-----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, Skpjs+X22kwuHqzG90gRkL/U6QMJdbjBvaftRzPFeiKeA9yIHaGi/dd+xIlH7B+3 LYjoxO6aHuolwo9O+HS7iA== 0000928385-01-000839.txt : 20010316 0000928385-01-000839.hdr.sgml : 20010316 ACCESSION NUMBER: 0000928385-01-000839 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010315 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: 1568558 BUSINESS ADDRESS: STREET 1: 1500 ECKINGTON PL NE CITY: WASHINGTON STATE: DC ZIP: 20002 BUSINESS PHONE: 2023804000 MAIL ADDRESS: STREET 1: 1500 ECKINGTON PL NE CITY: WASHINGTON STATE: DC ZIP: 20002 10-K 1 0001.txt 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, 2000 XM SATELLITE RADIO HOLDINGS INC. (Exact name of registrant as specified in its charter) Commission file number 000-27441 DELAWARE 54-1878819 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1500 ECKINGTON PLACE NE, WASHINGTON, DC 20002-2194 (Address of principal executive offices) (Zip code) 202-380-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Not Applicable Securities registered pursuant to Section 12(g) of the Act: Class A Common Stock, par value $.01 per share 8.25% Series B Convertible Redeemable Preferred Stock, par value $.01 per share (Title of Classes) --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] 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 6, 2001, is $254,917,830. XM SATELLITE RADIO INC. (Exact name of registrant as specified in its charter) Commission file number 333-39178 DELAWARE 52-1805102 (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) No.) 1500 ECKINGTON PLACE NE, WASHINGTON, DC 20002-2194 (Address of principal executive offices) (Zip code) 202-380-4000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act Not Applicable Securities registered pursuant to Section 12(g) of the Act Not Applicable Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] 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. [X] The aggregate market value of common stock held by non-affiliates of the registrant as of March 6, 2001 is $0. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. (Class) (Outstanding as of March 6, 2001) XM SATELLITE RADIO HOLDINGS INC. CLASS A COMMON STOCK, $0.01 PAR VALUE......................... 44,285,938 SHARES CLASS B COMMON STOCK, $0.01 PAR VALUE......................... 13,905,019 SHARES
XM SATELLITE RADIO INC. COMMON STOCK, $0.10 PAR VALUE.................. 125 SHARES (all of which are issued to XM Satellite Radio Holdings Inc.)
DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated: Portions of the definitive proxy statement for the Annual Meeting of Stockholders of XM Satellite Radio Holdings Inc. to be held on May 24, 2001, to be filed within 120 days after the end of XM Satellite Radio Holdings Inc.'s year, are incorporated by reference into Part III, Items 10-13 of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) XM SATELLITE RADIO INC. AND SUBSIDIARIES (A DEVELOPMENT STAGE COMPANY) TABLE OF CONTENTS
Page ---- PART I Item 1. Business...................................................... 1 Item 2. Property...................................................... 20 Item 3. Legal Proceedings............................................. 20 Item 4. Submission of Matters to a Vote of Security Holders........... 20 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders Matters....................................................... 21 Item 6. Selected Consolidated Financial Data.......................... 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..................................... 24 Item 7A. Quantitative and Qualitative Disclosures about Market Risk.... 30 Item 8. Financial Statements and Supplementary Data................... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...................................... 31 PART III Item 10. Directors and Executive Officers of the Registrant............ 32 Item 11. Executive Compensation........................................ 32 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................... 32 Item 13. Certain Relationships and Related Transactions................ 32 PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K........................................... 33 SIGNATURES.............................................................. 38 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.............................. F-1 SCHEDULE I--VALUATION AND QUALIFYING ACCOUNTS .......................... S-1
Except for any historical information, the matters we discuss in this Form 10-K 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. EXPLANATORY NOTE This annual report is filed jointly by XM Satellite Radio Holdings Inc. ("Holdings") and XM Satellite Radio Inc. ("XM"). XM is a wholly-owned subsidiary of Holdings. Unless the context requires otherwise, the terms "we," "our" and "us" refer to Holdings and its subsidiaries. This report on Form 10-K contains separate financial statements for each of Holdings and XM. The management's discussion and analysis section has been combined, focusing on the financial condition and results of operations of Holdings but including an explanation of any differences between the companies. PART I ITEM 1. BUSINESS Overview We seek to become a premier nationwide provider of audio entertainment and information programming. We will transmit our XM Radio service by satellites to vehicle, home and portable radios. We own one of two FCC licenses to provide a satellite digital radio service in the United States. We will offer a wide variety of music, news, talk, sports and other specialty programming on up to 100 distinct channels. We believe that customers will be attracted to our service because of its wide variety of formats, digital quality sound and coast-to-coast coverage. We are preparing to launch our satellites and have contracts with third party programmers, vendors and other partners. Key milestones achieved include the following: . $1.3 billion of equity and debt net proceeds raised to date; we are funded through our planned commencement of commercial operations in the summer of 2001 and into 2002; our strategic and financial investors include General Motors, Clear Channel Communications, DIRECTV, Telcom Ventures, Columbia Capital, Madison Dearborn Partners, American Honda and AEA Investors; . 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; Agreement with Freightliner Corporation to install XM radios in Freightliner trucks; . Boeing Satellite Systems completed construction of two high-powered satellites ("Rock" and "Roll") which are scheduled to be launched in March and May of this year; . Opening of our new headquarters and Broadcast Center in Washington, D.C. featuring over 80 interconnected all-digital studios; . Contracts with Delphi-Delco Electronics, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox, Clarion, SHARP, Blaupunkt, Fujitsu Ten, Hyundai Autonet, Bontec, Visteon, Panasonic and Sanyo to manufacture and distribute XM radios; . Completion of our production chipset design and commencement by ST Microelectronics, our chipset manufacturer, of fabrication to make the components available to radio manufacturers starting the end of March 2001; . At the Consumer Electronics Show (CES) in January 2001, six manufacturers, including Pioneer, Alpine, and Sony, unveiled 24 different models of XM-ready radios, we won the "Best of CES" award for the automotive category and the XM Sony "plug and play" device won the "CES Innovation 2001 Award" and the Popular Mechanics "Top 15 CES Products Award;" . Circuit City, Best Buy, Radio Shack, Sears & Roebuck Co., Tweeter, Ultimate, Al and Ed's, CarToys, Sound Advice, Mobile-One, Crutchfield, Cowboy Maloney's Electronic City and Magnolia Hi-Fi have announced that they intend to distribute and promote XM Radio products and services; and . Agreements with leading specialty programmers, for many of which we will be the exclusive satellite radio platform, covering at least 25 channels, including AsiaOne, Associated Press, Black Entertainment Television (BET), BBC World Service, Bloomberg News Radio, Clear Channel, CNBC, CNN en Espanol, CNNfn, CNN Sports Illustrated, Country Music Hall of Fame, C- SPAN, DIRECTV, Discovery, Firesign Theatre, Hispanic Broadcasting Corporation (formerly Heftel), NASCAR, One-on-One Sports, Radio One, Salem Communications, Sesame Workshop, Sporting News, Weather Channel and USA Today. 1 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 satellite television further indicate potential for significant consumer demand for satellite radio services. Radio Listening On average, adults listen to the radio 3.1 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, 2000-2001). 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 2000 climbed to $19 billion, an increase of 12% over 1999. Veronis, Suhler & Associates projects a compound annual increase of 9.5% through 2004. This growth rate exceeds the projected increase in advertising spending for television, newspapers, magazines, yellow pages and outdoor advertising (Communications Industry Forecast, 2000). Current Limitations on Programming Choice Many consumers have access to a limited number of stations and programming formats offered by traditional AM/FM radio. Our service is expected to be attractive to underserved radio listeners who want expanded radio choices. Limited Number of Radio Stations. The number of radio stations available to many consumers in their local market is limited in comparison to the up to 100 channels we expect to offer on a nationwide basis. In 2000, 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 2000 Ratings Report, Duncan's American Radio, 2000). 2 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 49% of all commercial radio stations use one of only three general programming formats--country, adult contemporary and news/talk/sports (Veronis, Suhler & Associates Communications Industry Forecast 2000). 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 a $9.95 monthly subscription fee and a radio price point of $150-$399 depending upon the type of car or home unit chosen. The study also anticipates that satellite radio will grow even faster than DBS. In December 1998, we commissioned SMART to conduct a study based on one-on- one interviews with over 1,000 licensed drivers ages 16 to 64 in ten geographically dispersed markets. The study concluded that approximately 50% of aftermarket radio purchases would be for AM/FM/satellite radio units with a single-disc CD player. This assumed a radio price point of $399, a $75 installation fee and a $10 monthly subscription fee for the service. The same study also found that consumers are more likely to buy satellite radio units that offer at least 80 channels. In November 1998, we commissioned Yankelovich Partners to gauge consumer interest in satellite radio. This involved surveying 1,000 people via telephone and correlating the results with the Yankelovich MONITOR study, which is the longest standing tracking study of consumer values and attitudes in the United States. The study indicated that 18% of people age 16 and older were "definitely" or "probably" willing to pay $9.99 per month to receive satellite radio and an additional $150 for a satellite radio when buying a new car. 3 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 variety/number Up to 100 channels with a Limited formats in many markets of stations wide variety of programming 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 music Text display with title/name No visual display 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 49% of all commercial radio stations in markets measured by Arbitron use one of only three programming formats: country; adult contemporary; or news/talk/sports. There are many types of music with significant popularity, as measured by recorded music sales and concert revenues, that are unavailable in many traditional AM/FM radio markets. Such music could include classical recordings or popular blues and rap music that have retail appeal but are not commonly played on traditional AM/FM radio. This music also includes special recordings such as the Irish dance soundtrack "Riverdance" and the "Three Tenors" concerts which generate millions of CD sales, yet are not typically played on today's AM/FM stations. Additionally, heavy metal and dance are two of the more popular musical styles not currently broadcast in many small and medium sized markets. Even major markets do not always offer a full complement of formats. Superserve popular music formats. We will be able to offer more specific programming choices than traditional AM/FM radio generally offers for even the most popular listening formats. For example, on traditional AM/FM radio oldies music is often generalized on a single format. We will be able to segment this category by offering several dedicated, era-specific formats. We also plan to offer up to six dedicated channels with urban formats and four distinct country music formats. Use more extensive playlists. Traditional AM/FM radio stations frequently use limited playlists that focus on artists and specific music that target the largest audience. With our large channel capacity and focus on specific formats, we have the ability to provide more variety to attract listeners dissatisfied with repetitive and/or limited playlist selection offered by traditional radio. Deliver a wide range of ethnic and informational programming. We will provide a variety of formats that target specific ethnic and special interest groups who are rarely served by traditional AM/FM radio. We 4 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 Broadcasting Classic Hard Rock All News (Bloomberg) Corp.) New Hard Rock Public Affairs (C-SPAN) Caribbean (Hispanic Broadcasting New Alternative Financial News (CNN fn) Corp.) Classic Alternative News/Information (BBC World Regional Mexican (Hispanic Soft Rock Service) Broadcasting Corp.) ECLECTIC MUSIC Travel, Home, Science, Animals Rock en Espanol (Hispanic - -------------- (Discovery) Broadcasting Corp.) Contemporary Christian Love/Relationship Line Hispanic Ballads (Hispanic (Salem) Farm/Rural Broadcasting Corp.) Traditional Christian Health/Fitness Hispanic News (CNN en Espanol) (Salem) Comedy OLDIES MUSIC Blues Audio Book ------------ Traditional Jazz 40's Oldies Reggae/Island 50's Oldies World Music 60's Oldies American Folk Consumer Classified 70's Oldies Pop Classical Soap Operas 80's Oldies Traditional Classical For Truckers Only 90's Oldies Modern Jazz Movie Soundtrack Channel Love Songs Progressive/Fusion Lifestyles TALK POP MUSIC Celebrity Gossip ---- - --------- Entertainment News African American Talk Top 20 Contemporary Hits Game Show/Contest (BET/Radio One) Disco/Dance URBAN MUSIC Asian/Indian Talk (AsiaOne) Broadway Show Tunes ----------- Christian/Family Talk (Salem) Modern Adult Contemporary Hip Hop/Rap (BET/Radio One) Mandarin Talk (AsiaOne) Classic Vocalists Urban Dance Mix (Radio One) Conservative Talk All Request Contemporary Classic Soul (BET/Radio One) Liberal Talk Hits Gospel (BET/Radio One) Senior Citizen Talk SPORTS Adult Urban (BET/Radio One) Rock Talk - ------ Top 20 Urban Hispanic Talk Sports Headlines ENVIRONMENTAL MUSIC Teen Talk (CNN/Sports) ------------------- CHILDREN'S MUSIC Sports Talk (One-On-One Soft Jazz ---------------- Sports, New Age Pre-School Sporting News) Electronic Grade School/pre-teen Sportsman Channel Environmental (Earth Sounds) SPECIAL/EVENTS Automotive (NASCAR) Beautiful Instrumentals -------------- COUNTRY MUSIC Reserved Channels - ------------- Mainstream Country Classic Country Bluegrass/Traditional Country All Request Country
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 25 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 -- AsiaOne Illustrated -- One-On-One Sports -- C-SPAN Radio -- BBC World Service -- Black Entertainment -- NASCAR Television -- Associated Press -- DIRECTV -- BBC Concerts -- Weather Channel -- Sporting News -- National Lampoon -- Sesame Workshop -- Discovery -- Country Music Hall of Fame
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. 7 Future Content Arrangements. Under our agreement with Sirius Radio, all new arrangements with providers of programming or content, including celebrity talent, must be non-exclusive and may not reward any provider for not providing content to the other party. Marketing and Distribution Our marketing strategy will be designed to build awareness and demand among potential subscribers in our target markets and the advertising community. In addition, we expect to work closely with radio and automotive manufacturers and retail distributors to promote rapid market penetration. Establish Broad Distribution Channels for XM Radios We plan to market our satellite radio service through several distribution channels including national electronics retailers, car audio dealers, mass retailers and automotive manufacturers. In addition, we will support our distribution channels by building awareness of XM Radio with a substantial introductory launch campaign, including national and local advertising. Exclusive Distribution Agreement with General Motors. We have an agreement with the OnStar division of General Motors whereby, for a 12-year period, General Motors will exclusively distribute and market the XM Radio service and install XM radios in General Motors vehicles beginning in 2001. General Motors sold over 4.9 million automobiles in 1999, which represented more than 29% of the United States automobile market. Under the agreement, we have substantial payment obligations to General Motors, including among others, certain guaranteed, annual, fixed payment obligations. While we have discussed with General Motors certain installation projections, General Motors is not required to meet any minimum targets for installing XM radios in General Motors vehicles. In addition, certain of the payments to be made by us under this agreement will not be directly related to the number of XM radios installed in General Motors vehicles. Other Automobile Manufacturers. We are currently in discussions with other car manufacturers regarding additional distribution agreements. 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. In addition, we have signed an agreement with Freightliner Corporation to install XM radios in Freightliner trucks. Distribution through Radio Manufacturers. We have signed contracts with Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Clarion, Blaupunkt, Fujitsu Ten, Hyundai Autonet, Bontec, Visteon, Panasonic and Sanyo 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 31% of car radios manufactured for installation in new automobiles in the United States in 2000 (J.D. Power and Associates Audio Quality Report). Delphi-Delco is also the leading manufacturer of car radios sold in General Motors vehicles and has signed a contract to build our radios for General Motors. Sony is the leader in sales of portable CD players by a large margin and one of the top three sellers of shelf systems. Sony has agreed to assist with marketing XM Radios and has agreed to incentive arrangements that condition its compensation on use of XM Radios manufactured by Sony or containing Sony hardware. Motorola is a leading supplier of integrated electronics systems to automobile manufacturers. Mitsubishi Electric Automotive America, together with its parent corporation, Mitsubishi Electric Corp., is the largest Japanese manufacturer of factory-installed car radios in the United States. Clarion is a leader in the car audio and mobile electronics industry. Two of our other manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together sold over 29% of aftermarket car radios sold in the United States in first eleven months of 2000 (NPD Intelect, January-November 2000). We have also signed a 8 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. 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. Retail Electronics Distributors. We anticipate that XM radios and the XM Radio service will be marketed and distributed through major consumer electronics retail channels, including Circuit City, Best Buy, Radio Shack, Sears, Tweeter, Ultimate, Al and Ed's, CarToys, Sound Advice, Mobile-One, Crutchfield, Cowboy Maloney's Electronic City and Magnolia Hi-Fi. 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 Interoperability Distribution Arrangements. We have signed an agreement with Sirius Radio to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both our and Sirius Radio's services. Both companies expect to work with their automobile and radio manufacturing partners to integrate the new standard. Future agreements with automakers and radio manufactures will specify the unified satellite radio standard. Furthermore, future agreements with retail and automotive distribution partners and content providers will be on a non-exclusive basis and may not reward any distribution partner for not distributing the satellite radio system of the other party. 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. We have signed TBWA/Chiat Day (Los Angeles) as our advertising agency of record. 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 9 such as DIRECTV and Web TV, will enable us to refine our launch implementation throughout the roll-out period. The advertising will consist of both branding and promotion efforts for XM Radio, as well as separate campaigns to promote and brand individual channels. Initially, we will focus marketing efforts on the various channels targeting young adults, who we believe are more likely to drive early penetration. We also expect to benefit from free local media coverage as XM Radio is first offered in each new market. XM Radio will promote subscriber acquisition activities with both original equipment and aftermarket radio manufacturers. This might include . promotional campaigns directed towards automobile manufacturers and dealers; . promotional campaigns for free months of service with purchase of an XM radio or free installations for aftermarket car radios; . incentive programs for retailer sales forces; . in-store promotional campaigns, including displays located in electronics, music and other retail stores, rental car agencies and automobile dealerships; and . jointly funded local advertising campaigns with retailers. Advertiser Development and Acquisition Our ability to aggregate various local niche market segments into national audiences will be attractive to national advertisers and agencies. We have held extensive meetings with media directors, planners and buyers at advertising and media buying agencies to develop advertiser awareness of the benefits of satellite radio. We expect to have advertising sales offices in seven major media markets to sell directly to advertising agencies and media buying groups 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. Among the advertisers and agencies we have sold advertising packages to are AT&T, Allstate, Sears, Goodyear, Bayer and J. Walter Thompson. 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 have designed 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. 10 Space Segment Satellite Construction. Boeing Satellite Systems, formerly Hughes Space and Communications, has built and will launch two Boeing 702 high-power satellites for the XM Radio system. Boeing is also building one ground spare satellite, expected to be completed in the next few months, to be available in the event of a failed launch of any satellite or to accommodate our satellite system growth. Boeing will also provide us with launch and operations support services, equipment and software. The Boeing 702 is the highest powered commercial communications satellite currently available. The first Boeing 702 satellite was successfully launched in the fourth quarter of 1999 and a total of three Boeing 702 satellites were currently scheduled for launch before the launch of our satellites. Our first satellite is scheduled to be launched by the end of the first quarter of 2001, and the second satellite shortly thereafter. Both communications payloads, provided by Alcatel, have been completed and integrated into the spacecraft bus. The communications payload electronics are designed to make best use of technologies that have already been developed or used in previous satellite programs. The design includes significant redundancy and protective measures to prevent loss of service. Satellite Transmission. Our two satellites will be deployed at 85 West Longitude and 115 West Longitude. After reaching their designated orbital location, the satellites will receive audio signals from our programming center and retransmit the signals across the continental United States. The satellites will be 30(degrees) apart in longitude in order to enhance the probability of clear line-of-sight communication between the satellites and XM mobile radios. The transmission coverage areas, or footprints, of our satellites encompass the 48 contiguous states and nearby coastal waters. We have tailored these footprints to provide nearly uniform availability over the United States and to minimize transmission spillage across the United States borders into Canada and Mexico. However, because coverage does extend to the Gulf of Mexico, the California coast and the Atlantic coast, we also expect to be able to provide XM Radio to the cruise ships, cargo vessels and leisure boats which frequent these waters. Our satellites will transmit audio programming within a 12.5 MHz range of S-Band radio frequencies that have been allocated by the FCC for our exclusive use. Megahertz is a unit of measurement of frequency. This 12.5 MHz bandwidth will be subdivided to carry the transmission of six signals, two signals to be transmitted from each of our two satellites and two signals to be transmitted by the terrestrial repeater network. The audio programming for XM Radio will be carried on two satellite signals, and the remaining two satellite signals and the terrestrial repeater signals will repeat the audio programming to enhance overall signal reception. The transmission of higher quality sound requires the use of more kilobits per second than the transmission of lesser quality sound. In order to provide high-quality digital sound, we expect that music channels will require approximately 56 to 64 kilobits per second, depending on the type of compression technology used, whereas talk channels will require significantly less bandwidth. We expect to use our allocated bandwidth in such a way as to provide up to 100 channels of programming, with our music channels having a high bandwidth allocation so as to provide high-quality digital sound. Launch Services. Hughes Space and Communications, now Boeing Satellite Systems, contracted with Sea Launch Limited Partnership, a joint venture in which Boeing Commercial Space Company has a controlling 40% interest, to provide the launch services for our satellites. The Sea Launch vehicle uses a new rocket called the Zenit-3SL, which is based on a two-stage rocket called the Zenit-2, plus a stage which is the upper stage of a Russian-developed rocket called the Proton rocket. The Sea Launch system launches 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 11 Launch successfully launched a rocket carrying an inert payload into geo- stationary orbit. Sea Launch also successfully launched its first commercial satellite, DIRECTV-1R, in October 1999. Four of the five launches from the Sea Launch platform have been successful. Our satellites are scheduled for launch in March and May, 2001. As of February, 2001, Sea Launch had contracts for an additional 11 launches. Insurance. We bear the risk of loss for each of the satellites from the time of launch, subject to exceptions set forth in our agreement with Boeing Satellite Systems, and we have obtained insurance to cover that risk. We have purchased launch and in-orbit insurance policies from global space insurance underwriters. The launch insurance premiums for both satellites are approximately $50 million. These policies 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. Coverage exceeds all hardware, insurance and launch service costs related to the in-orbit replacement of a lost satellite. However, our insurance will not protect us from the adverse effect on our business operations due to the loss of a satellite. Our policies contain standard commercial satellite insurance provisions, including standard coverage exclusions. Ground Segment Satellite Control. Each of our satellites will be monitored by a telemetry, tracking and control station, and both satellites will be controlled by a satellite control station. Each of the stations will have a backup station. We have a contract with an experienced satellite operator to perform the telemetry, tracking and control functions. Programming and Business Center. Programming from both our studios and external sources will be sent to our programming center, which will package and retransmit signals to our satellites through the uplink station. Financial services and certain administrative support will be carried on at our business center. Communications traffic between the various XM Radio facilities will be controlled by the network monitoring center. The network monitoring center will monitor satellite signals and the terrestrial repeater network to ensure that the XM Radio system is operating properly. We have designed and installed fault detection systems to detect various system failures before they cause significant damage. Terrestrial Repeaters. We are installing a terrestrial repeater system to supplement the coverage of our satellites. 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. 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 and started construction on many of the repeater sites. We have entered into a contract with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. We have contracted to purchase 1,550 terrestrial repeaters to cover urban areas in approximately 70 markets. We expect that this system will commence operation by the summer 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 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 12 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 expect to benefit from the expertise gained by Motient with its ARDIS terrestrial two-way data network consisting of approximately 1,700 base stations sites serving cities throughout the United States. We may use a portion of these sites in our system. XM Radios. We will transmit XM Radio throughout the continental United States to vehicle, portable, home and plug and play radios. Our radios will be capable of receiving both XM Radio and traditional AM/FM stations. Six manufacturers, including Pioneer, Alpine and Sony, have introduced 24 different models of XM-ready radios at the January 2001 Consumer Electronics Show (CES) in Las Vegas, Nevada. We have signed a contract with ST Microelectronics to design and produce chips that will decode the XM Radio signal. We have completed the production chipset design and ST Microelectronics has commenced fabrication to make the components available to radio manufacturers starting the end of March 2001. Delphi-Delco, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox, Panasonic, Visteon, Blaupunkt and Clarion have signed contracts with us to develop, manufacture and distribute XM radios which can be used in the car, and we have signed a contract with Sony Electronics to design, manufacture and market XM radios for the portable, home, aftermarket and original equipment manufacture car stereo markets. We have also signed a contract with SHARP to manufacture XM radios for home and portable use. Unified Standard for Satellite Radio. On February 16, 2000, we signed an agreement with Sirius Radio to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both our and Sirius Radio's services. The technology relating to this unified standard will be jointly developed, funded and owned by the two companies. In addition, we will work together with Sirius Radio to proliferate the new standard by creating a service mark for satellite radio. This unified standard is intended to meet FCC rules that require interoperability with both licensed satellite radio systems. As part of the agreements, each company has licensed to the other its intellectual property relating to its system; the value of this license will be considered part of each company's contribution toward the joint development. In addition, each company has agreed to license its non-core technology, including non-essential features of its system, to the other at commercially reasonable rates. In connection with this agreement, the pending patent litigation against XM Radio has been resolved. We anticipate that it will take several years to develop radios capable of receiving both services. At the commercial launch of our service, we anticipate that our consumers will be able to purchase radios only capable of receiving our service. Both companies expect to work with their automobile and radio manufacturing partners to integrate the new standard. Future agreements with automakers and radio manufacturers will specify the unified satellite radio standard. Furthermore, future agreements with retail and automotive distribution partners and content providers will 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. 13 Competition We expect to face competition for both listeners and advertising dollars. Sirius Satellite Radio Our direct competitor in satellite radio service is likely to be Sirius Radio, the only other FCC licensee for satellite radio service in the United States. Since October 1997, Sirius Radio's common stock has traded on the Nasdaq National Market. Sirius Radio has deployed 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 have radios compatible with its system available to consumers later this year. Traditional AM/FM Radio Our competition will also include traditional AM/FM radio. Unlike XM Radio, traditional AM/FM radio already has a well established market for its services and generally offers free broadcast reception paid for by commercial advertising rather than by a subscription fee. Also, many radio stations offer information programming of a local nature, such as traffic and weather reports, which XM Radio initially will be unable to offer as effectively as local radio, or at all. The AM/FM radio broadcasting industry is highly competitive. Radio stations compete for listeners and advertising revenues directly with other radio stations within their markets on the basis of a variety of factors, including . program content; . on-air talent; . transmitter power; . source frequency; . audience characteristics; . local program acceptance; and . the number and characteristics of other radio stations in the market. Currently, traditional AM/FM radio stations broadcast by means of analog signals, not digital transmission. We believe, however, that in the future traditional AM/FM radio broadcasters may be able to transmit digitally into the bandwidth occupied by current AM/FM stations. Internet Radio There are a growing number of Internet radio broadcasts which provide listeners with radio programming from around the country and the world. Internet radio can be heard through a personal computer equipped with a modem, sound card and speakers. Announcements have been made about plans by one or more companies to deliver Internet radio to cars or portable radios using satellites. Although we believe that the current sound quality of Internet radio is below standard and may vary depending on factors such as network traffic, which can distort or interrupt the broadcast, we expect that improvements from higher bandwidths, faster modems and wider programming selection may make Internet radio a more significant competitor in the future. There are a number of Internet-based audio formats in existence or in development which could compete directly with XM Radio. For example, Internet users with the appropriate hardware and software can download sound files for free or for a nominal charge and play them from their personal computers or from specialized portable players. In addition, prominent members of the music and computer industry have supported an initiative known as the Secure Digital Music Initiative to become a standard for fee-based electronic 14 distribution of copyrighted sound recordings. Although presently available formats have drawbacks such as hardware requirements and download bandwidth constraints, which we believe would make XM Radio a more attractive option to consumers, Internet-based audio formats may become increasingly competitive as quality improves and costs are reduced. Direct Broadcast Satellite and Cable Audio A number of companies provide specialized audio service through either direct broadcast satellite and cable audio systems. These services are targeted to fixed locations, mostly in-home. The radio service offered by direct broadcast satellite and cable audio is generally an add-on service to the higher priced video service. Regulatory Matters XM Radio and Sirius Radio received licenses from the FCC in October 1997 to construct and operate satellite radio service. The FCC has allocated 25 MHz for the new service in a range of radio frequencies known as the S-Band. As an owner of one of two FCC licenses to operate a commercial satellite radio service in the United States, we will continue to be subject to regulatory oversight by the FCC. Our development, implementation and eventual operation of our system will be subject to significant regulation by the FCC under authority granted under the Communications Act and related federal law. Non-compliance by us with FCC rules and regulations could result in fines, additional license conditions, license revocation or other detrimental FCC actions. Any of these FCC actions may harm our business. There is no guarantee that the rules and regulations of the FCC will continue to support our business plan. One of the two losing bidders in the satellite radio license auction filed a petition to deny our application for an FCC license, but the petition 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 us. 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. In December 2000, the FCC approved a transfer of control of our FCC license from Motient Corporation to a diffuse group of owners, none of whom will have a controlling interest in us. The FCC has conditioned this approval on the outcome 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 XM, has a term of eight years from commencement of XM's operations and may be renewed. The FCC requires the satellite radio licensees, including us, to adhere to certain milestones in the development of their systems, including a requirement that the licensees begin full operation by October 2003. Our FCC license requires us to meet the following milestones:
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 First Quarter 2001 October 2003 Begin full operation of the XM Radio system Expected Summer 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. 15 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. In January 2000 we requested that the FCC allow us to modify the XM Radio system to incorporate these changes. While the FCC regularly approves modifications to commercial licenses, it may not approve our request. The FCC has indicated that it may in the future impose public service obligations, such as channel set-asides for educational programming, on satellite radio licensees. The FCC's rules require interoperability with all licensed satellite radio systems that are operational or under construction. The FCC conditioned our license on certification by us that our final receiver design is interoperable with the final receiver design of the other licensee, Sirius Radio, which plans to use a different transmission technology than we plan to use. Because of uncertainty regarding the design of Sirius Radio's systems, we may face difficulties initially in meeting this interoperability requirement. We have signed an agreement with Sirius Radio to develop a unified standard for satellite radios, but we anticipate that it will take several years to develop the technologies necessary for radios that will be capable of receiving both our service and Sirius Radio's service. Accordingly, we may not be able to meet the FCC's interoperability requirements by the time we launch our commercial operations. Together with Sirius Radio, we have informed the FCC of the progress that has been made to date in meeting the interoperability requirement. We may need to obtain an extension of time or modification of the interoperability 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, Wireless Communications Service (WCS) licensees, Multipoint Distribution Service (MDS) licensees, and Instructional Television Fixed Service (ITFS) licensees have asked the FCC to . limit the number of repeaters operating at greater than 2 kW EIRP that may be deployed; . limit the power level of the repeaters operating at greater than 2 kW EIRP that are deployed; . delay consideration of terrestrial repeater rules until XM Radio and Sirius Radio provide additional information regarding planned terrestrial repeaters; . require individual licensing of each terrestrial repeater; 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. Furthermore, we may need special temporary authority from the FCC to operate our terrestrial repeaters if the FCC delays the issuance of these rules. The FCC may also require us to compensate certain MDS and ITFS customers and licensees to remedy interference caused to some of their receivers by the operation of our terrestrial repeaters. 16 The FCC also may adopt limits on emissions of terrestrial repeaters to protect other services using nearby frequencies. While we believe that we will meet any reasonable non-interference standard for terrestrial repeaters, the FCC has no specific standard at this time, and the application of such limits might increase our cost of using repeaters. Although we are optimistic that we will be able to construct and use terrestrial repeaters as needed, the development and implementation of the FCC's ultimate rules might delay this process or restrict our ability to do so. We will need to coordinate the XM Radio system with systems operating in the same frequency bands in adjacent countries. Canada and Mexico are the countries whose radio systems are most likely to be affected by satellite radio. The United States government, which conducts the coordination process, has resolved the issue with the Canadian government and has reached an agreement with the Mexican government that has not yet been fully approved by that government. We will operate the communication uplinks between our own earth station and our satellites in a band of radio frequencies that are used for several other services. These services are known under FCC rules as fixed services, broadcast auxiliary services, electronic news gathering services, and mobile satellite services for uplink station networks. Although we are optimistic that we will succeed in coordinating domestic uplink station networks, we may not be able to coordinate use of this spectrum in a timely manner, or at all. We have filed an application with the FCC for approval of a satellite earth station to be located in Washington, D.C. This application has not yet been granted. We also need to protect our system from out-of-band emissions from licensees operating in adjacent frequency bands. Wireless Communication Service licensees operating in frequency bands adjacent to the satellite radio's S-Band allocation must comply with certain out-of-band emission limits imposed by the FCC to protect satellite radio systems. These limits, however, are less stringent than those we proposed. In addition, in April 1998, the FCC proposed to amend its rules to allow for new radio frequency lighting devices that would operate in an adjacent radio frequency band. We opposed the proposal on the grounds that the proliferation of this new kind of lighting and its proposed emission limits, particularly if used for street lighting, may interfere with XM Radio. However, the FCC may not rule in our favor, a decision which could adversely affect our signal quality. In addition, in May 2000, the FCC proposed to amend its rules to allow for the operation of devices incorporating ultra- wideband (UWB) technology on an unlicensed basis. The FCC has proposed to impose less stringent emissions limits for UWB devices operating above 2 GHz, where XM operates, than for such devices operating below 2 GHz. We have opposed this proposal on the basis that the operation of these devices may interfere with XM Radio. Interference from other unlicensed frequency devices may also adversely affect the Company's signal. The FCC order granting our license determined that because we are a private satellite system providing a subscription service on a non-common carrier basis, we would not be subject to the FCC's foreign ownership restrictions. However, such restrictions would apply to us if we were to offer non subscription services, which may appear more lucrative to potential advertisers than subscription services. The FCC also stated in its order that it may reconsider its decision not to subject satellite radio licensees to its foreign ownership restrictions. Sea Launch, Alcatel and other vendors are subject to United States export regulations. Our vendors need (and have obtained) 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. 17 Intellectual Property System Technology We have contracted with several technology companies to implement portions of the XM Radio system. These technology companies include Boeing Satellite Systems and Alcatel (satellites); Delphi-Delco, Sony, Motorola, Pioneer, Alpine, Mitsubishi, Audiovox, Clarion, SHARP, Blaupunkt, Fujitsu Ten, Hyundai Autonet, Bontec, Visteon, Panasonic and Sanyo (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, 2000. We will not be required to pay royalties to WorldSpace Management for licensed technology that we do not use in our system. We anticipate the Fraunhofer Institute will continue to provide various development services for us in connection with the design of our system. Motient has granted us a royalty-free license with respect to certain ground segment communications technology and antenna technology. Motient and WorldSpace Management have also granted us royalty-free, non- exclusive and irrevocable licenses to use and sublicense all improvements to their technology. The technology licenses from Motient and WorldSpace Management renew automatically on an annual basis unless terminated for a breach which has not been or cannot be remedied. We believe that the intellectual property rights we have licensed under our technology license were independently developed or duly licensed by Motient or WorldSpace International, as the case may be. We cannot assure you, however, that third parties will not bring suit against us for patent or other infringement of intellectual property rights. We have signed an agreement with Sirius Radio to develop a unified standard for satellite radios to facilitate the ability of consumers to purchase one radio capable of receiving both our and Sirius Radio's services. The technology relating to this unified standard will be jointly developed, funded and owned by the two companies. As part of the agreement, each company has licensed to the other its intellectual property relating to the unified standard and to its system; the value of this license will be considered part of its contribution toward the joint project. In addition, each company has agreed to license its non-core technology, including non-essential features of its system, to the other at commercially reasonable rates. Each party will be entitled to license fees or a credit towards its obligation to fund one half of the development cost of the technologies used to develop a unified standard for satellite radios. The amount of the fees or credit will be based upon the validity, value, use, importance and available alternatives of the technology each contributes. In our discussions we have yet to agree on the validity, value, use, importance and available alternatives of our respective technologies. If we fail to reach agreement, the fees or credits may be determined through binding arbitration. We cannot predict at this time the amount of license fees, if any, payable by or to XM or Sirius Radio or the size of the credits to XM and Sirius Radio from the use of their technology. This may require additional capital, which could be significant. 18 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 4% of their revenues to these performing rights societies. We expect to negotiate or establish license fees through a rate court proceeding in the U.S. District Court for the Southern District of New York but such royalty arrangements may be more costly than anticipated. Under the Digital Performance Right in Sound Recordings Act of 1995 and the Digital Millennium Copyright Act of 1998, we also have to negotiate royalty arrangements with the owners of the sound recordings. The Recording Industry Association of America will negotiate licenses and collect royalties on behalf of copyright owners for this performance right in sound recordings. Cable audio services currently pay a royalty rate of 6.5% of gross subscriber revenue. This rate was set by the Librarian of Congress, which has statutory authority to decide rates through arbitration, and was affirmed on May 21, 1999 by the United States Court of Appeals for the District of Columbia. Although we believe we can distinguish XM Radio sufficiently from the cable audio services in order to negotiate a lower statutory rate, we may not be able to do so. The XM 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 19 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, 2001, we had 250 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. PROPERTY Our executive offices, studio and production facilities are located at 1500 Eckington Place, N.E., Washington, D.C. 20002, under a ten year lease of approximately 150,000 square feet. We have also entered into license or lease agreements with regard to our terrestrial repeater system throughout the United States. 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 2000. 20 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS PRICE RANGE OF COMMON STOCK Holdings' Class A common stock has been quoted on the Nasdaq National Market under the symbol "XMSR" since its initial public offering on October 5, 1999. The following table presents, for the period indicated, the high and low sales prices per share of the Class A common stock as reported on the Nasdaq National Market.
High Low ------- ------- 1999: Fourth Quarter (beginning October 5, 1999).................. $44.750 $11.625 2000: First Quarter............................................... $50.000 $27.000 Second Quarter.............................................. $39.250 $18.125 Third Quarter............................................... $46.938 $30.125 Fourth Quarter.............................................. $43.750 $12.063 2001: First Quarter (through March 6, 2001)....................... $21.063 $ 9.000
On March 6, 2001, the last reported sale price of Holdings' Class A common stock on the Nasdaq National Market was $10.000. As of March 6, 2001, there were 214 holders of record of Holdings' Class A common stock. DIVIDEND POLICY Holdings has not declared or paid any dividends on its common stock since its date of inception. Currently, Holdings' Series B Convertible Redeemable preferred stock restricts Holdings from paying dividends on its common stock unless full cumulative dividends have been paid or set aside for payment on all shares of the Series B preferred stock. The terms of Holdings' Series C Convertible Redeemable preferred stock contain similar restrictions. In accordance with its terms, Holdings has paid dividends on the Series B preferred stock in common stock. Dividends on the Series C preferred stock will accrue. The indenture governing XM's senior secured notes restricts XM from paying dividends to Holdings which, in turn, will significantly limit the ability of Holdings to pay dividends. Holdings does not intend to pay cash dividends on its common stock in the foreseeable future. Holdings anticipates that it will retain any earnings for use in operations and the expansion of its business. RECENT SALES OF UNREGISTERED SECURITIES None. 21 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA XM Satellite Radio Holdings Inc. In considering the following selected consolidated financial data, you should also read Holdings' 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 four-year period ended December 31, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000, and the consolidated balance sheets data as of December 31, 1997, 1998, 1999 and 2000 are derived from Holdings' consolidated financial statements. These statements have been audited by KPMG LLP, independent certified public accountants. KPMG's report contains a paragraph stating that Holdings has not begun operations and is dependent upon additional debt or equity financing, and that these factors raise substantial doubt about Holdings' 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 2000 2000(1) ---------- ---------- ----------- ----------- --------------- (In thousands, except share data) Consolidated Statements of Operations Data: Revenue................ $ -- $ -- $ -- $ -- $ -- ---------- ---------- ----------- ----------- --------- Operating expenses: Research and development.......... -- 6,941 4,274 7,397 18,612 Professional fees..... 1,090 5,242 9,969 22,836 39,137 General and administrative....... 20 4,010 16,448 49,246 69,724 ---------- ---------- ----------- ----------- --------- Total operating expenses........... 1,110 16,193 30,691 79,479 127,473 ---------- ---------- ----------- ----------- --------- Operating loss.......... (1,110) (16,193) (30,691) (79,479) (127,473) Other income (expense) interest income (expense), net......... (549) 26 (6,205) 27,606 20,878 ---------- ---------- ----------- ----------- --------- Net loss................ $ (1,659) $ (16,167) $ (36,896) $ (51,873) $(106,595) ========== ========== =========== =========== ========= Series C preferred stock beneficial conversion charge................. -- -- -- (123,042) Series B preferred stock incentivized charge.... -- -- -- (11,211) Preferred dividends..... -- -- -- (15,212) ---------- ---------- ----------- ----------- Net loss applicable to common stockholders.... $ (1,659) $ (16,167) $ (36,896) $ (201,338) ========== ========== =========== =========== Net loss per share-- basic and diluted...... $ (0.26) $ (2.42) $ (2.40) $ (4.15) ========== ========== =========== =========== Weighted average shares used in computing net loss per share--basic and diluted............ 6,368,166 6,689,250 15,344,102 48,508,042
22
December 31, ---------------------------------- 1997 1998 1999 2000 ------ ------- -------- --------- (In thousands) Consolidated Balance Sheets Data: Cash, cash equivalents and short-term investments............................... $ 1 $ 310 $120,170 $ 224,903 Restricted investments..................... -- -- -- 161,166 System under construction.................. 91,932 169,029 362,358 805,563 Total assets............................... 91,933 170,485 515,189 1,293,218 Total debt................................. 82,504 140,332 212 262,665 Total liabilities.......................... 82,949 177,668 30,172 337,266 Stockholders' equity (deficit)............. 8,984 (7,183) 485,017 955,952
- -------- (1) Business activity for the period from December 15, 1992, which was our date of inception, through December 31, 1996 was insignificant. XM Satellite Radio Inc. In considering the following selected consolidated financial data, you should also read XM's 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 four-year period ended December 31, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000, and the consolidated balance sheets data as of December 31, 1997, 1998, 1999 and 2000 are derived from XM's consolidated financial statements. These statements have been audited by KPMG LLP, independent certified public accountants. KPMG's report contains a paragraph stating that XM has not begun operations and is dependent upon additional debt or equity financing, and that these factors raise substantial doubt about XM's 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 2000 2000(1) ------- -------- -------- -------- --------------- (In thousands, except share data) Consolidated Statements of Operations Data: Revenue................. $ -- $ -- $ -- $ -- $ -- ------- -------- -------- -------- --------- Operating expenses: Research and development.......... -- 6,941 4,274 7,397 18,612 Professional fees..... 1,090 5,242 9,948 22,751 39,031 General and administrative....... 20 4,010 16,448 48,979 69,457 ------- -------- -------- -------- --------- Total operating expenses........... 1,110 16,193 30,670 79,127 127,100 ------- -------- -------- -------- --------- Operating loss.......... (1,110) (16,193) (30,670) (79,127) (127,100) Other income (expense)-- interest income (expense), net......... (85) 26 490 27,200 27,631 ------- -------- -------- -------- --------- Net loss................ $(1,195) $(16,167) $(30,180) $(51,927) $ (99,469) ======= ======== ======== ======== =========
23
December 31, --------------------------------- 1997 1998 1999 2000 ------ ------- -------- --------- (In thousands) Consolidated Balance Sheets Data: Cash, cash equivalents and short-term investments................................ $ 1 $ 310 $119,902 $ 203,191 Restricted investments...................... -- -- -- 161,166 System under construction................... 90,031 155,334 333,500 776,706 Total assets................................ 90,032 156,397 485,134 1,242,517 Total debt.................................. -- 87 212 262,665 Total liabilities........................... -- 28,941 30,030 337,107 Stockholder's equity........................ 90,032 127,456 455,104 905,410
- -------- (1) Business activity for the period from December 15, 1992, which was our date of inception, through December 31, 1996 was insignificant. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis provides information that we believe is relevant to an assessment and understanding of our financial condition and consolidated results of operations. This discussion should be read together with our consolidated financial statements and related notes beginning on page F-1 of this report. Introduction This annual report on Form 10-K is filed jointly by XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. XM is a wholly-owned subsidiary of Holdings. Accordingly, the management's discussion and analysis section of this report focuses on the financial condition and results of operations of Holdings but contains an explanation of any differences, if applicable, between the two companies. Overview XM Satellite Radio Inc. was incorporated in Delaware in 1992 as a wholly- owned subsidiary of Motient Corporation, formerly American Mobile Satellite Corporation. XM Satellite Radio Holdings Inc. became a holding company for XM Satellite Radio Inc. in early 1997. 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 raised $1.3 billion to date, which is described under the heading "Liquidity and Capital Resources--Funds Raised for Period Through Commencement of Commercial Operations." 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. 24 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 summer of 2001, we anticipate that our revenues will consist primarily of customers' subscription fees and advertising revenues. Results of Operations Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 XM Satellite Radio Holdings Inc. and Subsidiaries Research and Development. Research and development expenses increased to approximately $7.4 million in 2000, compared with approximately $4.3 million in 1999. The increase in the research and development expenses primarily resulted from increased activity relating to our system technology development, including chipset design and uplink technology, in 2000. Professional Fees. Professional fees increased to approximately $22.8 million in 2000, compared with $10.0 million in 1999. The increase primarily reflects additional services of consultants, including incurring $11.3 million for software selection and workflow process development. We expect the professional fees to trend upward as we continue to develop marketing strategies. General and Administrative. General and administrative expenses increased to $49.2 million in 2000, compared with $16.4 million in 1999. The increase reflects increased headcount, facilities and sales and marketing expenses. We have granted certain key executives stock options and incurred a non-cash compensation charge of approximately $1.5 million in 2000 primarily for performance-based stock options. We also recorded non-cash compensation charges of approximately $1.2 million during 2000 relating to options repriced in 1999. We also continued the amortization of goodwill and other intangibles during 2000. We anticipate general and administrative expenses to continue to increase through commercial operations. Interest Income. Interest income increased to $27.6 million in 2000, compared with $2.9 million in 1999. The increase was the result of higher average balances of cash and cash equivalents in 2000, due to the proceeds from the private placement of 14% senior secured notes and warrants, the public offerings of Class A common stock and Series B convertible redeemable preferred stock and the private placement of Series C convertible redeemable preferred stock, all in the first nine months of 2000, which exceeded expenditures for satellite and launch vehicle construction, other capital expenditures and operating expenses. Interest Expense. We incurred interest costs of $39.1 and $24.4 million in 2000 and 1999, respectively. We capitalized interest costs of $39.1 million and $15.3 million associated with our FCC license and the XM Radio system in 2000 and 1999, respectively. The increase in interest costs was the result of the incurrence of new debt during the first quarter of 2000, which exceeded the reduction in interest due to the conversion of all debt into equity in the fourth quarter of 1999. Further, the interest capitalization threshold was exceeded in 1999. Net Loss. The net loss for 2000 and 1999 was $51.9 million and $36.9 million, respectively. The increase in net losses in 2000 compared with 1999 reflects increases in research and development and professional fees expenses, and additional general and administration expenses, primarily due to increased headcount, facility, and sales and marketing expenses in preparation for commercial operations and the amortization of goodwill and intangibles. 25 XM Satellite Radio Inc. and Subsidiaries The results of operations for XM and its subsidiaries were substantially the same as the results for Holdings and its subsidiaries discussed above for 2000. In 1999, XM recognized $2.4 million less interest income due to the timing of capital contributions from Holdings and substantially less interest expense as Holdings' $5.5 million charge to interest for the beneficial conversion feature of the new Motient note and Holdings' exceeding its capitalization threshold by $3.6 million were not allocated to XM. Year Ended December 31, 1999 Compared to Year Ended December 31, 1998 XM Satellite Radio Holdings Inc and Subsidiaries 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 Motient's acquisition of a former investor's interest in us during 1999. We have granted certain key executives stock options and incurred a non-cash compensation charge of approximately $4.1 million in the fourth quarter of 1999 primarily for performance-based stock options. We will continue to incur quarterly non-cash compensation charges over the vesting period depending on the market value of 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 Motient 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. XM Satellite Radio Inc. and Subsidiaries The results of operations for XM and its subsidiaries were substantially the same as the results for Holdings and its subsidiaries discussed above; except that in 1999, XM recognized $2.4 million less interest income due to the timing of capital contributions from Holdings and substantially less interest expense as Holdings' $5.5 million charge to interest for the beneficial conversion feature of the new Motient note and Holdings' exceeding its capitalization threshold by $3.6 million were not allocated to XM. 26 Liquidity and Capital Resources At December 31, 2000, we had a total of cash and cash equivalents of $224.9 million, which excludes $95.3 million of current restricted investments, and working capital of $261.2 million. Giving effect to the concurrent offerings detailed below, as of March 6, 2001, we had cash and cash equivalents of $417.6 million, which excludes $95.3 million of current restricted investments, and working capital of $453.9 million on a pro forma basis. By comparison, cash, cash equivalents and short-term investments were $120.2 million and working capital equaled $94.7 million at December 31, 1999. The increases in the respective balances are due primarily to the proceeds from the financings described below. Funds Raised for Period Through Commencement of Commercial Operations Since inception, we have raised an aggregate of $1.3 billion, net of expenses, interest reserve and repayment of debt. These funds are expected to be sufficient, in the absence of additional financing, to cover funding needs through commencement of commercial operations in the summer of 2001 and into 2002. These funds have been used to acquire our FCC license, make required payments for our system, including the satellites, terrestrial repeater system, and ground networks, and for working capital and operating expenses. Sources of Funds. Of the $1.3 billion raised to date, approximately $167.0 million, excluding the Class A common stock acquired by Motient Corporation as part of our initial public offering, has been raised through the issuance of equity to, and receipt of loans from, Motient Corporation 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 totaling $11.3 million in connection with these transactions. In October 1999, we completed an initial public offering which yielded net proceeds of $114.1 million. Concurrent with the closing of our initial public offering, $250.0 million of our Series A subordinated convertible notes, together with associated accrued interest, converted into shares of our Series A convertible preferred stock and shares of our Class A common stock. Additionally, $103.3 million of convertible notes issued to Motient by us, together with associated accrued interest, converted into shares of our Class B common stock. During the fiscal year ended December 31, 2000: . We completed a follow-on offering of 4,370,000 shares of Class A common stock, yielding net proceeds of $132.1 million; . We completed a concurrent offering of 2,000,000 shares of our Series B convertible redeemable preferred stock, which yielded net proceeds of $96.5 million; . We completed a private placement of 325,000 units, each consisting of $1,000 principal amount of 14% senior secured notes due 2010 of XM, and one warrant to purchase 8.024815 shares of our Class A common stock at $49.50 per share that provided net proceeds of $191.5 million excluding $123.0 million for an interest reserve; and . We closed a private offering of 235,000 shares of our Series C convertible redeemable preferred stock, which yielded net proceeds of approximately $226.8 million. We recorded a $123.0 million beneficial conversion charge that reduced earnings available to common stockholders. The issuance of the Series C preferred stock also caused the exercise price of the warrants sold in March 2000 to be adjusted to $47.94 and the number of warrant shares to be increased to 8.285948 per warrant. 27 Following the end of the fiscal year ended December 31, 2000, in March 2001, we completed a follow-on offering of 7,500,000 shares of Class A common stock, which yielded net proceeds of $72.0 million, and a concurrent offering of 7.75% convertible subordinated notes due 2006, convertible into shares of our Class A common stock at $12.23 per share, which yielded net proceeds of $120.7 million. These issuances caused the conversion price of the Series C preferred stock to be adjusted from $26.50 to $22.93 and the exercise price of the warrants sold in March 2000 to be adjusted to $45.27 and the number of warrant shares to be increased to 8.776003 per warrant. Through December 31, 2000, the proceeds from these offerings were contributed by Holdings to XM except for $21,712,000 which remains at Holdings. Uses of Funds. Of the approximately $1.3 billion of funds raised to date, as of December 31, 2000, we have paid $765.1 million in capital expenditures, including approximately $90.0 million for our FCC licence which has been paid for in full, and incurred $127.5 million in operating expenses. Satellite Contract. Under our satellite contract, Boeing Satellite Systems International, Inc. (formerly Hughes Space and Communications, Inc.) will deliver two satellites in orbit and is to complete construction of a ground spare satellite. Boeing 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 summer of 2001, we will have had to pay an aggregate amount of approximately $472.6 million for these items. 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, 2000, we had paid approximately $466.0 million under our satellite contract and have recognized an additional $1.6 million in accrued milestone payments. Launch Insurance. We expect that launch insurance for both satellites will cost approximately $50.0 million. As of December 31, 2000, we had paid $24.2 million with respect to launch insurance. Terrestrial Repeater System. Based on the current design of the XM Radio system and existing contracts, we estimate that through our expected commencement of operations in the summer of 2001 we will incur aggregate costs of approximately $258.0 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, 2000, we had incurred costs with respect to the terrestrial repeater buildout of $84.7 million. In August 1999, we signed a contract with LCC International, Inc., a related party, that presently calls for payments of approximately $107.5 million for engineering and site preparation. As of December 31, 2000, we had paid $50.2 million under this contract and accrued an additional $15.1 million. We have also engaged other companies to perform site preparation services. We also entered into a contract effective October 22, 1999, with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. Payments under this contract are expected to be approximately $128.0 million. As of December 31, 2000, we had paid $15.4 million under this contract. Ground Segment. Based on the design of the XM Radio system, available research and existing contracts, we expect to incur aggregate ground segment costs through the expected commencement of operations in the summer 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, 2000, we had incurred $47.5 million with respect to the ground segment. FCC License. In October 1997, we received one of two satellite radio licenses issued by the FCC. We have paid approximately $90.0 million for this license, including the initial bid right. There are no further payments required relating to the license. Operating Expenses. From inception through December 31, 2000, we have incurred total operating expenses of $127.5 million. 28 Joint Development Agreement Funding Requirements. We may require additional funds to pay license fees or make contributions towards the development of the technologies used to develop a unified standard for satellite radios under our joint development agreement with Sirius Radio. Each party is obligated to fund one half of the development cost for such technologies. Each party will be entitled to license fees or a credit towards its one half of the cost based upon the validity, value, use, importance and available alternatives of the technology it contributes. In our discussions we have yet to agree on the validity, value, use, importance and available alternatives of our respective technologies. If we fail to reach agreement, the fees or credits may be determined through binding arbitration. We cannot predict at this time the amount of license fees or contribution payable by us or Sirius Radio or the size of the credits to us and Sirius Radio from the use of the other's technology. This may require significant additional capital. Funds Required Following Commencement of Commercial Operations We expect to need significant additional funds following commencement of commercial operations to cover our cash requirements before we generate sufficient cash flow from operations to cover our expenses. We estimate that our existing resources, including proceeds of offerings concluded in March 2001, would be sufficient in the absence of additional financing to cover our estimated funding needs into 2002, including funding needs of $150-$175 million required through the end of 2001 to be used for marketing, system operating expenses and general corporate purposes. After 2001, we anticipate that we will need an additional $250-$300 million through 2002, and we will require additional funding thereafter. These amounts are estimates, and may change, and we may need additional financing in excess of these estimates. 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 the total amount of these operational, promotional, subscriber acquisition, joint development and manufacturing costs and expenses, since they vary depending upon different criteria, but they are expected to be substantial. We will have significant payment obligations after commencement of operations under our distribution agreement with General Motors. We will pay an aggregate of approximately $35 million in the first four years following commencement of commercial service. After that, through 2009, we will have additional fixed annual payments ranging from less than $35 million to approximately $130 million, aggregating approximately $400 million. In order to encourage the broad installation of XM radios, we have agreed to subsidize a portion of the cost of XM radios and to make incentive payments to General Motors when the owners of General Motors vehicles with installed XM radios become subscribers for the XM Radio service. We must also share with General Motors a percentage of the subscription revenue attributable to General Motors vehicles with installed XM radios. This percentage increases until there are more than eight million General Motors vehicles with installed XM radios. This agreement is subject to renegotiation if General Motors does not achieve and maintain specified installation levels, starting with 1.24 million units after four years and thereafter increasing by the lesser of 600,000 units per year and amounts proportionate to our share of the satellite digital radio market. We currently expect to satisfy our funding requirements for the period following commencement of commercial operations by selling debt or equity securities and by obtaining loans or other credit lines from banks or other financial institutions. If we are successful in raising additional financing, we anticipate that a significant portion of the financing will consist of debt. We are actively considering possible financings, and because of our substantial capital needs we may consummate one or more financings at any time. We may not be able to raise any funds or obtain loans on favorable terms or at all. Our ability to obtain the required financing depends on several factors, including future market conditions; our success or lack of 29 success in developing, implementing and marketing our satellite radio service; our future creditworthiness; and restrictions contained in agreements with our investors or lenders. If we fail to obtain any necessary financing on a timely basis, a number of adverse effects could occur. We could default on our commitments to creditors or others and may have to discontinue operations or seek a purchaser for our business or assets. Recent Accounting Pronouncements In March 2000, the Financial Accounting Standards Board issued FASB Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation ("FIN 44"). FIN 44 further defines the accounting consequences of various modifications to the terms of a previously fixed stock option or award under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44 became effective on July 1, 2000, but certain conclusions in FIN 44 cover specific events that occur after either December 15, 1998 or January 12, 2000. In July 1999, we repriced 818,339 options and FIN 44 requires that these options be accounted for as variable from July 1, 2000 until the date the award is exercised, is forfeited, or expires unexercised. For those options that have vested as of July 1, 2000, compensation cost is recognized only to the extent that the exercise price exceeds the stock price on July 1, 2000. For those options that have not vested as of July 1, 2000, the portion of the award's intrinsic value measured at July 1, 2000 is recognized over the remaining vesting period. Additional compensation cost is measured for the full amount of any increases in stock price after the effective date and is recognized over the remaining vesting period. Any adjustment to compensation cost for further changes in the stock price after the award vests is recognized immediately. The effects of implementing FIN 44 required us to recognize additional non-cash compensation of $1.2 million during the fiscal year ended December 31, 2000. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activity, An Amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after 2000; we adopted SFAS No. 133 and SFAS No. 138 on January 1, 2001. We have reviewed our contracts and determined that we have no derivative instruments and do not engage in hedging activities. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As of December 31, 2000, we do not have any derivative financial instruments and do not intend to use derivatives. We invest our cash in short-term commercial paper and investment-grade corporate and government obligations and money market funds. Our long-term debt includes a fixed interest rate and the fair market value of the debt is sensitive to changes to interest rates. We run the risk that market rates will decline and the required payments will exceed those based on current market rates. Under our current policies, we do not use interest rate derivative instruments to manage our exposure to interest rate fluctuations. Additionally, we believe that our exposure to interest rate risk is not material to our results of operations. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of XM Satellite Radio Holdings Inc., including consolidated balance sheets as of December 31, 1999 and 2000, and consolidated statements of operations, consolidated statements of stockholders' equity (deficit) and consolidated statements of cash flows for the three-year period ended December 31, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000 and notes to the consolidated financial statements, together with a report thereon of KPMG LLP, dated February 9, 2001, are attached hereto as pages F-1 through F-26. The consolidated financial statements of XM Satellite Radio Inc., including consolidated balance sheets as of December 31, 1999 and 2000, and consolidated statements of operations, consolidated statements of 30 stockholder's equity and consolidated statements of cash flows for the three- year period ended December 31, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000 and notes to the consolidated financial statements, together with a report thereon of KPMG LLP, dated February 9, 2001, are attached hereto as pages F-27 through F-47. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None 31 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTS The information is incorporated herein by reference to Holdings' definitive 2001 Proxy Statement. Holdings and XM have the same directors and executive officers. ITEM 11. EXECUTIVE COMPENSATION The information is incorporated herein by reference to Holdings' definitive 2001 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information is incorporated herein by reference to Holdings' definitive 2001 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information is incorporated herein by reference to Holdings' definitive 2001 Proxy Statement. 32 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 for XM Satellite Radio Holdings Inc. are included in Item 8 of this Form 10-K: Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1999 and 2000. Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Notes to Consolidated Financial Statements. The following Consolidated Financial Statements of and report of independent public accountants for XM Satellite Radio Inc. are included in Item 8 of this Form 10-K: Report of Independent Auditors. Consolidated Balance Sheets as of December 31, 1999 and 2000. Consolidated Statements of Operations for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Consolidated Statements of Stockholder's Equity for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. Notes to Consolidated Financial Statements. (a)(2) The following consolidated financial statement schedules are filed as part of this report and attached hereto on pages S-1 through S-4: 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, the Consolidated Financial Statements of XM Satellite Radio Inc. or the notes thereto, are not required under the related instructions or are inapplicable, and therefore have been omitted. 33 (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. 3.3 Restated Certificate of Incorporation of XM Satellite Radio Inc. (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333-39178). 3.4 Amended and Restated Bylaws of XM Satellite Radio Inc. (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333- 39178). 4.1 Form of Certificate for Holdings' Class A common stock (incorporated by reference to Exhibit 3 to Holdings' Registration Statement on Form 8-A, filed with the SEC on September 23, 1999). 4.2 Form of Certificate for Holdings' 8.25% Series B Convertible Redeemable Preferred Stock (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-93529). 4.3 Certificate of Designation Establishing the Voting Powers, Designations, Preferences, Limitations, Restrictions and Relative Rights of 8.25% Series B Convertible Redeemable Preferred Stock due 2012 (incorporated by reference to Holdings' Annual Report on Form 10- K for the fiscal year ended December 31, 1999, filed with the SEC on March 16, 2000). 4.4 Warrant to purchase shares of Holdings' Class A common stock, dated February 9, 2000, issued to Sony Electronics, Inc. (incorporated by reference to Holdings' quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed with the SEC on May 12, 2000). 4.5 Warrant Agreement, dated March 15, 2000, between XM Satellite Radio Holdings Inc. as Issuer and United States Trust Company of New York as Warrant Agent (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 4.6 Warrant Registration Rights Agreement, dated March 15, 2000, between XM Satellite Radio Holdings Inc. and Bear, Stearns & Co., Inc., Donaldson, Lufkin and Jenrette Securities Corporation, Salomon Smith Barney Inc. and Lehman Brothers Inc. (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 4.7 Form of Warrant (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 4.8 Certificate of Designation Establishing the Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of the 8.25% Series C Convertible Redeemable Preferred Stock due 2012 (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 4.9 Form of Certificate for Holdings' 8.25% Series C Convertible Redeemable Preferred Stock (incorporated by reference to the Registrant's Registration Statement on Form S-1, File No. 333-39176). 4.10 Indenture, dated as of March 15, 2000, between XM Satellite Radio Inc. and United States Trust Company of New York (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333-39178). 4.11 Registration Rights Agreement, dated March 15, 2000, between XM Satellite Radio Inc. and Bear, Stearns & Co. Inc., Donaldson, Lufkin and Jenrette Securities Corporation, Salomon Smith Barney Inc. and Lehman Brothers Inc. (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333-39178).
34
Exhibit No. Description ------- ----------- 4.12 Form of 14% Senior Secured Note of XM Satellite Radio Inc. (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333-39178). 4.13 Security Agreement, dated March 15, 2000, between XM Satellite Radio Inc. and United States Trust Company of New York (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333- 39178). 4.14 Pledge Agreement, dated March 15, 2000, between XM Satellite Radio Inc. and United States Trust Company of New York (incorporated by reference to XM's Registration Statement on Form S-4, File No. 333- 39178). 4.15 Indenture, dated March 6, 2001, between XM Satellite Radio Holdings Inc. and United States Trust Company of New York. 4.16 Form of 7.75% convertible subordinated note of Holdings. 10.1 Amended and Restated Shareholders' Agreement, dated as of August 8, 2000, by and among XM Satellite Radio Holdings Inc., Motient Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital Asset Fund, Clear Channel Investments, Inc., Columbia XM Radio Partners, LLC, Columbia Capital Equity Partners III (QP), L.P., Columbia XM Satellite Partners III, LLC, DIRECTV Enterprises, Inc., General Motors Corporation, Madison Dearborn Capital Partners III, L.P., Special Advisors Fund I, LLC, Madison Dearborn Special Equity III, L.P., American Honda Motor Co., Inc. and Telcom-XM Investors, L.L.C. (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 10.2 Amended and Restated Registration Rights Agreement, dated as of August 8, 2000, by and among XM Satellite Radio Holdings Inc., Motient Corporation, Baron Asset Fund, Baron iOpportunity Fund, Baron Capital Asset Fund, Clear Channel Investments, Inc.,Columbia XM Radio Partners, LLC, Columbia Capital Equity Partners III (QP), L.P., Columbia XM Satellite Partners III, LLC, DIRECTV Enterprises, Inc., General Motors Corporation, Madison Dearborn Capital Partners III, L.P., Special Advisors Fund I, LLC, Madison Dearborn Special Equity III, L.P., American Honda Motor Co., Inc. and Telcom-XM Investors, L.L.C. (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-39176). 10.3+ Note Purchase Agreement, dated June 7, 1999, by and between XM Satellite Radio Holdings Inc., XM Satellite Radio Inc., Clear Channel Communications, Inc., DIRECTV Enterprises, Inc., General Motors Corporation, Telcom-XM Investors, L.L.C., Columbia XM Radio Partners, LLC, Madison Dearborn Capital Partners III, L.P., Madison Dearborn Special Equity III, L.P., and Special Advisors Fund I, LLC (including form of Series A subordinated convertible note of XM Satellite Radio Holdings Inc. attached as Exhibit A thereto). 10.4+* Technology Licensing Agreement by and among XM Satellite Radio Inc., XM Satellite Radio Holdings Inc., WorldSpace Management Corporation and American Mobile Satellite Corporation, dated as of January 1, 1998, amended by Amendment No. 1 to Technology Licensing Agreement, dated June 7, 1999. 10.5+* Technical Services Agreement between XM Satellite Radio Holdings Inc. and American Mobile Satellite Corporation, dated as of January 1, 1998, as amended by Amendment No. 1 to Technical Services Agreement, dated June 7, 1998. 10.6+* Satellite Purchase Contract for In-Orbit Delivery, by and between XM Satellite Radio Inc. and Hughes Space and Communications International Inc., dated July 21, 1999. 10.7+* Amended and Restated Agreement by and between XM Satellite Radio Inc. and STMicroelectronics Srl, dated September 27, 1999.
35
Exhibit No. Description ------- ----------- 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+ Intentionally Omitted. 10.15+ Form of Letter Agreement with Senior Vice Presidents. 10.16+ Intentionally Omitted. 10.17+ Form of Indemnification Agreement between XM Satellite Radio Holdings Inc. and each of its directors and executive officers. 10.18 1998 Shares Award Plan (incorporated by reference to Holdings' Registration Statement on Form S-8, File No. 333-42590). 10.19+ Form of Employee Non-Qualified Stock Option Agreement. 10.20+* Firm Fixed Price Contract #001 between XM Satellite Radio Inc. and the Fraunhofer Gesellschaft zur Foderung Der angewandten Forschung e.V., dated July 16, 1999. 10.21+* Contract for Engineering and Construction of Terrestrial Repeater Network System by and between XM Satellite Radio Inc. and LCC International, Inc., dated August 18, 1999. 10.22 Employee Stock Purchase Plan (incorporated by reference to Holdings' Registration Statement on Form S-8, File No. 333-92049). 10.23+ Non-Qualified Stock Option Agreement between Gary Parsons and XM Satellite Radio Holdings Inc., dated July 16, 1999. 10.24+ Non-Qualified Stock Option Agreement between Hugh Panero and XM Satellite Radio Holdings Inc., dated July 1, 1998, as amended. 10.25+ Form of Director Non-Qualified Stock Option Agreement. 10.26+ Lease between Consortium One Eckington, L.L.C. and XM Satellite Radio Inc., dated September 29, 1999. 10.27 Letter Agreement with Stephen Cook dated January 12, 1999 (incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-93529). 10.28* Contract for the Design, Development and Purchase of Terrestrial Repeater Equipment by and between XM Satellite Radio Inc. and Hughes Electronics Corporation, dated February 14, 2000 (incorporated by reference to Holdings' Annual Report on Form 10-K for the fiscal year ended December 31, 1999, filed with the SEC on March 16, 2000). 10.29* Joint Development Agreement, dated February 16, 2000, between XM Satellite Radio Inc. and Sirius Satellite Radio Inc. (incorporated by reference to the Holdings' quarterly report on Form 10-Q for the quarter ended March 31, 2000, filed with the SEC on May 12, 2000)
36
Exhibit No. Description ------- ----------- 21.1 Subsidiaries of XM Satellite Radio Holdings Inc. 23.1 Consent of KPMG LLP.
- -------- + Incorporated by reference to Holdings' Registration Statement on Form S-1, File No. 333-83619. * Pursuant to the Commission's Orders Granting Confidential Treatment under Rule 406 of the Securities Act of 1933 or Rule 24(b)-2 under the Securities Exchange Act of 1934, certain confidential portions of this Exhibit were omitted by means of redacting a portion of the text. (b) Reports on Form 8-K. On January 16, 2001, Holdings filed a Current Report on Form 8-K that reported the issuance of a press release announcing a satellite launch delay. Holdings filed the press release as an exhibit. On February 22, 2001, Holdings filed a Current Report on Form 8-K that contained audited, consolidated financial statements substantially the same as those contained herein. Holdings also filed certain other information that it deemed of importance to its stockholders. On March 1, 2001, Holdings filed a Current Report on Form 8-K that contained certain exhibits in connection with its offerings of Class A common stock and convertible subordinated notes. (c) Exhibits. XM Satellite Radio Holdings Inc. and XM Satellite Radio Inc. hereby file 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 for each of Holdings and XM: 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 and XM Satellite Radio Inc. or notes thereto. 37 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. XM SATELLITE RADIO HOLDINGS INC. /s/ Hugh Panero By: _________________________________ Hugh Panero President and Chief Executive Officer Date: March 14, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Hugh Panero President, Chief Executive March 14, 2001 ______________________________________ Officer and Director Hugh Panero (Principal Executive Officer) /s/ Heinz Stubblefield Senior Vice President, March 14, 2001 ______________________________________ Chief Financial Officer Heinz Stubblefield (Principal Financial and Accounting Officer) /s/ Gary M. Parsons Chairman of the Board of March 14, 2001 ______________________________________ Directors Gary M. Parsons /s/ Nathaniel A. Davis Director March 14, 2001 ______________________________________ Nathaniel A. Davis Director , 2001 ______________________________________ Thomas J. Donohue /s/ Randall T. Mays Director March 14, 2001 ______________________________________ Randall T. Mays /s/ Pierce J. Roberts, Jr. Director March 14, 2001 ______________________________________ Pierce J. Roberts, Jr. /s/ Randy S. Segal Director March 14, 2001 ______________________________________ Randy S. Segal /s/ Jack Shaw Director March 14, 2001 ______________________________________ Jack Shaw /s/ Dr. Rajendra Singh Director March 14, 2001 ______________________________________ Dr. Rajendra Singh /s/ Ronald L. Zarrella Director March 14, 2001 ______________________________________ Ronald L. Zarrella
38 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. XM SATELLITE RADIO INC. /s/ Hugh Panero By: _________________________________ Hugh Panero President and Chief Executive Officer Date: March 14, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Hugh Panero President, Chief Executive March 14, 2001 ______________________________________ Officer and Director Hugh Panero (Principal Executive Officer) /s/ Heinz Stubblefield Senior Vice President, March 14, 2001 ______________________________________ Chief Financial Officer Heinz Stubblefield (Principal Financial and Accounting Officer) /s/ Gary M. Parsons Chairman of the Board of March 14, 2001 ______________________________________ Directors Gary M. Parsons /s/ Nathaniel A. Davis Director March 14, 2001 ______________________________________ Nathaniel A. Davis Director , 2001 ______________________________________ Thomas J. Donohue /s/ Randall T. Mays Director March 14, 2001 ______________________________________ Randall T. Mays /s/ Pierce J. Roberts, Jr. Director March 14, 2001 ______________________________________ Pierce J. Roberts, Jr. /s/ Randy S. Segal Director March 14, 2001 ______________________________________ Randy S. Segal /s/ Jack Shaw Director March 14, 2001 ______________________________________ Jack Shaw /s/ Dr. Rajendra Singh Director March 14, 2001 ______________________________________ Dr. Rajendra Singh /s/ Ronald L. Zarrella Director March 14, 2001 ______________________________________ Ronald L. Zarrella
39 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES 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-7 Notes to Consolidated Financial Statements.................................. F-8 Schedule I--Valuation and Qualifying Accounts............................... S-1
XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) Independent Auditors' Report............................................... F-27 Consolidated Balance Sheets................................................ F-28 Consolidated Statements of Operations...................................... F-29 Consolidated Statements of Stockholder's Equity............................ F-30 Consolidated Statements of Cash Flows...................................... F-31 Notes to Consolidated Financial Statements................................. F-32 Schedule I--Valuation and Qualifying Accounts.............................. S-3
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, 1999 and 2000, 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, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. 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 auditing standards generally accepted in the United States of America. 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, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 and for the period from December 15, 1992 (date of inception) to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 10 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 10. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP McLean, VA February 9, 2001 F-2 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1999 and 2000 ASSETS
1999 2000 -------- ---------- (in thousands, except share data) Current assets: Cash and cash equivalents.............................. $ 50,698 $ 224,903 Short-term investments................................. 69,472 -- Restricted investments................................. -- 95,277 Prepaid and other current assets....................... 1,077 8,815 -------- ---------- Total current assets................................. 121,247 328,995 Other assets: Restricted investments, net of current portion......... -- 65,889 System under construction.............................. 362,358 805,563 Property and equipment, net of accumulated depreciation and amortization of $347 and $2,337................... 2,551 59,505 Goodwill and intangibles, net of accumulated amortization of $1,220 and $2,599..................... 25,380 24,001 Other assets, net of accumulated amortization of $0 and $672.................................................. 3,653 9,265 -------- ---------- Total assets......................................... $515,189 $1,293,218 ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable....................................... $ 23,338 $ 47,159 Accrued expenses....................................... 1,514 4,645 Due to related party................................... 62 63 Accrued interest on senior secured notes............... -- 13,397 Royalty payable........................................ 1,646 2,565 -------- ---------- Total current liabilities............................ 26,560 67,829 Senior secured notes, net of discount amortization of $0 and $2,044.............................................. -- 261,298 Royalty payable, net of current portion.................. 3,400 2,600 Capital lease, net of current portion.................... 212 1,367 Other non-current liabilities............................ -- 4,172 -------- ---------- Total liabilities.................................... 30,172 337,266 -------- ---------- Stockholders' equity: Series A convertible preferred stock, par value $0.01 (liquidation preference of $102,688,000); 15,000,000 shares authorized, 10,786,504 shares issued and outstanding at December 31, 1999 and 2000............. 108 108 Series B convertible redeemable preferred stock, par value $0.01 (liquidation preference of $43,364,000); 3,000,000 shares authorized, no shares and 867,289 shares issued and outstanding at December 31, 1999 and 2000, respectively.................................... -- 9 Series C convertible redeemable preferred stock, par value $0.01 (liquidation preference of $244,277,000); 250,000 shares authorized, no shares and 235,000 shares issued and outstanding at December 31, 1999 and 2000, respectively.................................... -- 2 Class A common stock, par value $0.01; 180,000,000 shares authorized, 26,465,333 and 34,073,994 shares issued and outstanding at December 31, 1999 and 2000, respectively.............. 265 341 Class B common stock, par value $0.01; 30,000,000 shares authorized, 17,872,176 and 16,557,262 shares issued and outstanding at December 31, 1999 and 2000, respectively.............. 179 166 Class C common stock, par value $0.01; 30,000,000 shares authorized, no shares issued and outstanding at December 31, 1999 and 2000............................ -- -- Additional paid-in capital............................. 539,187 1,061,921 Deficit accumulated during development stage........... (54,722) (106,595) -------- ---------- Total stockholders' equity........................... 485,017 955,952 -------- ---------- Commitments and contingencies (notes 3, 10 and 11) Total liabilities and stockholders' equity........... $515,189 $1,293,218 ======== ==========
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, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 ---------- ---------- ---------- ----------------- (in thousands, except share data) Revenue.................. $ -- $ -- $ -- $ -- ---------- ---------- ---------- --------- Operating expenses: Research and development........... 6,941 4,274 7,397 18,612 Professional fees...... 5,242 9,969 22,836 39,137 General and administrative........ 4,010 16,448 49,246 69,724 ---------- ---------- ---------- --------- Total operating expenses............ 16,193 30,691 79,479 127,473 ---------- ---------- ---------- --------- Operating loss........... (16,193) (30,691) (79,479) (127,473) Other income (expense): Interest income........ 26 2,916 27,606 30,548 Interest expense....... -- (9,121) -- (9,670) ---------- ---------- ---------- --------- Net loss............. $ (16,167) $ (36,896) $ (51,873) $(106,595) ========== ========== ========== ========= 8.25% Series B preferred stock dividend requirement............. -- -- (5,935) 8.25% Series C preferred stock dividend requirement............. -- -- (9,277) Series B preferred stock deemed dividend......... -- -- (11,211) Series C preferred stock beneficial conversion feature................. -- -- (123,042) ---------- ---------- ---------- Net loss attributable to common stockholders........ $ (16,167) $ (36,896) $ (201,338) ========== ========== ========== Net loss per share: Basic and diluted...... $ (2.42) $ (2.40) $ (4.15) ========== ========== ========== Weighted average shares used in computing net loss per share-basic and diluted................. 6,689,250 15,344,102 48,508,042 ========== ========== ==========
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, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
Series B Series C Convertible Convertible Series A Redeemable Redeemable Convertible Preferred Preferred Class A Common Class B Common Class C Preferred Stock Stock Stock Stock Stock Common Stock ----------------- ------------- ------------- ----------------- ----------------- ------------- Additional Paid-in Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Capital ---------- ------ ------ ------ ------ ------ ---------- ------ ---------- ------ ------ ------ ---------- (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 Issuance of common stock and capital contributions... -- -- -- -- -- -- -- -- 25 -- -- -- 9,000 Issuance of options......... -- -- -- -- -- -- -- -- -- -- -- -- 1,500 Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- -- ---------- ---- --- --- --- --- ---------- ---- ---------- ---- --- --- ------- Balance at December 31, 1997............ -- -- -- -- -- -- -- -- 125 -- -- -- 10,643 Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- -- ---------- ---- --- --- --- --- ---------- ---- ---------- ---- --- --- ------- Balance at December 31, 1998............ -- -- -- -- -- -- -- -- 125 -- -- -- 10,643 53,514-for-one stock split..... -- -- -- -- -- -- -- -- 6,689,125 67 -- -- (67) Initial public offering........ -- -- -- -- -- -- 10,241,000 102 -- -- -- -- 114,032 Conversion of Series A convertible debt............ 10,786,504 108 -- -- -- -- 16,179,755 162 -- -- -- -- 246,079 Conversion of subordinated convertible notes payable to related party........... -- -- -- -- -- -- -- -- 11,182,926 112 -- -- 106,843 Increase in FCC license, goodwill and intangibles..... -- -- -- -- -- -- -- -- -- -- -- -- 51,624 Charge for beneficial conversion feature of note issued to Parent.. -- -- -- -- -- -- -- -- -- -- -- -- 5,520 Issuance of shares to employees through stock option and purchase plans.. -- -- -- -- -- -- 29,862 1 -- -- -- -- 303 Non-cash stock compensation.... -- -- -- -- -- -- 14,716 -- -- -- -- -- 4,210 Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- -- ---------- ---- --- --- --- --- ---------- ---- ---------- ---- --- --- ------- Balance at December 31, 1999............ 10,786,504 108 -- -- -- -- 26,465,333 265 17,872,176 179 -- -- 539,187 Deficit Accumulated ------------------------- Total During Stockholders' Development Equity Stage (Deficit) ----------- ------------- Issuance of common stock (December 15, 1992)........... $ -- $ -- ----------- ------------- Balance at December 31, 1992............ -- -- Net loss........ -- -- ----------- ------------- Balance at December 31, 1993............ -- -- Net loss........ -- -- ----------- ------------- Balance at December 31, 1994............ -- -- Net loss........ -- -- ----------- ------------- Balance at December 31, 1995............ -- -- Net loss........ -- -- ----------- ------------- Balance at December 31, 1996............ -- -- Contributions to paid-in capital......... -- 143 Issuance of common stock and capital contributions... -- 9,000 Issuance of options......... -- 1,500 Net loss........ (1,659) (1,659) ----------- ------------- Balance at December 31, 1997............ (1,659) 8,984 Net loss........ (16,167) (16,167) ----------- ------------- Balance at December 31, 1998............ (17,826) (7,183) 53,514-for-one stock split..... -- -- Initial public offering........ -- 114,134 Conversion of Series A convertible debt............ -- 246,349 Conversion of subordinated convertible notes payable to related party........... -- 106,955 Increase in FCC license, goodwill and intangibles..... -- 51,624 Charge for beneficial conversion feature of note issued to Parent.. -- 5,520 Issuance of shares to employees through stock option and purchase plans.. -- 304 Non-cash stock compensation.... -- 4,210 Net loss........ (36,896) (36,896) ----------- ------------- Balance at December 31, 1999............ (54,722) 485,017
(continued) F-5 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (cont.) Years Ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
Series C Series B Convertible Series A Convertible Redeemable Convertible Redeemable Preferred Class A Common Class B Common Class C Preferred Stock Preferred Stock Stock Stock Stock Common Stock ----------------- ------------------ -------------- ----------------- ------------------ ------------- Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount ---------- ------ ---------- ------ ------- ------ ---------- ------ ---------- ------ ------ ------ (in thousands, except share data) Secondary public offering........ -- $ -- -- $ -- -- $-- 4,370,000 $ 44 -- $ -- -- $-- Sale of Series B convertible redeemable preferred stock........... -- -- 2,000,000 20 -- -- -- -- -- -- -- -- Sale of Series C convertible redeemable preferred stock........... -- -- -- -- 235,000 2 -- -- -- -- -- -- Incentivized conversion of Series B convertible redeemable preferred stock........... -- -- (1,132,711) (11) -- -- 1,700,016 17 -- -- -- -- Sale of warrants to purchase Class A common stock........... -- -- -- -- -- -- -- -- -- -- -- -- Conversion of Class B common stock........... -- -- -- -- -- -- 1,314,914 13 (1,314,914) (13) -- -- Series B convertible redeemable preferred stock dividends....... -- -- -- -- -- -- 145,166 1 -- -- -- -- Issuance of shares to employees through stock option and purchase plans.. -- -- -- -- -- -- 73,565 1 -- -- -- -- Non-cash stock compensation.... -- -- -- -- -- -- 5,000 -- -- -- -- -- Net loss........ -- -- -- -- -- -- -- -- -- -- -- -- ---------- ---- ---------- ---- ------- --- ---------- ---- ---------- ---- --- --- Balance at December 31, 2000............ 10,786,504 $108 867,289 $ 9 235,000 $ 2 34,073,994 $341 16,557,262 $166 -- $-- ========== ==== ========== ==== ======= === ========== ==== ========== ==== === === Deficit Accumulated ------------------------- Total Additional During Stockholders' Paid-in Development Equity Capital Stage (Deficit) ----------- ----------- ------------- Secondary public offering........ $ 132,026 $ -- $132,070 Sale of Series B convertible redeemable preferred stock........... 96,452 -- 96,472 Sale of Series C convertible redeemable preferred stock........... 226,820 -- 226,822 Incentivized conversion of Series B convertible redeemable preferred stock........... (6) -- -- Sale of warrants to purchase Class A common stock........... 63,536 -- 63,536 Conversion of Class B common stock........... -- -- -- Series B convertible redeemable preferred stock dividends....... (1) -- -- Issuance of shares to employees through stock option and purchase plans.. 1,164 -- 1,165 Non-cash stock compensation.... 2,743 -- 2,743 Net loss........ -- (51,873) (51,873) ----------- ----------- ------------- Balance at December 31, 2000............ $1,061,921 $(106,595) $955,952 =========== =========== =============
See accompanying notes to consolidated financial statements. F-6 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 -------- -------- -------- ----------------- (in thousands) Cash flows from operating activities: Net loss...................... $(16,167) $(36,896) $(51,873) $(106,595) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................. 57 1,478 3,369 4,936 Amortization of deferred financing fees............... -- 509 -- 509 Non-cash stock compensation... -- 4,210 2,743 6,953 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) (7,738) (8,815) Increase (decrease) in other assets...................... -- 43 -- (641) Increase in accounts payable and accrued expenses........ 1,701 7,519 16,051 32,733 Increase (decrease) in amounts due to related parties..................... 13,322 (1,316) 1 63 Increase (decrease) in accrued interest............ (2) 3,053 -- -- -------- -------- -------- --------- Net cash used in operating activities................. (1,301) (16,785) (37,447) (65,337) -------- -------- -------- --------- Cash flows from investing activities: Purchase of property and equipment.................... (506) (2,008) (51,378) (53,974) Additions to system under construction................. (43,406) (159,510) (414,889) (711,173) Net purchase/maturity of short-term investments....... -- (69,472) 69,472 -- Net purchase/maturity of restricted investments....... -- -- (106,338) (106,338) Other investing activities.... -- (3,422) (56,268) (56,268) -------- -------- -------- --------- Net cash used in investing activities................. (43,912) (234,412) (559,401) (927,753) -------- -------- -------- --------- Cash flows from financing activities: Proceeds from sale of common stock and capital contribution................. -- 114,428 133,235 256,816 Proceeds from issuance of Series B convertible redeemable preferred stock... -- -- 96,472 96,472 Proceeds from issuance of senior secured notes and warrants..................... -- -- 322,889 322,889 Proceeds from issuance of Series C convertible redeemable preferred stock... -- -- 226,822 226,822 Proceeds from issuance of subordinated convertible notes to related parties..... 45,920 22,966 -- 157,866 Proceeds from the issuance of options...................... -- -- -- 1,500 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) (8,365) (19,372) Other net financing activities................... (5) (84) -- -- -------- -------- -------- --------- Net cash provided by financing activities....... 45,522 301,585 771,053 1,217,993 -------- -------- -------- --------- Net increase in cash and cash equivalents................... 309 50,388 174,205 224,903 Cash and cash equivalents at beginning of period........... 1 310 50,698 -- -------- -------- -------- --------- Cash and cash equivalents at end of period................. $ 310 $ 50,698 $224,903 $ 224,903 ======== ======== ======== ========= Supplemental cash flow disclosure: Increase in FCC license, goodwill and intangibles..... $ -- $ 51,624 $ -- $ 51,624 Liabilities exchanged for new convertible note to related parties...................... -- 81,676 -- 81,676 Non-cash interest capitalized.................. 11,824 15,162 16,302 45,274 Interest converted into principal note balance....... 9,157 4,601 -- -- Accrued expenses transferred to loan balance.............. -- 7,405 -- -- Accrued system milestone payments..................... 21,867 15,500 30,192 30,192 Property acquired through capital leases............... -- 470 1,688 2,075 Conversion of debt to equity.. -- 353,315 -- 353,315 Use of deposit for terrestrial repeater contract............ -- -- 3,422 --
See accompanying notes to consolidated financial statements. F-7 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS For the period from December 15, 1992 (date of inception) through December 31, 2000 (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 Motient Corporation, formerly American Mobile Satellite Corporation ("Motient" 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 Motient, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent interest in XMSR. On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc. (the "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. Motient 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, Motient acquired WSI's 20 percent interest in the Company, which is discussed in note 3. (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., XM Radio Inc. and XM Equipment Leasing, LLC. All significant intercompany transactions and accounts have been eliminated. The Company's management has devoted its time to the planning and organization of the Company, obtaining its DARS license, conducting research and development programs, conducting market research, constructing its satellite and terrestrial repeater systems, securing content providers, securing manufacturers for its radios and obtaining retail distribution channels, securing adequate debt and equity capital for anticipated operations and growth, and addressing regulatory matters. 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 5, 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. F-8 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (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, ---------------- 1999 2000 ------- -------- Cash on deposit.......................................... $ 66 $ 97 Money market funds....................................... 10,620 224,806 Commercial paper......................................... 40,012 -- ------- -------- $50,698 $224,903 ======= ========
(d) Short-term Investments At December 31, 1999, the Company held commercial paper with maturity dates of less than one year that were stated at amortized cost, which approximated fair value. (e) Restricted Investments Restricted investments consist of fixed income securities and are stated at amortized cost plus accrued interest income. The securities included in restricted investments are $106.3 million of US Treasury strips restricted to provide for the remaining five scheduled interest payments on the Company's 14 percent Senior Secured Notes due 2010, which are classified as held-to-maturity securities under the provision of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, $49.6 million in money market funds for scheduled milestone payments under the Hughes Electronics Corporation contract and $5.1 million in certificates of deposit to collateralize letters of credit required by facility leases and other secured credits. The carrying value and fair value of the held-to-maturity securities at December 31, 2000 were (in thousands):
Carrying Unrealized Fair Value Gain Value -------- ---------- -------- Held-to-Maturity securities................. $106,338 $1,060 $107,398
(f) 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: Computer equipment................................... 3-5 years Computer software.................................... 3-5 years Furniture and fixtures............................... 3-7 years Machinery and equipment.............................. 3-7 years Leasehold improvements............................... Remaining lease term
(g) 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, 2000, 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. F-9 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 and can be extended by the Company. 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, ----------------- 1999 2000 -------- -------- License................................................. $132,418 $140,220 Satellite system........................................ 214,471 533,154 Terrestrial system...................................... 11,396 84,715 Spacecraft control facilities........................... 2,000 13,046 Broadcast facilities.................................... 2,073 27,970 System development...................................... -- 6,458 -------- -------- $362,358 $805,563 ======== ========
The balances at December 31, 1999 and 2000 include capitalized interest of $29,068,000 and $68,120,000, respectively. 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 undiscounted 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. The Company had scheduled the launch of its satellite, "XM Roll", on January 8, 2001. This launch was halted just before lift off. As a result, the Company has determined that it will launch its other satellite, "XM Rock", first, which is scheduled for March 18, 2001. The Company anticipates that XM Roll will be launched in early May 2001 and will commence commercial operations in the summer of 2001. (h) 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 by the amount by which the carrying amount of the assets exceed the fair value of the assets. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. F-10 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (i) 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 including FASB Interpretation ("FIN") No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB opinion No. 25 issued in March 2000, 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. The Company adopted FIN No. 44 in July 2000 to account for stock options that had been repriced during the period covered by FIN No. 44. The application resulted in additional compensation of $1,213,000 during the year ended December 31, 2000. Additional compensation charges may result depending upon the market value of the common stock at each balance sheet date. (j) Research and Development Research and development costs are expensed as incurred. (k) Net Income (Loss) Per Share The Company computes net income (loss) per share in accordance with SFAS No. 128, Earnings Per Share and SEC Staff Accounting Bulletin No. 98 ("SAB 98"). Under the provisions of SFAS No. 128 and SAB 98, basic net income (loss) per share is computed by dividing the net income (loss) available to common 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. (l) Income Taxes The Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and the financial reporting amounts at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the sum of taxes payable for the period and the change during the period in deferred tax assets and liabilities. (m) 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 F-11 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) the financial statements. This statement is effective for all interim and annual periods within the year ended December 31, 1999. 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, 1998, 1999 and 2000 that would be classified as other comprehensive income. (n) 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. (o) Reclassifications Certain fiscal year 1998 and 1999 amounts have been reclassified to conform to the current presentation. (p) Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000 the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activity, an amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after 2000. The Company will adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company has reviewed its contracts and has determined that it has no derivative instruments and does not engage in hedging activities. (2) Related Party Transactions The Company had related party transactions with the following shareholders: (a) Motient In 1997, Motient contributed $143,000 to 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 Motient. During 1999 and 2000, Motient incurred general and administrative costs and professional fees for the Company and established an intercompany balance of $62,000 and $63,000, respectively. Effective January 15, 1999, the Company issued a convertible note maturing on September 30, 2006 to Motient for $21,419,000. (See note 3). (b) WSI On March 28, 1997, the Company received $1,500,000 as a capital contribution from WSI. The Company issued WSI 25 (6,689,250 post split) shares of common stock for this consideration. During 1997, 1998, and 1999, the Company borrowed $87,911,000, $45,583,000, and $8,953,000, respectively, under various debt agreements with WSI. F-12 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) As discussed in note 3, all amounts due to WSI under the debt agreements were acquired by Motient or repaid on July 7, 1999. (c) Related Party Services 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, 1998 ----------------------- WSI Motient 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 Motient Total ------- ------- ------- Research and development............................ $ 50 $ -- $ 50 Professional fees................................... -- 219 219 General and administrative.......................... -- 5 5 ------- ---- ------- Total............................................. $ 50 $224 $ 274 ======= ==== ======= Year ended December 31, 2000 ----------------------- Motient ------- Research and development............................ $ -- Professional fees................................... 252 General and administrative.......................... -- ---- Total............................................. $252 ====
With the WorldSpace Transaction, which is discussed in note 3, on July 7, 1999, WSI ceased to be a related party; therefore, the expenses reflected for WSI are representative of the period from January 1, 1999 through July 7, 1999. (3) Debt (a) Loans Payable Due to Related Parties In March 1997, XMSR entered into a series of agreements (the "Participation Agreement") with Motient 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. The Participation Agreement, as well as other agreements subsequently reached between the Company, Motient and WSI, served as the basis for several rounds of financing in the form of loans and notes with either conversion features or options for the Company's common stock through July 7, 1999. The Company had raised $142,447,000 in the form of loans and convertible notes from WSI and $21,419,000 in convertible notes from Motient through July 7, 1999. On July 7, 1999, Motient acquired WSI's remaining debt and equity interests in the Company in exchange for approximately 8.6 million shares of Motient's common stock (termed the "Worldspace Transaction"). F-13 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Additionally, the Company issued an aggregate $250.0 million of Series A subordinated convertible notes (see note 3(b)) 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, Motient owned all of the issued and outstanding stock of the Company. Concurrent with Motient'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 =======
On January 15, 1999, the Company issued a convertible note to Motient for $21,419,000. This convertible note bore interest at LIBOR plus five percent per annum and was due on December 31, 2004. The principal and interest balances were convertible at prices of $16.35 and $9.52, respectively, per Class B common share. Following the WorldSpace Transaction, the Company issued a convertible note maturing December 31, 2004 to Motient 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 Motient'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 this note. These Motient convertible 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. (b) 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 were 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 was $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. (c) 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 percent Senior Secured Notes due 2010 of its subsidiary XM Satellite Radio Inc. and one warrant to purchase 8.024815 shares of the Company's Class A common stock at a price of $49.50 per share. The Company realized net proceeds of $191.5 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. The $325,000,000 face value of the notes was offset by a discount of $65,746,000 associated with the fair value of the warrants sold. The Company had amortized $2,044,000 of the discount through December 31, 2000. See note 5(e) for further discussion regarding adjustments to the warrants sold. F-14 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term investments, accounts payable, accrued expenses and royalty payable approximate their fair market value because of the relatively short duration of these instruments as of December 31, 1999 and 2000, in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. At December 31, 2000, the carrying amount and fair value of the 14 percent Senior Secured Notes due 2010 were $261,298,000 and $179,563,000, respectively, based on the quoted market price. (5) Equity (a) Recapitalization Concurrent with the WorldSpace Transaction discussed in note 3, the Company's capital structure was reorganized. The Company's common stock was converted into the newly authorized Class B common stock, 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 Motient, (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 Motient'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. (c) Conversion of Class B Common Stock to Class A Common Stock On March 8, 2000, at the request of the Company, one of the Class B common stockholders converted 1,314,914 shares of the Company's Class B common stock into Class A common stock on a one-for-one basis. As of March 31, 2000, Motient held all of the Company's outstanding Class B common stock. On January 12, 2001, Motient converted 2,652,243 shares of the Company's Class B common stock into Class A common stock on a one-for-one basis. See note 11(j) for further discussion of the Company's filing of an application for change of control with the FCC. F-15 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (d) 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 $120,837,000. 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 $96,472,000. The Series B convertible redeemable preferred stock provides for 8.25 percent 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. On August 1, 2000, the Company entered into agreements with certain holders of its 8.25 percent Series B convertible redeemable preferred stock to exchange their shares of 8.25 percent Series B convertible redeemable preferred stock for shares of the Company's Class A common stock. By August 31, 2000, Holdings had issued 1,700,016 shares of its Class A common stock in exchange for 1,132,711 shares of its 8.25 percent Series B convertible redeemable preferred stock. Holdings recorded an $11.2 million charge to earnings attributable to common stockholders in the third quarter related to this transaction. This charge represents the difference in the fair value of the stock issued upon this conversion in excess of the stock that the holders were entitled to upon a voluntary conversion. The Company paid the quarterly dividends on the 8.25 percent Series B convertible redeemable preferred stock on May 1, 2000, August 1, 2000 and November 1, 2000 by issuing 62,318, 57,114 and 25,734, respectively, shares of Class A common stock to the respective holders of record. (e) Series C Convertible Redeemable Preferred Stock On July 7, 2000, the Company reached an agreement for a private offering of 235,000 shares of its Series C convertible redeemable preferred stock for $1,000 per share, which closed on August 8, 2000 and yielded net proceeds of $206,379,000 and a stock subscription of $20,000,000 that earned interest at 7 percent per annum until it was paid on November 30, 2000. The stock subscription was received in November 2000 and provided an additional $20,443,000. The Series C convertible redeemable preferred stock provides for 8.25 percent cumulative dividends payable in cash. The Series C convertible redeemable preferred stock is convertible, at the holders' option, into Class A common stock at the conversion price then in effect. Currently, the conversion price is $26.50, but may change upon the occurrence of certain dilutive events. The Company must redeem the Series C convertible redeemable preferred stock in Class A common stock on February 1, 2012. At its option, the Company may redeem the Series C convertible redeemable preferred stock beginning on February 8, 2005 in cash or, at the holder's option, in Class A common stock. As a result of the current conversion price of $26.50 being less than the market value of Holdings' Class A common stock of $40.375 on the commitment date, the Company recorded a $123.0 million beneficial conversion charge that reduced earnings available to common stockholders. The issuance of the Series C preferred stock also caused the exercise price of the warrants sold in March 2000 to be adjusted to $47.94 and the number of warrant shares to be increased to 8.285948 per warrant. (f) Stock-Based Compensation The Company operates three separate stock option plans, the details of which are described below. F-16 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Class A common stock under the Plan, which was increased to 2,675,700 in July 1999 and 5,000,000 in May 2000. 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, 1999 and 2000 are summarized below:
Outstanding Options ------------------------- Weighted- Number of Average Shares Exercise Price --------- -------------- Balance, December 31, 1997...................... -- $ -- 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 Options granted............................... 1,176,683 30.21 Options canceled or expired................... (131,267) 17.01 Options exercised............................. (48,817) 9.52 --------- ------ Balance, December 31, 2000...................... 3,095,688 $17.61 ========= ======
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 ============= ========= ========== ====== ========= ====== 2000..... $ 9.52-$12.00 2,120,400 8.26 years $10.39 1,110,756 $10.06 $13.13-$30.50 297,685 9.03 years $23.13 5,334 $13.13 $30.63-$45.44 677,603 9.54 years $37.92 20,000 $43.69 ============= ========= ========== ====== ========= ======
There were no, 416,294 and 1,136,090 stock options exercisable at December 31, 1998, 1999 and 2000, respectively. There were 1,615,483 shares available under the plan for future grants at December 31, 2000. At December 31, 2000, all options have been issued to employees, officers and directors. F-17 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The per share weighted-average fair value of employee options granted during the year ended December 31, 1998, 1999 and 2000 was $10.54, $6.21 and $22.06, respectively, on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
December 31, -------------------------------------------- 1998 1999 2000 -------------- -------------- -------------- Expected dividend yield.... 0% 0% 0% Volatility................. 56.23% 63.92% 68.21% Risk-free interest rate range..................... 4.53% to 5.57% 5.47% to 5.97% 4.99% to 6.71% Expected life.............. 7.5 years 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, 2000, 53,539 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 and $11.28 for the years ended December 31, 1999 and 2000, respectively. The estimates were calculated at the grant date using the Black- Scholes Option Pricing Model with the following assumptions at December 31, 1999 and 2000:
December 31, ---------------------- 1999 2000 ---------- ----------- Expected dividend yield... 0% 0% Volatility................ 62.92% 68.21% Risk-free interest rate range.................... 4.73% 5.33%-6.23% Expected life............. 0.23 years 0.24 years ========== ===========
F-18 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, for options granted with exercise prices below fair value on the date of grant and for repriced options under FIN No. 44. During 1999 and 2000, the Company incurred $4,070,000 and $2,557,000, respectively, 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 2000 ------- ------- -------- Net loss: As reported............................... $16,167 $36,896 $201,338 Pro forma................................. 17,508 37,706 209,582 As reported--net loss per share--basic and diluted.................................. (2.42) (2.40) (4.15) Pro forma--net loss per share--basic and diluted.................................. (2.62) (2.62) (4.32) ======= ======= ========
Talent Option Plan In May 2000, the Company adopted the XM Talent Option Plan ("Talent Plan") under which non-employee service providers to the Company may be granted options to purchase shares of Class A common stock of the Company. The Company authorized 500,000 shares of Class A common stock under the Talent Plan. The options are exercisable in installments determined by the talent committee of the Company's board of directors. The options expire as determined by the talent committee, but no later than ten years from the date of the grant. As of December 31, 2000, no options had been granted under the Talent Plan. (6) WSI Options In 1997, the Company issued WSI three options in accordance with the terms of loans issued to WSI. 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, Motient 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 Motient and exchanged for the $81,676,000 note to Motient as part of the WorldSpace Transaction (see note 3(a)). (7) Profit Sharing and Employee Savings Plan On July 1, 1998, the Company adopted a profit sharing and employee savings plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer up to 15 percent of their compensation on a pre-tax basis through contributions to the savings plan. The Company contributed $0.50 in 1998, 1999 and 2000 for every dollar the employees contributed up to 6 percent of compensation, which amounted to $14,000, $164,000 and $229,000, respectively. F-19 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) 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, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 1999 (in thousands):
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 ------- ------- ------- ----------------- Interest cost capitalized.............. $11,824 $15,343 $39,052 $68,120 Interest cost charged to expense.................. -- 9,120 -- 9,669 ------- ------- ------- ------- Total interest cost incurred............... $11,824 $24,463 $39,052 $77,789 ======= ======= ======= =======
Interest costs incurred prior to the award of the license were expensed in 1998. 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 a related party note. (9) 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 Motient. The Company generated net operating losses and other deferred tax benefits that were not utilized by Motient. 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, 2000, the Company's tax provision would be as follows: Taxes on income included in the statements of operations consists of the following (in thousands):
December 31, -------------------------- 1998 1999 2000 -------- -------- -------- Current taxes: Federal........................................ $ -- $ -- $ -- State.......................................... -- -- -- -------- -------- -------- Total current taxes.......................... -- -- -- -------- -------- -------- Deferred taxes: Federal........................................ $ -- $ -- $ -- State.......................................... -- -- -- -------- -------- -------- Total deferred taxes......................... -- -- -- -------- -------- -------- Total tax expense (benefit).................. $ -- $ -- $ -- ======== ======== ========
F-20 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, ---------------------------- 1998 1999 2000 -------- -------- -------- Income (loss) before taxes on income, as reported in the statements of income......... $(16,167) $(36,896) $(51,873) ======== ======== ======== Theoretical tax benefit on the above amount at 35%.......................................... (5,497) (12,545) (18,156) State tax, net of federal benefit............. (1,059) 462 (2,588) Increase in taxes resulting from permanent differences, net............................. 30 2,060 562 Adjustments arising from differences in the basis of measurement for tax purposes and financial reporting purposes and other....... (706) 13,182 9 Change in valuation allowance................. 7,232 (3,159) 20,173 -------- -------- -------- Taxes on income for the reported year......... $ -- $ -- $ -- ======== ======== ========
At December 31, 1998, 1999 and 2000, deferred income tax consists of future tax assets/(liabilities) attributable to the following (in thousands):
December 31, --------------------------- 1998 1999 2000 ------- -------- -------- Deferred tax assets: Net operating loss/other tax attribute carryovers................................. $ 518 $ 2,490 $ 14,716 Start-up costs.............................. 7,460 17,765 40,033 ------- -------- -------- Gross total deferred tax assets........... 7,978 20,255 54,749 Valuation allowance for deferred tax assets... (7,978) (4,819) (24,992) ------- -------- -------- Net deferred assets....................... -- 15,436 29,757 ------- -------- -------- Deferred tax liabilities: Fixed assets................................ -- (51) (15,500) FCC license................................. -- (10,160) (9,735) Other intangible assets..................... -- (5,225) (4,522) ------- -------- -------- Net deferred tax liabilities.............. -- (15,436) (29,757) ------- -------- -------- Deferred income tax, net.................. $ -- $ -- $ -- ======= ======== ========
At December 31, 2000, the Company had accumulated net operating losses of $35,892,000 for Federal income tax purposes that are available to offset future regular taxable income. These operating loss carryforwards expire between the years 2012 and 2020. Utilization of these net operating losses may be subject to limitations in the event of significant changes in the stock ownership of the Company. (10) 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. F-21 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At the Company's current stage of development, economic uncertainties exist regarding the successful acquisition of additional debt or equity financings and the attainment of positive cash flows from the Company's proposed service. The Company is currently constructing its satellite and terrestrial systems and will require substantial additional financing to market and distribute the satellite-based radio service. Failure to obtain the required long-term financing will prevent the Company from realizing its objective of providing satellite-based 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. (11) 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 Motient and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in which Motient and WorldSpace MC would provide technical support in areas related to the development of a DARS system. Payments for services provided under these agreements are made based on negotiated hourly rates. These agreements may be terminated by the parties on or after the date of the commencement of commercial operation following the launch of the Holdings' first satellite. There are no minimum services purchase requirements. The Company incurred costs of $413,000, $224,000 and $252,000 under its agreement with Motient and $4,357,000, $0 and $0 costs were incurred under its agreement with WorldSpace MC during the years ended December 31, 1998, 1999 and 2000, respectively. The Company incurred costs of $1,039,000 under its agreement with Motient and $5,317,000 in costs were incurred under its agreement with WorldSpace MC from December 15, 1992 (date of inception) through December 31, 2000. (d) Technology Licenses Effective January 1, 1998, XMSR entered into a technology licensing agreement with Motient and WorldSpace MC by which as compensation for certain licensed technology then under development to be used in the XM Radio system, XMSR will pay up to $14,300,000 to WorldSpace MC over a ten-year period. As of December 31, 2000 XMSR incurred costs of $6,696,000 payable to WorldSpace MC. Any additional amounts to be incurred under this agreement are dependent upon further development of the technology, which is at XMSR's option. No liability exists to Motient or WorldSpace MC should such developments prove unsuccessful. XMSR maintains an accrual of $5,165,000 payable to WorldSpace MC, for quarterly royalty F-22 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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 Boeing Satellite Systems International, Inc. ("BSS"--formerly Hughes Space and Communications, Inc.) 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. Holdings expects to incur total payment obligations under this contract of approximately $541,300,000, which includes amounts the Company expects to pay pursuant to the exercise of the option to build the ground spare satellite and certain financing costs and in-orbit incentive payments. On June 27, 2000, the Company exercised the option to build the ground spare. As of December 31, 2000, the Company had paid $466,017,000 under the Satellite contract with BSS and had accrued $1,585,000. (f) Terrestrial Repeater System Contracts In August 1999, the Company signed a contract with LCC International, Inc., a related party, calling for the payments of approximately $115,000,000 for engineering and site preparation. In January 2001, the scope of the contract was amended and the estimated contract value was reduced to $107,500,000. As of December 31, 2000, the Company had paid $50,168,000 under this contract, and accrued an additional $15,141,000. The Company has entered into tower construction agreements with various companies, which will provide certain services which LCC International, Inc. was to provide. The Company also entered into a contract effective October 22, 1999, with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. Payments under the contract are expected to be approximately $128,000,000, which could be modified based on the number of terrestrial repeaters that are required for the system. As of December 31, 2000, the Company had paid $15,358,000 under this contract. (g) General Motors Distribution Agreement The Company has signed a long-term distribution agreement with the OnStar division of General Motors providing for the installation of XM radios in General Motors vehicles. During the term of the agreement, which expires 12 years from the commencement date of the Company's commercial operations, General Motors has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The Company will also have a non- exclusive right to arrange for the installation of XM radios included in OnStar systems in non-General Motors vehicles that are sold for use in the United States. The Company has significant annual, fixed payment obligations to General Motors for four years following commencement of commercial service. These payments approximate $35,000,000 in the aggregate during this period. Additional annual fixed payment obligations beyond the initial four years of the contract term range from less than $35,000,000 to approximately $130,000,000 through 2009, aggregating approximately $400,000,000. In order to encourage the broad installation of XM radios in General Motors vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to General Motors when the owners of General Motors vehicles with installed XM radios become subscribers for the Company's service. The Company must also share with General Motors a percentage of the subscription revenue attributable to General Motors vehicles with installed XM radios, which percentage increases until there are more than 8 million General Motors vehicles with installed XM radios. The Company will also make available to General Motors bandwidth on the Company's systems. The agreement is subject to renegotiations at any time based upon the installation of F-23 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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) Joint Development Agreement 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. Each party is obligated to fund one half of the development cost for a unified standard for satellite radios. Each party will be entitled to license fees or a credit towards its one half of the cost based upon the validity, value, use, importance and available alternatives of the technology it contributes. The amounts for these fees or credits will be determined over time by agreement of the parties or by arbitration. The parties have yet to agree on the validity, value, use, importance and available alternatives of their respective technologies. If the parties fail to reach agreement, the fees or credits may be determined through binding arbitration. 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. (i) 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 it attains its millionth customer, and the number of shares underlying the warrant will be determined by the percentage of XM Radios that have a Sony brand name as of the vesting date. If Sony achieves its maximum performance target, it will receive 2 percent 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 percent of fair market value of the Class A common stock on the vesting date, determined based upon the 20-day trailing average. (j) Approval of Change of Control On July 14, 2000, Holdings filed an application with the FCC to allow Holdings to transfer its control from Motient to a diffuse group of owners, none of whom will have controlling interest. On December 22, 2000, the application was approved by the FCC. As discussed in note 5(c), Motient converted 2,652,243 shares of the Company's Class B common stock to Class A common stock on January 12, 2001. Through February 9, 2001, Motient has sold 2,000,000 shares of Class A common stock, which reduced its voting interest to 48.7 percent of the shares outstanding. (k) Sales, Marketing and Distribution Agreements The Company has entered into various joint sales, marketing and distribution agreements. Under the terms of these agreements, the Company is obligated to provide incentives, subsidies and commissions to other F-24 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued) companies that may include fixed payments, per-unit subscriber amounts and revenue sharing arrangements. The amount of these operational, promotional, subscriber acquisition, joint development, and manufacturing costs related to these agreements cannot be estimated, but are expected to be substantial future costs. (l) Leases The Company has noncancelable operating leases for office space and terrestrial repeater sites and noncancelable capital leases for equipment that expire over the next ten years. The future minimum lease payments under noncancelable leases as of December 31, 2000 are (in thousands):
Operating Capital leases leases --------- ------- Year ending December 31: 2001....................................................... $13,261 $ 847 2002....................................................... 13,665 761 2003....................................................... 13,986 474 2004....................................................... 14,230 -- 2005....................................................... 11,041 -- Thereafter................................................. 22,513 -- ------- ------ Total.................................................... $88,696 2,082 ======= Less amount representing interest............................ (159) ------ Present value of net minimum lease payments.................. 1,923 Less current maturities...................................... (556) ------ Long-term obligations........................................ $1,367 ======
Rent expense for 1998, 1999 and 2000 was $231,000, $649,000 and $6,082,000 respectively. (12) Quarterly Data (Unaudited)
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 attributable to common stockholders............................. 3,100 5,032 3,857 4,178 ------- ------- ------- ------- Net loss per share--basic 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 attributable to common stockholders............................. 4,367 3,999 17,402 11,128 ------- ------- ------- ------- Net loss per share--basic and diluted... $ (0.65) $ (0.60) $ (2.60) $ (0.27) ======= ======= ======= =======
F-25 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2000 ---------------------------------- 1st 2nd 3rd 4th Quarter Quarter Quarter Quarter ------- ------- ------- ------- Revenues.................................. $ -- $ -- $ -- $ -- Operating loss............................ 16,888 13,937 28,109 20,544 Loss before income taxes.................. 12,740 5,088 20,060 13,985 Net loss attributable to common stockholders............................. 14,212 7,259 160,095 19,773 ------- ------- ------- ------- Net loss per share--basic and diluted... $ (0.30) $ (0.15) $ (3.26) $ (0.40) ======= ======= ======= =======
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. (13)Subsequent Financing (unaudited) In March 2001, the Company completed a follow-on offering of 7,500,000 shares of Class A common stock, which yielded net proceeds of $72.0 million, and a concurrent offering of 7.75% convertible subordinated notes due 2006, convertible into shares of Class A common stock at a conversion price of $12.23 per share, which yielded net proceeds of $120.7 million. F-26 Independent Auditors' Report To the Board of Directors and Stockholder XM Satellite Radio Inc. and Subsidiaries: We have audited the accompanying consolidated balance sheets of XM Satellite Radio Inc. and subsidiaries (a development stage company) as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000. 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 auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of XM Satellite Radio Inc. and subsidiaries (a development stage company) as of December 31, 1999 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 and for the period from December 15, 1992 (date of inception) to December 31, 2000, in conformity with accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 10 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 10. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ KPMG LLP McLean, VA February 9, 2001 F-27 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED BALANCE SHEETS December 31, 1999 and 2000 ASSETS
1999 2000 -------- ---------- (in thousands, except share data) Current assets: Cash and cash equivalents.............................. $ 49,630 $ 203,191 Short-term investments................................. 69,472 -- Restricted investments................................. -- 95,277 Prepaid and other current assets....................... 1,077 8,815 -------- ---------- Total current assets................................. 120,179 307,283 Other assets: Restricted investments, net of current portion......... -- 65,889 System under construction.............................. 333,500 776,706 Property and equipment, net of accumulated depreciation and amortization of $347 and $2,337................... 2,551 59,505 Goodwill and intangibles, net of accumulated amortization of $1,220 and $2,599..................... 25,380 24,001 Other assets, net of accumulated amortization of $0 and $672.................................................. 3,524 9,133 -------- ---------- Total assets......................................... $485,134 $1,242,517 ======== ========== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable....................................... $ 23,258 $ 47,072 Accrued expenses....................................... 1,514 4,636 Accrued interest on senior secured notes............... -- 13,397 Royalty payable........................................ 1,646 2,565 -------- ---------- Total current liabilities............................ 26,418 67,670 Senior secured notes, net of discount amortization of $0 and $2,044.............................................. -- 261,298 Royalty payable, net of current portion.................. 3,400 2,600 Capital lease, net of current portion.................... 212 1,367 Other non-current liabilities............................ -- 4,172 -------- ---------- Total liabilities.................................... 30,030 337,107 -------- ---------- Stockholder's equity: Common stock, par value $0.10; 3,000 shares authorized, 125 shares issued and outstanding..................... -- -- Additional paid-in capital............................. 502,646 1,004,879 Deficit accumulated during development stage........... (47,542) (99,469) -------- ---------- Total stockholder's equity........................... 455,104 905,410 -------- ---------- Commitments and contingencies (notes 3, 10 and 11) Total liabilities and stockholder's equity........... $485,134 $1,242,517 ======== ==========
See accompanying notes to consolidated financial statements. F-28 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 -------- -------- -------- ----------------- (in thousand) Revenue......................... $ -- $ -- $ -- $ -- -------- -------- -------- --------- Operating expenses: Research and development...... 6,941 4,274 7,397 18,612 Professional fees............. 5,242 9,948 22,751 39,031 General and administrative.... 4,010 16,448 48,979 69,457 -------- -------- -------- --------- Total operating expenses.... 16,193 30,670 79,127 127,100 -------- -------- -------- --------- Operating loss.................. (16,193) (30,670) (79,127) (127,100) Other income (expense): Interest income............... 26 533 27,200 27,759 Interest expense.............. -- (43) -- (128) -------- -------- -------- --------- Net loss.................... $(16,167) $(30,180) $(51,927) $ (99,469) ======== ======== ======== =========
See accompanying notes to consolidated financial statements. F-29 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Stockholder's Equity Years ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
Deficit Accumulated Common Stock Additional During Total ------------- Paid-in Development Stockholder's Shares Amount Capital Stage Equity ------ ------ ---------- ----------- ------------- (in thousands) Issuance of common stock (December 15, 1992)......... 100 $ -- $ -- $ -- $ -- ----- ----- ---------- -------- -------- Balance at December 31, 1992....................... 100 -- -- -- -- Net loss.................... -- -- -- -- -- ----- ----- ---------- -------- -------- Balance at December 31, 1993....................... 100 -- -- -- -- Net loss.................... -- -- -- -- -- ----- ----- ---------- -------- -------- Balance at December 31, 1994....................... 100 -- -- -- -- Net loss.................... -- -- -- -- -- ----- ----- ---------- -------- -------- Balance at December 31, 1995....................... 100 -- -- -- -- Net loss.................... -- -- -- -- -- ----- ----- ---------- -------- -------- Balance at December 31, 1996....................... 100 -- -- -- -- Contributions to paid-in capital.................... -- -- 73,107 -- 73,107 Issuance of common stock and capital contributions...... 25 -- 9,143 -- 9,143 Loan converted into capital.................... -- -- 8,477 -- 8,477 Issuance of options......... -- -- 500 -- 500 Net loss.................... -- -- -- (1,195) (1,195) ----- ----- ---------- -------- -------- Balance at December 31, 1997....................... 125 -- 91,227 (1,195) 90,032 Contributions to paid-in capital.................... -- -- 53,591 -- 53,591 Net loss.................... -- -- -- (16,167) (16,167) ----- ----- ---------- -------- -------- Balance at December 31, 1998....................... 125 -- 144,818 (17,362) 127,456 Contributions to paid-in capital.................... -- -- 301,994 -- 301,994 Increase in FCC license, goodwill and intangibles from WorldSpace transaction................ -- -- 51,624 -- 51,624 Non-cash stock compensation............... -- -- 4,210 -- 4,210 Net loss.................... -- -- -- (30,180) (30,180) ----- ----- ---------- -------- -------- Balance at December 31, 1999....................... 125 -- 502,646 (47,542) 455,104 Contributions to paid-in capital.................... -- -- 499,490 -- 499,490 Non-cash stock compensation............... -- -- 2,743 -- 2,743 Net loss.................... -- -- -- (51,927) (51,927) ----- ----- ---------- -------- -------- Balance at December 31, 2000....................... 125 $ -- $1,004,879 $(99,469) $905,410 ===== ===== ========== ======== ========
See accompanying notes to consolidated financial statements. F-30 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 2000
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 -------- -------- -------- ----------------- (in thousands) Cash flows from operating activities: Net loss...................... $(16,167) $(30,180) $(51,927) $ (99,469) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization................ 57 1,478 3,369 4,936 Non-cash stock compensation.. -- 4,210 2,743 6,953 Changes in operating assets and liabilities: Increase in prepaid and other current assets.............. (212) (905) (7,738) (8,815) Increase (decrease) in other assets...................... -- 62 -- (132) Increase in accounts payable and accrued expenses........ 1,700 7,149 16,037 30,280 Increase in amounts due to related party............... 5,257 -- -- -- -------- -------- -------- --------- Net cash used in operating activities................. (9,365) (18,186) (37,516) (66,247) -------- -------- -------- --------- Cash flows from investing activities: Purchase of property and equipment.................... (506) (2,008) (51,378) (53,974) Additions to system under construction................. (43,406) (159,510) (414,889) (711,173) Net purchase/maturity of restricted investments....... -- -- (106,338) (106,338) Net purchase/maturity of short-term investments....... -- (69,472) 69,472 -- Other investing activities.... -- (3,422) (56,268) (56,268) -------- -------- -------- --------- Net cash used in investing activities................. (43,912) (234,412) (559,401) (927,753) -------- -------- -------- --------- Cash flows from financing activities: Proceeds from sale of common stock and capital contribution................. -- -- 499,589 559,667 Capital contribution from parent through transfer of liabilities.................. 53,591 302,002 -- 386,135 Proceeds from issuance of senior secured notes......... -- -- 259,254 259,254 Proceeds from the issuance of options...................... -- -- -- 500 Payments for deferred financing fees............... -- -- (8,365) (8,365) Other net financing activities................... (5) (84) -- -- -------- -------- -------- --------- Net cash provided by financing activities....... 53,586 301,918 750,478 1,197,191 -------- -------- -------- --------- Net increase in cash and cash equivalents................... 309 49,320 153,561 203,191 Cash and cash equivalents at beginning of period........... 1 310 49,630 -- -------- -------- -------- --------- Cash and cash equivalents at end of period................. $ 310 $ 49,630 $203,191 $ 203,191 ======== ======== ======== ========= Supplemental cash flow disclosure: Increase in FCC license, goodwill and intangibles..... $ -- $ 51,624 $ -- $ 51,624 Property acquired through capital leases............... -- 470 1,688 2,075 Non-cash interest capitalized.................. 29 -- 16,302 16,416 Accrued system milestone payments..................... 21,867 15,500 30,192 30,192 Use of deposit for terrestrial repeater contract............ -- -- 3,422 --
See accompanying notes to consolidated financial statements. F-31 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) CONSOLIDATED FINANCIAL STATEMENTS December 31, 1999 and 2000, and for the period from December 15, 1992 (date of inception) through December 31, 2000 (1) Summary of Significant Accounting Policies and Practices (a) Nature of Business XM Satellite Radio Inc. ("XMSR" or the "Company"), formerly American Mobile Radio Corporation, was incorporated on December 15, 1992 in the State of Delaware as a wholly owned subsidiary of Motient Corporation, formerly American Mobile Satellite Corporation ("Motient") for the purpose of procuring a digital audio radio service ("DARS") license. Business activity for the period from December 15, 1992 through December 31, 1996 was insignificant. Pursuant to various financing agreements entered into in 1997 between Motient, XMSR and WorldSpace, Inc. ("WSI"), WSI acquired a 20 percent interest in XMSR. On May 16, 1997, Motient and WSI formed XM Satellite Radio Holdings Inc. (the "Parent"), 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. Motient and WSI exchanged their respective interests in XMSR for equivalent interests in the Company, which had no assets, liabilities or operations prior to the transaction. (b) Principles of Consolidation and Basis of Presentation The consolidated financial statements include the accounts of XM Satellite Radio Inc. and its subsidiaries, XM Radio Inc. and XM Equipment Leasing LLC. All significant intercompany transactions and accounts have been eliminated. The Company's management has devoted its time to the planning and organization of the Company, obtaining its DARS license, conducting research and development programs, conducting market research, constructing its satellite and terrestrial repeater systems, securing content providers, securing manufacturers for its radios and obtaining retail distribution channels, securing adequate debt and equity capital for anticipated operations and growth, and addressing regulatory matters. The Company has not generated any revenues and planned principal operations have not commenced. Accordingly, the Company's financial statements are presented as those of a development stage enterprise, as prescribed by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and Reporting by Development Stage Enterprises. (c) Cash and Cash Equivalents The Company considers short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company had the following cash and cash equivalents balances (in thousands):
December 31, ---------------- 1999 2000 ------- -------- Cash on deposit.......................................... $ 63 $ 92 Money market funds....................................... 9,555 203,099 Commercial paper......................................... 40,012 -- ------- -------- $49,630 $203,191 ======= ========
F-32 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (d) Short-term Investments At December 31, 1999, the Company held commercial paper with maturity dates of less than one year that were stated at amortized cost, which approximates fair value. (e) Restricted Investments Restricted investments consist of fixed income securities and are stated at amortized cost plus accrued interest income. The securities included in restricted investments are $106.3 million of US Treasury strips restricted to provide for the remaining five scheduled interest payments on the Company's 14 percent Senior Secured Notes due 2010, which are classified as held-to-maturity securities under the provision of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, $49.6 million in money market funds for scheduled milestone payments under the Hughes Electronics Corporation contract and $5.1 million in certificates of deposit to collateralize letters of credit required by facility leases and other secured credits. The carrying value and fair value of the held-to-maturity securities at December 31, 2000 were (in thousands):
Carrying Unrealized Fair Value Gain Value -------- ---------- -------- Held-to-Maturity securities................. $106,338 $1,060 $107,398
(f) 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: Computer equipment................................... 3-5 years Computer software.................................... 3-5 years Furniture and fixtures............................... 3-7 years Machinery and equipment.............................. 3-7 years Leasehold improvements............................... Remaining lease term
(g) 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, 2000, 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. F-33 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) System under construction consists of the following (in thousands):
December 31, ----------------- 1999 2000 -------- -------- License................................................. $115,142 $122,944 Satellite system........................................ 204,198 521,573 Terrestrial system...................................... 10,087 84,715 Spacecraft control facilities........................... 2,000 13,046 Broadcast facilities.................................... 2,073 27,970 System development...................................... -- 6,458 -------- -------- $333,500 $776,706 ======== ========
The balances at December 31, 1999 and 2000 include capitalized interest of $210,000 and $39,262,000, respectively. 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 undiscounted 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. The Company had scheduled the launch of its satellite, "XM Roll", on January 8, 2001. This launch was halted just before lift off. As a result, the Company has determined that it will launch its other satellite, "XM Rock", first, which is scheduled for March 18, 2001. The Company anticipates that XM Roll will be launched in early May 2001 and will commence commercial operations in the summer of 2001. (h) 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 by the amount by which the carrying amount of the assets exceed the fair value of the assets. The assessment of the recoverability of goodwill will be impacted if estimated future operating cash flows are not achieved. (i) 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 including FASB Interpretation ("FIN") No. 44, Accounting for Certain Transactions Involving Stock Compensation, an interpretation of APB opinion No. 25 issued in March 2000, 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. F-34 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company adopted FIN No. 44 in July 2000 to account for stock options that had been repriced during the period covered by FIN No. 44. The application resulted in additional compensation of $1,213,000 during the year ended December 31, 2000. Additional compensation charges may result depending upon the market value of the common stock at each balance sheet date. (j) Research and Development Research and development costs are expensed as incurred. (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 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 taxes 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 within the year ended December 31, 1999. 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, 1998, 1999 and 2000 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 1998 and 1999 amounts have been reclassified to conform to the current presentation. (o) Derivative Instruments and Hedging Activities In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 2000 the FASB issued SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activity, an amendment of SFAS 133. SFAS No. 133 and SFAS No. 138 require that all derivative instruments be recorded on the balance sheet at their respective fair values. SFAS No. 133 and SFAS No. 138 are effective for all fiscal quarters of all fiscal years beginning after 2000. The Company will adopt SFAS No. 133 and SFAS No. 138 on January 1, 2001. The Company has reviewed its contracts and has determined that it has no derivative instruments and does not engage in hedging activities. F-35 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (2) Related Party Transactions The Company had related party transactions with the following shareholders: (a) Motient In 1997, Motient contributed $143,000 to 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 Motient. Effective January 15, 1999, the Parent issued a convertible note maturing on September 30, 2006 to Motient for $21,419,000. (See note 3(d)). The proceeds from the convertible note were contributed to the Company as additional paid-in capital. (b) WSI On March 28, 1997, the Company received $1,500,000 as a capital contribution from WSI. The Company issued WSI 25 shares of common stock for this consideration. On April 16, 1997, the Company received $15,000,000 from WSI, which represented $6,000,000 as an additional capital contribution and $9,000,000 as a six-month bridge loan (see note 3). The liability for the draw against the bridge loan was assumed by the Parent on May 16, 1997. In addition to financing, the Company has relied upon certain related parties for legal and technical services. Total expenses incurred in transactions with related parties are as follows (in thousands):
Year ended December 31, 1998 ----------------------- WSI Motient 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 Motient Total ------- ------- ------- Research and development............................ $ 50 $ -- $ 50 Professional fees................................... -- 219 219 General and administrative.......................... -- 5 5 ------- ---- ------- Total............................................. $ 50 $224 $ 274 ======= ==== ======= Year ended December 31, 2000 ----------------------- Motient ------- Research and development............................ $ -- Professional fees................................... 252 General and administrative.......................... -- ---- Total............................................. $252 ====
F-36 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) With the WorldSpace Transaction, which is discussed in note 3, on July 7, 1999, WSI ceased to be a related party; therefore, the expenses reflected for WSI are representative of the period from January 1, 1999 through July 7, 1999. (c) Parent On May 16, 1997, the Parent obtained a $1,000,000 working capital loan facility from WSI. During 1997, the Company drew down $663,000 against the facility with the remaining $337,000 drawn in 1998 (see note 3). The proceeds from these draws were contributed to the Company as additional paid-in capital. On October 16, 1997, the Parent received $71,911,000 from WSI, which represented an additional $13,522,000 under the bridge loan and $58,389,000 under the additional amounts loan (see note 3). The proceeds from these draws were contributed to the Company as additional paid-in capital. On April 1, 1998, the Parent entered into an agreement with WSI to issue $54,536,000 in subordinated convertible notes. During 1999, the Parent drew down $8,953,000, respectively, under the agreement (see note 3). The proceeds from these draws were contributed to the Company as additional paid-in capital. In July 1998, the Parent contributed furniture and equipment with a book value of $104,000 to the Company. On October 8, 1999, the Parent completed an initial public offering of 10,000,000 shares of Class A common stock at $12.00 per share. The offering yielded net proceeds of $111,437,000, which was contributed to the Company as additional paid-in capital. On October 17, 1999, the underwriters of the Parent's initial public offering exercised the over-allotment option for an additional 241,000 shares of Class A common stock at $12.00 per share. This exercise yielded net proceeds of $2,697,000, which was contributed to the Company as additional paid-in capital. On January 31, 2000, the Parent closed on a secondary offering of its Class A common stock and newly designated Series B convertible redeemable preferred stock. The Parent sold 4,000,000 shares of its Class A common stock for $32.00 per share, which yielded net proceeds of $120,837,000. The Parent concurrently sold 2,000,000 shares of its Series B convertible redeemable preferred stock for $50.00 per share, which yielded net proceeds of $96,472,000. 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. All proceeds were contributed to the Company by the Parent. On March 15, 2000 the Parent and the Company closed a private placement of 325,000 units, each unit consisting of $1,000 principal amount of 14 percent Senior Secured Notes due 2010 of XMSR and one warrant to purchase 8.024815 shares of the Parent's Class A common stock at a price of $49.50 per share. The Company realized net proceeds of $191.5 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. The $325,000,000 face value of the notes was offset by a discount of $65,746,000 associated with the fair value of the warrants sold, which was contributed to the Company. The Company had amortized $2,044,000 of the discount through December 31, 2000. On July 7, 2000, the Parent reached an agreement for a private offering of 235,000 shares of its Series C convertible redeemable preferred stock for $1,000 per share, which closed on August 8, 2000 and yielded net proceeds of $206,379,000 and a stock subscription of $20,000,000 that earned interest at 7 percent per annum until it was paid on November 30, 2000. The stock subscription was received by the Parent in November 2000 and provided an additional $20,443,000. All proceeds, except the receipt of the stock subscription were contributed to the Company by the Parent. F-37 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (3) Debt (a) Loans Payable Due to Related Parties In March 1997, XMSR entered into a series of agreements (the "Participation Agreement") with Motient 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. The Participation Agreement, as well as other agreements subsequently reached between the Company, Motient and WSI, served as the basis for several rounds of financing in the form of loans and notes with either conversion features or options for the Parent's common stock through July 7, 1999. The Parent had raised $142,447,000 in the form of loans and convertible notes from WSI and $21,419,000 in convertible notes from Motient through July 7, 1999. On July 7, 1999, Motient acquired WSI's remaining debt and equity interests in the Parent in exchange for approximately 8.6 million shares of Motient's common stock (termed the "Worldspace Transaction"). Additionally, the Parent issued an aggregate $250.0 million of Series A subordinated convertible notes (see note 3(b)) 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, Motient owned all of the issued and outstanding stock of the Parent. Concurrent with Motient's acquisition of the remaining interest in the Parent, the Company recognized goodwill and intangibles of $51,624,000, which has been allocated as follows (in thousands): FCC License...................................................... $25,024 Goodwill......................................................... 13,738 Programming agreements........................................... 8,000 Receiver agreements.............................................. 4,600 Other intangibles................................................ 262 ------- $51,624 =======
(b) Issuance of Series A Subordinated Convertible Notes of the Parent to New Investors At the closing of the WorldSpace Transaction, the Parent issued an aggregate $250.0 million of Series A subordinated convertible notes to six new investors--General Motors Corporation, $50.0 million; Clear Channel 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 Parent contributed the net proceeds from the sale of these notes to the Company. (c) Private Units Offering On March 15, 2000 the Parent and the Company closed a private placement of 325,000 units, each unit consisting of $1,000 principal amount of 14 percent senior secured notes due 2010 of XM Satellite Radio Inc. and one warrant to purchase 8.024815 shares of the Parent's Class A common stock at a price of $49.50 per share. The Company realized net proceeds of $191.0 million, excluding $123.0 million used to acquire securities which will be used to pay interest payments due under the notes for the first three years. (d) Notes to Related Party On January 15, 1999, the Parent issued a convertible note to Motient for $21,419,000. The proceeds from the note were contributed to the Company as additional paid-in capital. F-38 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (4) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, short-term investments, accounts payable, accrued expenses and royalty payable approximate their fair market value because of the relatively short duration of these instruments as of December 31, 1999 and 2000, in accordance with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. At December 31, 2000, the carrying amount and fair value of the 14 percent Senior Secured Notes due 2010 were $261,298,000 and $179,563,000, respectively, based on the quoted market price. (5) Stock-Based Compensation The Company operates three separate stock option plans, the details of which are described below. (a) 1998 Shares Award Plan On June 1, 1998, the Parent adopted the 1998 Shares Award Plan (the "Plan") under which XMSR employees, consultants, and non-employee directors may be granted options to purchase shares of Class A common stock of the Parent. The Parent initially authorized 1,337,850 shares of Class A common stock under the Plan, which was increased to 2,675,700 in July 1999 and 5,000,000 in May 2000. 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, 1999 and 2000 are summarized below:
Outstanding Options ------------------------- Weighted- Number of Average Shares Exercise Price --------- -------------- Balance, December 31, 1997...................... -- $ -- 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 Options granted............................... 1,176,683 30.21 Options canceled or expired................... (131,267) 17.01 Options exercised............................. (48,817) 9.52 --------- ------ Balance, December 31, 2000...................... 3,095,688 $17.61 ========= ======
F-39 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The following table summarizes information about stock options outstanding at December 31, 1998, 1999 and 2000:
Options Outstanding Options Exercisable --------------------------------- --------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Number Contractual Exercise Number Exercise 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 ============== ========= ========== ====== ========= ====== 2000.... $ 9.52-$12.00 2,120,400 8.26 years $10.39 1,110,756 $10.06 $ 13.13-$30.50 297,685 9.03 years $23.13 5,334 $13.13 $ 30.63-$45.44 677,603 9.54 years $37.92 20,000 $43.69 ============== ========= ========== ====== ========= ======
There were no, 416,294 and 1,136,090 stock options exercisable at December 31, 1998, 1999 and 2000, respectively. There were 1,615,483 shares available under the plan for future grants at December 31, 2000. At December 31, 2000, all options have been issued to employees, officers and directors. The per share weighted-average fair value of employee options granted during the year ended December 31, 1998, 1999 and 2000 was $10.54, $6.21 and $22.06, respectively, on the date of grant using the Black-Scholes Option Pricing Model with the following weighted-average assumptions:
December 31, -------------------------------------------- 1998 1999 2000 -------------- -------------- -------------- Expected dividend yield.... 0% 0% 0% Volatility................. 56.23% 63.92% 68.21% Risk-free interest rate range..................... 4.53% to 5.57% 5.47% to 5.97% 4.99% to 6.71% Expected life.............. 7.5 years 5 years 5 years ============== ============== ==============
(b) Employee Stock Purchase Plan In 1999, the Parent established an employee stock purchase plan that provides for the issuance of 300,000 shares of the Parent's Class A common stock. All XMSR employees whose customary employment is more than 20 hours per week and for more than five months in any calendar year are eligible to participate in the stock purchase plan, provided that any employee who would own five percent or more of the Company's total combined voting power immediately after an offering date under the plan is not eligible to participate. Eligible employees must authorize the Company to deduct an amount from their pay during offering periods established by the compensation committee. The purchase price for shares under the plan will be determined by the compensation committee but may not be less than 85 percent of the lesser of the market price of the common stock on the first or last business day of each offering period. As of December 31, 2000, 53,539 shares had been issued to XMSR employees under this plan. F-40 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The per share weighted-average fair value of purchase rights granted during the year was $3.30 and $11.28 for the years ended December 31, 1999 and 2000, respectively. The estimates were calculated at the grant date using the Black- Scholes Option Pricing Model with the following assumptions at December 31, 1999 and 2000:
December 31, ---------------------- 1999 2000 ---------- ----------- Expected dividend yield... 0% 0% Volatility................ 62.92% 68.21% Risk-free interest rate range.................... 4.73% 5.33%-6.23% Expected life............. 0.23 years 0.24 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, for options granted with exercise prices below fair value on the date of grant and for repriced options under FIN No. 44. During 1999 and 2000, the Company incurred $4,070,000 and $2,557,000, respectively, 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 2000 ------- ------- ------- Net Loss: As reported............. $16,167 $30,180 $51,927 Pro forma............... 17,508 30,990 60,171 ======= ======= =======
(c) Talent Option Plan In May 2000, the Parent adopted the XM Talent Option Plan ("Talent Plan") under which non-employee service providers to the Company may be granted options to purchase shares of Class A common stock of the Parent. The Parent authorized 500,000 shares of Class A common stock under the Talent Plan. The options are exercisable in installments determined by the talent committee of the Company's board of directors. The options expire as determined by the talent committee, but no later than ten years from the date of the grant. As of December 31, 2000, no options had been granted under the Talent Plan. (6) Assumptions of Liabilities On May 16, 1997, the Parent assumed the bridge loan and the option liability held by XMSR. After May 16, 1997, the Parent initiated all future debt with lenders and contributed the proceeds to XMSR as a contribution of capital and maintained the debt. The Parent also assumed other liabilities relating to the technical support agreement. (7) Profit Sharing and Employee Savings Plan On July 1, 1998, the Company adopted a profit sharing and employee savings plan under Section 401(k) of the Internal Revenue Code. This plan allows eligible employees to defer up to 15 percent of their compensation on a pre-tax basis through contributions to the savings plan. The Company contributed $0.50 in 1998, 1999 and 2000 for every dollar the employees contributed up to 6 percent of compensation, which amounted to $14,000, $164,000 and $229,000, respectively. F-41 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (8) 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, 1998, 1999 and 2000, and for the period from December 15, 1992 (date of inception) to December 31, 1999 (in thousands):
December 15, 1992 (date of inception) to 1998 1999 2000 December 31, 2000 ---- ---- ------- ----------------- Interest cost capitalized............... $30 $210 $39,022 $39,262 Interest cost charged to expense........ -- 43 -- 128 --- ---- ------- ------- Total interest cost incurred.......... $30 $253 $39,022 $39,390 === ==== ======= =======
Interest costs incurred prior to the award of the license were expensed in 1998. (9) Income Taxes For the period from December 15, 1992 (date of inception) to October 8, 1999, the Parent and the Company filed consolidated federal and state tax returns where permitted with its majority stockholder Motient. The Company generated net operating losses and other deferred tax benefits that were not utilized by Motient. 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, 2000, the Company's tax provision would be as follows: Taxes on income included in the statements of operations consists of the following (in thousands):
December 31, -------------------------- 1998 1999 2000 -------- -------- -------- Current taxes: Federal........................................ $ -- $ -- $ -- State.......................................... -- -- -- -------- -------- -------- Total current taxes.......................... -- -- -- -------- -------- -------- Deferred taxes: Federal........................................ $ -- $ -- $ -- State.......................................... -- -- -- -------- -------- -------- Total deferred taxes......................... -- -- -- -------- -------- -------- Total tax expense (benefit).................. $ -- $ -- $ -- ======== ======== ========
F-42 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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, ---------------------------- 1998 1999 2000 -------- -------- -------- Income (loss) before taxes on income, as reported in the statements of income......... $(16,167) $(30,181) $(51,972) ======== ======== ======== Theoretical tax benefit on the above amount at 35%.......................................... (5,658) (10,563) (18,174) State tax, net of federal benefit............. (1,604) 1,370 (2,877) Increase in taxes resulting from permanent differences, net............................. 31 2,120 562 Adjustments arising from differences in the basis of measurement for tax purposes and financial reporting purposes and other....... -- 13,252 7 Change in valuation allowance................. 7,231 (6,179) 20,482 -------- -------- -------- Taxes on income for the reported year......... $ -- $ -- $ -- ======== ======== ========
At December 31, 1998, 1999 and 2000, deferred income tax consists of future tax assets/(liabilities) attributable to the following (in thousands):
December 31, --------------------------- 1998 1999 2000 ------- -------- -------- Deferred tax assets: Net operating loss/other tax attribute carryovers................................. $ 518 $ 2,054 $ 12,396 Start-up costs.............................. 7,251 14,972 42,252 ------- -------- -------- Gross total deferred tax assets........... 7,769 17,026 54,648 Valuation allowance for deferred tax assets... (7,769) (1,590) (22,072) ------- -------- -------- Net deferred assets....................... -- 15,436 32,576 ------- -------- -------- Deferred tax liabilities: Fixed assets................................ -- (51) (16,532) FCC license................................. -- (10,160) (9,821) Other intangible assets..................... -- (5,225) (6,223) ------- -------- -------- Net deferred tax liabilities.............. -- (15,436) (32,576) ------- -------- -------- Deferred income tax, net.................. $ -- $ -- $ -- ======= ======== ========
At December 31, 2000, the Company had accumulated net operating losses of $31,047,000 for Federal income tax purposes that are available to offset future regular taxable income. These operating loss carryforwards expire between the years 2012 and 2020. Utilization of these net operating losses may be subject to limitations in the event of significant changes in the stock ownership of the Company. (10) 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. F-43 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At the Company's current stage of development, economic uncertainties exist regarding the successful acquisition of additional debt or equity financings and the attainment of positive cash flows from the Company's proposed service. The Company is currently constructing its satellite and terrestrial systems and will require substantial additional financing to market and distribute the satellite-based radio service. Failure to obtain the required long-term financing will prevent the Company from realizing its objective of providing satellite-based 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. (11) 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 Motient and WorldSpace Management Corporation ("WorldSpace MC"), an affiliate of WSI, in which Motient and WorldSpace MC would provide technical support in areas related to the development of a DARS system. Payments for services provided under these agreements are made based on negotiated hourly rates. These agreements may be terminated by the parties on or after the date of the commencement of commercial operation following the launch of the Holdings' first satellite. There are no minimum services purchase requirements. The Company incurred costs of $413,000, $224,000 and $252,000 under its agreement with Motient and $4,357,000, $0 and $0 costs were incurred under its agreement with WorldSpace MC during the years ended December 31, 1998, 1999 and 2000, respectively. The Company incurred costs of $1,039,000 under its agreement with Motient and $5,317,000 in costs were incurred under its agreement with WorldSpace MC from December 15, 1992 (date of inception) through December 31, 2000. (d) Technology Licenses Effective January 1, 1998, XMSR entered into a technology licensing agreement with Motient and WorldSpace MC by which as compensation for certain licensed technology then under development to be used in the XM Radio system, XMSR will pay up to $14,300,000 to WorldSpace MC over a ten-year period. As of December 31, 2000 XMSR incurred costs of $6,696,000 payable to WorldSpace MC. Any additional amounts to be incurred under this agreement are dependent upon further development of the technology, which is at XMSR's option. No liability exists to Motient or WorldSpace MC should such developments prove F-44 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) unsuccessful. XMSR maintains an accrual of $5,165,000 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 Boeing Satellite Systems International, Inc. ("BSS"--formerly Hughes Space and Communications, Inc.) 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. Holdings expects to incur total payment obligations under this contract of approximately $541,300,000, which includes amounts the Company expects to pay pursuant to the exercise of the option to build the ground spare satellite and certain financing costs and in-orbit incentive payments. On June 27, 2000, the Company exercised the option to build the ground spare. As of December 31, 2000, the Company had paid $466,017,000 under the Satellite contract with BSS and had accrued $1,585,000. (f) Terrestrial Repeater System Contracts In August 1999, the Company signed a contract with LCC International, Inc., a related party, calling for the payments of approximately $115,000,000 for engineering and site preparation. In January 2001, the scope of the contract was amended and the estimated contract value was reduced to $107,500,000. As of December 31, 2000, the Company had paid $50,168,000 under this contract, and accrued an additional $15,141,000. The Company has entered into tower construction agreements with various companies, which will provide certain services which LCC International, Inc. was to provide. The Company also entered into a contract effective October 22, 1999, with Hughes Electronics Corporation for the design, development and manufacture of the terrestrial repeaters. Payments under the contract are expected to be approximately $128,000,000, which could be modified based on the number of terrestrial repeaters that are required for the system. As of December 31, 2000, the Company had paid $15,358,000 under this contract. (g) General Motors Distribution Agreement The Company has signed a long-term distribution agreement with the OnStar division of General Motors providing for the installation of XM radios in General Motors vehicles. During the term of the agreement, which expires 12 years from the commencement date of the Company's commercial operations, General Motors has agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The Company will also have a non- exclusive right to arrange for the installation of XM radios included in OnStar systems in non-General Motors vehicles that are sold for use in the United States. The Company has significant annual, fixed payment obligations to General Motors for four years following commencement of commercial service. These payments approximate $35,000,000 in the aggregate during this period. Additional annual fixed payment obligations beyond the initial four years of the contract term range from less than $35,000,000 to approximately $130,000,000 through 2009, aggregating approximately $400,000,000. In order to encourage the broad installation of XM radios in General Motors vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments to General Motors when the owners of General Motors vehicles with installed XM radios become subscribers for the Company's service. The Company must also share with General Motors a percentage of the subscription revenue attributable to General Motors vehicles with installed XM radios, which percentage increases until there are more than 8 million General Motors F-45 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 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) Joint Development Agreement 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. Each party is obligated to fund one half of the development cost for a unified standard for satellite radios. Each party will be entitled to license fees or a credit towards its one half of the cost based upon the validity, value, use, importance and available alternatives of the technology it contributes. The amounts for these fees or credits will be determined over time by agreement of the parties or by arbitration. The parties have yet to agree on the validity, value, use, importance and available alternatives of their respective technologies. If the parties fail to reach agreement, the fees or credits may be determined through binding arbitration. 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. (i) Sony Warrants In February 2000, the Parent issued a warrant to Sony exercisable for shares of the Parent's Class A common stock. The warrant will vest at the time that it attains its millionth customer, and the number of shares underlying the warrant will be determined by the percentage of XM Radios that have a Sony brand name as of the vesting date. If Sony achieves its maximum performance target, it will receive 2 percent of the total number of shares of the Parent's Class A common stock on a fully-diluted basis upon exercise of the warrant. The exercise price of the Sony warrant will equal 105 percent of fair market value of the Class A common stock on the vesting date, determined based upon the 20- day trailing average. (j) Sales, Marketing and Distribution Agreements The Company has entered into various joint sales, marketing and distribution agreements. Under the terms of these agreements, the Company is obligated to provide incentives, subsidies and commissions to other companies that may include fixed payments, per-unit subscriber amounts and revenue sharing arrangements. The amount of these operational, promotional, subscriber acquisition, joint development, and manufacturing costs related to these agreements cannot be estimated, but are expected to be substantial future costs. F-46 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (k) Leases The Company has noncancelable operating leases for office space and terrestrial repeater sites and noncancelable capital leases for equipment that expire over the next ten years. The future minimum lease payments under noncancelable leases as of December 31, 2000 are (in thousands):
Operating Capital leases leases --------- ------- Year ending December 31: 2001....................................................... $13,261 $ 847 2002....................................................... 13,665 761 2003....................................................... 13,986 474 2004....................................................... 14,230 -- 2005....................................................... 11,041 -- Thereafter................................................. 22,513 -- ------- ------ Total.................................................... $88,696 2,082 ======= Less amount representing interest............................ (159) ------ Present value of net minimum lease payments.................. 1,923 Less current maturities...................................... (556) ------ Long-term obligations........................................ $1,367 ======
Rent expense for 1998, 1999 and 2000 was $231,000, $649,000 and $6,082,000 respectively. (12) Subsequent Financing (unaudited) In March 2001, the Parent completed a follow-on offering of 7,500,000 shares of Class A common stock, which yielded net proceeds of $72.0 million, and a concurrent offering of 7.75% convertible subordinated notes due 2006, convertible into shares of Class A common stock at a conversion price of $12.23 per share, which yielded net proceeds of $120.7 million. F-47 Independent Auditors' Report on Consolidated Financial Statement Schedule The Board of Directors XM Satellite Radio Holdings Inc. and Subsidiaries: Under date of February 9, 2001, we reported on the consolidated balance sheets of XM Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as of December 31, 1999 and 2000, 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, 2000 and for the period from December 15, 1992 (date of inception) to December 31, 2000, which are included in the XM Satellite Radio Holdings Inc. and subsidiaries annual report on Form 10-K for the year 2000. 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 9, 2001 S-1 XM SATELLITE RADIO HOLDINGS INC. AND SUBSIDIARIES (A Development Stage Company) Schedule I--Valuation And Qualifying Accounts (in thousands)
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, 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 Year Ended December 31, 2000 Deferred Tax Assets-- Valuation Allowance.. $4,819 20,173 -- -- $24,992
S-2 Independent Auditors' Report on Consolidated Financial Statement Schedule The Board of Directors XM Satellite Radio Inc. and Subsidiaries: Under date of February 9, 2001, we reported on the consolidated balance sheets of XM Satellite Radio Inc. and subsidiaries (a development stage company) as of December 31, 1999 and 2000, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 2000 and for the period from December 15, 1992 (date of inception) to December 31, 2000, which are included in the XM Satellite Radio Inc. and subsidiaries annual report on Form 10-K for the year 2000. 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 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 9, 2001 S-3 XM SATELLITE RADIO INC. AND SUBSIDIARIES (A Development Stage Company) Valuation And Qualifying Accounts (in thousands)
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, 1998 Deferred Tax Assets-- Valuation Allowance.. $ 538 7,231 -- -- $ 7,769 Year Ended December 31, 1999 Deferred Tax Assets-- Valuation Allowance.. $7,769 (6,179) -- -- $ 1,590 Year Ended December 31, 2000 Deferred Tax Assets-- Valuation Allowance.. $1,590 20,482 -- -- $22,072
S-4 EX-4.15 2 0002.txt INDENTURES EXECUTION COPY ================================================================================ XM Satellite Radio Holdings Inc. $125,000,000 7.75% CONVERTIBLE SUBORDINATED NOTES DUE 2006 __________________________ INDENTURE Dated as of March 6, 2001 __________________________ __________________________ UNITED STATES TRUST COMPANY OF New York, as Trustee __________________________ ================================================================================ CROSS-REFERENCE TABLE*
Trust Indenture Act Section Indenture Section 310 (a)(1) 7.10 (a)(2)............................................................ 7.10 (a)(3)............................................................ N.A. (a)(4)............................................................ N.A. (a)(5)............................................................ 7.10 (b)............................................................... 7.10 (c)............................................................... N.A. 311 (a)............................................................... 7.11 (b)............................................................... 7.11 (c)............................................................... N.A. 312 (a)............................................................... 2.05 (b)............................................................... 12.03 (c)............................................................... 12.03 313 (a)............................................................... 7.06 (b)(1)............................................................ 10.03 (b)(2)............................................................ 7.07 (c)............................................................... 7.06;12.02 (d)............................................................... 7.06 314 (a)............................................................... 4.03;12.02 (b)............................................................... 10.02 (c)(1)............................................................ 12.04 (c)(2)............................................................ 12.04 (c)(3)............................................................ N.A. (d)............................................................... 10.03, 10.04, 10.05 (e)............................................................... 12.05 (f)............................................................... N.A. 315 (a)............................................................... 7.01 (b)............................................................... 7.05,12.02 (c)............................................................... 7.01 (d)............................................................... 7.01 (e)............................................................... 6.11 316 (a) (last sentence)............................................... 2.09 (a)(1)(A)......................................................... 6.05 (a)(1)(B)......................................................... 6.04 (a)(2)............................................................ N.A (b)............................................................... 6.07 (c)............................................................... 2.12 317 (a)(1)............................................................ 6.08 (a)(2)............................................................ 6.09 (b)............................................................... 2.04 318 (a)............................................................... 12.01
i
Trust Indenture Act Section Indenture Section (b)................................................................ N.A. (c)................................................................ 12.01
N.A. means not applicable. * This Cross Reference Table is not part of the Indenture. ii TABLE OF CONTENTS ----------------- ARTICLE I. DEFINITIONS; TRUST INDENTURE ACT................................................................ 1 Section 1.01 Definitions................................................................................. 1 Section 1.02 Other Definitions........................................................................... 5 Section 1.03 Incorporation by Reference of Trust Indenture Act........................................... 6 Section 1.04 Rules of Construction....................................................................... 6 ARTICLE II. THE NOTES...................................................................................... 7 Section 2.01 Form and Dating............................................................................. 7 Section 2.02 Execution and Authentication................................................................ 8 Section 2.03 Registrar and Paying Agent.................................................................. 8 Section 2.04 Paying Agent to Hold Money in Trust......................................................... 9 Section 2.05 Holder Lists................................................................................ 9 Section 2.06 Transfer and Exchange....................................................................... 9 Section 2.07 Replacement Notes........................................................................... 12 Section 2.08 Outstanding Notes........................................................................... 13 Section 2.09 Treasury Notes.............................................................................. 13 Section 2.10 Temporary Notes............................................................................. 13 Section 2.11 Cancellation................................................................................ 13 Section 2.12 Defaulted Interest.......................................................................... 14 Section 2.13 CUSIP Numbers............................................................................... 14 ARTICLE III. REDEMPTION.................................................................................... 14 Section 3.01 Notices to Trustee.......................................................................... 14 Section 3.02 Selection of Notes to Be Redeemed........................................................... 14 Section 3.03 Notice of Redemption........................................................................ 15 Section 3.04 Effect of Notice of Redemption.............................................................. 16 Section 3.05 Deposit of Redemption Price................................................................. 16 Section 3.06 Notes Redeemed in Part...................................................................... 16 Section 3.07 Optional Redemption......................................................................... 16 Section 3.08 Mandatory Redemption........................................................................ 16 Section 3.09 Change in Control Offer..................................................................... 16 ARTICLE IV. COVENANTS...................................................................................... 18 Section 4.01 Payment of Notes............................................................................ 18 Section 4.02 Compliance Certificate...................................................................... 18 Section 4.03 Stay, Extension and Usury Laws.............................................................. 19 Section 4.04 Corporate Existence......................................................................... 19 Section 4.05 Taxes....................................................................................... 19 Section 4.06 Change in Control........................................................................... 19 ARTICLE V. CONVERSION...................................................................................... 20 Section 5.01 Conversion Privilege........................................................................ 20 Section 5.02 Conversion Procedure........................................................................ 20 Section 5.03 Fractional Shares........................................................................... 21 Section 5.04 Taxes on Conversion......................................................................... 21 Section 5.05 Company to Provide Stock.................................................................... 21 Section 5.06 Adjustment of Conversion Price.............................................................. 22 Section 5.07 No Adjustment............................................................................... 23 Section 5.08 Other Adjustments........................................................................... 23 Section 5.09 Adjustments for Tax Purposes................................................................ 24 Section 5.10 Notice of Adjustment........................................................................ 24
i Section 5.11 Notice of Certain Transactions.............................................................. 24 Section 5.12 Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege...................................................................... 24 Section 5.13 Trustee's Disclaimer........................................................................ 25 ARTICLE VI. SUBORDINATION.................................................................................. 25 Section 6.01 Agreement to Subordinate and Ranking........................................................ 25 Section 6.02 No Payment on Notes if Senior Debt in Default............................................... 26 Section 6.03 Distribution on Acceleration of Notes; Dissolution and Reorganization; Subrogation of Notes....................................................... 27 Section 6.04 Reliance by Senior Debt on Subordination Provisions......................................... 29 Section 6.05 No Waiver of Subordination Provisions....................................................... 29 Section 6.06 Trustee's Relation to Senior Debt........................................................... 30 Section 6.07 Other Provisions Subject Hereto............................................................. 30 ARTICLE VII. SUCCESSORS.................................................................................... 30 Section 7.01 Limitation on Merger, Sale or Consolidation................................................. 30 ARTICLE VIII. DEFAULTS AND REMEDIES........................................................................ 31 Section 8.01 Events of Default........................................................................... 31 Section 8.02 Acceleration................................................................................ 33 Section 8.03 Other Remedies.............................................................................. 33 Section 8.04 Waiver of Past Defaults..................................................................... 33 Section 8.05 Control by Majority......................................................................... 33 Section 8.06 Limitation on Suits......................................................................... 33 Section 8.07 Rights of Holders to Receive Payment........................................................ 34 Section 8.08 Collection Suit by Trustee.................................................................. 34 Section 8.09 Trustee May File Proofs of Claim............................................................ 34 Section 8.10 Priorities.................................................................................. 34 Section 8.11 Undertaking for Costs....................................................................... 35 ARTICLE IX. TRUSTEE........................................................................................ 35 Section 9.01 Duties of Trustee........................................................................... 35 Section 9.02 Rights of Trustee........................................................................... 36 Section 9.03 Individual Rights of Trustee................................................................ 36 Section 9.04 Trustee's Disclaimer........................................................................ 36 Section 9.05 Notice of Defaults.......................................................................... 37 Section 9.06 Reports by Trustee to Holders............................................................... 37 Section 9.07 Compensation and Indemnity.................................................................. 37 Section 9.08 Replacement of Trustee...................................................................... 38 Section 9.09 Successor Trustee by Merger, Etc............................................................ 39 Section 9.10 Eligibility; Disqualification............................................................... 39 Section 9.11 Preferential Collection of Claims Against Company........................................... 39 ARTICLE X. DISCHARGE OF INDENTURE.......................................................................... 39 Section 10.01 Termination of Company's Obligations........................................................ 39 Section 10.02 Repayment to Company........................................................................ 39 ARTICLE XI. AMENDMENTS, SUPPLEMENTS AND WAIVERS............................................................ 39 Section 11.01 Without Consent of Holders.................................................................. 39 Section 11.02 With Consent of Holders..................................................................... 40 Section 11.03 Compliance with Trust Indenture Act......................................................... 41 Section 11.04 Revocation and Effect of Consents........................................................... 41 Section 11.05 Notation on or Exchange of Notes............................................................ 42 Section 11.06 Trustee Protected........................................................................... 42 ARTICLE XII. MISCELLANEOUS................................................................................. 42
ii Section 12.01 Trust Indenture Act Controls................................................................ 42 Section 12.02 Notices..................................................................................... 42 Section 12.03 Communication by Holders with Other Holders................................................. 43 Section 12.04 Certificate and Opinion as to Conditions Precedent.......................................... 43 Section 12.05 Statements Required in Certificate or Opinion............................................... 43 Section 12.06 Rules by Trustee and Agents................................................................. 43 Section 12.07 Legal Holidays.............................................................................. 43 Section 12.08 No Recourse Against Others.................................................................. 44 Section 12.09 Governing Law, submission to jurisdiction................................................... 44 Section 12.10 Counterparts and Facsimile Signatures....................................................... 44 Section 12.11 Variable Provisions......................................................................... 44 Section 12.12 Governing Law, submission to jurisdiction................................................... 45 Section 12.13 No Adverse Interpretation of Other Agreements............................................... 45 Section 12.14 Successors.................................................................................. 45 Section 12.15 Severability................................................................................ 45 Section 12.16 Table of Contents, Headings, Etc............................................................ 45
iii INDENTURE, dated as of March 6, 2001, between XM Satellite Radio Holdings Inc., a Delaware corporation (the "Company"), and United States Trust Company of New York, as trustee (the "Trustee"). Each party agrees as follows for the benefit of the other party and for the equal and ratable benefit of the Holders (as defined in Section 1.01 hereof) of the Company's 7.75% Convertible Subordinated Notes due 2006 (the "Notes"): ARTICLE I. DEFINITIONS; TRUST INDENTURE ACT Section 1.01 Definitions. "Affiliate" of any specified Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control", as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of such Person, whether through the ownership of voting securities, by agreement or otherwise, provided that beneficial ownership of 10% of more of the Voting Stock of a Person shall be deemed to be control. For purposes of this definition the terms "controlling." "controlled by," and "under common control with" shall have correlative meanings. "Agent" means any Registrar, Paying Agent or Conversion Agent. "Applicable Procedures" means, with respect to any transfer or exchange of or for beneficial interests in any Global Note, the rules and procedures of the Depositary that apply to such transfer or exchange. "Board of Directors" means: (1) with respect to a corporation, the board of directors of the corporation; (2) with respect to a partnership, the Board of Directors of the general partner of the partnership; and (3) with respect to any other Person, the board or committee of such Person serving a similar function. "Board Resolution" means a duly authorized resolution of the Board of Directors. "Business Day" means any day that is not a Legal Holiday. "Capital Stock" means: (1) in the case of a corporation, corporate stock; (2) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock; 1 (3) in the case of a partnership or limited liability company, partnership or membership interests (whether general or limited); and (4) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person. "Change in Control" means the occurrence of one or more of the following events: (i) any person or group, other than a Permitted Owner, acquires direct or indirect beneficial ownership of shares of the Company's capital stock (by means of an exchange offer, liquidation, tender offer, consolidation, merger, combination, reclassification, recapitalization or otherwise) sufficient to entitle such person to exercise more than 50% of the total voting power of all classes of the Company's capital stock entitled to vote generally in elections of directors, unless the closing price per share of the Company's Class A Common Stock for any five trading days within the period of ten consecutive trading days ending immediately after the announcement of such change in control equals or exceeds 105% of the Conversion Price of Notes in effect on each such trading day, or (ii) the Company sells, leases, exchanges or otherwise transfers, in one transaction or a series of related transactions, all or substantially all of its assets to any person or group, other than to a Permitted Owner. "Class A Common Stock" means the Class A common stock, par value $0.01 per share, of the Company as the same exists at the date of the execution of this Indenture or as such stock may be constituted from time to time. "Company" means XM Satellite Radio Holdings Inc. and any and all successors thereto. "Current Market Price" means the average of the daily closing prices for the five consecutive trading days selected by the Company's Board of Directors beginning not more than 20 trading days before, and ending not later than the relevant date of the applicable event and the date immediately preceding the record date fixed in connection with that event. "Daily Market Price" means the price of a share of Class A Common Stock on the relevant date, determined (a) on the basis of the daily closing or last reported sale price regular way of the Class A Common Stock as reported on the Nasdaq National Market, or if the Class A Common Stock is not then listed on the Nasdaq National Market, as reported on such national securities exchange upon which the Class A Common Stock is listed, or (b) if there is no such reported sale on the day in question, on the basis of the average of the closing bid and asked quotations regular way as so reported, or (c) if the Class A Common Stock is not listed on the Nasdaq National Market or on any national securities exchange, on the basis of the average of the high bid and low asked quotations regular way on the day in question in the over-the-counter market as reported by the National Association of Securities Dealers Automated Quotation System, or if not so quoted, as reported by National Quotation Bureau, Incorporated, or a similar organization. "Default" means any event that is, or with the passage of time or the giving of notice or both would be, an Event of Default. "Definitive Note" means a certificated Note registered in the name of the Holder thereof and issued in accordance with Section 2.06 hereof, substantially in the form of Exhibit A hereto except that such Note shall not bear the Global Note Legend and shall not have the "Schedule of Exchanges of Interests in the Global Note" attached thereto. -2- "Depositary" means, with respect to the Notes issuable or issued in whole or in part in global form, the Person specified in Section 2.03 hereof as the Depositary with respect to the Notes, and any and all successors thereto appointed as depositary hereunder and having become such pursuant to the applicable provision of this Indenture. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Fundamental Change" means any transaction or event, including any merger, consolidation, sale of assets, tender or exchange offer, reclassification, compulsory share exchange or liquidation in which all or substantially all outstanding shares of the Company's Class A Common Stock are converted into or exchanged for stock, other securities, cash or assets. "GAAP" means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, which are in effect from time to time. "Guarantee" means a guarantee, other than by endorsement of negotiable instruments for collection in the ordinary course of business, direct or indirect, in any manner, including, without limitation, by way of a pledge of assets or through letters of credit or reimbursement agreements in respect thereof, of all or any part of any Indebtedness. "Holder" means a Person in whose name a Note is registered in the register referred to in Section 2.03. "Indebtedness" means (i) all of the Company's indebtedness, obligations and other liabilities, contingent or otherwise, including (a) for borrowed money, (b) overdrafts, foreign exchange contracts, currency exchange agreements, interest rate protection agreements and any loans or advances from banks or other lenders, whether or not evidenced by notes or similar instruments, or (c) evidenced by bonds, debentures, notes or similar instruments, whether or not the recourse of the lender is to all of the Company's assets or to only a portion thereof, other than any account payable or other accrued current liability or obligation incurred in the ordinary course of business in connection with the obtaining of materials or services; (ii) all of the Company's reimbursement obligations and other liabilities, contingent or otherwise, with respect to letters of credit, bank guarantees, banker's acceptances or similar facilities; (iii) all of the Company's obligations and liabilities, contingent or otherwise, in respect of leases required, in conformity with GAAP, to be accounted for as capitalized lease obligations on the Company's balance sheet, or under other leases for facilities equipment or related assets, whether or not capitalized, entered into or leased for financing purposes, as determined by the Company; (iv) all of the Company's obligations and other liabilities, contingent or otherwise, under any lease or related document, including a purchase agreement, in connection with the lease of real property or improvements (or any personal property included as part of any such lease) which provides that the Company be contractually obligated to purchase or cause a third party to purchase the leased property and thereby Guarantee a residual value of leased property to the lessor and all of the Company's obligations under such lease or related document to purchase or to cause a third party to purchase the leased property (whether or not such lease transaction is characterized as an operating lease or a capitalized lease in accordance with GAAP); (v) all of the Company's obligations, contingent or otherwise, with respect to an interest rate, currency or other swap, cap, floor or collar agreement, hedge agreement, forward contract or other similar instrument or agreement or foreign currency hedge, exchange, purchase or similar instrument or agreement; (vi) all of the Company's direct or indirect Guarantees or similar -3- agreements to purchase or otherwise acquire or otherwise assure a creditor against loss in respect of indebtedness, obligations or liabilities of another person of the kind described in clauses (i) through (v); (vii) any indebtedness or other obligations described in clauses (i) through (vi) secured by any mortgage, pledge, lien or other encumbrance existing on property which is owned or held by the Company, regardless of whether the indebtedness or other obligation secured thereby has been assumed by the Company; and (viii) renewals, extensions, modifications, replacements, restatements and refundings of, or any indebtedness or obligation issued in exchange for, any such indebtedness or obligation described in clauses (i) through (vii) of this definition. "Indenture" means this Indenture, as amended from time to time. "Interest Payment Date" means each semiannual interest payment date on March 1 and September 1 of each year commencing on September 1, 2001. "Issuance Date" means the date on which the Notes are first authenticated and issued. "Nasdaq National Market" means the National Association of Securities Dealers, Inc. Automated Quotation System National Market. "Notes" means any of the securities as defined in the second paragraph of the preamble hereto. "Obligations" means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness. "Officer" means, with respect to any Person, the Chairman of the Board, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of such Person. "Officers' Certificate" means a certificate signed on behalf of the Company by two Officers of the Company, one of whom must be the principal executive officer, the principal financial officer, the treasurer or the principal accounting officer of the Company, that meets the requirements of Section 12.05 hereof.. "Opinion of Counsel" means a written opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee of or counsel to the Company or the Trustee. "Permitted Owner" means Motient Corporation, General Motors Corporation, DIRECTV and Clear Channel Communications, Inc. and their respective Affiliates "Person" means any individual, corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, limited liability company or government or any agency or political subdivision thereof. "Record Date" means each semiannual record date on February 15 and August 15 of each year commencing on August 15, 2001. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. -4- "Senior Debt" means the principal of, premium, if any, interest, including all interest accruing subsequent to the commencement of any bankruptcy or similar proceeding, whether or not a claim for post-petition interest is allowable as a claim in any such proceeding, and rent payable on or in connection with, and all fees, costs, expenses and other amounts accrued or due on or in connection with, Indebtedness of the Company, whether outstanding on the date of this Indenture or thereafter created, incurred, assumed, Guaranteed or in effect Guaranteed by the Company. Notwithstanding anything to the contrary in the foregoing, Senior Debt shall not include (a) Indebtedness of or amounts owed by the Company for compensation to employees, or for goods or materials purchased or for services obtained in the ordinary course of business; (b) the Company's Indebtedness to any of its Subsidiaries or (c) the Company's Indebtedness that expressly provides that it shall not be senior in right of payment to the Notes or expressly provides that it is pari passu with or junior to the Notes. "Significant Subsidiary" means any Subsidiary of the Company that is a "significant subsidiary" as defined in Rule 1-02(w) of Regulation S-X under the Securities Act and the Exchange Act. "Subsidiary" means with respect to any specified Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled, without regard to the occurrence of any contingency, to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person or a combination thereof and (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or one or more Subsidiaries of such Person (or any combination thereof). "TIA" means the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa- 77bbbb), as amended. "Trustee" means the party named as such above until a successor replaces it in accordance with the applicable provisions of this Indenture and thereafter means the successor serving hereunder. "Trust Officer" means any officer of the Trustee assigned by the Trustee to administer its corporate trust matters. "Voting Stock" of any Person as of any date means the Capital Stock of such Person that is at the time entitled to vote in the election of the Board of Directors of such Person. Section 1.02 Other Definitions. Defined Term in Section ---- ----------- "Agent Member"............................ 2.01 "Bankruptcy Law".......................... 8.01 "Change in Control Offer"................. 3.09 "Change in Control Payment"............... 4.06 "Commencement Date"....................... 3.09 "Conversion Agent"........................ 2.03 "Conversion Date"......................... 5.02 "Conversion Price"........................ 5.01 "Custodian"............................... 8.01 "Event of Default"........................ 8.01 "Global Note"............................. 2.01 -5- Defined Term in Section ---- ----------- "Legal Holiday"........................... 12.07 "Non-Payment Default"..................... 6.02 "Offer Amount"............................ 3.09 "Paying Agent"............................ 2.03 "Payment Blockage Notice"................. 6.02 "Payment Blockage Period"................. 6.02 "Payment Default"......................... 6.02 "Purchase Date"........................... 3.09 "Redemption Date"......................... 3.01 "Registrar"............................... 2.03 "Tender Period"........................... 3.09 Section 1.03 Incorporation by Reference of Trust Indenture Act. Whenever this Indenture refers to a provision of the TIA, the provision is incorporated by reference in and made a part of this Indenture. The following TIA terms used in this Indenture have the following meanings: "indenture securities" means the Notes; "indenture security Holder" means a Holder of a Note; "indenture to be qualified" means this Indenture; "indenture trustee" or "institutional trustee" means the Trustee; and "obligor" on the Notes means the Company and any successor obligor upon the Notes. All other terms used in this Indenture that are defined by the TIA, defined by TIA reference to another statute or defined by SEC rule under the TIA have the meanings so assigned to them. Section 1.04 Rules of Construction. Unless the context otherwise requires: (a) a term has the meaning assigned to it; (b) an accounting term not otherwise defined has the meaning assigned to it in accordance with GAAP consistently applied; (c) "or" is not exclusive; (d) words in the singular include the plural, and in the plural include the singular; (e) provisions apply to successive events and transactions; -6- (f) references to sections of or rules under the Securities Act shall be deemed to include substitute, replacement or successor sections or rules adopted by the SEC from time to time; and (g) a reference to "$" or U.S. Dollars is to United States dollars. ARTICLE II. THE NOTES Section 2.01 Form and Dating. (a) General. The Notes and the Trustee's certificate of authentication shall be substantially in the form of Exhibit A hereto, which is hereby incorporated by reference and expressly made a part of this Indenture. The Notes may have notations, legends or endorsements required by law, stock exchange rule, agreements to which the Company is subject, if any, or usage (provided that any such notation, legend or endorsement is in a form acceptable to the Company). The Company shall furnish any such legend not contained in Exhibit A to the Trustee in writing. Each Note shall be dated the date of its authentication. The Notes shall be issued in registered form without coupons in denominations of $1,000 and integral multiples thereof. The terms and provisions contained in the Notes constitute, and are hereby expressly made, a part of this Indenture and to the extent applicable, the Company and the Trustee, by their execution and delivery of this Indenture, expressly agree to such terms and provisions and to be bound thereby. However, to the extent any provision of any Note conflicts with the express provisions of this Indenture, the provisions of this Indenture shall govern and be controlling. (b) Global Notes. Notes issued in global form shall be substantially in the form of Exhibit A attached hereto (including the Global Note Legend thereon and the "Schedule of Exchanges of Interests in the Global Note" attached thereto) (the "Global Note"). Notes issued in definitive form shall be substantially in the form of Exhibit A attached hereto (but without the Global Note Legend thereon and without the "Schedule of Exchanges of Interests in the Global Note" attached thereto). Each Global Note shall represent such of the outstanding Notes as shall be specified therein and each shall provide that it shall represent the aggregate principal amount of outstanding Notes from time to time endorsed thereon and that the aggregate principal amount of outstanding Notes represented thereby may from time to time be reduced or increased, as appropriate, to reflect exchanges and redemptions. Any endorsement of a Global Note to reflect the amount of any increase or decrease in the aggregate principal amount of outstanding Notes represented thereby shall be made by the Trustee or the Custodian, at the direction of the Trustee, in accordance with instructions given by the Holder thereof as required by Section 2.06 hereof. (c) Book-Entry Provisions. The Company shall execute and the Trustee shall, in accordance with this Section 2.01(c), authenticate and deliver initially one or more Global Notes that (a) shall be registered in the name of the Depositary for such Global Note or Global Notes or the nominee of such Depositary and (b) shall be delivered by the Trustee to such Depositary or pursuant to such Depositary's instructions or held by the Trustee as custodian for the Depositary. -7- Members of, or participants in, the Depositary ("Agent Members") shall have no rights under this Indenture with respect to any Global Note held on their behalf by the Depositary or by the Trustee as the custodian of the Depositary or under such Global Note, and the Depositary may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of such Global Note for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depositary or impair, as between the Depositary and its Agent Members, the operation of customary practices of such Depositary governing the exercise of the rights of an owner of a beneficial interest in any Global Note. Section 2.02 Execution and Authentication. Two Officers shall sign the Notes for the Company by manual or facsimile signature. If an Officer whose signature is on a Note no longer holds that office at the time the Note is authenticated, the Note shall nevertheless be valid. A Note shall not be valid until authenticated by the manual or facsimile signature of an authorized officer of the Trustee. The signature shall be conclusive evidence that the Note has been authenticated under this Indenture. The Trustee shall, upon a written order of the Company signed by two Officers (an "Authentication Order"), authenticate (1) Notes for original issue up to an aggregate principal amount stated in Section 5 of the Notes. The aggregate principal amount of Notes outstanding at any time may not exceed $125,000,000 except as provided in Section 2.07. The Trustee may appoint an authenticating agent acceptable to the Company to authenticate Notes. An authenticating agent may authenticate Notes whenever the Trustee may do so. Each reference in this Indenture to authentication by the Trustee includes authentication by such agent. An authenticating agent has the same rights as an Agent to deal with Holders, the Company or an Affiliate. Section 2.03 Registrar and Paying Agent. The Company shall maintain (i) an office or agency where the Notes may be presented for registration of transfer or for exchange ("Registrar"), (ii) an office or agency where the Notes may be presented for payment ("Paying Agent") and (iii) an office or agency where the Notes may be presented for conversion ("Conversion Agent"). The Registrar shall keep a register of the Notes and of their transfer and exchange. The Company may appoint one or more co-registrars, one or more additional paying agents and one or more additional Conversion Agents in such other locations as it shall determine. The term "Registrar" includes any co-registrar, the term "Paying Agent" includes any additional paying agent and the term "Conversion Agent" includes any additional conversion agent. The Company may change any Paying Agent, Registrar or Conversion Agent without prior notice to any Holder. The Company shall notify the Trustee in writing of the name and address of any Agent not a party to this Indenture. If the Company fails to appoint or maintain another entity as Registrar, Paying Agent or Conversion Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may act as Paying Agent, Registrar or Conversion Agent. The Company initially appoints The Depository Trust Company ("DTC") to act as Depositary with respect to the Global Notes. The Company initially appoints the Trustee to act as the Registrar, Paying Agent and Conversion Agent and to act as Custodian with respect to the Global Notes. -8- Section 2.04 Paying Agent to Hold Money in Trust. The Company shall require each Paying Agent other than the Trustee to agree in writing that the Paying Agent will hold in trust for the benefit of Holders or the Trustee all money held by the Paying Agent for the payment of principal or interest on the Notes, and will notify the Trustee of any default by the Company in making any such payment. While any such default continues, the Trustee may require a Paying Agent to pay all money held by it to the Trustee and to account for any money disbursed by it. The Company at any time may require a Paying Agent to pay all money held by it to the Trustee. Upon payment over to the Trustee, the Paying Agent (if other than the Company or Subsidiary of the Company) shall have no further liability for the money. If the Company or Subsidiary of the Company acts as Paying Agent, it shall segregate and hold in a separate trust fund for the benefit of the Holders all money held by it as Paying Agent. Upon any bankruptcy or reorganization proceedings relating to the Company, the Trustee shall serve as Paying Agent for the Notes. Section 2.05 Holder Lists. The Trustee shall preserve in as current a form as is reasonably practicable the most recent list available to it of the names and addresses of all Holders and shall otherwise comply with TIA (S)312(a). If the Trustee is not the Registrar, the Company shall furnish to the Trustee at least seven Business Days before each Interest Payment Date and at such other times as the Trustee may request in writing a list in such form and as of such date as the Trustee may reasonably require of the names and addresses of all Holders and the Company shall otherwise comply with TIA (S)312(a). Section 2.06 Transfer and Exchange. (a) Transfer and Exchange of Global Notes. A Global Note may not be transferred as a whole except by the Depositary to a nominee of the Depositary, by a nominee of the Depositary to the Depositary or to another nominee of the Depositary, or by the Depositary or any such nominee to a successor Depositary or a nominee of such successor Depositary. All Global Notes will be exchanged by the Company for Definitive Notes if (i) the Company delivers to the Trustee notice from the Depositary that it is unwilling or unable to continue to act as Depositary or that it is no longer a clearing agency registered under the Exchange Act and, in either case, a successor Depositary is not appointed by the Company within 120 days after the date of such notice from the Depositary or (ii) the Company in its sole discretion determines that the Global Notes (in whole but not in part) should be exchanged for Definitive Notes and delivers a written notice to such effect to the Trustee Upon the occurrence of either of the preceding events in (i) or (ii) above, Definitive Notes shall be issued in such names as the Depositary shall instruct the Trustee. Global Notes also may be exchanged or replaced, in whole or in part, as provided in Sections 2.07 and 2.10 hereof. Every Note authenticated and delivered in exchange for, or in lieu of, a Global Note or any portion thereof, pursuant to this Section 2.06 or Section 2.07 or 2.10 hereof, shall be authenticated and delivered in the form of, and shall be, a Global Note. A Global Note may not be exchanged for another Note other than as provided in this Section 2.06(a), however, beneficial interests in a Global Note may be transferred and exchanged as provided in Section 2.06(b) or (c) hereof. -9- (b) Transfer and Exchange of Beneficial Interests in the Global Notes. The transfer and exchange of beneficial interests in the Global Notes shall be effected through the Depositary, in accordance with the provisions of this Indenture and the Applicable Procedures. Transfers of beneficial interests in the Global Notes shall require compliance with either subparagraph (i) or (ii) below, as applicable, as well as one or more of the other following subparagraphs, as applicable: (i) Transfer of Beneficial Interests in the Same Global Note. Beneficial interests in any Global Note may be transferred to Persons who take delivery thereof in the form of a beneficial interest in a Global Note. No written orders or instructions shall be required to be delivered to the Registrar to effect the transfers described in this Section 2.06(b)(i). (ii) All Other Transfers and Exchanges of Beneficial Interests in Global Notes. In connection with all transfers and exchanges of beneficial interests that are not subject to Section 2.06(b)(i) above, the transferor of such beneficial interest must deliver to the Registrar either (A) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to credit or cause to be credited a beneficial interest in another Global Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given in accordance with the Applicable Procedures containing information regarding the Participant account to be credited with such increase or (B) (1) a written order from a Participant or an Indirect Participant given to the Depositary in accordance with the Applicable Procedures directing the Depositary to cause to be issued a Definitive Note in an amount equal to the beneficial interest to be transferred or exchanged and (2) instructions given by the Depositary to the Registrar containing information regarding the Person in whose name such Definitive Note shall be registered to effect the transfer or exchange referred to in (1) above. Upon satisfaction of all of the requirements for transfer or exchange of beneficial interests in Global Notes contained in this Indenture and the Notes or otherwise applicable under the Securities Act, the Trustee shall adjust the principal amount of the relevant Global Note(s) pursuant to Section 2.06(g) hereof. (c) Transfer or Exchange of Beneficial Interests for Definitive Notes. If any holder of a beneficial interest in a Global Note proposes to exchange such beneficial interest for a Definitive Note or to transfer such beneficial interest to a Person who takes delivery thereof in the form of a Definitive Note, then, upon satisfaction of the conditions set forth in Section 2.06(b)(ii) hereof, the Trustee shall cause the aggregate principal amount of the applicable Global Note to be reduced accordingly pursuant to Section 2.06(g) hereof, and the Company shall execute and the Trustee shall authenticate and deliver to the Person designated in the instructions a Definitive Note in the appropriate principal amount. Any Definitive Note issued in exchange for a beneficial interest pursuant to this Section 2.06(c) shall be registered in such name or names and in such authorized denomination or denominations as the holder of such beneficial interest shall instruct the Registrar through instructions from the Depositary and the Participant or Indirect Participant. The Trustee shall deliver such Definitive Notes to the Persons in whose names such Notes are so registered. -10- (d) Transfer and Exchange of Definitive Notes for Beneficial Interests. A Holder of an Definitive Note may exchange such Note for a beneficial interest in a Global Note or transfer such Definitive Notes to a Person who takes delivery thereof in the form of a beneficial interest in a Global Note at any time. Upon receipt of a request for such an exchange or transfer, the Trustee shall cancel the applicable Definitive Note and increase or cause to be increased the aggregate principal amount of one of the Global Notes. (e) Transfer and Exchange of Definitive Notes for Definitive Notes. Upon request by a Holder of Definitive Notes and such Holder's compliance with the provisions of this Section 2.06(e), the Registrar shall register the transfer or exchange of Definitive Notes. Prior to such registration of transfer or exchange, the requesting Holder shall present or surrender to the Registrar the Definitive Notes duly endorsed or accompanied by a written instruction of transfer in form satisfactory to the Registrar duly executed by such Holder or by its attorney, duly authorized in writing. (f) Legends. Each Global Note shall bear a legend in substantially the following form: "THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.01 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY." (g) Cancellation and/or Adjustment of Global Notes. At such time as all beneficial interests in a particular Global Note have been exchanged for Definitive Notes or a particular Global Note has been redeemed, repurchased or canceled in whole and not in part, each such Global Note shall be returned to or retained and canceled by the Trustee in accordance with Section 2.11 hereof. At any time prior to such cancellation, if any beneficial interest in a Global Note is exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note or for Definitive Notes, the principal amount of Notes represented by such Global Note shall be reduced accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such reduction; and if the beneficial interest is being exchanged for or transferred to a Person who will take delivery thereof in the form of a beneficial interest in another Global Note, such other Global Note shall be increased accordingly and an endorsement shall be made on such Global Note by the Trustee or by the Depositary at the direction of the Trustee to reflect such increase. (h) General Provisions Relating to Transfers and Exchanges. (i) To permit registrations of transfers and exchanges, the Company shall execute and the Trustee shall authenticate Global Notes and Definitive Notes upon the Company's order or at the Registrar's request. -11- (ii) No service charge shall be made to a holder of a beneficial interest in a Global Note or to a Holder of a Definitive Note for any registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any transfer tax or similar governmental charge payable in connection therewith (other than any such transfer taxes or similar governmental charge payable upon exchange or transfer pursuant to Sections 2.10, 3.06, 4.06, hereof). (iii) The Registrar shall not be required to register the transfer of or exchange any Note selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. (iv) All Global Notes and Definitive Notes issued upon any registration of transfer or exchange of Global Notes or Definitive Notes shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Global Notes or Definitive Notes surrendered upon such registration of transfer or exchange. (v) The Company shall not be required (A) to issue, to register the transfer of or to exchange any Notes during a period beginning at the opening of business 15 days before the day of any selection of Notes for redemption under Section 3.02 hereof and ending at the close of business on the day of selection, (B) to register the transfer of or to exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part or (C) to register the transfer of or to exchange a Note between a record date and the next succeeding Interest Payment Date. (vi) Prior to due presentment for the registration of a transfer of any Note, the Trustee, any Agent and the Company may deem and treat the Person in whose name any Note is registered as the absolute owner of such Note for the purpose of receiving payment of principal of and interest on such Notes and for all other purposes, and none of the Trustee, any Agent or the Company shall be affected by notice to the contrary. (vii) The Trustee shall authenticate Global Notes and Definitive Notes in accordance with the provisions of Section 2.02 hereof. (viii) All certifications, certificates and Opinions of Counsel required to be submitted to the Registrar pursuant to this Section 2.06 to effect a registration of transfer or exchange may be submitted by facsimile. Section 2.07 Replacement Notes. If the Holder of a Note claims that the Note has been lost, destroyed or wrongfully taken or if such Note is mutilated and is surrendered to the Trustee, the Company shall issue and the Trustee shall authenticate a replacement Note if the Trustee's and the Company's requirements are met. If required by the Trustee or the Company, an indemnity bond must be supplied by the Holder that is sufficient in the judgment of the Trustee and the Company to protect the Company, the Trustee, any Agent and any authenticating agent from any loss that any of them may suffer if a Note is replaced. The Company may charge for its expenses in replacing a Note. -12- Every replacement Note is an additional obligation of the Company and shall be entitled to all of the benefits of this Indenture equally and proportionately with all other Notes duly issued hereunder. Section 2.08 Outstanding Notes. The Notes outstanding at any time are all the Notes authenticated by the Trustee except for those canceled by it, those delivered to it for cancellation, those reductions in the interest in a Global Note effected by the Trustee in accordance with the provisions hereof, and those described in this Section as not outstanding. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If a Note is replaced pursuant to Section 2.07 hereof, it ceases to be outstanding unless the Trustee receives proof satisfactory to it that the replaced Note is held by a bona fide purchaser. If the principal amount of any Note is considered paid under Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to accrue. Except as set forth in Section 2.09 hereof, a Note does not cease to be outstanding because the Company or an Affiliate of the Company holds the Note. If the Paying Agent (other than the Company, a Subsidiary or an Affiliate of any thereof) holds, on a Redemption Date or maturity date, money sufficient to pay Notes, including accrued and unpaid interest, payable on that date, then on and after that date such Notes shall be deemed to be no longer outstanding and shall cease to accrue interest. Section 2.09 Treasury Notes. In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Company or an Affiliate of the Company shall be considered as though they are not outstanding, except that for the purposes of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes that the Trustee knows are so owned shall be so disregarded. Section 2.10 Temporary Notes. Until Definitive Notes are ready for delivery, the Company may prepare and the Trustee shall authenticate temporary Notes. Temporary Notes shall be substantially in the form of Definitive Notes but may have variations that the Company considers appropriate for temporary Notes. Without unreasonable delay, the Company shall prepare and the Trustee shall authenticate Definitive Notes in exchange for temporary Notes. Holders of temporary Notes shall be entitled to all of the benefits of this Indenture. Section 2.11 Cancellation. The Company at any time may deliver Notes to the Trustee for cancellation. The Registrar, Paying Agent and Conversion Agent shall forward to the Trustee any Notes surrendered to them for registration of transfer, exchange or payment. The Trustee and no one else shall promptly cancel all Notes surrendered for registration of transfer, exchange, payment, conversion, replacement or cancellation and shall destroy canceled Notes (subject to the record retention requirement of the Exchange Act). Certification of the destruction of all canceled Notes shall be delivered to the Company. The Company may not issue new Notes to replace Notes that it has paid or that have been delivered to the Trustee for cancellation. Section 2.12 Defaulted Interest. If the Company fails to make a payment of interest on the Notes, it shall pay such defaulted interest plus any interest payable on the defaulted interest, in any lawful manner. It may pay such defaulted interest, plus any such interest payable on it, to the Persons who are Holders on a subsequent special record date. The Company shall fix any such record date and payment date, provided that no such record date shall be less than 10 days prior to the related payment date for such defaulted interest. At least 15 days before any such record date, the Company shall mail to Holders a notice that states the special record date, the related payment date and amount of such interest to be paid. Section 2.13 CUSIP Numbers. The Company in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption and other notices as a convenience to Holders of Notes; provided, that any such notice may state that no representation is made as to the correctness of such numbers either as printed on the Notes or as contained in any notice of a redemption or notice of a Change in Control Offer and that reliance may be placed only on the other identification numbers printed on the Notes, and any redemption or Change in Control Offer shall not be affected by any defect in or omission of such numbers. The Company will promptly notify the Trustee of any change in the "CUSIP" numbers. ARTICLE III. REDEMPTION Section 3.01 Notices to Trustee. If the Company elects to redeem Notes pursuant to the optional redemption provisions of the Notes and Section 3.07 hereof, it shall notify the Trustee of the redemption date (a "Redemption Date") and the principal amount of Notes to be redeemed. The Company shall give the notice provided for in this Section 3.01 at least 30 days but no more than 60 days before the Redemption Date, unless a shorter notice period shall be satisfactory to the Trustee. The Company may not give notice of any redemption if the Company has defaulted in payment of interest and the default is continuing. Section 3.02 Selection of Notes to Be Redeemed. If less than all of the Notes are to be redeemed at any time, selection of Notes shall be made by the Trustee on a pro rata basis or by lot or by a method that complies with the requirements of any exchange on which the Notes are listed and that the Trustee considers fair and appropriate, provided that no Notes of $1,000 or less shall be redeemed in part. The Trustee shall make the selection not more than 60 days and not less than 30 days before the Redemption Date from Notes outstanding not previously called for redemption. Notes and portions of Notes selected shall be in amounts of $1,000 or integral multiples of $1,000. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Company promptly of the Notes or portions of Notes to be called for redemption. -14- If any Note selected for partial redemption is converted in part after such selection, the converted portion of such Note shall be deemed (so far as may be) to be the portion to be selected for redemption. The Notes (or portions thereof) so selected shall be deemed duly selected for redemption for all purposes hereunder, notwithstanding that any such Note is converted in whole or in part before the mailing of the notice of redemption. Upon any redemption of less than all the Notes, the Company and the Trustee may treat as outstanding any Notes surrendered for conversion during the period 15 days next preceding the mailing of a notice of redemption and need not treat as outstanding any Note authenticated and delivered during such period in exchange for the unconverted portion of any Note converted in part during such period. Section 3.03 Notice of Redemption. At least 30 days but not more than 60 days before a Redemption Date, the Company shall mail, by first class mail, a notice of redemption to each Holder whose Notes are to be redeemed at its registered address. The notice shall identify the Notes to be redeemed and shall state: (a) the Redemption Date; (b) the redemption price; (c) if any Note is to be redeemed in part only, the portion of the principal amount thereof redeemed, and that, after the Redemption Date, upon surrender of such Note, a new Note in principal amount equal to the unredeemed portion thereof shall be issued in the name of the Holder thereof upon cancellation of the original Note; (d) the name and address of the Paying Agent; (e) that Notes called for redemption must be surrendered to the Paying Agent to collect the redemption price plus accrued interest, if any; (f) that interest on Notes called for redemption ceases to accrue on and after the Redemption Date; (g) the paragraph of the Notes pursuant to which the Notes called for redemption are being redeemed; and (h) the "CUSIP" number of the Notes to be redeemed. Such notice shall also state the current Conversion Price and the date on which the right to convert such Notes or portions thereof into Class A Common Stock of the Company will expire. At the Company's request, the Trustee shall give notice of redemption in the Company's name and at the Company's expense; provided that the Company shall have delivered to the Trustee, at least 60 days prior to the Redemption Date, an Officers' Certificate requesting that the Trustee give such notice and setting forth the information to be stated in such notice, as provided in the preceding paragraph. -15- Section 3.04 Effect of Notice of Redemption. Once notice of redemption is mailed in accordance with Section 3.03 hereof, Notes called for redemption become due and payable on the Redemption Date at the price set forth in the Note. A notice of redemption may not be conditional. Section 3.05 Deposit of Redemption Price. On or before the Redemption Date, the Company shall deposit with the Trustee or with the Paying Agent money sufficient to pay the redemption price of and accrued interest on all Notes to be redeemed on that date unless theretofore converted into Class A Common Stock pursuant to the provisions hereof. The Trustee or the Paying Agent shall return to the Company any money not required for that purpose. If the Company complies with the provisions of the preceding paragraph, on and after the Redemption Date, interest shall cease to accrue on the Notes or the portions of Notes called for redemption. If a Note is redeemed on or after an interest record date but on or prior to the related interest payment date, then any accrued and unpaid interest shall be paid to the Person in whose name such Note was registered at the close of business on such record date. If any Note called for redemption shall not be so paid upon surrender for redemption because of the failure of the Company to comply with the preceding paragraph, interest shall be paid on the unpaid principal, from the Redemption Date until such principal is paid, and to the extent lawful on any interest not paid on such unpaid principal, in each case at the rate provided in the Notes. Section 3.06 Notes Redeemed in Part. Upon surrender of a Note that is redeemed in part, the Company shall issue and the Trustee shall authenticate for the Holder at the expense of the Company a new Note equal in principal amount to the unredeemed portion of the Note surrendered. Section 3.07 Optional Redemption. The Company may redeem all or any portion of the Notes, upon the terms and at the redemption prices set forth in the Notes. Any redemption pursuant to this Section 3.07 shall be made pursuant to the provisions of Section 3.01 through 3.06 hereof. Section 3.08 Mandatory Redemption The Company shall not be required to make mandatory redemption payments or sinking fund payments with respect to the Notes. Section 3.09 Change in Control Offer. (a) In the event that, pursuant to Section 4.06 hereof, the Company shall commence an offer to all Holders of the Notes to purchase Notes (the "Change in Control Offer"), the Company shall follow the procedures in this Section 3.09. (b) The Change in Control Offer shall remain open for a period specified by the Company which shall be no less than 30 calendar days and no more than 60 calendar days following its commencement (the "Commencement Date") (as determined in accordance with -16- Section 4.06 hereof), except to the extent that a longer period is required by applicable law (the "Tender Period"). Upon the expiration of the Tender Period (the "Purchase Date"), the Company shall purchase the principal amount of all of the Notes required to be purchased pursuant to Section 4.06 hereof (the "Offer Amount"). (c) If the Purchase Date is on or after a Record Date and on or before the related Interest Payment Date, any accrued interest shall be paid to the Person in whose name a Note is registered at the close of business on such Record Date, and no additional interest will be payable to Holders who tender Notes pursuant to the Change in Control Offer. (d) The Company shall provide the Trustee with notice of the Change in Control Offer at least 10 days before the Commencement Date. (e) On or before the 30th day after the Change in Control, the Company or the Trustee (at the expense of the Company) shall send, by first class mail, a notice to each of the Holders, which shall govern the terms of the Change in Control Offer and shall state: (i) that the Change in Control Offer is being made pursuant to this Section 3.09 and Section 4.06 hereof, that all Notes validly tendered will be accepted for payment and the length of time the Change in Control Offer will remain open; (ii) the purchase price (as determined in accordance with Section 4.06 hereof) and the Purchase Date, and that all Notes tendered will be accepted for payment; (iii) that any Note or portion thereof not tendered or accepted for payment will continue to accrue interest; (iv) that, unless the Company defaults in the payment of the purchase price, any Note or portion thereof accepted for payment pursuant to the Change in Control Offer will cease to accrue interest after the Purchase Date; (v) that Holders electing to have a Note or portion thereof purchased pursuant to any Change in Control Offer will be required to surrender the Note, with the form entitled "Option of Holder to Elect Purchase upon a Change in Control" on the reverse of the Note completed, to the Paying Agent at the address specified in the notice prior to the close of business on the third Business Day preceding the Purchase Date; (vi) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than the close of business on the Business Day preceding the Purchase Date, or such longer period as may be required by law, a letter or facsimile transmission (receipt of which is confirmed and promptly followed by a letter) setting forth the name of the Holder, the principal amount of the Note or portion thereof the Holder delivered for purchase and a statement that such Holder is withdrawing his election to have the Note or portion thereof purchased; (vii) that Holders whose Notes were purchased only in part will be issued new Notes equal in principal amount to the unpurchased portion of the Notes surrendered, which unpurchased portion shall be equal to $1,000 or an integral multiple thereof in principal amount; and (viii) the "CUSIP" number of the Notes to be purchased. (f) On or prior to the Purchase Date, the Company shall irrevocably deposit with the Trustee or a Paying Agent in immediately available funds an amount equal to the Offer Amount to be held for payment in accordance with the terms of this Section 3.09. On the Purchase Date, the Company shall, to the extent lawful, accept for payment the Notes or portions thereof properly tendered pursuant to the Change in Control Offer and deliver to the Trustee an Officers' Certificate stating such Notes or portions thereof have been accepted for payment by the Company in accordance with the terms of this Section 3.09. The Paying Agent shall promptly (but in any case not later than ten (10) calendar days after the Purchase Date) mail or deliver to each tendering Holder, or, if any Holder requests in writing, wire transfer immediately available funds to an account previously specified in writing by such Holder to the Company and the Paying Agent, an amount equal to the purchase price of the Notes tendered by such Holder and accepted by the Company for purchase, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Note equal in principal amount to any unpurchased portion of the Note surrendered. Any Notes not so accepted shall be promptly mailed or delivered by or on behalf of the Company to the Holder thereof. The Company will publicly announce in a newspaper of general circulation the results of the Change in Control Offer on or as soon as practicable after the Purchase Date. (g) The Change in Control Offer shall be made by the Company in compliance with all applicable provisions of the Exchange Act, and all applicable tender offer rules promulgated thereunder, and shall include all instructions and materials necessary to enable such Holders to tender their Notes. To the extent that the provisions of any securities laws or regulations conflict with the Change in Control provisions of this Section 3.09, the Company will comply with the applicable securities laws and regulations and will not be deemed to have breached its obligations under the Change in Control provisions of the Indenture by virtue of such conflict. ARTICLE IV. COVENANTS Section 4.01 Payment of Notes. The Company shall pay the principal of, and premium, if any, and interest on, the Notes on the dates and in the manner provided in the Notes. Principal, premium, if any, and interest shall be considered paid on the date due if the Paying Agent (other than the Company or an Affiliate of the Company) holds on that date money designated for and sufficient to pay all principal, premium, if any, and interest then due. To the extent lawful, the Company shall pay interest (including post-petition interest in any proceeding under any Bankruptcy Law) on (i) overdue principal and premium, if any, at the rate borne by the Notes, compounded semiannually; and (ii) overdue installments of interest (without regard to any applicable grace period) at the same rate, compounded semiannually. Section 4.02 Compliance Certificate. The Company shall deliver to the Trustee, within 90 days after the end of each fiscal year of the Company, an Officers' Certificate stating that a review of the activities of the Company and its -18- subsidiaries during the preceding fiscal year has been made under the supervision of the signing Officers with a view to determining whether the Company has kept, observed, performed and fulfilled its obligations under, and complied with the covenants and conditions contained in, this Indenture, and further stating, as to each such Officer signing such certificate, that to the best of his knowledge the Company has kept, observed, performed and fulfilled each and every covenant, and complied with the covenants and conditions contained in this Indenture and is not in default in the performance or observance of any of the terms, provisions and conditions hereof (or, if a Default or Event of Default shall have occurred, describing all such Defaults or Events of Default of which he may have knowledge) and that to the best of his knowledge no event has occurred and remains in existence by reason of which payments on account of the principal or of interest, if any, on the Notes are prohibited. One of the Officers signing such Officers' Certificate shall be either the Company's principal executive officer, principal financial officer or principal accounting officer. The Company will, so long as any of the Notes are outstanding, deliver to the Trustee forthwith upon becoming aware of any Default or Event of Default, an Officers' Certificate specifying such Default or Event of Default. Section 4.03 Stay, Extension and Usury Laws. The Company covenants (to the extent that it may lawfully do so) that it will not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent it may lawfully do so) hereby expressly waives all benefit or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Trustee, but will suffer and permit the execution of every such power as though no such law had been enacted. Section 4.04 Corporate Existence. Subject to Article VII hereof, to the extent permitted by law the Company will do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence and the corporate, partnership or other existence of each subsidiary of the Company in accordance with the respective organizational documents of each subsidiary and the rights (charter and statutory), licenses and franchises of the Company; provided, however, that the Company shall not be required to preserve any such right, license or franchise, or the corporate, partnership or other existence of any subsidiary, if the preservation thereof is no longer desirable in the conduct of the business of the Company and its subsidiaries taken as a whole. Section 4.05 Taxes. The Company shall, and shall cause each of its subsidiaries to, pay prior to delinquency all material taxes, assessments and governmental levies, except as contested in good faith and by appropriate proceedings or where the failure to effect such payment would not have a material adverse effect on the Company and its subsidiaries, taken as a whole. Section 4.06 Change in Control. Upon the occurrence of a Change in Control, each Holder shall have the right to require the Company to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such Holder's Notes on a date fixed by the Company that is no earlier than 30 nor later than 60 days from the date the Company gives notice of the Change in Control. The Company shall be required to make a Change in Control Offer for an amount of cash equal to 100% of the principal amount of the Notes on the Purchase Date, plus accrued and unpaid interest, if any to the Purchase Date (the "Change in Control Payment"). Notwithstanding the foregoing, the Company shall not be required to make a Change in Control Offer if a third party makes an offer to purchase the Notes in the manner, at the times and otherwise in compliance with the requirements of Section 3.09 that the Company would otherwise be required to make and that third party purchases all of the Notes validly tendered and not withdrawn in such offer. ARTICLE V. CONVERSION Section 5.01 Conversion Privilege. A Holder of a Note may convert it into fully paid and nonassessable shares of Class A Common Stock at any time after 90 days following the Issuance Date and prior to maturity at the Conversion Price then in effect, except that, with respect to any Note called for redemption, such conversion right shall terminate at the close of business on the Business Day immediately preceding the Redemption Date (unless the Company shall default in making the redemption payment when it becomes due, in which case the conversion right shall terminate on the date such default is cured). The number of shares of Class A Common Stock issuable upon conversion of a Note is determined by dividing the principal amount of such Note by the conversion price in effect on the Conversion Date (the "Conversion Price"). The initial Conversion Price is stated in Section 12 of the Notes and is subject to adjustment as provided in this Article V. A Holder may convert a portion of a Note equal to any integral multiple of $1,000. Provisions of this Indenture that apply to conversion of all of a Note also apply to conversion of a portion of it. Section 5.02 Conversion Procedure. To convert a Note, a Holder must satisfy the requirements in Section 11 of the Notes. The date on which the Holder satisfies all of those requirements is the conversion date (the "Conversion Date"). As soon as practicable after the Conversion Date, the Company shall deliver to the Holder through the Conversion Agent a certificate for the number of whole shares of Class A Common Stock issuable upon the conversion and a check for any fractional share determined pursuant to Section 5.03 hereof. The Person in whose name the certificate is registered shall become the stockholder of record on the Conversion Date and, as of such date, such Person's rights as a Holder shall cease; provided, however, that no surrender of a Note on any date when the stock transfer books of the Company shall be closed shall be effective to constitute the Person entitled to receive the shares of Class A Common Stock upon such conversion as the stockholder of record of such shares of Class A Common Stock on such date, but such surrender shall be effective to constitute the Person entitled to receive such shares of Class A Common Stock as the stockholder of record thereof for all purposes at the close of business on the next succeeding day on which such stock transfer books are open; provided further, however, that such conversion shall be at the Conversion Price in effect on the date that such Note shall have been surrendered for conversion, as if the stock transfer books of the Company had not been closed. -20- No payment or other adjustment shall be made for accrued interest or dividends on any Class A Common Stock issued upon conversion of the Notes. If any Notes are converted during any period after any Record Date for the payment of an installment of interest but before the next Interest Payment Date, interest for such notes will be paid on the next Interest Payment Date, notwithstanding such conversion, to the Holders of such Notes. Any Notes that are, however, delivered to the Company for conversion after any Record Date but before the next Interest Payment Date must, except as described in the next sentence, be accompanied by a payment equal to the interest payable on such Interest Payment Date on the principal amount of Notes being converted. The payment to the Company described in the preceding sentence shall not be required if, during that period between a Record Date and the next Interest Payment Date, a conversion occurs on or after the date that the Company has issued a redemption notice and prior to the date of redemption stated in such notice. No fractional shares will be issued upon conversion, but a cash adjustment will be made for any fractional shares. If a Holder converts more than one Note at the same time, the number of whole shares of Class A Common Stock issuable upon the conversion shall be based on the total principal amount of Notes converted. Upon surrender of a Note that is converted in part, the Trustee shall authenticate for the Holder a new Note equal in principal amount to the unconverted portion of the Note surrendered. Section 5.03 Fractional Shares. The Company will not issue fractional shares of Class A Common Stock upon conversion of a Note. In lieu thereof, the Company will pay an amount in cash based upon the Daily Market Price of the Class A Common Stock on the trading day prior to the date of conversion. Section 5.04 Taxes on Conversion. The issuance of certificates for shares of Class A Common Stock upon the conversion of any Note shall be made without charge to the converting Holder for such certificates or for any tax in respect of the issuance of such certificates, and such certificates shall be issued in the respective names of, or in such names as may be directed by, the Holder or Holders of the converted Note; provided, however, that in the event that certificates for shares of Class A Common Stock are to be issued in a name other than the name of the Holder of the Note converted, such Note, when surrendered for conversion, shall be accompanied by an instrument of transfer, in form satisfactory to the Company, duly executed by the registered holder thereof or his duly authorized attorney; and provided further, however, that the Company 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 certificates in a name other than that of the Holder of the converted Note, and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid or is not applicable. Section 5.05 Company to Provide Stock. The Company shall at all times reserve and keep available, free from preemptive rights, out of its authorized but unissued Class A Common Stock, solely for the purpose of issuance upon conversion of Notes as herein provided, a sufficient number of shares of Class A Common Stock to permit the conversion of all outstanding Notes for shares of Class A -21- Common Stock. All shares of Class A Common Stock which may be issued upon conversion of the Notes shall be duly authorized, validly issued, fully paid and nonassessable when so issued . Section 5.06 Adjustment of Conversion Price. The Conversion Price shall be subject to adjustment from time to time as follows: (a) Stock split and combinations. In case the Company, at any time or from time to time after the issuance date of the Notes (a) subdivides or splits the outstanding shares of its Class A Common Stock, (b) combines or reclassifies the outstanding shares of its Class A Common Stock into a smaller number of shares or (c) issues by reclassification of the shares of its Class A Common Stock any shares of its capital stock, then the Conversion Price in effect immediately prior to that event or the record date for that event, whichever is earlier, will be adjusted so that the holder of any Notes thereafter surrendered for conversion will be entitled to receive the number of shares of the Company's Class A Common Stock or of its other securities which the Holder would have owned or have been entitled to receive after the occurrence of any of the events described above, had those Notes been surrendered for conversion immediately before the occurrence of that event or the record date for that event, whichever is earlier; (b) Stock Dividends in Class A Common Stock. In case the Company, at any time or from time to time after the issuance date of the Notes, pays a dividend or make a distribution in shares of its Class A Common Stock on any class of its capital stock other than dividends or distributions of shares of Class A Common Stock or other securities with respect to which adjustments are provided in paragraph (1) above or with respect to payments of interest or dividend obligations with respect to a particular series of capital stock in accordance with the terms of such capital stock, the Conversion Price will be adjusted so that the Holder of each Note will be entitled to receive, upon conversion of that Note, the number of shares of the Company's Class A Common Stock determined by multiplying (a) the Conversion Price by (b) a fraction, the numerator of which will be the number of shares of Class A Common Stock outstanding and the denominator of which will be the sum of that number of shares and the total number of shares issued in that dividend or distribution; (c) Issuance of rights or warrants. In case the Company issues to all holders of its Class A Common Stock rights or warrants entitling those holders to subscribe for or purchase its Class A Common Stock at a price per share less than the current market price, the Conversion Price in effect immediately before the close of business on the record date fixed for determination of shareholders entitled to receive those rights or warrants will be reduced by multiplying the Conversion Price by a fraction, the numerator of which is the sum of the number of shares of the Company's Class A Common Stock outstanding at the close of business on that record date and the number of shares of Class A Common Stock that the aggregate offering price of the total number of shares of the Company's Class A Common Stock so offered for subscription or purchase would purchase at the Current Market Price and the denominator of which is the sum of the number of shares of Class A Common Stock outstanding at the close of business on that record date and the number of additional shares of the Company's Class A Common Stock so offered for subscription or purchase. For purposes of this paragraph (3), the issuance of rights or warrants to subscribe for or purchase securities convertible into shares of the Company's Class A Common Stock will be deemed to be the issuance of rights or warrants to purchase shares of the Company's Class A Common Stock into which those securities are convertible at an aggregate offering price equal to the sum of the aggregate offering price of those securities and the -22- minimum aggregate amount, if any, payable upon conversion of those securities into shares of the Company's Class A Common Stock. This adjustment will be made successively whenever any such event occurs; (d) Distribution of indebtedness, securities or assets. In case the Company distributes to all holders of its Class A 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 Class A Common Stock, rights or warrants referred to in paragraph (3) above or an ordinary dividend payable exclusively in cash and other than as a result of a Fundamental Change described in paragraph (5) below, the Conversion Price in effect immediately before the close of business on the record date fixed for determination of shareholders entitled to receive that distribution will be reduced by multiplying the Conversion Price by a fraction, the numerator of which is the Current Market Price on that record date less the fair market value, as determined by the Company's Board of Directors, of the portion of those evidences of indebtedness, shares of capital stock, other securities, cash and assets so distributed applicable to one share of Class A Common Stock and the denominator of which is the Current Market Price. This adjustment will be made successively wherever any such event occurs; (e) Fundamental changes. If a Fundamental Change occurs, the Holder of each Note outstanding immediately before that Fundamental Change occurred, will have the right upon any subsequent conversion to receive, but only out of legally available funds, to the extent required by applicable law, the kind and amount of stock or other securities, cash and assets that that Holder would have received if that share had been converted immediately prior to the Fundamental Change. Section 5.07 No Adjustment. No adjustment in the Conversion Price shall be required until cumulative adjustments amount to 1% or more of the Conversion Price as last adjusted; provided, however, that any adjustments which by reason of this Section 5.07 are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article V shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. No adjustment need be made for rights to purchase Class A Common Stock pursuant to a Company plan for reinvestment of dividends or interest. No adjustment need be made for a change in the par value or no par value of the Class A Common Stock. Section 5.08 Other Adjustments. (a) In the event that, as a result of an adjustment made pursuant to Section 5.06 hereof, the Holder of any Note thereafter surrendered for conversion shall become entitled to receive any shares of Capital Stock of the Company other than shares of its Class A Common Stock, thereafter the Conversion Price of such other shares so receivable upon conversion of any Note shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to Class A Common Stock contained in this Article V. (b) In the event that shares of Class A Common Stock are not delivered after the expiration of any of the rights or warrants referred to in Section 5.06(b) and Section 5.06(c) hereof, the Conversion Price shall be readjusted to the Conversion Price which would otherwise be in effect had the adjustment made upon the issuance of such rights or warrants been made on the basis of delivery of only the number of shares of Class A Common Stock actually delivered. -23- Section 5.09 Adjustments for Tax Purposes. The Company may make such reductions in the Conversion Price, in addition to those required by Section 5.06 hereof, as it determines in its discretion to be advisable in order that any stock dividend, subdivision of shares, distribution or rights to purchase stock or securities or distribution of securities convertible into or exchangeable for stock made by the Company to its stockholders will not be taxable to the recipients thereof. Section 5.10 Notice of Adjustment. Whenever the Conversion Price is adjusted, the Company shall promptly mail to Holders at the addresses appearing on the Registrar's books a notice of the adjustment and file with the Trustee an Officers' Certificate briefly stating the facts requiring the adjustment and the manner of computing it. The certificate shall be conclusive evidence of the correctness of such adjustment. Unless and until a Trust Officer of the Trustee shall receive written notice of an adjustment of the Conversion Price, the Trustee may assume without inquiry that the Conversion Price has not been adjusted and that the last Conversion Price of which it has knowledge remains in effect. Section 5.11 Notice of Certain Transactions. In the event that: (1) the Company takes any action which would require an adjustment in the Conversion Price; (2) the Company takes any action that would require a supplemental indenture pursuant to Section 5.12; or (3) there is a dissolution or liquidation of the Company; the Company shall mail to Holders at the addresses appearing on the Registrar's books and the Trustee a notice stating the proposed record or effective date, as the case may be, to permit a Holder of a Note to convert such Note into shares of Class A Common Stock prior to the Record Date for or the effective date of the transaction in order to receive the rights, warrants, securities or assets which a holder of shares of Class A Common Stock on that date may receive. The Company shall mail the notice at least 15 days before such date; however, failure to mail such notice or any defect therein shall not affect the validity of any transaction referred to in clause (1), (2) or (3) of this Section 5.11. Section 5.12 Effect of Reclassifications, Consolidations, Mergers or Sales on Conversion Privilege. If any of the following shall occur, namely: (i) any reclassification or change of outstanding shares of Class A Common Stock issuable upon conversion of Notes (other than a change in par value, or from par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), (ii) any consolidation or merger to which the Company is a party other than a merger in which the Company is the continuing corporation and which does not result in any reclassification of, or change (other than a change in name, or par value, or from par value to no par value, or from no par value to par value or as a result of a subdivision or combination) in, outstanding shares of Class A Common Stock or (iii) any sale or conveyance of all or substantially all of the property or business of the Company as an entirety, then the Company, or such successor or purchasing corporation, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Trustee a supplemental indenture in form reasonably satisfactory to the Trustee -24- providing that the Holder of each Note then outstanding shall have the right to convert such Note into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale or conveyance by a Holder of the number of shares of Class A Common Stock deliverable upon conversion of such Note immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. In the event that the shares of Class A Common Stock are exchanged or substituted for other securities in connection with any such reclassification, change, consolidation, merger, sale or conveyance, such supplemental indenture shall provide for adjustments of the Conversion Price which shall be as nearly equivalent as may be practicable to the adjustments of the Conversion Price provided for in this Article V. The foregoing, however, shall not in any way affect the right a Holder of a Note may otherwise have, pursuant to subsection (e) of Section 5.06 hereof, to receive stock or other securities, cash or assets upon conversion of a Note. If, in the case of any such consolidation, merger, sale or conveyance, the stock or other securities and property (including cash) receivable thereupon by a Holder of Class A Common Stock includes shares of stock or other securities and property of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holders of the Notes as the Board of Directors of the Company shall reasonably consider necessary by reason of the foregoing. The provision of this Section 5.12 shall similarly apply to successive consolidations, mergers, sales or conveyances. In the event the Company shall execute a supplemental indenture pursuant to this Section 5.12, the Company shall promptly file with the Trustee an Officers' Certificate briefly stating the reasons therefor, the kind or amount of shares of stock or securities or property (including cash) receivable by Holders of the Notes upon the conversion of their Notes after any such reclassification, change, consolidation, merger, sale or conveyance and any adjustment to be made with respect thereto. Section 5.13 Trustee's Disclaimer. The Trustee has no duty to determine when an adjustment under this Article V should be made, how it should be made or what such adjustment should be, but may accept as conclusive evidence of the correctness of any such adjustment, and shall be protected in relying upon, the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 5.10 hereof. The Trustee makes no representation as to the validity or value of any securities or assets issued upon conversion of Notes, and the Trustee shall not be responsible for the Company's failure to comply with any provisions of this Article V. The Trustee shall not be under any responsibility to determine the correctness of any provisions contained in any supplemental indenture executed pursuant to Section 5.12, but may accept as conclusive evidence of the correctness thereof, and shall be protected in relying upon, the Officers' Certificate with respect thereto which the Company is obligated to file with the Trustee pursuant to Section 5.12 hereof. ARTICLE VI. SUBORDINATION Section 6.01 Agreement to Subordinate and Ranking. The Company, for itself and its successors, and each Holder, by its acceptance of Notes, agree that the payment of the principal of or interest on or any other amounts due on the Notes is subordinated in right of payment, to the extent and in the manner stated in this Article VI, to the prior payment in full -25- of all existing and future Senior Debt. The Notes shall rank pari passu with, and shall not be senior in right of payment to, such other Indebtedness of the Company, whether outstanding on the date of this Indenture or hereafter created, incurred, issued or Guaranteed by the Company, where the instrument creating or evidencing such Indebtedness expressly provides that such Indebtedness ranks pari passu with or junior to the Notes. Section 6.02 No Payment on Notes if Senior Debt in Default. Anything in this Indenture to the contrary notwithstanding, no payment on account of principal of or redemption of, interest on or other amounts due on the Notes, and no redemption, purchase, or other acquisition of the Notes, shall be made by or on behalf of the Company if (i) a default in the payment of Senior Debt occurs and is continuing beyond any applicable period of grace (a "Payment Default"), or (ii) a default other than a Payment Default on any Senior Debt occurs and is continuing that permits the Holders of Senior Debt to accelerate its maturity, and the trustee receives notice of such default (a "Payment Blockage Notice") from the Company or from any holders of Senior Debt or such holder's representative (a "Non-Payment Default"), but only for the period (the "Payment Blockage Period") commencing on the date of receipt of the Payment Blockage Notice and ending (unless earlier terminated by notice given to the Trustee by the holders of such Senior Debt) (a) in the case of a Payment Default, upon the date on which such Payment Default is cured or waived or ceases to exist, and (b) in the case of a Non-Payment Default, the earliest of the date on which such Non-Payment Default is cured or waived or ceases to exist or 180 days from the date notice is received, if the maturity of the Senior Debt has not been accelerated. Upon termination of the Payment Blockage Period, payments on account of principal of or interest on the Notes (other than, subject to Section 6.03 hereof, amounts due and payable by reason of the acceleration of the maturity of the Notes) and redemptions, purchases or other acquisitions shall be made by or on behalf of the Company. Notwithstanding anything herein to the contrary, (a) only one Payment Blockage Notice with respect to the same Non-Payment Default or any other Non-Payment Default on the same issue of Senior Debt existing or continuing at the time of such Payment Blockage Notice may be given and (b) no new Payment Blockage Period may be commenced by the Holder or holders of Senior Debt or their representative or representatives, unless 360 consecutive days have elapsed since the initial effectiveness of the immediately preceding Payment Blockage Notice. In the event that, notwithstanding the provisions of this Section 6.02, payments are made by or on behalf of the Company in contravention of the provisions of this Section 6.02, such payments shall be held by the Trustee, any Paying Agent or the Holders, as applicable, in trust for the benefit of, and shall be paid over to and delivered to, the holders of Senior Debt or their representative or the trustee under the indenture or other agreement (if any), pursuant to which any instruments evidencing any Senior Debt may have been issued for application to the payment of all Senior Debt ratably according to the aggregate amounts remaining unpaid to the extent necessary to pay all Senior Debt in full in accordance with the terms of such Senior Debt, after giving effect to any concurrent payment or distribution to or for the holders of Senior Debt. The Company shall give prompt written notice to the Trustee and any Paying Agent of any default or event of default under any Senior Debt or under any agreement pursuant to which any Senior Debt may have been issued. -26- Section 6.03 Distribution on Acceleration of Notes; Dissolution and Reorganization; Subrogation of Notes. (a) If the Notes are declared due and payable because of the occurrence of an Event of Default, the Company or the Trustee shall give prompt written notice to the holders of all Senior Debt or to the trustee(s) for such Senior Debt of such acceleration. (b) Upon (i) any acceleration of the principal amount due on the Notes because of an Event of Default or (ii) any distribution of assets of the Company upon any dissolution, winding up, liquidation or reorganization of the Company (whether in bankruptcy, insolvency or receivership proceedings or upon an assignment for the benefit of creditors or any other dissolution, winding up, liquidation or reorganization of the Company): (1) the holders of all Senior Debt shall first be entitled to receive payment in full of the principal thereof, the interest thereon and any other amounts due thereon before the Holders are entitled to receive payment on account of the principal of or interest on or any other amounts due on the Notes; (2) any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, to which the Holders or the Trustee would be entitled except for the provisions of this Article VI, shall be paid by the liquidating trustee or agent or other Person making such a payment or distribution, directly to the holders of Senior Debt (or their representatives(s) or trustee(s) acting on their behalf), ratably according to the aggregate amounts remaining unpaid on account of the principal of or interest on and other amounts due on the Senior Debt held or represented by each, to the extent necessary to make payment in full of all Senior Debt remaining unpaid, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt; and In the event that, notwithstanding the foregoing, any payment or distribution of assets of the Company of any kind or character, whether in cash, property or securities, shall be received by the Trustee or the Holders before all Senior Debt is paid in full, such payment or distribution shall be held in trust for the benefit of, and be paid over to upon request by a holder of the Senior Debt, the holders of the Senior Debt remaining unpaid (or their representatives) or trustee(s) acting on their behalf, ratably as aforesaid, for application to the payment of such Senior Debt until all such Senior Debt shall have been paid in full, after giving effect to any concurrent payment or distribution to the holders of such Senior Debt. After all Senior Debt is paid in full and until the Notes are paid in full, Holders of Notes shall be subrogated (equally and ratably with all other Indebtedness pari passu with the Notes) to the rights of holders of Senior Debt to receive distributions applicable to Senior Debt to the extent that distributions otherwise payable to the Holders of Notes have been applied to the payment of Senior Debt. A distribution made under this Article VI to holders of Senior Debt that otherwise would have been made to Holders of Notes is not, as between the Company and Holders, a payment by the Company on the Notes. Nothing contained in this Article VI or elsewhere in this Indenture or in the Notes is intended to or shall (i) impair, as between the Company and its creditors, other than the holders of Senior Debt, the obligation of the Company, which is absolute and unconditional, to pay to the Holders the principal of and interest on the Notes as and when the same shall become due and payable in accordance with the terms of the Notes or (ii) affect the relative rights of the Holders and creditors of the Company other than holders of Senior Debt or, as between the Company and the Trustee, the obligations of the Company to -27- the Trustee, or (iii) prevent the Trustee or the Holders from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article VI of the holders of Senior Debt in respect of cash, property and securities of the Company received upon the exercise of any such remedy. Upon distribution of assets of the Company referred to in this Article VI, the Trustee, subject to the provisions of Section 9.01 hereof, and the Holders shall be entitled to rely upon a certificate of the liquidating trustee or agent or other Person making any distribution to the Trustee or to the Holders for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Senior Debt and other indebtedness of the Company, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article VI. The Trustee, however, shall not be deemed to owe any fiduciary duty to the holders of Senior Debt. Nothing contained in this Article VI or elsewhere in this Indenture, or in any of the Notes, shall prevent the good faith application by the Trustee of any moneys which were deposited with it hereunder, prior to its receipt of written notice of facts which would prohibit such application, for the purpose of the payment of or on account of the principal of or interest on, the Notes unless, prior to the date on which such application is made by the Trustee, the Trustee shall be charged with notice under Section 6.03(d) hereof of the facts which would prohibit the making of such application. (c) The provisions of this Article VI shall not be applicable to any cash, properties or securities received by the Trustee or by any Holder when received as a holder of Senior Debt and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee or such Holder of any of its rights as such holder. (d) The Company shall give prompt written notice to the Trustee of any fact known to the Company which would prohibit the making of any payment of money to or by the Trustee in respect of the Notes pursuant to the provisions of this Article VI. The Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled to assume that no such fact exists unless the Company or any holder of Senior Debt or any trustee therefor has given such notice to the Trustee. Notwithstanding the provisions of this Article VI or any other provisions of this Indenture, the Trustee shall not be charged with knowledge of the existence of any fact which would prohibit the making of any payment of monies to or by the Trustee in respect of the Notes pursuant to the provisions in this Article VI, unless, and until three Business Days after, the Trustee shall have received written notice thereof from the Company or any Holder or holders of Senior Debt or from any trustee therefor; and, prior to the receipt of any such written notice, the Trustee, subject to the provisions of Section 9.01 hereof, shall be entitled in all respects conclusively to assume that no such facts exist; provided that if on a date not less then three Business Days immediately preceding the date upon which by the terms hereof any such monies may become payable for any purpose (including, without limitation, the principal of or interest on any Note), the Trustee shall not have received with respect to such monies the notice provided for in this Section 6.03(d), than anything herein contained to the contrary notwithstanding, the Trustee shall have full power and authority to receive such monies and to apply the same to the purpose for which they were received, and shall not be affected by any notice to the contrary which may be received by it on or after such prior date. The Trustee shall be entitled to rely on the delivery to it of a written notice by a Person representing himself to be a holder of Senior Debt (or a trustee on behalf of such holder) to establish that such notice has been given by a holder of Senior Debt (or a trustee on behalf of any such holder or holders). In the event that the Trustee determines in good faith that further evidence is required with respect to the right of any Person as a holder of Senior Debt to participate in any payment or distribution -28- pursuant to this Article VI, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of Senior Debt held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and any other facts pertinent to the rights of such Person under this Article VI, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such Person to receive such payment; nor shall the Trustee be charged with knowledge of the curing or waiving of any default of the character specified in Section 6.02 hereof or that any event or any condition preventing any payment in respect of the Notes shall have ceased to exist, unless and until the Trustee shall have received an Officers' Certificate to such effect. (e) The provisions of this Section 6.03 applicable to the Trustee shall also apply to any Paying Agent for the Company. Section 6.04 Reliance by Senior Debt on Subordination Provisions. Each Holder of any Note by his acceptance thereof acknowledges and agrees that the foregoing subordination provisions are, and are intended to be, an inducement and a consideration for each holder of any Senior Debt, whether such Senior Debt was created or acquired before or after the issuance of the Notes, to acquire and continue to hold, or to continue to hold, such Senior Debt, and such holder of Senior Debt shall be deemed conclusively to have relied on such subordination provisions in acquiring and continuing to hold, or in continuing to hold, such Senior Debt. Notice of any default in the payment of any Senior Debt, except as expressly stated in this Article VI, and notice of acceptance of the provisions hereof are hereby expressly waived. Except as otherwise expressly provided herein, no waiver, forbearance or release by any holder of Senior Debt under such Senior Debt or under this Article VI shall constitute a release of any of the obligations or liabilities of the Trustee or Holders of the Notes provided in this Article VI. Section 6.05 No Waiver of Subordination Provisions. Except as otherwise expressly provided herein, no right of any present or future holder of any Senior Debt to enforce subordination as herein provided shall at any time in any way be prejudiced or impaired by any act or failure to act on the part of the Company or by any act or failure to act, in good faith, by any such holder, or by any noncompliance by the Company with the terms, provisions and covenants of this Indenture, regardless of any knowledge thereof any such holder may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Debt may, at any time and from time to time, without the consent of, or notice to, the Trustee or the Holders of the Notes, without incurring responsibility to the Holders of the Notes and without impairing or releasing the subordination provided in this Article VI or the obligations hereunder of the Holders of the Notes to the holders of Senior Debt, do any one or more of the following: (i) change the manner, place or terms of payment of, or renew or alter, Senior Debt, or otherwise amend or supplement in any manner Senior Debt or any instrument evidencing the same or any agreement under which Senior Debt is outstanding; (ii) sell, exchange, release or otherwise dispose of any property pledged, mortgaged or otherwise securing Senior Debt; (iii) release any Person liable in any manner for the collection of Senior Debt; and (iv) exercise or refrain from exercising any rights against the Company or any other Person. -29- Section 6.06 Trustee's Relation to Senior Debt. The Trustee in its individual capacity shall be entitled to all the rights set forth in this Article VI in respect of any Senior Debt at any time held by it, to the same extent as any holder of Senior Debt, and nothing in Section 9.11 hereof or elsewhere in this Indenture shall deprive the Trustee of any of its rights as such holder. With respect to the holders of Senior Debt, the Trustee undertakes to perform or to observe only such of its covenants and obligation, as are specifically set forth in this Article VI, and no implied covenants or obligations with respect to the holders of Senior Debt shall be read into this Indenture against the Trustee. The Trustee shall not owe any fiduciary duty to the holders of Senior Debt but shall have only such obligations to such holders as are expressly set forth in this Article VI. Each Holder of a Note by his acceptance thereof authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effectuate the subordination provided in this Article VI and appoints the Trustee his attorney-in-fact for any and all such purposes, including, in the event of any dissolution, winding up or liquidation or reorganization under any applicable bankruptcy law of the Company (whether in bankruptcy, insolvency or receivership proceedings or otherwise), the timely filing of a claim for the unpaid balance of such Holder's Notes in the form required in such proceedings and the causing of such claim to be approved. If the Trustee does not file a claim or proof of debt in the form required in such proceedings prior to 30 days before the expiration of the time to file such claims or proofs, then any Holder or holders of Senior Debt or their representative or representatives shall have the right to demand, sue for, collect, receive and receipt for the payments and distributions in respect of the Notes which are required to be paid or delivered to the holders of Senior Debt as provided in this Article VI and to file and prove all claims therefore and to take all such other action in the name of the holders or otherwise, as such holders of Senior Debt or representative thereof may determine to be necessary or appropriate for the enforcement of the provisions of this Article VI. Section 6.07 Other Provisions Subject Hereto. Expect as expressly stated in this Article VI, notwithstanding anything contained in this Indenture to the contrary, all the provisions of this Indenture and the Notes are subject to the provisions of this Article VI. However, nothing in this Article VI shall apply to or adversely affect the claims of, or payment, to, the Trustee pursuant to Section 9.07 hereof. Notwithstanding the foregoing, the failure to make a payment on account of principal of or interest on the Notes by reason of any provision of this Article VI shall not be construed as preventing the occurrence of an Event of Default under Section 8.01 hereof. ARTICLE VII. SUCCESSORS Section 7.01 Limitation on Merger, Sale or Consolidation. The Company may not, directly or indirectly, consolidate with or merge with or into, or sell, lease or otherwise dispose of all or substantially all of its assets, on a consolidated basis, whether in a single transaction or a series of related transactions, to another person or group of affiliated persons, unless: 30 (a) the Company is the resulting or surviving corporation, or such successor, transferee or lessee, if other than the Company, is a corporation organized under the laws of the United States, any state thereof or the District of Columbia and expressly assumes the Obligations of the Company under this Indenture and the Notes by means of a supplemental indenture entered into with the Trustee; and (b) after giving effect to such transaction, no Default or Event of Default shall have occurred and be continuing. Upon any permitted consolidation, merger conveyance, transfer or lease of the Company's properties and assets in accordance with the foregoing, the successor corporation formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made, shall succeed to, and be substituted for, and may exercise every right and power of, the Company under the Indenture with the same effect as if such successor corporation had been named therein in the same manner as the Company is named, and when a successor corporation duly assumes all of the Obligations of the Company under this Indenture and the Notes (except in the case of a lease), the Company will be released from its Obligations and covenants under the Indenture and the Notes, except as to any Obligations or covenants that arise from or as a result of such transaction. For purposes of the foregoing, the transfer, by lease, assignment, sale or otherwise, of all or substantially all of the properties and assets of one or more Subsidiaries, which properties and assets, if held by the Company instead of such Subsidiary, would constitute all or substantially all of the Company's properties and assets, shall be deemed to be the transfer of all or substantially all of the Company's properties and assets. ARTICLE VIII. DEFAULTS AND REMEDIES Section 8.01 Events of Default. An "Event of Default" occurs if: (a) the Company defaults in the payment of interest on any Note when the same becomes due and payable and the Default continues for a period of 30 days after the date due and payable, whether or not prohibited by the subordination provisions hereof; (b) the Company defaults in the payment of the principal of any Note when the same becomes due and payable at maturity, upon optional redemption, in connection with a Change in Control Offer, upon declaration or otherwise, whether or not prohibited by the subordination provisions hereof; (c) the Company fails to observe or perform for a period of 30 days after notice any covenant or agreement contained in Sections 4.06 and 7.01 hereof (other than, in the case of Section 4.06, a failure to purchase Notes in connection with a Change in Control Offer) hereof; (d) the Company or any of its Subsidiaries fail to observe or perform any other covenant or agreement contained in this Indenture or the Notes, required by it to be performed and the Default continues for a period of 60 days after notice from the Trustee to the Company or from the Holders of 25% in aggregate principal amount of the then outstanding Notes to the Company and the Trustee; -31- (e) the Company or any of its Subsidiaries fails to pay when due principal or interest on Indebtedness for money borrowed by the Company or its Subsidiaries, the principal amount of which exceeds $20.0 million, including any applicable grace periods, or the acceleration of such Indebtedness, that is not cured or withdrawn within 15 days after the date of written notice from the Trustee to the Company or from Holders of 25% in the aggregate principal amount of the then outstanding Notes to the Company and the Trustee; (f) the Company or any of its Subsidiaries that is a Significant Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law: (i) commences a voluntary case; (ii) consents to the entry of an order for relief against it in an involuntary case in which it is the debtor; (iii) consents to the appointment of a Custodian of it or for all or substantially all of its property; (iv) makes a general assignment for the benefit of its creditors; or (v) generally is unable to pay its debts as the same become due; (g) a court of competent jurisdiction enters an order or decree under any Bankruptcy Law that: (i) is for relief against the Company or any of its Subsidiaries that is a Significant Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary in an involuntary case; (ii) appoints a Custodian of the Company or any of its Subsidiaries that is a Significant Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary or for all or substantially all of its property; (iii) orders the liquidation of the Company or any of its Subsidiaries that is a Significant Subsidiary or any group of two or more Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary, and the order or decree remains unstayed and in effect for 60 days. (h) the Company or any of its Subsidiaries fail to pay final judgments aggregating in excess of $10.0 million (net of any commissions with respect to which a reputable and creditworthy insurance company has acknowledged liability in writing), which judgments are not paid, discharged or stayed for a period of 60 days. The term "Bankruptcy Law" means Title 11, U.S. Code or any similar Federal, state or foreign law for the relief of debtors or the protection of creditors. The term "Custodian" means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law. -32- Section 8.02 Acceleration. If an Event of Default (other than an Event of Default specified in clauses (f) or (g) of Section 8.01 hereof) occurs and is continuing, the Trustee by notice to the Company, or the Holders of at least 25% in principal amount of the then outstanding Notes by notice to the Company and the Trustee, may declare all the Notes to be due and payable. Upon such declaration, the principal of and interest on the Notes shall be due and payable immediately. If an Event of Default specified in clause (f) or (g) of Section 8.01 hereof occurs with respect to the Company, such an amount shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. In addition, if an Event of Default specified in clause (f) or (g) of Section 8.01 hereof occurs with respect to any Significant Subsidiary or Significant Subsidiaries of the Company, the Trustee by notice to the Company, or Holders of at least 25% in principal amount of the then outstanding Notes by notice to the Company and the Trustee, may declare all the Notes due and payable. Section 8.03 Other Remedies. Subject to Article VI hereof, if an Event of Default occurs and is continuing, the Trustee may pursue any available remedy to collect the payment of principal or interest on the Notes or to enforce the performance of any provision of the Notes or this Indenture. The Trustee may maintain a proceeding even if it does not possess any of the Notes or does not produce any of them in the proceeding. A delay or omission by the Trustee or any Holder in exercising any right or remedy accruing upon an Event of Default shall not impair the right or remedy or constitute a waiver of or acquiescence in the Event of Default. All remedies are cumulative to the extent permitted by law. Section 8.04 Waiver of Past Defaults. The Holders of a majority in principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all of the Holders of the Notes waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal of or interest on any Note. When a Default or Event of Default is waived, it is cured and ceases; but (except as specifically provided in such written notice) no such waiver shall extend to any subsequent or other Default or impair any right consequent thereon. Section 8.05 Control by Majority. The Holders of a majority in principal amount of the then outstanding Notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on it. However, the Trustee may refuse to follow any direction that conflicts with law or this Indenture, is unduly prejudicial to the rights of other Holders, or would involve the Trustee in personal liability. Section 8.06 Limitation on Suits. A Holder may pursue a remedy with respect to this Indenture or the Notes only if: (a) the Holder gives to the Trustee written notice of a continuing Event of Default; -33- (b) the Holders of at least 25% in principal amount of the then outstanding Notes make a written request to the Trustee to pursue the remedy; (c) such Holder or Holders offer and , if requested, provide to the Trustee indemnity satisfactory to the Trustee against any loss, liability or expense; (d) the Trustee does not comply with the request within 60 days after receipt of the request and the offer, and, if requested, the provision of indemnity; and (e) during such 60-day period the Holders of a majority in principal amount of the then outstanding Notes do not give the Trustee a direction inconsistent with the request. A Holder may not use this Indenture to prejudice the rights of another Holder or to obtain a preference or priority over another Holder. Section 8.07 Rights of Holders to Receive Payment. Notwithstanding any other provision of this Indenture, the right of any Holder of a Note to receive payment of principal, and interest on the Note, on or after the respective due dates expressed in the Note, or to bring suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of the Holder made pursuant to this Section 8.07. Section 8.08 Collection Suit by Trustee. If an Event of Default specified in Section 8.01(a) or (b), hereof occurs and is continuing, the Trustee may recover judgment in its own name and as trustee of an express trust against the Company for the whole amount of principal and interest remaining unpaid on the Notes and interest on overdue principal and interest and such further amount as shall be sufficient to cover the costs and, to the extent lawful, expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. Section 8.09 Trustee May File Proofs of Claim. The Trustee may file such proofs of claim and other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and the Holders allowed in any judicial proceedings relative to the Company, its creditors or its property. Nothing contained herein shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. Section 8.10 Priorities. If the Trustee collects any money pursuant to this Article, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 9.07 hereof; Second: to the holders of Senior Debt to the extent required by Article VI; -34- Third: to Holders for amounts due and unpaid on the Notes for principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively; and Fourth: to the Company. The Trustee may fix a record date and payment date for any payment to Holders made pursuant to this Section 8.10. Section 8.11 Undertaking for Costs. In any suit for the enforcement of any right or remedy under this Indenture or in any suit against the Trustee for any action taken or omitted by it as a Trustee, a court in its discretion may require the filing by any party litigant in the suit of an undertaking to pay the costs of the suit, and the court in its discretion may assess reasonable costs, including reasonable attorneys' fees, against any party litigant in the suit, having due regard to the merits and good faith of the claims or defenses made by the party litigant. This Section 8.11 does not apply to a suit by the Trustee, a suit by a Holder pursuant to Section 8.07 hereof, or a suit by Holders of more than 10% in principal amount of the then outstanding Notes. ARTICLE IX. TRUSTEE Section 9.01 Duties of Trustee. (a) If an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (b) Except during the continuance of an Event of Default: (i) the Trustee need perform only those duties that are specifically set forth in this Indenture and no others and (ii) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture. However, the Trustee shall examine the certificates and opinions to determine whether or not they conform to the requirements of this Indenture and to confirm the correctness of all mathematical computations. (c) The Trustee may not be relieved from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) this paragraph does not limit the effect of paragraph (b) of this Section 9.01; (ii) the Trustee shall not be liable for any error of judgment made in good faith by a Trust Officer, unless it is proved that the Trustee was negligent in ascertaining the pertinent facts and (iii) the Trustee shall not be liable with respect to any action it takes or omits to take in good faith in accordance with a direction received by it pursuant to Section 8.05 hereof. (d) Every provision of this Indenture that in any way relates to the Trustee is subject to paragraphs (a), (b) and (c) of this Section 9.01. -35- (e) The Trustee may refuse to perform any duty or exercise any right or power unless it receives indemnity satisfactory to it against any loss, liability or expense. (f) No provision of this Indenture shall require the Trustee to expend or risk its own funds or incur any liability. The Trustee shall be under no obligation to exercise any of its rights and powers under this Indenture at the request of any Holders, unless such Holder shall have offered to the Trustee security and indemnity satisfactory to it against any loss, liability or expense. (g) The Trustee shall not be liable for interest on any money received by it except as the Trustee may agree in writing with the Company. Money held in trust by the Trustee need not be segregated from other funds except to the extent required by law. Section 9.02 Rights of Trustee. (a) The Trustee may rely on any document believed by it to be genuine and to have been signed or presented by the proper Person. The Trustee need not investigate any fact or matter stated in the document. (b) Before the Trustee acts or refrains from acting, it may require an Officers' Certificate or an Opinion of Counsel, or both. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such Officers' Certificate or Opinion of Counsel. (c) The Trustee may act through agents and shall not be responsible for the misconduct or negligence of any agent appointed with due care. (d) The Trustee shall not be liable for any action it takes or omits to take in good faith which it believes to be authorized or within its rights or powers. (e) The Trustee shall not be charged with knowledge of any Event of Default under subsection (c), (d), (e) or (f) (and subsection (a) or (b) if the Trustee does not act as Paying Agent) of Section 8.01 or of the identity of any Significant Subsidiary or of any group of two or more Subsidiaries that, taken as a whole, would constitute a Significant Subsidiary unless either (1) a Trust Officer of the Trustee assigned to its corporate trust department shall have actual knowledge thereof, or (2) the Trustee shall have received notice thereof in accordance with Section 12.02 hereof from the Company or any Holder. Section 9.03 Individual Rights of Trustee. The Trustee in its individual or any other capacity may become the owner or pledgee of Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have if it were not Trustee. Any Agent may do the same with like rights. However, the Trustee is subject to Sections 9.10 and 9.11 hereof. Section 9.04 Trustee's Disclaimer. The Trustee makes no representation as to the validity or adequacy of this Indenture or the Notes, it shall not be accountable for the Company's use of the proceeds from the Notes, and it shall not be -36- responsible for any statement of the Company in the Indenture or any statement in the Notes other than its authentication. Section 9.05 Notice of Defaults. If a Default or Event of Default occurs and is continuing and if it is known to the Trustee, the Trustee shall mail to Holders a notice of the Default or Event of Default within 90 days after it occurs. Except in the case of a Default or Event of Default in payment on any Note, the Trustee may withhold the notice if and so long as a committee of its Trust Officers in good faith determines that withholding the notice is in the interests of Holders. Section 9.06 Reports by Trustee to Holders. Within 60 days after the reporting date stated in Section 12.10, the Trustee shall mail to Holders a brief report dated as of such reporting date that complies with TIA (S) 313(a) if and to the extent required by such (S) 313(a). The Trustee also shall comply with TIA (S) 313(b)(2). The Trustee shall also transmit by mail all reports as required by TIA (S) 313(c). A copy of each report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange on which the Notes are listed. The Company shall notify the Trustee when the Notes are listed on any stock exchange. Section 9.07 Compensation and Indemnity. The Company shall pay to the Trustee from time to time reasonable compensation for its services hereunder. The Trustee's compensation shall not be limited by any law on compensation of a trustee of an express trust. The Company shall reimburse the Trustee upon request for all reasonable disbursements, expenses and advances incurred or made by it. Such disbursements and expenses may include the reasonable disbursements, compensation and expenses of the Trustee's agents and counsel. The Company shall indemnify the Trustee against any claims, demands, expenses (including but not limited to reasonable compensation, fees, disbursements and expenses of the Trustee's agents and counsel), losses, damages or liabilities incurred by it, except as set forth in the next paragraph, arising out of, related to, or in connection with the acceptance or administration of this trust and its rights or duties hereunder, including the reasonable costs and expenses, and the costs and expenses of enforcing this Indenture (including this Section 9.07) against the Company and of defending itself against any claim (whether asserted by the Company, or any Holder or any other person) or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Trustee shall notify the Company promptly of any claim for which it may seek indemnity. The Company shall defend the claim and the Trustee shall cooperate in the defense. The Trustee may have separate counsel and the Company shall pay the reasonable fees, disbursements and expenses of such counsel. The Company need not pay for any settlement made without its consent, which consent shall not be unreasonably withheld. The Company need not reimburse any expense or indemnify against any loss or liability incurred by the Trustee through negligence or bad faith. To secure the Company's payment obligations in this Section 9.07, the Trustee shall have a lien prior to the Notes on all money or property held or collected by the Trustee, except money or property held in trust to pay principal and interest on particular Notes. -37- Without prejudice to any other rights available to the Trustee under applicable law, when the Trustee incurs expenses or renders services after an Event of Default specified in Section 8.01(f) or (g) hereof occurs, the expenses and the compensation for the services are intended to constitute expenses of administration under any Bankruptcy Law. All amounts owing to the Trustee under this Section 9.07 shall be payable by the Company in United States dollars. Section 9.08 Replacement of Trustee. A resignation or removal of the Trustee and appointment of a successor Trustee shall become effective only upon the successor Trustee's acceptance of appointment as provided in this Section 9.08. The Trustee may resign by so notifying the Company. The Holders of a majority in principal amount of the then outstanding Notes may remove the Trustee by so notifying the Trustee and the Company. The Company may remove the Trustee if: (a) the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA (S) 310(b); (b) the Trustee is adjudged a bankrupt or an insolvent or an order for relief is entered with respect to the Trustee under any Bankruptcy Law; (c) a Custodian or public officer takes charge of the Trustee or its property; or (d) the Trustee becomes incapable of acting. If the Trustee resigns or is removed or if a vacancy exists in the office of Trustee for any reason, the Company shall promptly appoint a successor Trustee. Within one year after the successor Trustee takes office, the Holders of a majority in principal amount of the then outstanding Notes may appoint a successor Trustee to replace the successor Trustee appointed by the Company. If a successor Trustee does not take office within 60 days after the retiring Trustee resigns or is removed, the retiring Trustee, the Company or the Holders of at least 10% in principal amount of the then outstanding Notes may petition any court of competent jurisdiction for the appointment of a successor Trustee. If the Trustee fails to comply with Section 9.10 hereof, unless the Trustee's duty to resign is stayed as provided in TIA (S) 310(b), any Holder who has been a bona fide Holder of a Note for at least six months may petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. A successor Trustee shall deliver a written acceptance of its appointment to the retiring Trustee and to the Company. Thereupon the resignation or removal of the retiring Trustee shall become effective, and the successor Trustee shall have all the rights, powers and duties of the Trustee under this Indenture. The successor Trustee shall mail a notice of its succession to Holders. The retiring Trustee shall promptly transfer all property held by it as Trustee to the successor Trustee, subject to the lien provided for in Section 9.07 hereof. Notwithstanding replacement of the Trustee pursuant to this Section 9.08 hereof, the Company's obligations under Section 9.07 hereof shall continue for the benefit of the retiring trustee with respect to expenses and liabilities incurred by it prior to such replacement. -38- Section 9.09 Successor Trustee by Merger, Etc. If the Trustee consolidates, merges or converts into, or transfers all or substantially all of its corporate trust business (including the administration of this Indenture) to, another corporation, the successor corporation without any further act shall be the successor Trustee. Section 9.10 Eligibility; Disqualification. This Indenture shall always have a Trustee who satisfies the requirements of TIA (S) 310(a)(1) and (5). The Trustee shall always have a combined capital and surplus as stated in Section 12.10 hereof. The Trustee is subject to TIA (S) 310(b). Section 9.11 Preferential Collection of Claims Against Company. The Trustee is subject to TIA (S) 311(a), excluding any creditor relationship listed in TIA (S) 311(b). A Trustee who has resigned or been removed shall be subject to TIA (S) 311(a) to the extent indicated therein. ARTICLE X. DISCHARGE OF INDENTURE Section 10.01 Termination of Company's Obligations. This Indenture shall cease to be of further effect (except that the Company's obligations under Sections 9.07 and 10.02 hereof shall survive) when all outstanding Notes theretofore authenticated and issued have been delivered to the Trustee for cancellation and the Company has paid all sums payable hereunder. Section 10.02 Repayment to Company. The Trustee and the Paying Agent shall promptly pay to the Company upon request any excess money or securities held by them at any time. The Trustee and the Paying Agent shall pay to the Company upon request any money held by them for the payment of principal or interest that remains unclaimed for two years after the date upon which such payment shall have become due; provided, however, that the Company shall have first caused notice of such payment to the Company to be mailed to each Holder entitled thereto no less than 30 days prior to such payment. After payment to the Company, the Trustee and the Paying Agent shall have no further liability with respect to such money and Holders entitled to the money must look to the Company for payment as general creditors unless any applicable abandoned property law designates another Person. ARTICLE XI. AMENDMENTS, SUPPLEMENTS AND WAIVERS Section 11.01 Without Consent of Holders. The Company and the Trustee may amend or supplement this Indenture or the Notes without the consent of any Holder: -39- (a) to cure any ambiguity, omission, defect or inconsistency; (b) to provide for uncertificated Notes in addition to or in place of certificated Notes or to alter the provisions of Article II hereof (including the related definitions) in a manner that does not materially adversely affect any Holder; (c) to comply with Sections 5.12 and 7.01 hereof; (d) to reduce the conversion price; (e) to increase the aggregate principal amount of the Notes issuable pursuant to Section 2.02 hereof, in an amount not in excess of $18,750,000, in the event that the underwriters that are underwriting the Notes exercise the over-allotment option granted to them by the Company; (f) to make any other change that would provide any additional rights or benefits to the Holders or that does not adversely affect the legal rights hereunder of any such Holder; or (g) to comply with the requirements of the SEC in order to maintain the qualification of this Indenture under the TIA. Upon the request of the Company accompanied by a resolution of its Board of Directors authorizing the execution of any such amended or supplemental Indenture, and upon receipt by the Trustee of the documents described in Section 11.02 hereof, the Trustee shall join with the Company in the execution of any amended or supplemental Indenture authorized or permitted by the terms of this Indenture and to make any further appropriate agreements and stipulations that may be therein contained, but the Trustee shall not be obligated to enter into such amended or supplemental Indenture that affects its own rights, duties or immunities under this Indenture or otherwise. Section 11.02 With Consent of Holders. Subject to Section 8.07 hereof, the Company and the Trustee may amend or supplement this Indenture or the Notes with the written consent of the Holders of a majority in principal amount of the then outstanding Notes, including consents obtained in connection with a tender offer or exchange offer for the Notes. Subject to Sections 8.04 and 8.07 hereof, the Holders of a majority in principal amount of the Notes then outstanding may also waive compliance in a particular instance by the Company with any provision of this Indenture or the Notes. However, without the consent of each Holder affected, an amendment, supplement or waiver under this Section 11.02 may not: (a) reduce the principal amount of Notes whose Holders must consent to an amendment, supplement or waiver; (b) reduce the principal of or change the fixed maturity of any Note or alter the provisions of Section 6 of the Notes, except for repurchases of the Notes pursuant to Section 3.09 of this Indenture and Section 10 of the Notes; (c) reduce the rate of or change the time for payment or accrual of interest on any Note; (d) waive a default in the payment of the principal of or interest on any Note, except a rescission of acceleration of the Notes by the Holders of at least a majority in aggregate principal amount of the Notes and a waiver of the payment default that resulted from such acceleration; -40- (e) increase the Conversion Price; (f) make any Note payable in money other than that stated in the Notes; (g) make any change in Section 8.04 or 8.07 hereof; (h) waive a redemption payment with respect to any Note; (i) impair the right to convert the Notes into Class A Common Stock; (j) modify Article V or VI in a manner adverse to the Holders of Notes; and (k) make any change in the foregoing amendment and waiver provisions of this Article XI. To secure a consent of the Holders under this Section 11.02, it shall not be necessary for the Holders to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 11.02 becomes effective, the Company shall mail to Holders a notice briefly describing the amendment or waiver. Section 11.03 Compliance with Trust Indenture Act. Every amendment to this Indenture or the Notes shall be set forth in a supplemental indenture that complies with the TIA as then in effect. Section 11.04 Revocation and Effect of Consents. Until an amendment, supplement or waiver becomes effective, a consent to it by a Holder of a Note is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if notation of the consent is not made on any Note. However, any such Holder or subsequent Holder may revoke the consent as to his Note or portion of a Note if the Trustee receives the notice of revocation before the date on which the Trustee receives an Officers' Certificate certifying that the Holders of the requisite principal amount of Notes have consented to the amendment, supplement or waiver. The Company may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the provisions of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to consent to such amendment, supplement or waiver or to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No consent shall be valid or effective for more than 90 days after such record date unless consents from Holders of the principal amount of Notes required hereunder for such amendment or waiver to be effective shall have also been given and not revoked within such 90-day period. After an amendment, supplement or waiver becomes effective it shall bind every Holder, unless it is of the type described in any of clauses (a) through (j) of Section 11.02 hereof. In such case, the -41- amendment or waiver shall bind each Holder who has consented to it and every subsequent Holder that evidences the same debt as the consenting Holder's Note. Section 11.05 Notation on or Exchange of Notes. The Trustee may place an appropriate notation about an amendment or waiver on any Note thereafter authenticated. The Company in exchange for all Notes may issue and the Trustee shall authenticate new Notes that reflect the amendment or waiver. Failure to make such notation on a Note or to issue a new Note as aforesaid shall not affect the validity and effect of such amendment or waiver. Section 11.06 Trustee Protected. The Trustee shall sign all supplemental indentures, except that the Trustee may, but need not, sign any supplemental indenture that adversely affects its rights. ARTICLE XII. MISCELLANEOUS Section 12.01 Trust Indenture Act Controls. This Indenture is subject to the provisions of the TIA that are required to be incorporated into this Indenture (or, prior to the registration of the Notes pursuant to the Registration Rights Agreement, would be required to be incorporated into this Indenture if it were qualified under the TIA), and shall, to the extent applicable, be governed by such provisions. If any provision of this Indenture limits, qualifies, or conflicts with another provision which is required (or would be so required) to be incorporated in this Indenture by the TIA, the incorporated provision shall control. Section 12.02 Notices. Any notice or communication by the Company or the Trustee to the other is duly given if in writing and delivered in Person or mailed by first class mail to the other's address stated in Section 12.10 hereof. The Company or the Trustee by notice to the other may designate additional or different addresses for subsequent notices or communications. Any notice or communication to a Holder shall be mailed by first class mail to his address shown on the register kept by the Registrar. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above within the time prescribed, it is duly given, whether or not the addressee receives it. If the Company mails a notice or communication to Holders, it shall mail a copy to the Trustee and each Agent at the same time. All other notices or communications shall be in writing. -42- In case by reason of the suspension of regular mail service, or by reason of any other cause, it shall be impossible to mail any notice as required by the Indenture, then such method of notification as shall be made with the approval of the Trustee shall constitute a sufficient mailing of such notice. Section 12.03 Communication by Holders with Other Holders. Holders may communicate pursuant to TIA (S) 312(b) with other Holders with respect to their rights under this Indenture or the Notes. The Company, the Trustee, the Registrar and anyone else shall have the protection of TIA (S) 312(c). Section 12.04 Certificate and Opinion as to Conditions Precedent. Upon any request or application by the Company to the Trustee to take any action under this Indenture, the Company shall furnish to the Trustee: (a) an Officers' Certificate stating that, in the opinion of the signers, all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with; and (b) an Opinion of Counsel stating that, in the opinion of such counsel, all such conditions precedent have been complied with. Section 12.05 Statements Required in Certificate or Opinion. Each certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 4.02) shall include: (a) a statement that the Person signing such certificate or rendering such opinion has read such covenant or condition; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of such Person, such Person has made such examination or investigation as is necessary to enable such Person to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether or not, in the opinion of such Person, such condition or covenant has been complied with. Section 12.06 Rules by Trustee and Agents. The Trustee may make reasonable rules for action by, or a meeting of, Holders. The Registrar or Paying Agent may make reasonable rules and set reasonable requirements for its functions. Section 12.07 Legal Holidays. A "Legal Holiday" is a Saturday, a Sunday or a day on which banking institutions in the State of New York are not required to be open. If a payment date is a 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 -43- interest shall accrue for the intervening period. If any other operative date for purposes of this Indenture shall occur on a Legal Holiday then for all purposes the next succeeding day that is not a Legal Holiday shall be such operative date. Section 12.08 No Recourse Against Others. A director, officer, employee, agent, incorporator, stockholder or agent of the Company, as such, shall not have any liability for any Obligations of the Company under the Notes or this Indenture or for any claim based on, in respect of or by reason of such Obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. Section 12.09 Governing Law, submission to jurisdiction. THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF TIE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. Section 12.10 Counterparts and Facsimile Signatures. This Indenture may be executed by manual or facsimile signature in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. Section 12.11 Variable Provisions. The first certificate pursuant to Section 4.02 hereof shall be for the fiscal year ended December 31, 2001. The reporting date for Section 9.06 hereof is February 15, of each year. The first reporting date is February 15, 2002. The Trustee shall always have a combined capital and surplus of at least $100,000,000 as set forth in its most recent published annual report of condition. -44- The Company's address is: XM Satellite Radio Holdings Inc. 1500 Eckington Place, NE Washington, D.C. 20002 Telecopy: (202) _____________ Attention: Chief Financial Officer The Trustee's address is: United States Trust Company of New York 114 West 47/th/ Street New York, N.Y. 10036 Telecopy: (212) 852-1626 Attention: Corporate Trust Division Section 12.12 Governing Law, submission to jurisdiction. THE INTERNAL LAWS OF THE STATE OF NEW YORK SHALL GOVERN THIS INDENTURE AND THE NOTES, WITHOUT REGARD TO THE CONFLICT OF LAWS PROVISIONS THEREOF. Section 12.13 No Adverse Interpretation of Other Agreements. This Indenture may not be used to interpret another indenture, loan or debt agreement of the Company or an Affiliate. Any such indenture, loan or debt agreement may not be used to interpret this Indenture. Section 12.14 Successors. All agreements of the Company in this Indenture and the Notes shall bind its successor. All agreements of the Trustee in this Indenture shall bind its successor. Section 12.15 Severability. In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 12.16 Table of Contents, Headings, Etc. The Table of Contents, Cross-Reference Table, and headings of the Articles and Sections of this Indenture have been inserted for convenience of reference only, are not to be considered a part hereof, and shall in no way modify or restrict any of the terms or provisions hereof. -45- SIGNATURES IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, all as of the date first written above. XM SATELLITE RADIO HOLDINGS INC. By:________________________________________ Name: Title: UNITED STATES TRUST COMPANY OF NEW YORK, as Trustee By:_______________________________________ Name: Title: EX-4.16 3 0003.txt NOTES THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.01 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.06(a) OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO SECTION 2.11 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY. No. 1 $125,000,000 CUSIP No. 983759AA9 7.75% CONVERTIBLE SUBORDINATED NOTE DUE 2006 XM Satellite Radio Holdings Inc. XM Satellite Radio Holdings Inc., a Delaware corporation (the "Company"), promises to pay to Cede & Co. or registered assigns, the principal sum of ONE HUNDRED TWENTY FIVE MILLION DOLLARS ($125,000,000), or such other amount as is indicated on Schedule A hereof, on March 1, 2006, subject to the further provisions of this Note set forth on the reverse hereof which further provisions shall for all purposes have the same effect as if set forth at this place. Interest Payment Dates: March 1 and September 1, commencing September 1, 2001 Record Dates: February 15 and August 15 [REMAINDER OF PAGE INTENTIONALLY BLANK] IN WITNESS WHEREOF, XM Satellite Radio Holdings Inc. has caused this Note to be signed manually or by facsimile by two of its duly authorized officers. Dated:_________________________________ XM SATELLITE RADIO HOLDINGS INC. By:____________________________________ Name: Title: By:____________________________________ Name: Title: TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the 7.75% Convertible Subordinated Notes due 2006 described in the within-mentioned Indenture. United States Trust Company of New York, as Trustee By:__________________________________ Name: Title: REVERSE OF NOTE XM SATELLITE RADIO HOLDINGS INC. 7.75% Convertible Subordinated Note due 2006 1. Interest. XM SATELLITE RADIO HOLDINGS INC., a Delaware -------- corporation (the "Company"), is the issuer of 7.75% Convertible Subordinated Notes due 2006 (the "Notes"). The Notes will accrue interest at a rate of 7.75% per annum. The Company promises to pay interest on the Notes in cash semiannually on each March 1 and September 1, commencing on September 1, 2001, to Holders of record on the immediately preceding February 15 and August 15, respectively. Interest on the Notes will accrue from the most recent date to which interest has been paid, or if no interest has been paid, from March 6, 2001. Interest will be computed on the basis of a 360-day year of twelve 30-day months. The Company will pay interest on overdue principal at the interest rate borne by the Notes, compounded semiannually, and it shall pay interest on overdue installments of interest (without regard to any applicable grace period) at the same interest rate compounded semiannually. 2. Payments. All payments made by the Company on this Note shall be -------- made without deduction or withholding for or on account of, any and all present or future taxes, duties, assessments, or governmental charges of whatever nature unless the deduction or withholding of such taxes, duties, assessments or governmental charges is then required by law. 3. Method of Payment. The Company will pay interest on the Notes ----------------- (except with respect to defaulted interest, which may be paid at such earlier date as specified in the Indenture) to the Persons who are registered Holders of Notes at the close of business on the Record Date for the next Interest Payment Date even though Notes are canceled after the Record Date and on or before the Interest Payment Date. Holders must surrender Notes to a Paying Agent to collect principal and premium payments. The Company will pay principal and interest in money of the United States that at the time of payment is legal tender for payment of public and private debts. However, the Company may pay principal and interest, if any, by check payable in such money. It may mail an interest check to a Holder's address set forth in the register of Holders. If a Holder who holds at least $5.0 million aggregate principal amount of the Notes so requests, principal, premium, if any, and interest shall be paid by wire transfer of immediately available funds to an account previously specified in writing by such Holder to the Company and the Trustee. 4. Paying Agent, Conversion Agent and Registrar. The Trustee will -------------------------------------------- act as Paying Agent, Conversion Agent and Registrar in the City of New York, New York. The Company may change any Paying Agent, Conversion Agent or Registrar without prior notice. The Company or any of its Subsidiaries may act in any such capacity. 5. Indenture. The Company issued the Notes under an Indenture, ---------- dated as of March 6, 2001 (the "Indenture"), between the Company and United States Trust Company of New York, as Trustee. The terms of the Notes include those stated in the Indenture and those made part of the Indenture by the Trust Indenture Act of 1939 (15 U.S. Code (S)(S) 77aaa-77bbbb) (the "TIA") as in effect on the date of the Indenture. The Notes are subject to, and qualified by, all such terms, certain of which are summarized hereon, and Holders are referred to the Indenture and such Act for a statement of such terms. The Notes are unsecured general obligations of the Company limited to $125,000,000 in aggregate principal amount and subordinated in right of payment to all existing and future Senior Debt of the Company. 1 6. Optional Redemption. At any time on or after March 3, 2004, the ------------------- Company may redeem any portion of the Notes, in whole or in part, on at least 30 days but no more than 60 days' notice, at the following prices (expressed as a percentage of the principal amount), together with accrued and unpaid interest to, but excluding, the redemption date:
Redemption Period Redemption Price ----------------- ---------------- March 3, 2004 through March 2, 2005................................... 103.100% March 3, 2005 through February 28, 2006............................... 101.550%
and 100% of the principal amount on March 1, 2006. In the event the Company redeems less than all of the outstanding Notes, the Notes to be redeemed shall be selected by the Trustee in accordance with Section 3.02 of the Indenture. In the event a portion of an outstanding Note is selected for redemption and such Note is converted in part after such selection, the converted portion of such Note shall be deemed (so far as may be) to be the portion to be selected for redemption in accordance with Section 3.02 of the Indenture. The Company may not give notice of any redemption if the Company has defaulted in payment of interest and the default is continuing. 7. Notice of Redemption. Notice of redemption will be mailed at -------------------- least 30 days but not more than 60 days before the redemption date to each Holder of the Notes to be redeemed at such Holder's address of record. The Notes in denominations larger than $1,000 may be redeemed in part but only in integral multiples of $1,000. In the event of a redemption of less than all of the Notes, the Notes will be chosen for redemption by the Trustee in accordance with the Indenture. On and after the redemption date, interest ceases to accrue on the Notes or portions of them called for redemption. If this Note is redeemed subsequent to a Record Date with respect to any Interest Payment Date specified above and on or prior to such Interest Payment Date, then any accrued interest will be paid to the Person in whose name this Note is registered at the close of business on such Record Date. The above description of redemption of Notes is qualified by reference to, and is subject in its entirety by, the more complete description thereof contained in the Indenture. 8. Mandatory Redemption. Except as set forth in Section 9 below, -------------------- the Company will not be required to make mandatory redemption or repurchase payments with respect to the Notes. There are no sinking fund payments with respect to the Notes. 9. Repurchase at Option of Holder. If there is a Change in Control, ------------------------------ the Company shall be required to offer to purchase on the Purchase Date all outstanding Notes at a purchase price equal to 100% of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to the Purchase Date. Holders of Notes that are subject to an offer to purchase will receive a Change of Control Offer from the Company in accordance with Section 3.09 of the Indenture and may elect to have such Notes or portions thereof in authorized denominations purchased by completing the form entitled "Option of Holder to Elect Purchase" appearing below. 10. Subordination. The payment of the principal of, interest on or ------------- any other amounts due on the Notes is subordinated in right of payment to all existing and future Senior Debt of the Company, as described in the Indenture. Each Holder, by accepting a Note, agrees to such subordination and authorizes and directs the Trustee on its behalf to take such action as may be necessary or 2 appropriate to effectuate the subordination so provided and appoints the Trustee as its attorney-in-fact for such purpose. 11. Conversion. The holder of any Note has the right, exercisable at ---------- any time after 90 days following the Issuance Date and prior to the close of business (New York time) on the date of the Note's maturity, to convert the principal amount thereof (or any portion thereof that is an integral multiple of $1,000) into shares of Class A Common Stock at the initial Conversion Price of $12.225 per share, subject to adjustment under certain circumstances as set forth in the Indenture, except that if a Note is called for redemption, the conversion right will terminate at the close of business on the Business Day immediately preceding the date fixed for redemption (unless the Company shall default in making the redemption payment when it becomes due, in which case the conversion right shall terminate on the date such default is cured). To convert a Note, a holder must (1) complete and sign a conversion notice substantially in the form set forth below, (2) surrender the Note to a Conversion Agent, (3) furnish appropriate endorsements or transfer documents if required by the Registrar or Conversion Agent and (4) pay any transfer or similar tax, if required. No payment or other adjustment shall be made for accrued interest or dividends on any Class A Common Stock issued upon conversion of the Notes. If any Notes are converted during any period after any Record Date for the payment of an installment of interest but before the next Interest Payment Date, interest for such notes will be paid on the next Interest Payment Date, notwithstanding such conversion, to the Holders of such Notes. Any Notes that are, however, delivered to the Company for conversion after any Record Date but before the next Interest Payment Date must, except as described in the next sentence, be accompanied by a payment equal to the interest payable on such Interest Payment Date on the principal amount of Notes being converted. The payment to the Company described in the preceding sentence shall not be required if, during that period between a Record Date and the next Interest Payment Date, a conversion occurs on or after the date that the Company has issued a redemption notice and prior to the date of redemption stated in such notice. No fractional shares will be issued upon conversion, but a cash adjustment will be made for any fractional shares. A Note in respect of which a Holder has delivered an "Option of Holder to Elect Purchase" form appearing below exercising the option of such Holder to require the Company to purchase such Note may be converted only if the notice of exercise is withdrawn as provided above and in accordance with the terms of the Indenture. The above description of conversion of the Notes is qualified by reference to, and is subject in its entirety by, the more complete description thereof contained in the Indenture. 12. Denominations, Transfer, Exchange. The Notes are in registered --------------------------------- form, without coupons, in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered, and Notes may be exchanged, as provided in the Indenture. The Registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The Registrar need not exchange or register the transfer of any Note or portion of a Note selected for redemption (except the unredeemed portion of any Note being redeemed in part). Also, it need not exchange or register the transfer of any Note for a period of 15 days before a selection of Notes to be redeemed. 13. Persons Deemed Owners. The registered Holder of a Note shall be --------------------- treated as its owner for all purposes. 3 14. Unclaimed Money. If money for the payment of principal or --------------- interest remains unclaimed for two years, the Trustee and the Paying Agent shall pay the money back to the Company at its written request. After that, Holders of Notes entitled to the money must look to the Company for payment unless an abandoned property law designates another Person and all liability of the Trustee and such Paying Agent with respect to such money shall cease. 15. Defaults and Remedies. The Notes shall have the Events of --------------------- Default set forth in Section 8.01 of the Indenture. Subject to certain limitations in the Indenture, if an Event of Default occurs and is continuing (other than an Event of Default arising from certain events of bankruptcy, insolvency or reorganization set forth in the Indenture), the Trustee by notice to the Company or the Holders of at least 25% in aggregate principal amount of the then outstanding Notes by notice to the Company and the Trustee may declare all the Notes to be due and payable immediately. If an Event of Default arising from certain events of bankruptcy, insolvency or reorganization set forth in the Indenture occurs with respect to the Company, such principal of, premium, if any, and interest on the Notes shall become and be due and payable immediately without further action or notice. If an Event of Default arising from certain events of bankruptcy, insolvency or reorganization set forth in the Indenture occurs with respect to any Significant Subsidiary or Significant Subsidiaries of the Company, the Trustee by notice to the Company or the Holders of at least 25% in aggregate principal amount of the then outstanding Notes by notice to the Company and the Trustee may declare all the Notes to be due and payable immediately. The Holders of a majority in principal amount of the then outstanding Notes by written notice to the Trustee may on behalf of all Holders of the Notes waive an existing Default or Event of Default and its consequences except a continuing Default or Event of Default in the payment of the principal or interest on any Note. Holders may not enforce the Indenture or the Notes except as provided in the Indenture. Subject to certain limitations set forth in the Indenture, Holders of a majority in principal amount of the then outstanding Notes issued under the Indenture may direct the Trustee in its exercise of any trust or power. The Company must furnish annually compliance certificates to the Trustee. The above description of Events of Default and remedies is qualified by reference, and subject in its entirety, to the more complete description thereof contained in the Indenture. 16. Amendments, Supplements and Waivers. Subject to certain ----------------------------------- exceptions set forth in the Indenture, the Indenture or the Notes may be amended or supplemented with the consent of the Holders of a majority in principal amount of the then outstanding Notes (including consents obtained in connection with a tender offer or exchange offer for Notes), and any existing default may be waived with the consent of the Holders of a majority in principal amount of the then outstanding Notes. Without the consent of any Holder, the Indenture or the Notes may be amended among other things, to cure any ambiguity, defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for assumption of the Company's obligations to Holders, to reduce the conversion price, to make any change that does not adversely affect the rights of any Holder or to qualify the Indenture under the TIA or to comply with the requirements of the SEC in order to maintain the qualification of the Indenture under the TIA. 17. Trustee Dealings with the Company. The Trustee, in its --------------------------------- individual or any other capacity may become the owner or pledgee of the Notes and may otherwise deal with the Company or an Affiliate with the same rights it would have, as if it were not Trustee, subject to certain limitations set forth in the Indenture and in the TIA. Any Agent may do the same with like rights. 18. No Recourse Against Others. A director, officer, employee, -------------------------- incorporator, agent or shareholder of the Company, as such, shall not have any liability for any obligations of the Company under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations 4 or their creation. Each Holder of the Notes by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for the issue of the Notes. 19. Governing Law. THIS INDENTURE AND THE SECURITIES SHALL BE ------------- GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AS APPLIED TO CONTRACTS MADE AND PERFORMED WITHIN THE STATE OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK OR ANY FEDERAL COURT SITTING IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK IN RESPECT OF ANY SUIT, ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS INDENTURE AND THE SECURITIES, AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, JURISDICTION OF THE AFORESAID COURTS. THE COMPANY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO UNDER APPLICABLE LAW, TRIAL BY JURY AND ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF THE VENUE OF ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT AND ANY CLAIM THAT ANY SUCH SUIT, ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING HEREIN SHALL AFFECT THE RIGHT OF TIE TRUSTEE OR ANY SECURITYHOLDER TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION. 20. Authentication. The Notes shall not be valid until authenticated -------------- by the manual signature of an authorized officer of the Trustee or an authenticating agent. 21. Abbreviations. Customary abbreviations may be used in the name ------------- of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (= tenants by the entireties), JT TEN (= joint tenants with right of survivorship and not as tenants in common), CUST (= Custodian), and UGMA (= Uniform Gifts to Minors Act). The Company will furnish to any Holder of the Notes upon written request and without charge a copy of the Indenture. Request may be made to: XM Satellite Radio Holdings Inc. 1500 Eckington Place, NE Washington, DC 20002 Attention: [Investor Relations] 5 ASSIGNMENT FORM To assign this Note, fill in the form below: (I) or (we) assign and transfer this Note to __________________________________________ (Insert assignee's social security or tax I.D. no.) __________________________________________ __________________________________________ (Print or type assignee's name, address and zip code) and irrevocably appoint _________________________________ agent to transfer this Note on the books of the Company. The agent may substitute another to act for him. Your Signature:__________________________________________________________ (Sign exactly as your name appears on the other side of this Note) Date: __________________ Signature Guarantee: * ____________________________________________ _______________________ * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange OPTION OF HOLDER TO ELECT PURCHASE UPON A CHANGE IN CONTROL If you want to elect to have this Note or a portion thereof repurchased by the Company upon a Change in Control pursuant to Section 3.09 or 4.06 of the Indenture, check the box: [ ] If the purchase is in part, indicate the portion (in denominations of $1,000 or any integral multiple thereof) to be purchased: _________________ Your Signature:________________________________________________ (Sign exactly as your name appears on the other side of this Note) Date: ________________________ Signature Guarantee:** _________________________ ** Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. ELECTION TO CONVERT To XM Satellite Radio Holdings Inc.: The undersigned owner of this Note hereby irrevocably exercises the option to convert this Note, or the portion below designated, into Class A Common Stock of XM Satellite Radio Holdings Inc. in accordance with the terms of the Indenture referred to in this Note, and directs that the shares issuable and deliverable upon conversion, together with any check in payment for fractional shares, be issued in the name of and delivered to the undersigned, unless a different name has been indicated in the assignment below. If the shares are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto. Date:__________________ in whole ___ Portions of Note to be converted ($1,000 or integral multiples thereof): $______________ __________________________________________________ Signature Please Print or Typewrite Name and Address, Including Zip Code, and Social Security or Other Identifying Number __________________________________________________ __________________________________________________ __________________________________________________ Signature Guarantee:* ____________________________ ____________________________ * Signature must be guaranteed by a commercial bank, trust company or member firm of the New York Stock Exchange. SCHEDULE A SCHEDULE OF PRINCIPAL AMOUNT The initial principal amount of this Global Note shall be $125,000,000. The following increases or decreases in the principal amount of this Global Note have been made:
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EX-21.1 4 0004.txt SUBSIDIARIES Exhibit 21.1 Subsidiaries of XM Satellite Radio Holdings Inc. - ------------------------------------------------ XM Satellite Radio Inc. Subsidiaries of XM Satellite Radio Inc. - --------------------------------------- XM Radio Inc. XM Equipment Leasing LLC XM Innovations Inc. EX-23.1 5 0005.txt INDEPENDENT AUDITOR'S CONSENT 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 statements Nos. 333-47570, 333-93529 and 333-39176 on Forms S-3 and Nos. 333-92049 and 333- 42590 on Form S-8 of XM Satellite Radio Holdings Inc. and subsidiaries of our reports dated February 9, 2001 with respect to the consolidated balance sheets of XM Satellite Radio Holdings Inc. and subsidiaries (a development stage company) as of December 31, 1999 and 2000 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, 2000 and for the period from December 15, 1992 (date of inception) to December 31, 2000, and related schedule, which reports appear in the December 31, 2000 annual report on Form 10-K of XM Satellite Radio Holdings Inc. and subsidiaries. Our reports, dated February 9, 2001, contain 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, VA March 14, 2001 -----END PRIVACY-ENHANCED MESSAGE-----