XM Radio 2001 Annual Report Download - page 56

54 XM SATELLiTE RADiO 2 0 0 1 Annual Report
(15) Commitments and Contingencies
(a) DARS License
The Company’s DARS license is valid for eight years upon successful launch and orbital insertion of the satellites
and can be extended by the Company. The DARS license requires that the Company comply with a construction
and launch schedule specified by the FCC for each of the two authorized satellites, which has occurred. The FCC
has the authority to revoke the authorizations and in connection with such revocation could exercise its authority
to rescind the Company’s license. The Company believes that the exercise of such authority to rescind the license
is unlikely. Additionally, the FCC has not yet issued final rules permitting the Company to deploy its terrestrial
repeaters to fill gaps in satellite coverage. The Company is operating its repeaters on a non-interference basis
pursuant to a grant of special temporary authority from the FCC, which expired March 18, 2002. On March 11,
2002, the Company applied for an extension of this special temporary authority and can continue to operate its
terrestrial repeaters pursuant to the special temporary authority pending a final determination on this extension
request. This authority is currently being challenged by operators of terrestrial wireless systems who have asserted
that the Company’s repeaters may cause interference.
(b) Application for Review of DARS License
One of the losing bidders for the DARS licenses filed an Application for Review by the full FCC of the Licensing
Order that granted the Company its DARS license. The Application for Review alleges that a former investor had
effectively taken control of the Company without FCC approval. The FCC has denied the Application for Review
and the losing bidder has appealed to the United States Court of Appeals for the District of Columbia Circuit. The
FCC or the U.S. Court of Appeals has the authority to overturn the award of the DARS license should they rule in favor
of the losing bidder. Although the Company believes that its right to the DARS license will withstand the challenge
as the former investor is no longer a stockholder in the Company, no prediction of the outcome of this challenge
can be made with any certainty. The FCC’s approval of the transfer of control of the DARS license to a diffuse
group of owners, granted in December 2000 , is conditioned upon the outcome of the application for review.
(c) Technology Licenses
Effective January 1, 1998, XMSR entered into a technology licensing agreement with Motient and WorldSpace
Management Corporation (“WorldSpace MC”) by which as compensation for certain licensed technology then
under development to be used in the XM Radio System, XMSR will pay up to $14,3 00,000 to WorldSpace MC
over a ten-year period. As of December 31, 2001, XMSR incurred costs of $6,69 6,000 payable to WorldSpace
MC. 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 Motient or WorldSpace MC should such developments
prove unsuccessful. XMSR maintains an accrual of $5,357,000 payable to WorldSpace MC for quarterly royalty
payments to be made after XMSR recognizes $5,000,000 in revenue.
(d) Satellite Contract
During the first half of 1999, the Company and BSS 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. BSS has delivered two satellites in orbit and is to complete
the construction of a ground spare satellite. BSS has also provided ground equipment and software used in the
XM Radio System and certain launch and operations support services. The contract also provides for in-orbit
incentives to be earned depending on the performance of the in-orbit satellites over their useful lives. Such payments
could total up to an additional $70 ,183,000 over the useful lives of the satellites. As of December 31 , 2001,
the Company had paid $470,376,000 under the satellite contract and had accrued $741,000.
On December 5, 2001, the Company and Boeing amended the satellite contract so as to permit the deferral of
approximately $31 million of payments to be made under the agreement, as well as to provide certain additional
rights and obligations to the Company, including the launch of the ground spare satellite on the SeaLaunch
launch vehicle should the ground spare satellite be launched between specified dates. Under the amendment,
deferred amounts must be repaid by December 5, 2006 and the amounts deferred bear interest at the rate of
8%, compounded annually, and are payable quarterly in arrears.
AMERiCA’S FiRST SATELLiTE RADiO SERViCE
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