard Repeaters 2001 and no later than (Enclosure Kits for ___ ________ 2001 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- ***** Certain information on this page has been with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------- Deliverable Item Delivery Period Place of Delivery - ------------------------------------------------------------------------------------------------- 23. Enclosure Kits for ___ No earlier than Staging Area __ Standard Repeaters ________ 2001 and no (Enclosure Kits for ___ later than ________ 2001 Installation Site: ________ Standard Non-Redundant Repeaters; Enclosure Kits for ___ Standard Sectored Non-Redundant Repeaters) Enclosure Kits for ___ High-Power Repeaters (Enclosure Kits for ___ High-Power Redundant Repeater; Enclosure Kits for __ High-Power Sectored Redundant Repeater) - ------------------------------------------------------------------------------------------------------------- 24. Additional entries for subsequent deliveries shall be added as needed and as this Delivery Schedule is updated from time to time in accordance with the Contract. - ------------------------------------------------------------------------------------------------------------- 25. [*****] [*****] [*****] - ------------------------------------------------------------------------------------------------------------- 26. [*****] [*****] [*****] - ------------------------------------------------------------------------------------------------------------- 27. [*****] [*****] [*****] - ------------------------------------------------------------------------------------------------------------- 28. [*****] [*****] [*****] - ------------------------------------------------------------------------------------------------------------- 29. [*****] [*****] [*****] - -------------------------------------------------------------------------------------------------------------
* Enclosure Kits for Standard Repeaters are to be delivered to Staging Areas and Enclosure Kits with Klystron Kits for High-Power Repeaters to Installation Sites. The Staging Areas noted in the table above correspond to the Staging Area to be located in the following cities:
- --------------------------------------------------------------------------- Staging Area Location (by City) - --------------------------------------------------------------------------- [*****] [*****] - ---------------------------------------------------------------------------
CONFIDENTIAL CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT BY AND BETWEEN XM SATELLITE RADIO INC. AND HUGHES ELECTRONICS CORPORATION EXHIBIT E TEST PLANS AND PROCEDURES CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. CONFIDENTIAL EXHIBIT E TEST PLANS AND PROCEDURES **** Confidential treatment has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONFIDENTIAL CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM Satellite Radio Inc. and HUGHES ELECTRONICS CORPORATION EXHIBIT F QUALITY ASSURANCE PLAN CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. [*****] This entire Exhibit F has been redacted for confidentiality reasons. CONFIDENTIAL [LOGO] 2 CONFIDENTIAL **** Confidential treatment has been requested for portions of this agreement. The copy filed herewith omits the information subject to the confidentiality request. Omissions are designated as [*****]. A complete version of this agreement has been filed separately with the Securities and Exchange Commission. CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT BY AND BETWEEN XM SATELLITE RADIO INC. AND HUGHES ELECTRONICS CORPORATION EXHIBIT G KEY CONTRACTOR PERSONNEL CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. CONFIDENTIAL ***** Certain information on this page has been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested with respect to the omitted portions. EXHIBIT G KEY CONTRACTOR PERSONNEL Position Individual [*****] [*****] CONFIDENTIAL CONTRACT FOR THE DESIGN, DEVELOPMENT AND PURCHASE OF TERRESTRIAL REPEATER EQUIPMENT By and Between XM SATELLITE RADIO INC. and HUGHES ELECTRONICS CORPORATION EXHIBIT H TECHICAL MATERIALS ESCROW AGREEMENT CONFIDENTIALITY NOTICE ---------------------- This attached Contract and the information contained herein is confidential to XM Satellite Radio Inc. and Hughes Electronics Corporation, and shall not be published or disclosed to any third party without the express written consent of a duly authorized representative of XM Satellite Radio Inc. and Hughes Electronics Corporation. TECHNICAL MATERIALS ESCROW AGREEMENT Account Number: _______________ Recitals This Technical Materials Escrow Agreement including any Schedules ("Escrow Agreement") is effective this ______ day of __________, 1999 ("Effective Date"), by and among DSI Technology Escrow Services, Inc. ("DSI"), a Delaware corporation, XM Satellite Radio Inc., ("XM"), a Delaware corporation, and Hughes Electronics Corporation ("Contractor"), a Delaware corporation, by and through its division, Hughes Network Systems. WHEREAS, Contractor and XM have entered into a Contract for the Design, Development and Purchase of Terrestrial Repeater Equipment, dated _________, 1999 (the "Contract"); and WHEREAS, pursuant to said Contract, Contractor has agreed to deposit in escrow the Technical Materials, as defined and more specifically set forth in the Contract, which are proprietary to Contractor (except as otherwise expressly set forth in the Contract) ; and The parties hereto agree as follows: 1. Definitions. Other than those terms defined herein, the defined terms ----------- (initial caps) used herein have the same meanings as set forth in the Contract. 2. Deposit Account. Following the execution and delivery of this Escrow --------------- Agreement and the payment of the set-up and deposit account fees to DSI, Contractor, XM and DSI shall open a deposit account ("Deposit Account"). The opening of the Deposit Account means that DSI shall establish an account ledger in the name of Contractor and XM, calendar Contractor and XM to receive renewal notices from DSI as provided in Section 9 below, and request the Initial Deposit, as defined in Section 3 below ("Initial Deposit") from Contractor unless and until an Initial Deposit has already been delivered to DSI. Unless and until DSI receives such Initial Deposit, DSI shall have no further obligation to Contractor and XM. 3. Initial Deposit. The Initial Deposit will consist of the Technical ---------------- Materials as such term is defined in the Contract as specified by an accompanying document called a "Description of Deposit Materials" hereinafter referred to as "Exhibit B". DSI shall issue a completed copy of a signed and dated "Description of Deposit Materials" in the form of Exhibit B of the foregoing items, to Contractor and XM within ten (10) days of receipt of the Initial Deposit by DSI. 4. Deposit Changes. "Deposit" as used in this Escrow Agreement means and ---------------- includes the Initial Deposit and any Supplemental Deposit. "Supplemental Deposit" means and includes the following items: any and all updates to the Technical Materials as required to ensure that the Deposit contains the Technical Materials that are applicable to the Prototype Repeaters, Standard Repeaters, High-Power Repeaters, each Module, and the Network Management System then-being utilized by XM. Contractor will submit the Supplemental Deposit accompanied by an Exhibit B. DSI shall issue a completed copy of a signed and dated "Description of Deposit Materials" in the form of Exhibit B of the foregoing items to Contractor and XM within ten (10) days of receipt of any Supplemental Deposit by DSI. 5. Deposit Inspection. Upon receipt of the Initial Deposit and each ------------------ Supplemental Deposit, if any, DSI will visually match the listed items to the labeling of the material delivered by Contractor ("Deposit Inspection"). DSI will not be responsible for the contents of any Deposit or for validating the accuracy of Contractor's labeling of a Deposit. 6. Registration Account. Following the execution and delivery of this Escrow -------------------- Agreement and the payment of the registration fee to DSI, DSI shall open a registration account ("Registration Account") for Contractor and XM. The opening of the Registration Account means that DSI shall establish an account ledger in the name of Contractor and XM, calendar Contractor and XM to receive renewal notices as provided in Section 9, and request payment of the DSI escrow fee. Unless and until DSI receives the initial registration fee payment, DSI shall have no obligation under this Escrow Agreement to Contractor or XM. 7. Deposit Obligations of Confidentiality. DSI agrees to establish a -------------------------------------- receptacle in which it shall place the Deposit and shall put the receptacle under the control of one or more of its officers, selected by DSI, whose identity shall be available to Contractor and XM at all times. DSI shall exercise a professional level of care in carrying out the terms of this Escrow Agreement. DSI acknowledges that Contractor and XM have advised DSI that the Deposit contains valuable confidential and proprietary information, data, material and technology and that DSI has an obligation to preserve and protect the confidentiality of the materials in the Deposit. DSI shall, and shall cause its officers, employees, agents and representatives to, maintain all data, material, information and technology forming the Deposit in confidence and shall not disclose any of the same nor make use of any of the Deposit for its own benefit or gain or for any purpose or in any manner other than as contemplated by this Escrow Agreement. Upon termination of this Escrow Agreement in accordance with the terms hereof, the Deposit shall be disposed of in accordance with Contractor's instructions or if instructions are not received by DSI within thirty (30) days of termination, then DSI may destroy the Deposit and confirm in writing to Contractor that it has destroyed the Deposit and the date and method of destruction. No right or license is granted to DSI to duplicate any item in the Deposit for any reason whatsoever without the consent and agreement of Contractor. 8. Verification Rights. Contractor grants to DSI the right to inventory the -------------------- Initial Deposit and each Supplementary Deposit, if any, for accuracy, completeness and sufficiency. No other rights or licenses are granted to DSI. XM shall have the right to cause a verification of any Deposit Materials. If a verification is elected after the Deposit Materials have been delivered to DSI, then only DSI, or at DSI's election an independent person or company selected and supervised by DSI, may perform the verification. Either or both Contractor or XM may be present at DSI's facility to observe any DSI inventory or audit of the Initial Deposit and each Supplementary Deposit by DSI. 9. Term of Agreement. This Escrow Agreement shall have an initial term of one ----------------- (l) year, commencing on the Effective Date and shall be continuously renewable as long as the fees are paid. In the event of the non-payment of fees owed to DSI, DSI shall provide written notice of delinquency to all parties to this Escrow Agreement thirty (30) days prior to expiration of the Contract. Any party to this Escrow Agreement shall have the right to make the payment to DSI to cure the default. If the past due payment is not received in full by DSI within thirty (30) days of the date of such notice, then DSI shall have the right to terminate this Escrow Agreement at any time thereafter by sending written notice of termination to all parties. DSI shall have no obligation to take any action under this Escrow Agreement so long as any payment due to DSI remains unpaid. Notwithstanding anything to the contrary herein, this Escrow Agreement may not be terminated so long as XM or Contractor pays the fees owed to DSI hereunder. 10. Expiry. If this Escrow Agreement expires or is otherwise terminated, all ------ duties and obligations of DSI to Contractor and XM, except DSI's obligations of confidentiality pursuant to Section 7 hereof, will terminate upon expiration or termination of this Escrow Agreement. DSI shall request instructions from Contractor with respect to return or disposal of the items in Escrow, and if DSI does not receive any instructions from Contractor, DSI may dispose of (destroy) the Deposit in accordance with Section 7. 11. Release of Deposit to XM. Upon written notice or request to DSI by XM to ------------------------- audit, access or inventory or require any reporting/information regarding the Escrow, DSI shall promptly advise Contractor in writing, by telecopier and by over-night courier. With respect to the Release Conditions specified in Article 13(a)(1)-(4) of the Contract only, XM may notify DSI that one or more of the Release Conditions (as such term is defined in the Contract) has occurred, and DSI shall notify Contractor of the XM notice, by no later than three (3) Business Days after receipt of such notification from XM. Ten (10) Business Days after notification to Contractor, DSI shall deliver the Deposit to XM, unless, in the interim, XM or a court order directs DSI not to deliver the Deposit. With respect to the Release Condition specified in Article 13(a)(5) of the Contract only, XM may notify DSI that this Release Condition has occurred, and DSI shall notify Contractor of the XM notice by no later than three (3) Business Days after receipt of such notification from XM. Ten (10) Business Days after notification to Contractor, DSI shall deliver the Deposit to XM, unless, in the interim, XM or a court order directs DSI not to deliver the Deposit or Contractor delivers a written notice of its objection to DSI concerning the release of the Deposit within such ten (10) Business Day period. In the event that a written notice of objection is received by DSI from Contractor within the ten (10) Business Days following the delivery of XM's notice that a Release Condition as set forth in Article 13(a)(5) of the Contract has occurred, DSI shall not release the Deposit to XM unless and until any dispute relating to whether or not such Release Condition has occurred has been resolved (either by written agreement of the parties or arbitral award) such that it is determined that the Release Condition set forth in Article 13(a)(5) has occurred. Any such dispute shall not be subject to Article 13 (Disputes) of this Escrow Agreement, but shall instead be governed by the escrow arbitration provisions set forth in Article 13 (Technical Materials Escrow) of the Contract, and DSI shall be bound by any resulting award as evidenced by a copy of the certificate of the arbitrator. Following delivery of the Deposit to XM, in the event it is determined by XM or by court order or arbitral award that the Release Condition did not occur as stated by XM, XM will return the Deposit to DSI as long as DSI's fees are received pursuant to Section 19. DSI shall not deliver any items in Escrow to any person other than XM, without the prior written consent and agreement of Contractor. 12. Return to Escrow. Following release from Escrow, and pursuant to Section ---------------- 19, XM shall return the Deposit to Escrow in accordance with the terms of the Contract. 13. Disputes. Except as otherwise provided in Section 11 above, any and all -------- disputes arising at any time under this Escrow Agreement or relating to this Escrow Agreement, or the interpretation or performance (or non- performance) of the terms of this Escrow Agreement, shall be finally resolved and settled by arbitration in accordance with the [International] Arbitration Rules of the American Arbitration Association ("AAA"). Contractor and XM shall each select one impartial arbitrator, and a third impartial arbitrator will be selected unanimously by said two (2) arbitrators. If there are three (3) arbitrators selected in accordance with the foregoing, the arbitration shall proceed. If said two (2) arbitrators are unable to select the third arbitrator within ten (10) Business Days of their selection by the parties, the third impartial arbitrator shall be selected by the AAA. Unless otherwise agreed to by Contractor and XM, arbitration will take place in Washington, DC. The decision of a majority of the arbitrators shall be final and binding and may be enforced by any court having proper jurisdiction. Pending the final determination of the arbitrators, either Party shall have the right to obtain such equitable relief to preserve the status quo and to protect its proprietary matter, including obtaining injunctive relief. The arbitrators may, subject to their signing a non-disclosure of Confidential Information Agreement agreeing not to disclose the contents of the Escrow, review the items Deposited in Escrow as is reasonably necessary for the arbitrators to reach a decision regarding the matter in dispute and submitted to arbitration by the parties. The arbitrators shall not have the right, power, or authority to grant any rights or licenses with respect to the Deposit to any persons whomsoever or to require that the same be delivered or made available to any person other than XM. The arbitrators shall determine who shall bear (and in what proportions) the cost of the proceedings including reasonable attorneys fees and costs. 14. Indemnification. DSI shall be responsible to perform its obligations under --------------- this Escrow Agreement and to act in a reasonable and prudent manner with regard to this escrow arrangement. Provided DSI has acted in the manner stated in the preceding sentence, Contractor and XM each agree to defend and indemnify DSI and hold DSI harmless from and against all claims, actions and suits, whether in contract or in tort, and from and against any and all liabilities, losses, damages, costs, charges, penalties, counsel fees, and other expenses of any nature (including, without limitation, settlement costs) incurred by DSI as a result of performance of this Escrow Agreement except in the event of a judgment or award which specifies that DSI breached this Escrow Agreement. 15. Audit Rights. DSI agrees to keep records of the activities undertaken and ------------ materials prepared pursuant to this Escrow Agreement. Contractor will be entitled upon reasonable notice and during normal business hours during the term of this Escrow Agreement through independent outside auditors, or in- house auditors, to inspect and audit the records of DSI with respect to this Escrow Agreement. 16. Designated Representative. Contractor and XM each agree to designate one -------------------------- individual to communicate with DSI respectively in relation to the performance of their obligations as set forth in this Escrow Agreement and to notify DSI in writing immediately in the event of any change: The XM representative is: XM Satellite Radio Inc. 1250 23rd Street, NW Suite 57 Washington, DC 20037 Tel. No.: 202-969-7074 Fax No.: 202-969-7124 Attention: Joseph M. Titlebaum, Esq. The Contractor representative is: Hughes Electronics Corporation c/o Hughes Network Systems 10450 Pacific Center Ct. San Diego, CA 92121 Tel. No.: 858-452-4717 Fax No.: 858-457-4994 Attention: Neil Wilson Copy to: Site Counsel 10450 Pacific Center Ct. San Diego, CA 92121 Or to such other addresses as may be indicated by the respective party by notice given in the same manner. 18. General. -------- (a) DSI may act in reliance upon any written instruction, instrument, or signature believed to be genuine and unless otherwise notified, may assume that any employee or attorney representing either Contractor or XM giving any written notice, request, advice or instruction in connection with or relating to this Escrow Agreement has been duly authorized by its respective employer (or client) to do so. DSI is not responsible for failure to fulfill its obligations under this Escrow Agreement due to causes beyond DSI's control. (b) This Escrow Agreement is to be governed by and construed in accordance with the substantive and procedural laws of the State of New York. (c) This Escrow Agreement, including any Schedules, constitutes the entire agreement between the parties concerning the subject matter hereof, and supersedes all previous communications, representations, understandings, and agreements (other than the Contract) either oral or written, between the parties. (d) Contractor and XM acknowledge that DSI has no knowledge of the terms and conditions contained in the Contract and that DSI's only obligations shall be as set forth herein or in any other writing signed by DSI, Contractor and XM. (e) If any provision of this Escrow Agreement is held by any court to be invalid or unenforceable, that provision will be severed from this Escrow Agreement and any remaining provisions will continue in full force. (f) All notices under this Escrow Agreement shall be in writing and shall be sent by telefax (with a copy deposited at the same time in the mail or sent by express courier postage or courier fees prepaid), or by registered or certified mail (postage prepaid), or by express courier service (courier fees prepaid) to: If to Contractor: Hughes Electronics Corporation 10450 Pacific Center Ct. San Diego, CA 92121 Attention: Neil Wilson Telephone: 858-452-4717 Facsimile: 858-457-4994 Copy to: Site Counsel 10450 Pacific Center Ct. San Diego, CA 92121 If to Customer: XM Satellite Radio Inc. 1250 23/rd/ Street, NW, Suite 57 Washington, DC 20037 Attention: Joseph M. Titlebaum, Esq. Telephone: 202-969-7074 Facsimile: 202-969-7124 If to DSI: DSI Technology Escrow Services, Inc. Attn: Contract Administration 9265 Sky Park Court, Suite 202 San Diego, CA 92123 Telephone: 858-499-1600 Facsimile: 858-694-1919 or to such other address as may be specified in accordance with this section. Notice shall be deemed to have been given at the expiration of two (2) Business Days after it is sent by telefax and confirmed, and/or five (5) Business Days from the date it is deposited postage prepaid with the postal service or given to an express courier service. 19. Fees. All service fees, including annual renewal fees, will be due in full ----- within thirty (30) days after receipt of the invoice therefor. If invoiced fees are not paid within thirty (30) days of the receipt of the invoice, DSI may terminate this Escrow Agreement following sending notices in accordance with Section 9 above. If a payment is not timely received by DSI, DSI shall have the right to accrue and collect interest thereon at the rate of one and one-half percent per month (18% per annum) from the 31st day on which payment is due, for all late payments. Attached hereto, is the current Fee Schedule of DSI (Exhibit C). All service fees and annual renewal fees shall be those specified in DSI's Fee and Service Schedule in effect at the time of renewal or request for service, except as otherwise agreed. For any increase in DSI's standard fees, DSI shall notify Contractor at least ninety (90) days prior to the anniversary date of this Escrow Agreement. For any service not listed on the Fee and Service Schedule, DSI shall provide a quote prior to rendering such service. Date: Date: Date: Hughes Electronics Corporation XM Satellite Radio Inc. DSI Technology Escrow Services, Inc. By: ___________________ By: _________________ By:________________ ________________________ ______________________ ____________________ (Print Name) (Print Name) (Print Name) _________________ ____________________ __________________ Title Title Title CONFIDENTIAL EXHIBIT A DESIGNATED CONTACT Account Number ______________________ Notices, deposit material returns and communications to Depositor Invoices to Depositor should be should be addressed to: addressed to: Company Name:__________________________ _______________________________ Address:_______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ Designated Contact:____________________ Contact:_______________________ Telephone:_____________________________ _______________________________ Facsimile: P.O.#, if required:____________ Notices and communications to Invoices to Preferred Preferred Beneficiary should be addressed to: Beneficiary should be addressed to: Company Name:__________________________ _______________________________ Address:_______________________________ _______________________________ _______________________________ _______________________________ _______________________________ _______________________________ Designated Contact:____________________ Contact:_______________________ Telephone:_____________________________ _______________________________ Facsimile:_____________________________ P.O.#, if required:____________ Requests from Depositor or Preferred Beneficiary to change the designated contact should be given in writing by the designated contact or an authorized employee of Depositor or Preferred Beneficiary. Contracts, deposit materials and notices to Invoice inquiries and fee DSI should be addressed to: remittances to DSI should be addressed to: DSI DSI Contract Administration Accounts Receivable Suite 202 Suite 1450 9265 Sky Park Court 425 California Street San Diego, CA 92123 San Francisco, CA 94104 Telephone: (858) 499-1600 (415) 398-7900 Facsimile: (858) 694-1919 (415) 398-7914 Date:_________________________________ CONFIDENTIAL EXHIBIT B DESCRIPTION OF DEPOSIT MATERIALS Depositor Company Name __________________________________________________ Account Number___________________________________________________________ Product Name _______________________________ Version____________________ (Product Name will appear on Account History report) DEPOSIT MATERIAL DESCRIPTION: Quantity Media Type & Size Label Description of Each Separate Item (Please use other side if additional space is needed) ________ Disk 3.5" or ____ ________ DAT tape ____mm ________ CD-ROM ________ Data cartridge tape ____ ________ TK 70 or ____ tape ________ Magnetic tape ____ ________ Documentation ________ Other ______________________ PRODUCT DESCRIPTION: Operating System________________________________________________________ Hardware Platform_______________________________________________________ DEPOSIT COPYING INFORMATION: Is the media encrypted? Yes/No If yes, please include any passwords and the decryption tools. Encryption tool name_______________________________ Version__________________ Hardware required_________________________________________________________ Software required_________________________________________________________ I certify for Depositor that the above described DSI has inspected and accepted the above Deposit Materials have been transmitted to DSI: materials (any exceptions are noted above): Signature___________________________ Signature____________________ Print Name _________________________ Print Name___________________ Date________________________________ Date Accepted________________ Exhibit B#___________________ Send materials to: DSI, 9265 Sky Park Ct., Suite 202, San Diego, CA 92123 (858) 499-1600 CONFIDENTIAL EXHIBIT C Fee & Services Schedule - ------------------------------------------------------------------------------ NEW ESCROW AGREEMENT ANNUAL FEE SETUP FEE Preferred $1,350 $1,050 ADDITIONAL BENEFICIARY (if desired) Preferred $650/ea. $1,000 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SERVICE OPTIONS FEES - ------------------------------------------------------------------------------- Unlimited deposit or replacement plus one additional storage unit $300/yr./1/ - ------------------------------------------------------------------------------- Individual deposit updates or replacements $200/ea. - ------------------------------------------------------------------------------- DeposiTrack updates $300/ea./1/ - ------------------------------------------------------------------------------- Remote vaulting $500/yr. - ------------------------------------------------------------------------------- Release filing fee No Fee/2/ - ------------------------------------------------------------------------------- Custom contracts No Fee/3/ - ------------------------------------------------------------------------------- Additional storage units $100/ea. - ------------------------------------------------------------------------------- Technical verification (estimates based on $200/hr.) Verification Level I $800/1/ -------------------- Verification Level II $1,200 - $1,600 --------------------- Verification Level III $3,200 - $6,400 ---------------------- - -------------------------------------------------------------------------------- _________________ /1/ Included in the Comprehensive Preferred annual fee. /2/ Copying expenses in excess of $300 will be chargeable. /3/ A one-time fee of $500 may be assessed for contract modifications that change DSI's standard processes. EX-23.1 4 EXHIBIT 23.1 Exhibit 23.1 INDEPENDENT AUDITORS' CONSENT The Board of Directors XM Satellite Radio Holdings Inc. and Subsidiaries: We consent to the incorporation by reference in the registration statement No. 333-92049 on Form S-8 of XM Satellite Radio Holdings Inc. and Subsidiaries of our report dated February 16, 2000, except for Note 14 which is as of March 15, 2000, with respect to the consolidated balance sheets of XM Satellite Radio Holdings Inc. and Subsidiaries (a development stage company) as of December 31, 1998 and 1999 and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1999 and for the period from December 15, 1992 (date of inception) to December 31, 1999, and related schedule, which report appears in the December 31, 1999 annual report on Form 10-K of XM Satellite Radio Holdings Inc. and subsidiaries. Our report, dated February 16, 2000, except for Note 14 which is as of March 15, 2000, contains an explanatory paragraph that states that 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. The consolidated financial statements do not include any adjustments that might result from the outcome of that uncertainty. /s/ KPMG LLP McLean, Virginia March 15, 2000 EX-27 5 EXHIBIT 27
5 This schedule contains summary financial information extracted from the Company's Consolidated Balance Sheet, Consolidated Statement of Loss, and Consolidated Statement of Cash Flows, in each case for the year ended December 31, 1999, and is qualified in its entirety by reference to such consolidated financial statements. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 50,698 69,472 0 0 0 121,247 365,256 347 515,189 26,560 0 0 108 444 484,465 515,189 0 0 0 30,691 0 0 6,205 (36,896) 0 (36,896) 0 0 0 (36,896) (2.40) (2.40)
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