XM Radio 1999 Annual Report Download - page 48

46 XM RADiO
taken control of the Company without FCC approval. The FCC or the U.S. Court of Appeals has the authority to
overturn the award of the FCC license should they rule in favor of the losing bidder. Although the Company
believes that its right to the FCC license will withstand the challenge as WSI is no longer a stockholder in the
Company, no prediction of the outcome of this challenge can be made with any certainty.
(c) Technical Services
Effective January 1, 1998, the Company entered into agreements with AMSC and WorldSpace Management
Corporation (“WorldSpace MC”), an affiliate of WSI, in which AMSC and WorldSpace MC would provide technical
support in areas related to the development of a DARS system. Payments for services provided under these
agreements are made based on negotiated hourly rates. These agreements may be terminated by the parties on
or after the date of the commencement of commercial operation following the launch of the Company’s first
satellite. There are no minimum services purchase requirements. The Company incurred costs of $413,000 and
$224,000 under its agreement with AMSC during 1998 and 1999, respectively. The Company incurred costs of
$4,357,000 and $0 under its agreement with WorldSpace MC during 1998 and 1999, respectively.
(d) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing agreement with AMSC and WorldSpace MC
by which as compensation for certain licensed technology currently under development to be used in the XM
Radio system, XMSR will pay up to $14,300,000 to WorldSpace MC over a ten-year period. XMSR incurred
costs of $6,624,000 and $50,000, payable to WorldSpace MC, under the agreement during 1998 and 1999,
respectively. Any additional amounts to be incurred under this agreement are dependent upon further
development of the technology, which is at XMSR’s option. No liability exists to AMSC or WorldSpace MC should
such developments prove unsuccessful. The Company maintains an accrual of $5,046,000, payable to
WorldSpace MC, for quarterly royalty payments to be made. In addition, XMSR agreed to pay 1.2 percent of
quarterly net revenues to WorldSpace MC and a royalty of $0.30 per chipset, payable to WorldSpace MC, for
equipment manufactured using certain source encoding and decoding signals technology.
(e) Satellite Contract
During the first half of 1999, the Company and Hughes Space and Communications, Inc. (“Hughes”) amended
the satellite contract to construct and launch the Company’s satellites to implement a revised work timetable,
payment schedule to reflect the timing of the receipt of additional funding, and technical modifications. The
Company expects to incur total payment obligations under this contract of approximately $541,300,000, which
includes amounts the Company expects to pay pursuant to the exercise of the option to build the ground spare
satellite and certain financing costs and in-orbit incentive payments. As of December 31, 1998 and 1999, the
Company had paid $40,481,250 and $183,918,000, respectively, under this contract.
(f) LCC International Services Contract
In August 1999, the Company signed a contract with LCC International, Inc., a related party, for the engineering
for its terrestrial repeater network. Payments by the Company under this contract are expected to aggregate
approximately $115,000,000 through April 15, 2001. As of December 31, 1999, the Company has paid
$6,578,000 under this contract.
(g) General Motors Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar division of General Motors
providing for the installation of XM radios in General Motors vehicles. During the term of the agreement, which
expires 12 years from the commencement date of the Company’s commercial operations, General Motors has
agreed to distribute the service to the exclusion of other S-band satellite digital radio services. The Company
will also have a non-exclusive right to arrange for the installation of XM radios included in OnStar systems in
non-General Motors vehicles that are sold for use in the United States. The Company has significant annual,