XM Radio 2001 Annual Report Download - page 57

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XM SATELLiTE RADiO 2 001 Annual Report
(e) Terrestrial Repeater System Contracts
As of December 31 , 2001, the Company had incurred aggregate costs of approximately $243,500,000 for its
terrestrial repeater system. These costs covered the capital costs of the design, development and installation
of a system of terrestrial repeaters to cover approximately 60 cities and metropolitan areas. In August 1999, the
Company signed a contract with LCCI calling for engineering and site preparation. As of December 31 , 2001, the
Company had paid $109,860,000 and accrued an additional $15 ,407,000 under this contract. The Company also
entered into a contract effective October 2 2, 1999 with Hughes 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, 2001, the Company had paid $95,788,000 and accrued an additional $7,685,000 under this contract.
(f) GM Distribution Agreement
The Company has signed a long-term distribution agreement with the OnStar division of GM providing for the
installation of XM radios in GM vehicles. During the term of the agreement, which expires 12 years from the
commencement date of the Company’s commercial operations, GM 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-GM vehicles that are sold for use in the
United States. The Company has significant annual, fixed payment obligations to General Motors through 2004.
These payments approximate $35 ,000,000 in the aggregate during this period. Additional annual fixed payment
obligations beyond 2004 range from less than $ 35,0 00,000 to approximately $130,000,000 through 2009,
aggregating approximately $400,0 00,0 00. In order to encourage the broad installation of XM radios in GM
vehicles, the Company has agreed to subsidize a portion of the cost of XM radios, and to make incentive payments
to GM when the owners of GM vehicles with installed XM radios become subscribers for the Company’s service.
The Company must also share with GM a percentage of the subscription revenue attributable to GM vehicles with
installed XM radios, which percentage increases until there are more than 8 million GM vehicles with installed XM
radios. The Company will also make available to GM 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, Inc.’s (“Sirius Radio”) service. The agreement is subject to
renegotiations if, four years after the commencement of the Company’s commercial operations and at two-year
intervals thereafter GM does not achieve and maintain specified installation levels of GM 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. GM’s 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. Prior to 2001, the Company had not incurred any costs under the contract. As of December
31, 2001, the Company has paid $608,000 and accrued costs of $656,000 under the agreement.
(g) 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. The companies have agreed
to seek arbitration to resolve issues with respect to certain existing technology. 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.
FiNANCiALS 2001
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