XM Radio 2000 Annual Report Download - page 47

RADiO TO THE POWER OF X
XM SATELLiTE RADiO 2000 Annual Report
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 decod-
ing 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 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.
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