XM Radio 2000 Annual Report Download - page 27

XM SATELLiTE RADiO 2000 Annual Report
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 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 (“FASB”) 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 vest-
ed 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.
FiNANCiALS 2000
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