XM Radio 2001 Annual Report Download - page 28

26 XM SATELLiTE RADiO 2 0 0 1 Annual Report
Funds Required in 2002 and Beyond
Although we commenced nationwide commercial operations in November 2001, we expect to need significant
additional funds to cover our cash requirements before we generate sufficient cash flow from operations to
cover our expenses. We estimate that our existing resources would be sufficient in the absence of additional
financing to cover our estimated funding needs into the fourth quarter of 2002. We estimate that we will
need an additional $40 million to $65 million through the end of 2002, and we will require additional funding
thereafter. These estimates may change, and we may need additional financing in excess of these estimates.
Funds will be needed to cover broadcasting operations, sales and marketing, general corporate purposes and
further development of the XM Radio system. Sales and marketing 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, however, since they vary depending upon
different criteria, but they are expected to be substantial. In addition, our ability to generate revenues and ultimately
to become profitable will depend upon several factors, including whether we can attract and retain enough subscribers
and advertisers; whether our system continues to operate at an acceptable level; whether we compete successfully;
and whether the FCC grants us all additional necessary authorizations in a timely manner.
We currently expect to satisfy our continuing funding requirements 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
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.
Our need for additional funds may also be affected by future developments. In September 2001, we were advised
by Boeing Satellite of a progressive degradation problem with the solar array output power of 702 class satellites,
including XM “Rock” and XM “Roll.” At the present time, the output power of the solar arrays and the broadcast
signal strength are above minimum acceptable levels and are expected to remain that way at least through 2005,
permitting full operation of the XM System (based on patterns projected by Boeing Satellite). We have advised
our insurance carriers of the situation and believe that should we experience a total or partial loss, we would have
adequate insurance coverage, although there is no assurance that would be the case. Since the issue is common
to 702 class satellites, the manufacturer is closely watching the progression of the problem, including data from a
satellite in orbit approximately 18 months longer than XM “Rock” and XM “Roll.” With this 18-month advance visibility
of performance levels, insurance arrangements in place, a spare satellite under construction that is being modified
to address the solar array anomaly and availability of additional satellites, we believe that we will be able to launch
additional satellites prior to the time the solar power problem might cause the broadcast signal strength to fall
below acceptable levels. Our management will continue to monitor this situation carefully over the next few years.
Contractual Obligations and Commercial Commitments
We are obligated to make significant payments under a variety of contracts and other commercial arrangements,
including the following.
Marketing and Distribution Arrangements. We have entered into various joint sales, marketing and distribution
agreements. Under the terms of these agreements, we are obligated to provide incentives, subsidies and commissions
to other entities that may include fixed payments, per-unit radio and subscriber amounts and revenue sharing
arrangements. We have subsidized the manufacture of certain component parts of XM radios in order to provide
attractive pricing to our customers. The subsidies are charged to expense when the radios are manufactured or
shipped from the factory. Consequently, the expense is most often recognized in advance of when revenue, if
any, is realized. 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. During the years ended December 31 , 1999, 2000 and 2001 we incurred expenses of $0, $0 and $19.5
million, respectively, in relation to these agreements. The amount of these costs will vary in future years, but is
expected to increase in the next year as the number of subscribers and revenue increase.
AMERiCA’S FiRST SATELLiTE RADiO SERViCE
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