Prospectus Summary
This summary contains basic information about us and this offering. Because it is a summary, it does not contain all the information you should consider before investing in our common stock. Please read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and the related notes to those statements. This prospectus contains certain statistical data about our industry and the markets in which we plan to operate that comes from information published by or made available by consultants. Although we believe that this data is generally reliable, there is no assurance as to its accuracy. We caution you not to place undue reliance on this data. All numbers in this prospectus will be adjusted to reflect a for 1 stock split which will occur upon completion of this offering. Unless stated otherwise, all information in this prospectus assumes conversion of our outstanding convertible notes into common and preferred stock and no exercise of the underwriters' over-allotment option.
Our Business
We seek to become a premier nationwide provider of digital quality audio entertainment and information programming. We will transmit our service, which we will call "XM Radio," from our satellites to vehicle, home and portable radios. XM Radio plans to offer up to 100 channels of music, news, talk, sports and children's programming developed by us or third parties for a monthly subscription price of $9.95. We believe XM Radio will appeal to consumers because of our digital sound quality, variety of programming and nationwide coverage. We will build a subscriber base for XM Radio through multiple distribution channels, including an exclusive distribution arrangement with General Motors, other automotive manufacturers, car audio dealers and national electronics retailers. We expect to commence full commercial operation of our service in the second quarter of 2001.
We hold one of only two licenses issued by the Federal Communications Commission to provide satellite digital audio radio service in the United States. We will broadcast XM Radio throughout the continental United States from two of the most powerful commercial satellites available. These satellites, and a ground spare, are being built by Hughes Space and Communications Inc., the world's leading commercial satellite contractor, and Alcatel Space Industries, a leading manufacturer of satellite communications electronics. A network of terrestrial repeaters serving up to 70 of the largest metropolitan areas will augment our satellite signal coverage.
We have contracts with four leading consumer electronics manufacturers to develop, manufacture and distribute XM radios. Our radios will be capable of receiving both XM Radio and traditional AM/FM stations. One of these manufacturers, Delco Electronics Corporation, a subsidiary of Delphi Automotive Systems, is the leading original equipment manufacturer of radios for the automobile industry, producing approximately 33% of original equipment automobile radios in the United States in 1997. Delphi-Delco is also the leading manufacturer of automobile radios sold in General Motors vehicles. Two of our other manufacturers, Pioneer Electronics Corporation and Alpine Electronics, together produced over 31% of radios sold in the United States in 1997 for installation in automobiles after purchase, so-called aftermarket radios. SHARP Corporation, a consumer electronics company, will develop and distribute XM radios for home and portable use. STMicroelectronics, a leading car audio chipset manufacturer, will design and produce chipsets for XM radios. STMicroelectronics developed similar technology being used in an international satellite radio system.
We intend to offer our consumers a unique listening experience by providing up to 100 channels, coast-to-coast coverage and digital quality sound. We believe that the quality and diversity of our programming will be key drivers of consumer interest in our service. To that end, we have developed a unique programming strategy that offers consumers . Original music and talk channels created by the company . Channels created by brand name content providers . The availability of commercial-free and limited-advertising channels XM Originals Through a programming unit in the company called "XM Originals", we will create a significant number of original channel formats with content focusing on popular music such as oldies, rock and country, and on new and innovative formats, including jazz, blues, reggae and pop classical. These formats will include artists with strong music sales and concert revenue who do not get significant airplay on traditional AM/FM radio stations. We also intend to brand individual channels creating a specific station personality and image for each using compelling on-air talent and other techniques to attract listeners in our target market segments. We have hired a team of programming professionals with a proven track record of introducing new radio formats and building local and national listenership.
Brand Name Programming Partners We intend to complement our original channels with a variety of unique and diverse channels provided to us by brand name programming providers. We already have signed contracts representing at least 24 channels with numerous well- known specialty and niche programmers that will provide brand name content for XM Radio. These companies include Media Radio
- Bloomberg News Radio - Hispanic Broadcasting Corporation (formerly Heftel)
- USA Today - Clear Channel Communications
- CNNfn - Radio One
- CNN en Espanol - Salem Communications
- CNN Sports Illustrated - AsiaOne
- C-SPAN Radio - One-On-One Sports
- Black Entertainment
Television - BBC World Service
- DIRECTV
Combination of Commercial-Free and Limited-Advertising Channels We will provide a number of commercial-free music channels covering popular music formats. In addition, our limited-advertising channels will carry less than half the advertising of a typical AM/FM radio station.
Our Investors and Strategic Partners We have raised $330.8 million in financing, net of expenses and repayment of debt, from investors and strategic partners. Our strategic investor group includes leaders in industries that are closely related to our business: automotive manufacturing, direct satellite broadcasting and radio broadcasting. We expect to receive assistance launching and operating our business from the following investor companies.
. General Motors, the automotive market leader, sold approximately 4.5 million automobiles in 1998, representing more than 29% of the United States market. The OnStar division of General Motors will install XM radios in General Motors vehicles and exclusively market our service to General Motors vehicle buyers. General Motors is also the parent company of Hughes, our satellite manufacturer.
. DIRECTV is a subsidiary of Hughes Electronics and the largest provider of satellite television services in the United States with over 7 million subscribers. We expect to benefit from DIRECTV's experience in marketing and operating subscription broadcast service around the world.
. Clear Channel Communications is the second largest radio broadcaster in the United States, operating 625 stations across the country. We expect Clear Channel to provide us with programming, technical and advertising sales support.
. American Mobile Satellite Corporation is a leading provider of nationwide wireless data services in the United States.
Our Opportunity
We believe that there is a significant market for XM Radio. Market data show strong demand for radio service. Over 75% of the entire United States population age 12 and older listens to the radio daily, and over 95% listens to the radio weekly. People listen to the radio an average of 3.2 hours a day, with an estimated 42% of radio listening done in the car. In 1997, United States consumers bought approximately 15.7 million factory/dealer original equipment automobile radios, 7.4 million aftermarket automobile radios and 1.2 million aftermarket automobile CD changers. In addition, radio advertising revenue was $15.4 billion in 1998 and is projected to continue to grow at over 9% annually through 2002.
We believe our national subscription service will complement traditional local radio and that XM Radio will be attractive to underserved radio listeners who want expanded radio choices. Approximately 50% of all commercial radio stations in the top 268 radio markets in the United States use one of only three programming formats. Over 36 million people live beyond these 268 radio markets, limiting the variety and quality of their radio programming choices. In addition, artists representing 21% of music sales receive little or no airplay on traditional AM/FM radio.
We believe that people will subscribe to our service because we will offer a large number of channels, coast-to-coast coverage, diverse programming and superior digital quality sound. Consumers in the United States have demonstrated the willingness to pay for additional programming choices. As of year-end 1998, more than 76% of households in the United States subscribed to cable or satellite television services at an average cost of $31 per month. A market study conducted for us by Critical Mass Media, a leading radio research firm, projects that between 34 million and 43 million customers would be willing to pay approximately $9.95 per month for satellite radio service, and between $200 and $400 for a satellite radio.
Our Strategy
Offer Unique Programming Tailored for Specific Audiences We expect the diversity of our programming will appeal to a large audience, including urban and rural listeners of virtually all ages, ethnicities, economic groups and specialty interests. We intend to tailor our programming and marketing to appeal to specific groups that our research has shown are most likely to subscribe to our satellite radio service.
Establish Broad Distribution Channels for XM Radios We expect to establish several broad distribution channels for XM Radio including . Exclusive distribution agreement with General Motors. General Motors has agreed to exclusively distribute and market the XM Radio service and to install XM radios in General Motors vehicles. We are currently in discussions with other car manufacturers regarding additional distribution agreements.
. Distribution through radio manufacturers. We have an agreement with Delphi-Delco to develop, manufacture and distribute XM radios for installation in new cars, and have contracts with Pioneer, Alpine and SHARP, leading radio manufacturers with strong retail and dealer distribution networks in the United States.
. Rural market distribution/alternative distribution. We intend to market our satellite radio service in rural areas using distribution channels similar to direct broadcast satellite television and through alternative distribution opportunities such as catalog/direct marketing, the Internet and marketing through affinity groups.
Maximize Revenue Through Dual Sources We expect to generate revenue by charging a monthly subscription fee of $9.95 and selling limited advertising time on a number of our channels. XM Radio offers a totally new national radio platform for advertisers that solves many of the implementation problems associated with buying radio advertising nationally on a spot or syndicated basis. Additionally, by using our national platform to aggregate geographically disparate groups through affinity and niche programming, we will provide advertisers an effective way to market products and services to these groups. We believe that sales of advertising time will be a significant source of revenue as our subscriber base grows.
Partner with World Class Companies to Reduce Technology Risk We have contracted with world class technology companies to implement the XM Radio system. We believe that the benefits of having these associations will significantly reduce the risks involved in bringing XM Radio to market. These technology companies include Hughes and Alcatel (satellites); Delphi-Delco, Alpine, Pioneer and SHARP (car and home radios); STMicroelectronics (chipsets); and LCC International (repeater network).
Our principal executive offices are located at 1250 23rd Street, N.W., Washington, D.C. 20037-1100, and our telephone number is (202) 969-7100. We also maintain an Internet site on the World Wide Web at http://www.xmradio.com. Information contained at our web site is not, and should not be deemed to be, a part of this prospectus.
The Offering
Class A common stock offered... shares
Common stock to be outstanding
after the offering:
Class A...................... shares (1)
Class B ..................... shares (2)
Total...................... shares
Use of proceeds............. We expect to use the net proceeds from this offering to fund a portion of our estimated expenses, including ongoing funding and scheduled milestone payments on our satellite contracts, continued development and build-out of the XM Radio system, and working capital and general corporate purposes.
Proposed Nasdaq National Market symbol.............. XMSR (1) The Class A common stock outstanding after this offering is based on the number of shares outstanding as of , 1999, and includes shares of Class A common stock issuable upon conversion of notes which convert automatically into such common stock at the closing of this offering. It excludes
. shares of Class A common stock issuable upon exercise of outstanding
options exercisable at an exercise price of $ per share;
. shares of Class A common stock issuable upon conversion of Series A convertible preferred stock which will be issued upon conversion of notes that convert automatically at the closing of this offering; and . shares of Class A common stock issuable upon conversion of Class B common stock, which convert on a one-for-one basis.
(2) The Class B common stock outstanding after this offering is based on the number of shares outstanding as of , 1999, and includes shares of Class B common stock issuable upon conversion of notes which convert automatically into such common stock at the closing of this offering. The Class B common stock is substantially identical to Class A common stock, except that it has three votes per share (as compared to one vote per share for Class A common stock).
Summary Consolidated Financial Data
Years Ended December 31, Six Months Ended June 30, December 15,
----------------------------------------------- ------------------------------------------------- 1992
1998 1999 (Date of
1998 Pro 1999 Pro Inception)
1997 1998 Pro Forma As 1998 1999 Pro Forma As to June 30,
Actual Actual Forma (1) Adjusted (1)(2) Actual Actual Forma (1) Adjusted (1)(2) 1999 (3)
(In thousands, except share data)
Statements of Operations Data (1): Revenue.......... $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ -- Operating expenses: Research and development.... -- 6,941 6,941 6,941 3,867 1,378 1,378 1,378 8,319 Professional fees........... 1,090 5,242 5,242 5,242 3,723 2,560 2,560 2,560 8,892 General and administrative.. 20 4,010 7,014 7,014 542 4,503 6,005 6,005 8,533 Total operating expenses....... 1,110 16,193 19,197 19,197 8,132 8,441 9,943 9,943 25,744 Operating loss... (1,110) (16,193) (19,197) (19,197) (8,132) (8,441) (9,943) (9,943) (25,744) Other expense-- interest income (expense), net.. (549) 26 (18,218) 26 -- 76 (8,204) 76 (447) Net loss......... $ (1,659) $ (16,167) $ (37,415) $(19,171) $ (8,132) $ (8,365) $ (18,147) $ (9,867) $(26,191) Net loss per share--basic and diluted......... $(13,941) $(129,336) $(299,320) $(65,056) $(66,920) $(145,176) Weighted average shares used in computing net loss per share-- basic and diluted......... 119 125 125 125 125 125 June 30, 1999 Pro Forma December 31, Pro As 1998 Actual Forma (4) Adjusted (4)(5) (In thousands)
Balance Sheets Data: Cash and cash equivalents.............................................. $ 310 $ 163 $ 96,763 $235,513 System under construction.............................................. 169,029 261,653 261,653 261,653 Total assets........................................................... 170,485 263,901 415,963 543,463 Total debt............................................................. 140,298 179,134 354,134 348 Total liabilities...................................................... 177,668 279,449 386,449 32,663 Stockholders' equity (deficit)......................................... (7,183) (15,548) 29,514 510,800
(1) The information in this column gives effect to (a) the amortization of goodwill and other intangibles arising from American Mobile's acquisition of debt and equity interests in our company from WorldSpace; (b) the amortization of $11.3 million deferred financing fees; and (c) interest in excess of amounts that would be capitalized arising from the issuance of $250.0 million Series A subordinated convertible notes, as if all such transactions had been consummated on January 1, 1998.
(2) The information in this column gives effect to the elimination of the amortization of $11.3 million deferred financing fees and interest expense related to the $250.0 million Series A subordinated convertible notes upon the mandatory conversion of the notes into 196.1896 shares of Series A convertible preferred stock and 294.2844 shares of Class A common stock as if all such transactions had been consummated on January 1, 1998.
(3) Business activity for the period from December 15, 1992 (date of inception) through December 31, 1996 was insignificant.
(4) The information in this column gives effect to (a) American Mobile's acquisition of debt and equity interests in our company from WorldSpace; (b) our issuance of $250.0 million Series A subordinated convertible notes, net of repayment of $75.0 million of debt and related fees and expenses of $11.3 million; (c) payments to vendors of $68.0 million; and (d) the exchange of the outstanding options and debt held by American Mobile for a new convertible note, which is convertible into Class B common stock at a rate of $462,728 per share as if each had occurred on June 30, 1999.
(5) The information in this column gives effect to (a) the completion of this offering for an estimated $150.0 million less underwriters discounts and commissions and related fees and expenses of $11.3 million; and (b) the mandatory conversion of $250.0 million Series A subordinated convertible notes into 196.1896 shares of Series A convertible preferred stock and 294.2844 shares of Class A common stock and the mandatory conversion of an aggregate of $103.8 million of American Mobile convertible notes and the related accrued interest into 202.9848 shares of Class B common stock concurrently with this offering, as if each had occurred on June 30, 1999.