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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
COMMISSION FILE NO. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
Incorporation or organization)
300 KNIGHTSBRIDGE PARKWAY
LINCOLNSHIRE, IL 60069
847-478-4200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of common stock outstanding at November 8, 2004: 34,562,901
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MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine
Months Ended September 30, 2003 and 2004 3
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003 4
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 2003 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 42
Item 4. Controls and Procedures 42
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 44
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 44
Item 3. Defaults Upon Senior Securities 45
Item 6. Exhibits 46
2
PART I- FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
--------- --------- --------- ---------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
REVENUES
Services and related revenue $ 7,329 $ 10,662 $ 27,446 $ 38,209
Sales of equipment 1,024 1,389 3,846 3,204
--------- --------- --------- ---------
Total revenues $ 8,353 $ 12,051 $ 31,292 $ 41,413
--------- --------- --------- ---------
COSTS AND EXPENSES
Cost of services and operations (including stock-based compensation of
$70 and $2,028, respectively, for the three and nine months ended
September 30, 2004; exclusive of depreciation and amortization below) 7,768 12,461 29,532 39,999
Cost of equipment sold (exclusive of depreciation and
amortization below) 939 1,485 3,705 3,607
Sales and advertising (including stock-based compensation
of $(85) and $804, respectively, for the three and nine
months ended September 30, 2004; exclusive of
depreciation and amortization below) 166 1,065 2,058 3,782
General and administrative (including stock-based
compensation of $102 and $1,131, respectively, for the
three and nine months ended September 30, 2004;
exclusive of depreciation and amortization below) 2,026 3,846 6,902 10,393
Restructuring Charges -- -- 6,264 --
Depreciation and amortization 3,686 5,454 12,071 16,312
--------- --------- --------- ---------
Total Costs and Expenses 14,585 24,311 60,532 74,093
--------- --------- --------- ---------
Operating loss (6,232) (12,260) (29,240) (32,680)
--------- --------- --------- ---------
Interest expense, net (556) (1,638) (3,595) (4,592)
Write-off of deferred financing fees -- -- (8,052) --
Other income, net 66 12 265 819
Other income from Aether 650 180 1,957 1,956
Gain on asset disposal 2 51 2 51
(Loss) on impairment of intangible asset -- (5,535) -- (5,535)
Gain on debt and capital lease retirement -- -- 802 --
Equity in loss of Mobile Satellite Ventures (3,779) (3,155) (8,617) (7,768)
--------- --------- --------- ---------
Net (loss) $ (9,849) $(22,345) $(46,478) $(47,749)
========= ========= ========= =========
Basic and Diluted (Loss) Per Share of Common Stock::
Net (Loss), basic and diluted $ (0.29) $ (0.89) $ (1.59) $ (1.90)
Weighted-Average Common Shares Outstanding - basic and
diluted 33,418 25,170 29,323 25,128
========= ========= ========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
3
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
SEPTEMBER 30, 2004 DECEMBER 31, 2003
------------------ -----------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 16,742 $ 3,618
Restricted cash and short-term investments -- 504
Accounts receivable-trade, net of allowance for doubtful
accounts of $298 at September 30, 2004 and $759 at
December 31, 2003 2,076 3,804
Inventory 96 240
Due from Mobile Satellite Ventures, net 100 93
Deferred equipment costs 1,453 3,765
Assets held for sale 271 2,734
Other current assets 1,220 5,091
---------- ----------
Total current assets 21,958 19,849
---------- ----------
RESTRICTED INVESTMENTS 51 1,091
PROPERTY AND EQUIPMENT, net 21,822 31,381
FCC LICENSES AND OTHER INTANGIBLES, net 69,809 74,021
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 11,993 22,610
DEFERRED CHARGES AND OTHER ASSETS 4,519 8,076
---------- ----------
TOTAL ASSETS $ 130,152 $ 157,028
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 8,765 12,365
Deferred equipment revenue 1,512 3,795
Deferred revenue and other current liabilities 5,018 11,005
Vendor financing commitment, current -- 2,413
Obligations under capital leases, current -- 1,454
---------- ----------
Total current liabilities 15,295 31,032
---------- ----------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion -- 1,642
Vendor financing commitment, net of current portion -- 2,401
Notes payable, including accrued interest thereon -- 22,885
Term credit facility, including accrued interest thereon -- 4,914
Other long-term liabilities 251 1,347
---------- ----------
Total long-term liabilities 251 33,189
---------- ----------
Total liabilities 15,546 64,221
---------- ----------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
September 30, 2004 and December 31, 2003, no shares issued or
outstanding at September 30, 2004 or
December 31, 2003 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares
authorized
and 34,529,958 and 25,196,840 shares issued and
outstanding at September 30, 2004 and at December 31,
2003, respectively 345 252
Additional paid-in capital 256,541 198,743
Common stock purchase warrants 25,878 15,492
Accumulated deficit (168,158) (121,680)
---------- ----------
STOCKHOLDERS' EQUITY 114,606 92,807
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,152 $ 157,028
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
4
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004
AND THE NINE MONTHS ENDED SEPTEMBER 30, 2003
(in thousands)
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(46,478) $(47,749)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 12,071 16,312
Equity in loss of MSV 8,617 7,768
Restructuring charges, fixed asset disposals 2,798 --
(Gain) loss on disposal of assets -- 479
Gain on debt restructuring (802) (405)
Issuance of warrants -- 927
Write-off of deferred financing fees 8,052 --
Non cash amortization of deferred financing costs 2,026 1,531
Non cash stock compensation 3,990 1,216
Impairment of other intangibles -- 5,535
Changes in assets and liabilities, net of acquisitions
and dispositions:
Inventory 144 551
Accounts receivable -- trade 1,728 4,403
Other current assets 6,867 2,482
Accounts payable and accrued expenses (3,449) 805
Accrued interest (3,080) 1,602
Deferred revenue and other deferred items (7,062) 368
--------- ---------
Net cash (used in) operating activities (14,578) (4,175)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from MSV note 2,000 --
Proceeds from sale of property and equipment 2 --
Proceeds (purchase) of restricted investments 1,544 (202)
Additions to property and equipment, net (1,101) --
--------- ---------
Net cash (used in) provided by investing activities 2,445 (202)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (2,419) (2,116)
Principal payments under vendor financing (2,582) (657)
Repayment of notes (19,750) --
Repayment from term loan (6,785) --
Proceeds from term credit facility 1,500 4,500
Proceeds from issuance of stock 55,480 --
Proceeds from issuance of employee stock options 1,235 190
Stock issuance costs and other charges (1,422) --
Debt issuance costs and other charges -- (537)
--------- ---------
Net cash provided by (used in) financing activities 25,257 1,380
--------- ---------
Net increase (decrease) in cash and cash equivalents 13,124 (2,997)
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 3,618 5,840
CASH AND CASH EQUIVALENTS, end of period $ 16,742 $ 2,843
========= =========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation and field service. Motient provides its
eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network service providers. Motient also offers BlackBerry
(TM) by Motient, a wireless email solution developed by Research In Motion Ltd.
("RIM") and licensed to operate on Motient's network. BlackBerry (TM) by Motient
is designed for large corporate accounts operating in a Microsoft Exchange(R) or
Lotus Notes(R) environment. The Company considers the two-way mobile
communications service described in this paragraph to be its core wireless
business.
Motient presently has six wholly-owned subsidiaries and had a 29.5% interest,
assuming conversion of all outstanding convertible notes, in Mobile Satellite
Ventures LP ("MSV") as of September 30, 2004, and a 38.6% interest, in MSV as of
November 15, 2004. For further details regarding Motient's interest in MSV,
please see "- Mobile Satellite Ventures LP" below and Note 5, "Subsequent
Events". Motient Communications Inc. ("Motient Communications") owns the assets
comprising Motient's core wireless business, except for Motient's Federal
Communications Commission ("FCC") licenses, which are held in a separate
subsidiary, Motient License Inc. ("Motient License"). Motient License is a
special purpose wholly-owned subsidiary of Motient Communications that holds no
assets other than Motient's FCC licenses. Motient's other four subsidiaries hold
no material operating assets other than the stock of other subsidiaries and
Motient's interests in MSV. On a consolidated basis, we refer to Motient
Corporation and its six wholly-owned subsidiaries as "Motient."
Motient is devoting its efforts to maintaining its core wireless business, while
also focusing on cost-cutting efforts. These efforts involve substantial risk.
Future operating results will be subject to significant business, economic,
regulatory, technical, and competitive uncertainties and contingencies.
Depending on their extent and timing, these factors, individually or in the
aggregate, could have an adverse effect on the Company's financial condition and
future results of operations. In recent periods, certain factors have restrained
Motient's ability to generate revenue growth at the pace required to enable it
to generate cash in excess of its operating expenses. These factors include
competition from other wireless data suppliers and other wireless communications
providers with greater resources, the loss of UPS as a primary customer, the
limited availability of wireless email devices due to RIM's decision to
terminate production of RIM 857 devices that operate on Motient's network, the
financial difficulty of several of the Company's key resellers, and general
economic factors.
6
MOBILE SATELLITE VENTURES LP
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to Mobile Satellite Ventures LP ("MSV"), as part of a
transaction in which certain other parties joined MSV, including TMI
Communications and Company, Limited Partnership ("TMI"), a Canadian satellite
services provider. In this transaction, TMI also contributed its satellite
communications business assets to MSV. As part of this transaction, Motient
received, among other proceeds, a $15 million promissory note issued by MSV and
purchased a $2.5 million convertible note issued by MSV. In August 2002, in
connection with a rights offering by MSV, the Company funded an additional
$957,000, and received a new convertible note in such amount. The rights
offering did not impact the Company's position in MSV.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to the
Company's promissory note.
In April 2004, certain investors invested $17.6 million into MSV. Of the total
$17.6 million in proceeds, $5.0 million was used to repay certain outstanding
indebtedness of MSV, including $2.0 million of accrued interest under the $15.0
million promissory note issued to Motient by MSV. Motient was required to use
25% of the $2 million it received in this transaction, or $500,000, to and did
make prepayments under its existing notes owed to Rare Medium Group, Inc. (Rare
Medium) and Credit Suisse First Boston (CSFB). The remainder of the proceeds
from this investment were used by MSV for general corporate purposes. This
investment did not impact the Company's position in MSV.
As of the closing of the April 2004 investment, and at September 30, 2004,
Motient's percentage ownership of MSV was approximately 29.5%, assuming the
conversion of all outstanding convertible notes. On November 12, 2004, Motient
made a significant investment into MSV. For further details, please see Note 5,
"Subsequent Events".
In January 2001, MSV had filed a separate application with the FCC with respect
to MSV's plans for a new generation satellite system utilizing ancillary
terrestrial components, or "ATC". In January 2003, MSV's application with the
FCC with respect to MSV's plans for a new generation satellite system utilizing
ATC was approved by the FCC. The order granting such approval (the "ATC Order")
requires that licensees, including MSV, submit a further application with the
FCC to seek approval of the specific system incorporating ATC that the licensee
intends to use. MSV has filed an application for ATC authority, which is
pending. MSV has also filed a petition for reconsideration with respect to
certain aspects of the ATC Order. In January 2004, certain terrestrial wireless
providers petitioned the U.S. Court of Appeals for the District of Columbia to
review the FCC's decision to grant ATC to satellite service providers. Oral
arguments in this case occurred in May 2004, but a decision has not yet been
issued by the court. Please see Note 5, "Subsequent Events" for more information
on recent FCC approvals with regard to MSV's applications.
7
On May 17, 2004, MSV was awarded its first patent on a next generation satellite
system technology containing an ATC innovation. MSV believes that patent will
support its ability to deploy ATC in a way that minimizes interference to other
satellite systems, and addresses ways to mitigate residual interference levels
using interference-cancellation techniques.
COST AND DEBT REDUCTION AND LIQUIDITY ACTIONS
Several factors have restrained the Company's ability to grow revenue at the
rate it previously anticipated. These factors include the weak economy generally
and the weak telecommunications and wireless sector specifically, the loss of
UPS as a primary customer, the limited availability of wireless email devices
due to RIM's decision to terminate production of RIM 857 devices that operate on
Motient's network, and the financial difficulty of several of the Company's key
resellers, on whom it relies for a majority of its new revenue growth.
The Company has taken a number of steps recently to reduce operating
expenditures and reduce cash requirements under its debt obligations in order to
lower its cash burn rate and improve its liquidity position.
REDUCTIONS IN WORKFORCE. The Company undertook a reduction in its workforce in
February 2004. This action eliminated approximately 32.5% (54 employees) of its
workforce and reduced employee and related expenditures by approximately $0.4
million per month. As of September 30, 2004, Motient had 95 employees.
NETWORK RATIONALIZATION. In the second quarter of 2004, we finalized plans to
implement certain base station rationalization initiatives. These initiatives
involve the de-commissioning of approximately 409 base stations from our
network. We had 1,549 base stations in our network as of March 31, 2004, and
1,239 base stations as of September 30, 2004. We are taking these actions in a
coordinated effort to reduce network operating costs while also focusing on
minimizing the potential impact to our customers communications and coverage
requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are substantially complete with these network
rationalization initiatives, and anticipate final completion by December 2004.
Please see Item 2 ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") for further discussion of this network
rationalization.
FRAME RELAY AND TANDEM EQUIPMENT RETIREMENT. In conjunction with our base
station rationalization initiatives discussed above, Motient is in the process
of converting its telecommunications infrastructure technology to frame relay
technology. As of September 30, 2004, this project was approximately 80%
complete. In the fourth quarter of 2004, we will be retiring certain network
equipment associated with this conversion. We expect to realize significant
telecommunications cost reductions in 2005 as a result of this conversion.
8
CREDIT FACILITY REPAYMENT: On April 13, 2004, Motient repaid all amounts then
owing under its term credit facility, including all principal and accrued
interest thereon, in an amount of $6.8 million. The remaining availability under
the credit facility of $5.7 million will be available for borrowing by the
Company until December 31, 2004, subject to the lending conditions in the credit
agreement.
TERMINATION OF MOTOROLA AND HEWLETT-PACKARD AGREEMENTS: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facilities with Motorola and its capital lease with Hewlett-Packard.
The full amount due and owing under these agreements was a combined $6.8
million. The Company paid a combined $3.9 million in cash to Motorola and
Hewlett-Packard and issued a warrant to Motorola to purchase 200,000 shares of
the Company's common stock at a price of $8.68, in full satisfaction of the
outstanding balances. In the case of Hewlett-Packard, the Company took title to
all of the leased equipment and software and the letter of credit securing this
lease was cancelled; in the case of Motorola, there was no equipment or service
that Motorola was obligated to provide. The Company recorded a gain on the
extinguishment of debt in the amount of $0.7 million on the Hewlett Packard
settlement. The Company recorded a gain of $0.1 million on the Motorola
settlement.
SALES OF COMMON STOCK: On April 7, 2004, Motient sold 4,215,910 shares of its
common stock at a per share price of $5.50 for an aggregate purchase price of
$23.2 million to several institutional investors. On July 1, 2004, Motient sold
3,500,000 shares of its common stock at a per share price of $8.57 for an
aggregate purchase price of $30.0 million to several institutional investors.
Motient's registration statement registering the shares issued in these
transactions became effective on July 13, 2004.
Please see Item 2 ("Management's Discussion and Analysis of Financial Condition
and Results of Operations - Sources of Financing") for further discussion of
these sales of common stock, including a discussion of the terms of the sale and
the fees paid to the placement agent. Please see Note 5, "Subsequent Events" for
discussion of further sales of common stock subsequent to the time period
reflected in this quarterly report
TERMINATION OF RARE MEDIUM AND CSFB NOTES. On July 15, 2004, the Company paid
all principal and interest due and owing on its Rare Medium and CSFB notes, in
the aggregate amount of $23.5 million.
COMMUNICATION TECHNOLOGY ADVISORS LLC. Effective January 30, 2004, Motient hired
Communications Technology Advisors LLC, or CTA, to serve as "Chief Restructuring
Entity" and advise the Company on various ways to reduce cash operating
requirements. CTA has been engaged through December 2004. See Note 2 ("Related
Parties") for further discussion of Motient's relationship with CTA.
Despite these initiatives, the Company continues to generate losses from
operations, and there can be no assurances that it will ever generate income
from operations.
9
CHANGE IN ACCOUNTANTS
On March 2, 2004, Motient dismissed PricewaterhouseCoopers LLP as its
independent auditors effective immediately. The audit committee of the Company's
board of directors approved the dismissal of PricewaterhouseCoopers.
PricewaterhouseCoopers did not report on Motient's consolidated financial
statements for any fiscal period. On March 2, 2004, the audit committee engaged
Ehrenkrantz Sterling & Co. LLC as Motient's independent auditors to replace
PricewaterhouseCoopers.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC merged with the firm of Friedman
Alpren & Green LLP. The new entity, Friedman LLP, has been retained by Motient
and the audit committee of the Company's Board of Directors approved this
decision on June 4, 2004.
For further details regarding the change in accountants, please see the
Company's current report on Form 8-K filed with the SEC in April 23, 2003, the
Company's amendment to current report on Form 8-K/A filed with the SEC on March
9, 2004 and the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2003, filed with the SEC on June 7, 2004.
SALE OF SMR LICENSES TO NEXTEL COMMUNICATIONS, INC.
On December 9, 2003, Motient Communications entered into an asset purchase
agreement, under which Motient Communications will sell surplus licenses to
Nextel for $2.75 million. In February 2004, the Company closed the sale of
licenses covering approximately $2.2 million of the purchase price, and in April
2004, the Company closed the sale of approximately one-half of the remaining
licenses. The transfer of the other half of the remaining licenses has been
challenged at the FCC by a third-party. While the Company believes, based on the
advice of counsel, that the FCC will ultimately rule in its favor, the Company
cannot assure you that it will prevail, and, in any event, the timing of any
final resolution is uncertain. None of these licenses are necessary for
Motient's future network requirements. Motient has and expects to continue to
use the proceeds of the sales to fund its working capital requirements and for
general corporate purposes. The lenders under Motient Communications' term
credit agreement consented to the sale of these licenses.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company and are
unaudited. The results of operations for the three and nine months ended
September 30, 2004 are not necessarily indicative of the results to be expected
for any future period or for the full fiscal year. In the opinion of management,
all adjustments (consisting of normal recurring adjustments unless otherwise
indicated) necessary to present fairly the financial position, results of
operations and cash flows at September 30, 2004, and for all periods presented,
have been made. Footnote disclosure has been condensed or omitted as permitted
in interim financial statements.
CONSOLIDATION
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
10
CASH EQUIVALENTS
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
INVENTORY
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, is stated at the lower of cost or
market. Cost is determined using the weighted average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes and records a charge to current period
income when such factors indicate that a reduction to net realizable value is
appropriate. The Company considers both inventory on hand and inventory which it
has committed to purchase, if any.
Periodically, the Company will offer temporary discounts on equipment sales to
customers. The value of this discount is recorded as a cost of sale in the
period in which the sale occurs.
CONCENTRATIONS OF CREDIT RISK
For the nine months ended September 30, 2004, four customers accounted for
approximately 41% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 21%. No one customer
accounted for more than 13% of the Company's net accounts receivable at
September 30, 2004. For the nine months ended September 30, 2003, three
customers accounted for approximately 41% of the Company's service revenue, with
two customers, United Parcel Service of America, Inc. ("UPS") and SkyTel, each
accounting for more than 14%. SkyTel accounted for approximately 15% of the
Company's accounts receivable at September 30, 2003. UPS migrated a majority of
its units off of the Company's network in the second half of 2003.
The revenue attributable to such customers varies with the level of network
airtime usage consumed by such customers, and none of the service contracts with
such customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods.
INVESTMENT IN MSV AND NOTES RECEIVABLE FROM MSV
In accordance with the equity method of accounting, the Company recorded its
46.5% share of MSV losses against its basis in MSV. Additionally, the Company
has recorded the $15.0 million note receivable from MSV, plus accrued interest
thereon at its fair market value, estimated to be approximately $13.0 million at
"fresh start", after giving effect to discounted future cash flows at market
interest rates. In April 2004, MSV repaid $2.0 million of accrued interest under
this note. Motient does not control MSV and accounts for its investment under
the equity method.
11
The valuation of Motient's investment in MSV and its note receivable from MSV
are ongoing assessments that are, by their nature, judgmental given that MSV is
not traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in Motient's
investment in MSV and that the MSV note is collectible, there is the inherent
risk that this assessment will change in the future and Motient will have to
write down the value of this investment and note. Please see Note 5, "Subsequent
Events" for discussion of certain events subsequent to the period covered in
this report that will impact these investments.
For the three and nine month period ended September 30, 2004, MSV had revenues
of $8.8 million and $24.5 million, respectively, operating expenses of $12.2
million and $27.2 million, respectively, and a net loss of $11.3 million and
$25.5 million, respectively.
DEFERRED TAXES
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured. The Company has paid no income taxes since inception.
The Company has generated significant net operating losses for tax purposes
through September 30, 2004; however, it has had its ability to utilize these
losses limited on two occasions as a result of transactions that caused a change
of control in accordance with the Internal Revenue Service Code Section 382.
Additionally, since the Company has not yet generated taxable income, it
believes that its ability to use any remaining net operating losses has been
greatly reduced; therefore, the Company has established a valuation allowance
for any benefit that would have been available as a result of the Company's net
operating losses.
REVENUE RECOGNITION
The Company generates revenue principally through equipment sales and airtime
service agreements, and consulting services. In 2000, the Company adopted Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," issued by the SEC.
SAB No. 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the deferral of the recognition of revenue and costs related to equipment sold
as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No.104, "Revenue Recognition",
which supersedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB
No. 104's primary purpose is to rescind accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements and to rescind the SEC's
"Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers" ("FAQ") issued with SAB No. 104. Selected portions of the FAQ have been
incorporated into SAB No. 104. The adoption of SAB No. 104 did not have a
material impact on the Company's revenue recognition policies.
12
Revenue is recognized as follows:
SERVICE REVENUE: Revenues from wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. The Company defers any revenue and costs associated with activation of a
subscriber on its network over an estimated customer life of two years.
EQUIPMENT AND SERVICE SALES: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public, and it also sells its
product directly to end-users. Revenue from the sale of the equipment, as well
as the cost of the equipment, are initially deferred and are recognized over a
period corresponding to the Company's estimated customer life of two years.
Equipment costs are deferred only to the extent of deferred revenue.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over its useful life using the
straight-line method. Assets recorded as capital leases are amortized over the
shorter of their useful lives or the term of the lease. The estimated useful
lives of office furniture and equipment vary from two to ten years, and the
network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance that do not significantly increase the
utility or useful life of an asset are expensed as incurred.
RESTRUCTURING COSTS
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of September 30, 2004, the Company had incurred base station
deconstruct costs of $0.4 million, the loss on the retirement of certain base
station equipment of $2.8 million and termination liabilities of $0.5 million
for site leases no longer required for removed base stations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements.
ADVERTISING COSTS
Advertising costs are charged to operations in the year incurred.
13
STOCK-BASED COMPENSATION
The Company accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Generally, no expense is recognized related to
the Company's stock options because the option's exercise price is set at the
stock's fair market value on the date the option is granted. In cases where the
Company issues shares of restricted stock, the Company will record an expense
based on the value of the restricted stock on the measurement date.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on (loss) attributable to common
stockholders and (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Net loss, as reported $ (9,849) $(22,345) $(46,478) $(47,749)
Add: Stock-based employee compensation expense
included in net loss, net of related tax effects 87 76 3,963 1,217
(Deduct)/Add: Total stock-based employee
compensation (expense) income determined under
fair value based method for all awards, net of
tax related effects (1,790) (145) (2,218) (2,343)
--------- --------- --------- ---------
Pro forma net loss (11,552) (22,414) (44,733) (48,875)
========= ========= ========= =========
Weighted average common shares outstanding 33,418 25,170 29,323 25,128
Loss per share:
Basic and diluted---as reported $ (0.29) $ (0.89) $ (1.59) $ (1.90)
--------- --------- --------- ---------
Basic and diluted---pro-forma $ (0.35) $ (0.89) $ (1.53) $ (1.95)
--------- --------- --------- ---------
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
14
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Expected life (in years) 8 9 8 9
Risk-free interest rate .88%-1.46% 1.11% .88%-1.46% 1.11%
Volatility 146%-258% 156% 146%-258% 156%
Dividend yield 0.0% 0.0% 0.0% 0.0%
RESTRICTED STOCK PLAN
In August 2004, the Company adopted a restricted stock plan, and subsequently
registered the shares to be issued under such plan on a registration statement
on Form S-8. Pursuant to this plan, the Company may issue up to 1,000,000 shares
of restricted common stock to employees or directors. In September 2004, the
Company issued an aggregate of 15,400 shares of restricted stock to its
directors as partial compensation for their service on the board of directors.
Such shares will vest six months after issue, or upon a change of control of the
Company.
SEGMENT DISCLOSURES
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to all fifty
of the United States. The following summarizes the Company's core wireless
business revenue by major market categories:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
--------- --------- --------- ---------
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $4.3 $6.8 $15.7 $21.1
Field Services 1.4 1.9 4.7 7.9
Transportation 0.9 1.1 2.7 7.0
Telemetry 0.6 0.6 1.8 1.8
All Other 0.2 0.3 2.6 0.4
---- ----- ----- -----
Service revenue $7.4 $10.7 $27.5 $38.2
Equipment revenue 1.0 1.4 3.8 3.2
---- ----- ----- -----
Total Revenue $8.4 $12.1 $31.3 $41.4
==== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(LOSS) PER SHARE
Basic and diluted (loss) income per common share is computed by dividing income
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
15
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for all
periods. As a result, the basic and diluted earnings per share amounts for all
periods presented are the same. As of September 30, 2004 and 2003, there were
warrants to acquire 6,063,450 and 5,664,962, respectively, shares of common
stock. As of September 30, 2004 and 2003 there were options outstanding for
633,719 and 1,787,900 shares, respectively.
Holders of our pre-bankruptcy common stock received warrants to purchase an
aggregate of approximately 1,496,512 shares of common stock. The warrants were
exercisable to purchase shares of our common stock at a price of $.01 per share,
if and only at such time, the average closing price of our common stock for
ninety consecutive trading days was equal to or greater than $15.44 per share
during the two years following our May 1, 2002 reorganization. The terms of
these warrants were not met and they therefore expired on May 1, 2004.
RELATED PARTIES
The Company made payments of $196,000 and $967,000 to related parties for
service-related obligations for the three and nine month periods ended September
30, 2004, as compared to $0 and $208,000 for the three and nine month periods
ended September 30, 2003. There were no amounts due to related parties as of
September 30, 2004. CTA is a consulting and private advisory firm specializing
in the technology and telecommunications sectors. It had previously acted as the
spectrum and technology advisor to the official committee of unsecured creditors
in connection with the Company's bankruptcy proceedings, and subsequently as a
consultant to the Company since May 2002. On January 30, 2004, the Company
engaged CTA to act as chief restructuring entity. As consideration for this
work, Motient agreed to pay to CTA a monthly fee of $60,000. In addition, since
the initial engagement of CTA, the payment of certain monthly fees to CTA had
been deferred. In April 2004, Motient paid CTA $440,000 for all past deferred
fees. CTA's engagement runs through December 2004. Jared Abbruzzese, principal
of CTA, is a former member of the Company's board of directors.
3. COMMITMENTS AND CONTINGENCIES
As of September 30, 2004, the Company had no contractual inventory commitments.
In December 2002 Motient entered into an agreement with UPS pursuant to which
the customer prepaid an aggregate of $5 million in respect of network airtime
service to be provided beginning January 1, 2004. The $5 million prepayment will
be credited against airtime services provided to UPS beginning January 1, 2004,
until the prepayment is fully credited. Based on UPS' current level of network
airtime usage, Motient does not expect that UPS will be required to make any
cash payments in 2004 for service provided during 2004. There are no minimum
purchase requirements under the contract with UPS, and the contract may be
terminated by UPS on 30 days' notice. If UPS terminates the contract, we will be
required to refund any unused portion of the prepayment to UPS. The Company's
remaining airtime service obligation to UPS at September 30, 2004 in respect of
the prepayment was approximately $4.1 million.
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4. LEGAL AND REGULATORY MATTERS
LEGAL
Our rights to use and sell the BlackBerry(TM) software and RIM's handheld
devices may be limited or made prohibitively expensive as a result of a patent
infringement lawsuit brought against RIM by NTP Inc. (NTP v. Research In Motion,
Civ. Action No. 3:01CV767 (E.D. Va.)). In that action, a jury concluded that
certain of RIM's BlackBerry(TM) products infringe patents held by NTP covering
the use of wireless radio frequency information in email communications. On
August 5, 2003, the judge in the case ruled against RIM, awarding NTP $53.7
million in damages and enjoining RIM from making, using, or selling the
products, but stayed the injunction pending appeal by RIM. This appeal has not
yet been resolved. As a purchaser of those products, the Company could be
adversely affected by the outcome of that litigation.
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing to Motient under the "take-or-pay" agreement between
Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to
purchase certain minimum amounts of air-time on the Motient network. In June
2004, Motient reached an out of court settlement with Wireless Matrix, in which
Wireless Matrix paid Motient $1.1 million.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
Seeking to resolve interference to public safety users, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel is allowed to occupy spectrum in the 1.9 GHz band in exchange
for, among other things, relocating and retuning public safety licensees in the
800 MHz band. However, there are reports that a court challenge will be filed
challenging the legality of the FCC's decision, and the U.S. Comptroller General
is investigating whether the plan would impermissibly divert funds from the U.S.
Treasury. Motient has spectrum in both the lower-800 MHz band and upper-800 MHz
band, and on April 8, 2004, filed a request with the FCC asking that the FCC
relocate its lower-800 MHz band frequencies into the upper-800 MHz band as part
of the 800 MHz reconfiguration plan. On August 6, 2004, the FCC released the
text of its July 8, 2004 order. The text of the order did not grant Motient's
request, but neither did it explicitly deny it. Motient cannot assure that its
operations will be not affected by the adoption or implementation of this order
or any subsequent addenda.
5. SUBSEQUENT EVENTS
DEALER AGREEMENTS
On October 11, 2004, Motient and Verizon Wireless agreed to terminate Motient's
authorized agency agreement. This agreement had allowed Motient to sell
BlackBerry products for Verizon's CDMA/1XRTT network.
17
Concurrent with this termination, Motient entered into a Custom Service
Agreement with Sprint Solutions, Inc., dated as of November 9, 2004. This new
agreement allows Motient to sell Sprint's CDMA/1XRTT network on a nationwide
basis. Motient believes that the increased flexibility of this new agreement
will allow it to more effectively serve enterprise customers nationwide.
PRIVATE PLACEMENT OF SECURITIES
On November 12, 2004, Motient sold 15,353,606 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,783,
net of $5,182,620 in commissions paid to Motient's placement agent, Tejas
Securities Group, Inc. The approximately 60 purchasers included substantially
all of the purchasers from the April and July 2004 private placements, as well
multiple new investors. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, Motient signed a registration
rights agreement with the holders of these shares. Among other things, this
registration rights agreement requires Motient to file and cause to make
effective a registration statement permitting the resale of the shares by the
holders thereof. Motient also issued warrants to purchase an aggregate of
approximately 3,838,401 shares of its common stock to the investors listed
above, at an exercise price of $8.57 per share. These warrants will vest if and
only if Motient does not meet certain deadlines between January and March 2005
with respect to certain requirements under the registration rights agreement. If
the warrants vest, they may be exercised by the holders thereof at any time
through November 11, 2009.
Pursuant to terms of this sale, Motient will be permitted, but not required, to
undertake a follow-on rights offering of up to $50 million, at a price equal to
no less than $8.57 per share. Any such rights offering will be limited to
stockholders that did not participate in this private placement, and
participants will not have any right of over-subscription or be able to purchase
more than their pro-rata ownership of Motient.
ADDITIONAL INVESTMENT IN MSV
On November 12, 2004, Motient purchased approximately 5.4 million MSV limited
partnership units, and a corresponding number of shares in MSV's general
partner, Mobile Satellite Ventures GP Inc. ("MSV GP"). As consideration, Motient
provided MSV with $125 million in cash, cancelled its outstanding $15 million
principal note (and all accrued interest thereon) issued by MSV, converted its
$3.5 million of convertible notes issued by MSV, and cancelled the accrued
interest on such convertible notes. In connection with Motient's investment, the
other limited partners of MSV exchanged their outstanding notes (but not
generally the accrued interest thereon), and one limited partner contributed an
additional $20 million of cash, for limited partnership units and a
corresponding number of MSV GP shares. Such investments and conversions
increased Motient's ownership of MSV from 29.5% (assuming conversion of all
outstanding convertible notes) to 38.6%. Motient does not control MSV and
accounts for its investment under the equity method.
18
Motient's investment in MSV is governed by several important agreements to which
Motient is a party, including but not limited to the limited partnership
agreement of MSV and the stockholder's agreement of MSV GP. The acquisition or
disposition by MSV of its assets, the acquisition or disposition of any limited
partner's interest in MSV, subsequent investment into MSV by any person, and any
merger or other business combination of MSV, would be subject to the control
restrictions contained in such documents. Such control restrictions include, but
are not limited to, rights of first refusal, tag along rights and drag along
rights. Many of these actions, among others, cannot occur without the consent of
the majority of the ownership interests of MSV, and several of the other limited
partners of MSV entered into a voting agreement amongst themselves, which may
restrict any signatories ability to give such consent absent the agreement of
the majority of the signatories to such voting agreement. MSV plans to use the
proceeds from this investment for general corporate purposes.
OTHER MSV DEVELOPMENTS
On November 8, 2004, the FCC issued an order granting MSV an ancillary
terrestrial component, or ATC, license, the first ATC license ever granted by
the FCC. The FCC also approved several of MSV's waiver requests, allowing MSV to
further enhance its service and coverage, but it specifically deferred its
ruling on other MSV waiver requests. The order sets forth various limitations
and conditions necessary to the use of ATC by MSV, but there can be no
assurances that such conditions will be satisfied by MSV, or that such
limitations will not be unnecessarily burdensome to MSV. Please review the full
FCC order for additional important information regarding the authorizations and
waivers granted to MSV, and the limitations and conditions set forth therein.
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project" or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, those under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview - Overview of Liquidity
and Risk Factors," and elsewhere in this quarterly report. All of our subsequent
written and oral forward-looking statements or statements that may be attributed
to us are expressly qualified in their entirety by the cautionary statements
referred to above and contained elsewhere in this quarterly report on Form 10-Q.
You should carefully review the risk factors described in our other filings with
the Securities and Exchange Commission from time to time, including the risk
factors contained in our Form 10-K for the period ended December 31, 2003, and
our reports on Form 10-K and 10-Q to be filed after this quarterly report, as
well as our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed in these statements.
OVERVIEW
GENERAL
This section provides information regarding the various components of Motient's
business, which we believe are relevant to an assessment and understanding of
the financial condition and consolidated results of operations of Motient.
Motient presently has six wholly-owned subsidiaries and a 29.5% interest,
assuming conversion of all outstanding convertible notes, in Mobile Satellite
Ventures LP ("MSV") as of September 30, 2004, and a 38.6% interest in MSV as of
November 15, 2004. Motient Communications Inc. owns the assets comprising
Motient's core wireless business, except for Motient's FCC licenses, which are
held in a separate subsidiary, Motient License Inc. Motient License was formed
on March 16, 2004, as part of Motient's amendment of its credit facility, as a
special purpose wholly-owned subsidiary of Motient Communications and holds all
of the FCC licenses formerly
20
held by Motient Communications. A pledge of the stock of Motient License, along
with the other assets of Motient Communications, secures borrowings under our
term credit facility. Motient's other four subsidiaries hold no material
operating assets other than the stock of other subsidiaries and Motient's
interests in MSV. On a consolidated basis, we refer to Motient Corporation and
its six wholly-owned subsidiaries as "Motient." Our indirect, less-than 50%
voting interest in MSV is not consolidated with Motient for financial statement
purposes. Rather, we account for our interest in MSV under the equity method of
accounting.
CORE WIRELESS BUSINESS
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Our customers use our network for a variety of
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and consumers to transfer
electronic information and messages and access corporate databases and the
Internet.
MOBILE SATELLITE VENTURES LP
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to Mobile Satellite Ventures LP ("MSV"), as part of a
transaction in which certain other parties joined MSV, including TMI
Communications and Company, Limited Partnership ("TMI"), a Canadian satellite
services provider. In this transaction, TMI also contributed its satellite
communications business assets to MSV. As part of this transaction, Motient
received, among other proceeds, a $15 million promissory note issued by MSV and
purchased a $2.5 million convertible note issued by MSV. In August 2002, in
connection with a rights offering by MSV, the Company funded an additional
$957,000, and received a new convertible note in such amount. The rights
offering did not impact the Company's position in MSV.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to the
Company's promissory note.
In April 2004, certain investors invested $17.6 million into MSV. Of the total
$17.6 million in proceeds, $5.0 million was used to repay certain outstanding
indebtedness of MSV, including $2.0 million of accrued interest under the $15.0
million promissory note issued to Motient by MSV. Motient was required to use
25% of the $2 million it received in this transaction, or $500,000, to and did
make prepayments under its existing notes owed to Rare Medium Group, Inc. and
CSFB. The remainder of the proceeds from this investment were used by MSV for
general corporate purposes. This investment did not impact the Company's
position in MSV.
As of the closing of the April 2004 investment, and at September 30, 2004,
Motient's percentage ownership of MSV was approximately 29.5%, assuming the
conversion of all outstanding convertible notes.
The convertible notes from MSV mature on November 26, 2006, bear interest at 10%
per annum, compounded semiannually, and are payable at maturity. The convertible
notes are convertible at any time at Motient's discretion, and automatically
under certain circumstances into class A preferred units of limited partnership
interests of MSV. Our $15 million promissory note from MSV is subject to
prepayment in certain circumstances where MSV receives cash proceeds from
equity, debt or asset sale transactions. If not repaid earlier, outstanding
21
amounts owing under the $15.0 million note from MSV, including accrued interest
thereon, become due and payable on November 26, 2006; however, there can be no
assurance that MSV would have the ability, at that time, to pay the amounts due
under the note. Motient has recorded the $15.0 million note receivable from MSV,
plus accrued interest thereon at its fair market value, estimated to be
approximately $13.0 million at the May 1, 2002 "fresh-start" accounting date,
after giving effect to discounted future cash flows at market interest rates.
This note, including outstanding interest thereon, was exchanged on November 12,
2004 for limited partnership units and general partner shares of MSV. Please see
Note 5, "Subsequent Events" for further discussion of our investment in MSV,
which was substantially increased on November 12, 2004.
SUMMARY OF RISK FACTORS
In addition to the challenge of growing revenue as described above, our future
operating results could be adversely affected by a number of uncertainties and
factors, including:
o We have undergone significant organizational restructuring and
we face substantial operational challenges.
o We are not cash flow positive, and our prospects will depend
on our ability to control our costs while maintaining and
improving our service levels.
o We will need additional liquidity to fund our operations.
o We may not be able to meet our operating expenses, working
capital and other capital expenditures.
o We will continue to incur significant losses.
o We generate a large part of our revenues and cash flows from a
small number of customers, and the loss of one or more key
customers could result in a significant reduction in revenues
and cash flows; UPS deregistered a majority of its units on
our network during the third and fourth quarter of 2003.
o Our growth has been curtailed by funding constraints.
o Our internal controls may not be sufficient to ensure timely
and reliable financial information.
o We may not be able to realize value from our investment in MSV
due to risks associated with MSV's next-generation business
plan.
o Motient may have to take actions which are disruptive to its
business to avoid registration under the Investment Company
Act of 1940.
o We could lose market share and revenues as a result of
increasing competition from companies in the wireless
communications industry that have greater resources and name
recognition.
o Failure to keep pace with rapidly changing markets for
wireless communications would significantly harm our business.
o The success of our wireless communications business depends on
our ability to enter into and maintain third party
distribution relationships.
o We expect to maintain a limited inventory of devices to be
used in connection with our eLink service, and any
interruption in the supply of such devices could significantly
harm our business.
o We cannot guarantee that our suppliers will be able to supply
us with components and devices in the quantities and at the
times we require, or at all.
22
o If prices charged by suppliers for wireless devices do not
decline as we anticipate, our business may not experience the
growth we expect.
o We may not be able to develop, acquire and maintain
proprietary information and intellectual property rights,
which could limit the growth of our business and reduce our
market share.
o Patent infringement litigation against Research In Motion,
Ltd., or RIM, may impede our ability to use and sell certain
software and handheld devices.
o Government regulation may increase our cost of providing
services, slow our expansion into new markets, subject our
services to additional competitive pressures and affect the
value of our common stock.
o We face burdens relating to the recent trend toward stricter
corporate governance and financial reporting standards.
o Motient's competitive position may be harmed if the wireless
terrestrial network technology it licenses from Motorola is
made available to competitors.
o Motient could incur substantial costs if it is required to
relocate its spectrum licenses under a pending proposal being
considered by the FCC.
o Our adoption of "fresh-start" accounting may make evaluation
of our financial position and results of operations for 2002
and 2003, as compared to prior periods, more difficult.
o Certain tax implications of our bankruptcy and reorganization
may increase our tax liability.
o There is a very limited public trading market for our common
stock, and our equity securities may continue to be illiquid
or experience significant price volatility.
o We do not expect to pay any dividends on our common stock for
the foreseeable future.
o Future sales of our common stock could adversely affect its
price and/or our ability to raise capital.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's annual report on Form 10-K for the fiscal
year ended December 31, 2003.
23
RESULTS OF OPERATIONS
The table below outlines operating results for Motient:
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $4.3 $6.8 $15.7 $21.1
Field Services 1.4 1.9 4.7 7.9
Transportation 0.9 1.1 2.7 7.0
Telemetry 0.6 0.6 1.8 1.8
All Other 0.2 0.3 2.6 0.4
---- ----- ----- -----
Service Revenue 7.4 10.7 27.5 38.2
Equipment Revenue 1.0 1.4 3.8 3.2
---- ----- ----- -----
Total $8.4 $12.1 $31.3 $41.4
==== ===== ===== =====
Three Months Ended Three Months Ended
September 30, % of Service September 30, % of Service
2004(1) Revenue 2003(2) Revenue
------- ------- ------- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $7.8 105% $12.4 116%
Cost of Equipment Sold 0.9 12 1.5 14
Sales and Advertising 0.2 3 1.1 10
General and Administration 2.0 27 3.8 36
Depreciation and Amortization 3.7 50 5.5 51
----- ---- ----- ----
Total Operating $14.6 197% $24.3 227%
===== ==== ===== ====
------------
(1) Includes compensation expense of $87 thousand related to the
market value of employee stock options.
(2) Includes compensation expense of $99 thousand related to the
market value of employee stock options.
Nine Months Ended Nine Months Ended
September 30, % of Service September 30, % of Service
2004(1) Revenue 2003(2) Revenue
------- ------- ------- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $29.5 107% $40.0 105%
Cost of Equipment Sales 3.7 14 3.6 9
Sales and Advertising 2.1 8 3.8 10
General and Administration 6.9 25 10.4 27
Operational Restructuring Costs 6.3 23 0.0 0
Depreciation and Amortization 12.1 44 16.3 43
----- ---- ----- ----
Total Operating $60.6 221% $74.1 194%
===== ==== ===== ====
------------
(1) Includes compensation expense of $4.0 million related to the
market value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the
market value of employee stock options.
24
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
REVENUE AND SUBSCRIBER STATISTICS
Service revenues approximated $7.4 million and $27.5 million for the three and
nine months ended September 30, 2004, respectively, which represented a $3.3
million and $10.7 million decrease as compared to the three and nine months
ended September 30, 2003, respectively. The decrease in these periods was
primarily the result of a decrease in revenue in our wireless internet, field
services and transportation market segments. Total revenues approximated $8.4
million and $31.3 million for the three and nine months ended September 30,
2004, respectively, which represented a $3.7 million and $10.1 million decrease
as compared to the three and nine months ended September 30, 2003, respectively.
The decrease was primarily a result of decreased service and equipment revenues
for the three months ended September 30, 2004 as compared to the three months
ended September 30, 2003. For the nine months ended September 30, 2004, the
decrease in service revenues was partially offset by an increase in equipment
revenue.
The tables below summarize our revenue for the three and nine months ended
September 30, 2004 and 2003 and our subscriber base as of September 30, 2004 and
2003. An explanation of certain changes in revenue and subscribers is set forth
below.
Three Months Ended September 30,
-------------------------------------
Summary of Revenue 2004 2003 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $4.3 $6.8 $(2.5) (37)%
Field Services 1.4 1.9 (0.5) (26)
Transportation 0.9 1.1 (0.2) (18)
Telemetry 0.6 0.6 0.0 0
All Other 0.2 0.3 (0.1) (33)
---- ----- ------ -----
Service Revenue 7.4 10.7 (3.3) (31)
Equipment Revenue 1.0 1.4 (0.4 (29)
---- ----- ------ -----
Total $8.4 $12.1 $(3.7) (31)%
==== ===== ====== =====
Nine Months Ended September 30,
-------------------------------------
Summary of Revenue 2004 2003 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $15.7 $21.1 $(5.4) (26)%
Field Services 4.7 7.9 (3.2) (41)
Transportation 2.7 7.0 (4.3) (61)
Telemetry 1.8 1.8 0.0 0
All Other 2.6 0.4 2.2 550
---- ----- ------ -----
Service Revenue 27.5 38.2 (10.7) (28)
Equipment Revenue 3.8 3.2 0.6 19
---- ----- ------ -----
Total $31.3 $41.4 $(10.1) (24)%
===== ===== ======= =====
25
The make up of our registered subscriber base was as follows:
As of September 30,
---------------------------------
2004 2003 Change % Change
---- ---- ------ --------
Wireless Internet 81,738 109,164 (27,426) (25)%
Field Services 10,951 18,278 (7,327) (40)
Transportation (1) 46,361 103,324 (56,963) (55)
Telemetry 31,058 31,005 53 0
All Other 393 868 (475) (55)
------- ------- -------- ----
Total 170,501 262,639 (92,138) (35)%
======= ======= ======== =====
---------------
(1) Includes 9,692 registered UPS devices as of September 30,
2004, of which 3,006 were actively passing data traffic, as
compared to 69,897 registered UPS devices as of September 30,
2003, of which 7,766 were actively passing data traffic.
o Wireless Internet: Revenue declined from $6.8 million to $4.3 million for
the three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue declined from $21.1 million to $15.7
million for the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The revenue decline in the Wireless
Internet sector during this period represented customer losses that we are
experiencing in both our direct and reseller channels as a result of the
migration of wireless internet customers to other networks. These customer
losses have been exacerbated by the `end-of-life' announcement by RIM for
the 857 device, which has negatively impacted the ability of our resellers
to add new devices to our network to replace those that are migrating from
their respective customer bases. This decline is also the result of
Motient's coordinated effort during the first six months of 2004 to
actively sell and promote wireless email and wireless Internet applications
to enterprise accounts under our agent relationships with T-Mobile USA and
Verizon Wireless. During the fourth quarter of 2003, we sold several of our
existing customers devices on these networks that resulted in their
termination of devices on our network in 2004. We received commissions from
these carriers for these sales. Our efforts to sell and promote wireless
email and wireless Internet applications to enterprise accounts under our
agent relationships with T-Mobile USA and Verizon Wireless were reduced
significantly in the third quarter of 2004.
o Field Services: Revenue declined from $1.9 million to $1.4 million for the
three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue declined from $7.9 million to $4.7
million for the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The decrease in revenue from field
services was primarily the result of the termination of several customer
contracts, including Sears, Schindler, Lanier, and Bannex, as well as the
general reduction of units and/or rates across the remainder of our field
service customer base, primarily IBM and Pitney Bowes. Schindler's revenue
increased slightly due to a $250 thousand contract termination fee that was
billed and collected in third quarter of 2004. This revenue segment was
also negatively impacted by approximately $675 thousand for the nine months
ended September 30, 2004 due to the reclassification of one of our
customers, Lucent, to the wireless internet segment.
o Transportation: Revenue declined from $1.1 million to $0.9 million for the
three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue declined from $7.0 million to $2.7
million for the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The decrease in revenue for the nine
months ended September 30, 2004 from the transportation sector was
26
primarily the result of UPS, beginning in July 2003, having removed a
significant number of their units from our network and no longer
maintaining their historical level of payments. UPS represented $0.2
million and $0.7 million of revenue for the three and nine months ended
September 30, 2004, as compared to $0.4 million and $5.2 million of revenue
for the three and nine months ended September 30, 2003. We did, however,
also continue to experience growth during this period in other
transportation accounts, most notably Aether and Roadnet.
o Telemetry: Revenue remained at $0.6 million for the three months ended
September 30, 2004, as compared to the three months ended September 30,
2003. Revenue remained at $1.8 million for the nine months ended September
30, 2004, as compared to the nine months ended September 30, 2003. While we
experienced growth in certain telemetry customer accounts, including
Transaction Network Services (formerly US Wireless Data) and USA
Technologies, this was equally offset by churn or negative rate changes in
other telemetry accounts.
o Other: Revenue decreased from $0.3 million to $0.2 million for the three
months ended September 30, 2004, as compared to the three months ended
September 30, 2003. Revenue increased from $0.4 million to $2.6 million for
the nine months ended September 30, 2004, as compared to the nine months
ended September 30, 2003. The increase for the nine months ended September
30, 2004 was attributable to the settlement of a take-or-pay contract with
Wireless Matrix resulting in the recognition of $1.6 million and
approximately $0.6 million of commissions earned via the agency and dealer
agreements with Verizon Wireless and T-Mobile USA. Our efforts to sell and
promote wireless email and wireless Internet applications to enterprise
accounts under our agent relationships with T-Mobile USA and Verizon
Wireless were reduced significantly in the third quarter of 2004.
o Equipment: Revenue decreased from $1.4 million to $1.0 million for the
three months ended September 30, 2004, as compared to the three months
ended September 30, 2003. Revenue increased from $3.2 million to $3.8
million for the nine months ended September 30, 2004, as compared to the
nine months ended September 30, 2003. The decrease in equipment revenues
for the three months ended September 30, 2004 was the result of the decline
sales of devices attributable to agency and dealer agreements with Verizon
Wireless and T-Mobile USA. The increase in equipment revenue for the nine
months ended September 30, 2004 was primarily the result of the sales of
devices attributable to agency and dealer agreements with Verizon Wireless
and T-Mobile USA.
The table below summarizes our operating expenses for the three and nine months
ended September 30, 2004 and 2003. An explanation of certain changes in
operating expenses is set forth below.
Three Months Ended September 30,
-------------------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
- ------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $7.8 $12.4 $(4.6) (37)%
Cost of Equipment Sales 0.9 1.5 (0.6) (40)
Sales and Advertising 0.2 1.1 (0.9) (82)
General and Administration 2.0 3.8 1.8 (47)
Operational Restructuring Costs 0.0 0.0 0.0 0
Depreciation and Amortization 3.7 5.5 (1.8) (33)
----- ----- ------ -----
Total Operating $14.6 $24.3 $(9.7) (40)%
===== ===== ====== =====
----------
(1) Includes compensation expense of $87 thousand related to the
market value of employee stock options.
(2) Includes compensation expense of $99 thousand related to the
market value of employee stock options.
27
Nine Months Ended September 30,
-------------------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
- ------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $29.5 $40.0 $(10.5) (26)%
Cost of Equipment Sales 3.7 3.6 0.1 3
Sales and Advertising 2.1 3.8 (1.7) (45)
General and Administration 6.9 10.4 (3.5) (34)
Operational Restructuring Costs 6.3 0.0 6.3 0
Depreciation and Amortization 12.1 16.3 (4.2) (26)
----- ----- ------- -----
Total Operating $60.6 $74.1 $(13.5) (18)%
===== ===== ======= =====
-------------
(1) Includes compensation expense of $4.0 million related to the
market value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the
market value of employee stock options.
Cost of service and operations includes costs to support subscribers, such as
network telecommunications charges and site rent for network facilities, network
operations employee salary and related costs, network and hardware and software
maintenance charges, among other things. Costs of service and operations
decreased from $12.4 million to $7.8 million for the three months ended
September 30, 2004 as compared to the three months ended September 30, 2003.
Cost of service and operations expenses as a percentage of service revenue were
approximately 105% for the three months ended September 30, 2004, compared to
116% for the comparable period of 2003. Costs of service and operations
decreased from $40.0 million to $29.5 million for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003. Cost
of service and operations expenses as a percentage of service revenue were
approximately 107% for the first nine months of 2004, as compared to 105% for
the comparable period of 2003. The decrease in these expenses was partially the
result of lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004. The decrease in
these expenses was also partially the result of lower fees paid to RIM for
licensing Blackberry as a result of the decline of Wireless Internet units and
revenues. The decrease in these expenses was also impacted by lower network
maintenance costs as a result of the termination of our national maintenance
contract with Motorola at December 31, 2003, as well as the continued removal of
older-generation base stations from the network and the removal of base stations
under our network rationalization efforts initiated in the second quarter of
2004. We currently perform our maintenance on our base stations by contracting
directly with service shops in respective regions, which has materially lowered
our cost relative to our prior national maintenance contract. Site lease and
telecommunications costs for base station locations also decreased during this
period as a result of the removal of base stations as part of our efforts to
remove older-generation equipment from our network and the removal of base
stations under our network rationalization efforts initiated in the second
quarter of 2004. The decrease in costs of service and operations was also
partially the result of reductions in hardware and software maintenance costs as
a result of the negotiation of lower rates on maintenance service contracts in
2003 and 2004, the reduction of software licenses as a result of having fewer
employees and a decrease in software development costs as a result of a change
in capitalization policy. These decreases were partially offset by compensation
expenses associated with stock options issued to employees of $70 thousand and
$2.0 million for the three and nine months ended September 30, 2004,
respectively. Compensation expenses associated with stock options issued to
employees totaled $24 thousand and $0.4 million for the three and nine months
ended September 30, 2003. Excluding these compensation charges, cost of service
and operations decreased $5.1 million and $12.1 million, or 41% and 31% for the
three and nine months ended September 30, 2004, respectively, as compared to the
comparable periods in 2003.
28
Cost of equipment sold decreased from $1.5 million to $0.9 million for the three
months ended September 30, 2004 as compared to the three months ended September
30, 2003. Cost of equipment sold increased from $3.6 million to $3.7 million for
the nine months ended September 30, 2004 as compared to the nine months ended
September 30, 2003. The decrease in cost of equipment for the three months ended
September 30, 2004 was the result of the decline sales of devices attributable
to agency and dealer agreements with Verizon Wireless and T-Mobile USA. The
increase in cost of equipment for the nine months ended September 30, 2004 was
primarily the result of the cost of the increased sales of devices attributable
to the agency and dealer agreements with Verizon Wireless and T-Mobile USA. Our
efforts to sell and promote wireless email and wireless Internet applications to
enterprise accounts under our agent relationships with T-Mobile USA and Verizon
Wireless were reduced significantly in the third quarter of 2004.
Sales and advertising expenses decreased to $0.2 million for the three months
ended September 30, 2004, as compared to $1.1 million for the three months ended
September 30, 2003. Sales and advertising expenses decreased to $2.1 million for
the nine months ended September 30, 2004, as compared to $3.8 million for the
nine months ended September 30, 2003. Sales and advertising expenses as a
percentage of service revenue were approximately 3% for the three months ended
September 30, 2004, as compared to 10% for the comparable period of 2003. Sales
and advertising expenses as a percentage of service revenue were approximately
8% for the first nine months of 2004, as compared to 10% for the comparable
period of 2003. The decrease in sales and advertising expenses for the three and
nine months ended September 30, 2004 was primarily attributable to lower
employee salary and related costs, including sales commissions, due to lower
sales volumes and the workforce reductions implemented in March 2003 and
February 2004, and the significant reduction in or elimination of sales and
marketing programs after our reorganization in May 2002. These decreases were
also impacted by compensation charges associated with stock options issued to
employees of income of $85 thousand and an expense of $0.8 million for the three
and nine months ended September 30, 2004, respectively. Compensation expenses
associated with stock options issued to employees totaled $42 thousand and $0.3
million for the three and nine months ended September 30, 2003. Excluding these
compensation charges, sales and advertising decreased $0.4 million and $2.2
million, or 57% and 63% for the three and nine months ended September 30, 2004,
respectively, as compared to the comparable periods in 2003.
General and administrative expenses for the core wireless business decreased
from $3.8 million to $2.0 million for the three months ended September 30, 2004
as compared to the three months ended September 30, 2003. General and
administrative expenses for the core wireless business decreased from $10.4
million to $6.9 million for the nine months ended September 30, 2004 as compared
to the nine months ended September 30, 2003. General and administrative expenses
as a percentage of service revenue were approximately 27% for the three months
ended September 30, 2004, compared to 36% for the comparable period of 2003.
General and administrative expenses as a percentage of service revenue were
approximately 25% for the first nine months of 2004, compared to 27% for the
comparable period of 2003. The decrease in general and administrative expenses
for the three and nine months ended September 30, 2004 was primarily
attributable to lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004, lower consulting
expenses as a result of the $0.9 million expensed for the Further Lane warrants
in 2003, the closure of our Reston facility in July 2003, lower directors and
officers liability insurance costs subsequent to reorganization, lower audit and
tax fees and a reduction in bad debt reserves primarily due to lower accounts
receivables balances as a result of improvements in our collection capabilities.
These decreases were partially offset by increases in legal and regulatory fees
29
and by compensation expenses associated with stock options issued to employees
of $102 thousand and $1.1 million for the three and nine months ended September
30, 2004, respectively. Compensation expenses associated with stock options
issued to employees totaled $33 thousand and $0.5 million for the three and nine
months ended September 30, 2003. Excluding these compensation charges, general
and administrative decreased $1.8 million and $4.1 million, or 49% and 41% for
the three and nine months ended September 30, 2004, respectively, as compared to
the comparable periods in 2003.
Operational restructuring costs increased from $0.0 million to $6.3 million for
the nine months ended September 30, 2004, as compared to the nine months ended
September 30, 2003. The operational restructuring costs in the first quarter of
2004 resulted from the severance and related salary charges as a result of the
reduction in force in February 2004 and certain costs as a result of base
station deconstruction activities as part of our on-going network
rationalization efforts. In the second quarter of 2004, we took an operational
restructuring charge of $5.2 million related to these network rationalization
efforts.
In the second quarter of 2004, we finalized plans to implement certain network
station rationalization initiatives. These initiatives involve the
de-commissioning of approximately 409 base stations from our network. We had
1,549 base stations in our network as of March 31, 2004, and as of September 30,
2004, we have 1,239 base stations in our network. We are taking these actions in
a coordinated effort to reduce network operating costs while also focusing on
minimizing the potential impact to our customers communications and coverage
requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are substantially complete with these network
rationalization initiatives, and anticipate final completion by December 2004.
Depreciation and amortization for the core wireless business decreased to $3.7
million for the three months ended September 30, 2004, as compared to $5.5
million for the three months ended September 30, 2003. Depreciation and
amortization for the core wireless business decreased to $12.1 million for the
nine months ended September 30, 2004, as compared to $16.3 million for the nine
months ended September 30, 2003. Depreciation and amortization was approximately
50% of service revenue for the three months ended September 30, 2004, as
compared to 51% for the comparable period of 2003. Depreciation and amortization
was approximately 44% of service revenue for the first nine months of 2004, as
compared to 43% for the first nine months of 2003. Depreciation and amortization
expense reduced as a result of our decline in asset value related to our
frequency sale transactions in 2003 and our write-down as of September 2003 of
our customer contract related intangibles. In May 2004, the Company engaged a
financial advisory firm to prepare a valuation of customer intangibles as of
30
September 2003. Due to the loss of UPS as a core customer in 2003 as well as the
migration and customer churn occurring in the Company's mobile internet base
that is impacting the average life of a customer in this base, among other
things, the Company determined an impairment of the value of these customer
contracts was probable. As a result of this valuation, the value of customer
intangibles was determined to be impaired as of September 2003 and was reduced
by $5.5 million.
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
---- ---- ---- ----
Other Income/(Expense)
- ----------------------
(in thousands)
Interest Expense, net $(556) $(1,638) $(3,595) $(4,592)
Write -off of deferred financing costs --- --- (8,052) ---
Other Income, net 66 12 265 819
Other Income from Aether 650 180 1,957 1,956
Gain/(Loss) on Disposal of Assets 2 51 2 51
(Loss) on impairment of intangible asset --- (5,535) --- (5,535)
Gain on Debt & Capital Lease Retirement --- --- 802 ---
Equity in Losses of Mobile Satellite Ventures $(3,779) $(3,155) $(8,617) $(7,768)
Interest expense decreased for the nine months ended September 30, 2004, as
compared to the nine months ended September 30, 2003, due primarily to the April
2004 repayment of our term credit facility, the July 2004 repayments of our
notes payable to Motorola, Rare Medium and CSFB, and the termination of our
capital lease with Hewlett-Packard. Interest expense decreased for the nine
months ended September 30, 2004, as compared to the nine months ended September
30, 2003, due to the debt repayment actions mentioned above, offset by the
amortization of fees and the value ascribed to warrants provided to the term
credit facility lenders on our closing of our credit facility in January of 2003
and the subsequent amendment in March 2004. Interest expense is presented net of
interest income on our bank balances and the interest accrued on our note
receivable from MSV.
In April 2004, we repaid all amounts outstanding under our term credit facility
of $6.7 million, which resulted in the requirement to immediately expense $6.4
and $1.7 million in financing fees related to the January 2003 and March 2004
credit facilities.
In June 2004, we negotiated settlements of our vendor financing and notes
payable with Motorola and our capital lease with Hewlett-Packard. These
settlements resulted in a gain on debt and capital lease retirements of $0.8
million.
In July 2004, we repaid all amounts outstanding under our notes payable to Rare
Medium and CSFB.
We recorded equity in losses of MSV of $3.8 million and $8.6 million for the
three and nine months ended September 30, 2004, as compared to $3.1 million and
$7.8 million for the three and nine months ended September 30, 2003. The MSV
losses for the three and nine months ended September 30, 2004 are Motient's
46.5% of MSV's losses for the same periods, and losses for the three and nine
months ended September 30, 2003 consist of Motient's 46.5% share of the MSV
losses to date reduced by the loans in priority. For the three and nine months
ended September 30, 2004, respectively, MSV had revenues of $8.8 million and
$24.5 million, operating expenses of $12.2 million and $27.2 million and a net
loss of $11.3 million and $25.5 million.
31
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2004, we had approximately $16.7 million of cash on hand and
short-term investments. In addition to cash generated from operations, our
principal source of funds was, as of September 30, 2004, cash on hand, including
cash from two private placements of our common stock. On April 7, 2004, we
received proceeds of $23.2 million from the sale of our common stock to several
institutional investors in a private placement. On April 13, 2004, we repaid all
of our then owing principal and interest under our term credit facility. We
currently have $5.7 million of availability remaining under this facility, until
December 31, 2004, subject to the lending conditions of the credit agreement.
For the montly periods ended April 2003 through December 2003 and for the month
ended September 30, 2004, the Company reported events of default related to
non-compliance with covenants requiring minimum monthy revenue, earnings before
interest, taxes and depreciation and amortization and free cash flow
performance. In each period, the lenders waived these events of default. There
can be no assurance that Motient will not have to report additional events of
default or that the lenders will continue to provide waivers in such event. On
July 2, 2004, we received aggregate proceeds of $30.0 million from the sale of
our common stock to several institutional investors, of which approximately
$24.5 million was used to repay certain debt owing to Rare Medium and CSFB, with
the remainder used for general working capital purposes.
SUMMARY OF CASH FLOW FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
Nine Months Nine Months
Ended Ended
September 30, September 30,
2004 2003
---- ----
(Unaudited) (Unaudited)
Net cash (used in) Operating Activities: $(14,578) $ (4,175)
Net cash provided by Investing Activities: 2,445 (202)
Cash Flows from financing activities:
Principal payments under capital leases (2,419) (2,116)
Principal payments under vendor financing (2,582) (657)
Repayment from term loan (6,785) --
Repayment of notes (19,750) --
Proceeds from term credit facility 1,500 4,500
Proceeds from issuance of stock 55,480 190
Proceeds from issuance of employee stock options 1,235 --
Stock issuance costs and other charges (1,422) --
Debt issuance costs and other charges -- (537)
--------- ---------
Net cash provided by financing activities 25,257 1,380
--------- ---------
Net (decrease) increase in cash and cash equivalents 13,124 (2,997)
Cash and Cash Equivalents, beginning of period 3,618 5,840
--------- ---------
Cash and Cash Equivalents, end of period $ 16,742 $ 2,843
========= =========
Cash used in operating activities increased for the nine months ended September
30, 2004 as compared to the nine months ended September 30, 2003, as a result of
decreases in funds provided by revenue.
32
The increase in cash provided by investing activities for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003 was
primarily attributable to the receipt of $2.0 million from MSV as a result of
the April 2, 2004 investment in MSV. Cash flows from investing activities also
includes the conversion of our $1.1 million letter of credit that secured our
capital lease with Hewlett-Packard to unrestricted cash, as part of our
negotiated settlement of these obligations with Hewlett-Packard in June 2004.
Investments in property and equipment reflected our investment in new
telecommunications infrastructure technology for our network that allowed us to
reduce our telecommunications infrastructure costs.
The increase in cash provided by financing activities for the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003 was
the result of the proceeds from the exercise of certain employee stock options
and certain other warrants and our private placements of common stock completed
in April and July 2004. These proceeds were partially utilized in our negotiated
settlement of our vendor debt and capital lease obligations in the second
quarter of 2004, the repayment of all amounts outstanding under our term credit
facility in April 2004 and the repayment of all amounts outstanding under our
debt obligations to Rare Medium and CSFB.
We believe that our available funds, together with existing credit facilities
and proceeds from the exercise of warrants and options, will be adequate to
satisfy our current and planned operations for at least the next 12 months.
COST REDUCTION AND DEBT REDUCTION ACTIONS
We have taken a number of steps to reduce operating and capital expenditures in
order to lower our cash burn rate and improve our liquidity position.
REDUCTIONS IN WORKFORCE. We undertook a reduction in our workforce in February
2004. This action eliminated approximately 32.5% (54 employees), of our
workforce. This action reduced employee and related expenditures by
approximately $0.4 million per month.
NETWORK RATIONALIZATION. In the second quarter of 2004, we finalized plans to
implement certain base station rationalization initiatives. These initiatives
involve the de-commissioning of approximately 409 base stations from our
network. We had 1,549 base stations in our network as of March 31, 2004, and as
of September 30, 2004, we have 1,239 base stations in our network. We are taking
these actions in a coordinated effort to reduce network operating costs while
also focusing on minimizing the potential impact to our customers communications
and coverage requirements. This rationalization encompasses, among other things,
the reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. We are substantially complete with these network
rationalization initiatives, and anticipate final completion by December 2004.
33
FRAME RELAY AND TANDEM EQUIPMENT RETIREMENT. In conjunction with our base
station rationalization initiatives discussed above, Motient is in the process
of converting its telecommunications infrastructure technology to frame relay
technology. As of September 30, 2004, this project was approximately 80%
complete. In the fourth quarter of 2004, we will be retiring certain network
equipment associated with this conversion. We expect to realize significant
telecommunications cost reductions in 2005 as a result of this conversion.
Despite these initiatives, we continue to generate losses from operations, and
there can be no assurances that we will ever generate income from operations.
Please see Item 2 ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") for further discussion of this network
rationalization.
CREDIT FACILITY REPAYMENT: On April 13, 2004, Motient repaid the all principal
amounts then owing under its term credit facility, including accrued interest
thereon, in an amount of $6.8 million. The remaining availability under the
credit facility of $5.7 million will be available for borrowing by the Company
until December 31, 2004, subject to the lending conditions in the credit
agreement.
TERMINATION OF MOTOROLA AND HEWLETT-PACKARD AGREEMENTS: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facility with Motorola and its capital lease with Hewlett-Packard. The
full amount due and owing under these agreements was a combined $6.8 million.
The Company paid a combined $3.9 million in cash to Motorola and Hewlett-Packard
and issued a warrant to Motorola to purchase 200,000 shares of the Company's
common stock at a price of $8.68, in full satisfaction of the outstanding
balances.
TERMINATION OF RARE MEDIUM AND CSFB NOTES. On July 15, 2004, the Company paid
all principal and interest due and owing on its Rare Medium and CSFB notes, in
the aggregate amount of $23.5 million.
Despite these initiatives, we continue to generate losses from operations, and
there can be no assurances that we will ever generate income from operations.
UNITED PARCEL SERVICE PREPAYMENT: In December 2002 we entered into an agreement
with UPS pursuant to which UPS prepaid an aggregate of $5 million in respect of
network airtime service to be provided beginning January 1, 2004. The $5 million
prepayment will be credited against airtime services provided to UPS beginning
January 1, 2004, until the prepayment is fully credited. Based on UPS' current
level of network airtime usage, we do not expect that UPS will be required to
make any cash payments to us in 2004 for service provided during 2004. UPS has
substantially completed its migration to next generation network technology, and
its monthly airtime usage of our network has declined significantly. There are
no minimum purchase requirements under our contract with UPS, and the contract
may be terminated by UPS on 30 days' notice. If UPS terminates the contract, we
will be required to refund any unused portion of the prepayment to UPS. While we
expect that UPS will remain a customer for the foreseeable future, the bulk of
UPS' units have migrated to another network. Until June 2003, UPS had maintained
its historical level of payments to mitigate the near-term revenue and cash flow
impact of its recent and anticipated continued reduced network usage. However,
beginning in July 2003, the revenues and cash flow from UPS declined
significantly. As of September 30, 2004, UPS had approximately 3,000 active
units on Motient's network. The value of our remaining airtime service
obligations to UPS at September 30, 2004 in respect of the prepayment was
approximately $4.1 million.
34
SOURCES OF FINANCING
SALE OF COMMON STOCK: On April 7, 2004, we sold 4,215,910 shares of our common
stock at a per share price of $5.50 for an aggregate purchase price of $23.2
million to The Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio,
Ltd., The Altar Rock Fund L.P., Tudor Proprietary Trading, L.L.C., Highland
Crusader Offshore Partners, L.P., York Distressed Opportunities Fund, L.P., York
Select, L.P., York Select Unit Trust, M&E Advisors L.L.C., Catalyst Credit
Opportunity Fund, Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf
Capital II LP and Greywolf Capital Overseas Fund and LC Capital Master Fund. The
sale of these shares was not registered under the Securities Act of 1933, as
amended and the shares may not be sold in the United States absent registration
or an applicable exemption from registration requirements. The shares were
offered and sold pursuant to the exemption from registration afforded by Rule
506 under the Securities Act and/or Section 4(2) of the Securities Act. In
connection with this sale, we signed a registration rights agreement with the
holders of these shares. Among other things, this registration rights agreement
requires us to file and cause to make effective a registration statement
permitting the resale of the shares by the holders thereof. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. Motient's
registration statement registering the shares became effective on July 13, 2004,
prior to the deadline imposed by the registration rights agreement. Therefore,
the warrants issued in this transaction will never vest. The proceeds of this
private placement of common stock were used for general corporate purposes and
the repayment of the term credit facility.
ADDITIONAL SALE OF COMMON STOCK: On July 1, 2004, we sold 3,500,000 shares of
our common stock at a per share price of $8.57 for an aggregate purchase price
of $30.0 million to The Raptor Global Portfolio Ltd., The Tudor BVI Global
Portfolio, Ltd., The Altar Rock Fund L.P., Tudor Proprietary Trading, L.L.C.,
York Distressed Opportunities Fund, L.P., York Select, L.P., York Select Unit
Trust, York Global Value Partner, L.P., Catalyst Credit Opportunity Fund,
Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Rockbay Capital Fund, LLC,
Rockbay Capital Investment Fund, LLC, Rockbay Capital Offshore Fund, Ltd.,
Glenview Capital Partner, L.P., Glenview Institutional Partners, L.P., Glenview
Capital Master Fund, Ltd., GCM Little Arbor Master Fund, Ltd., OZ Master Fund,
Ltd., OZ Mac 13 Ltd., Fleet Maritime, Inc., John Waterfall, Edwin Morgens,
Greywolf Capital II, L.P., Greywolf Capital Overseas Fund, Highland Equity Focus
Fund, L.P., Singer Children's Management Trust, Highland Equity Fund, L.P., and
Strome Hedgecap Limited. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, we signed a registration rights
agreement with the holders of these shares. Among other things, this
registration rights agreement requires us to file and cause to make effective a
registration statement permitting the resale of the shares by the holders
thereof. We also issued warrants to purchase an aggregate of 525,000 shares of
our common stock to the investors listed above, at an exercise price of $8.57
per share. Motient's registration statement registering the shares issued in
this transaction became effective on July 13, 2004, prior to the deadline
imposed by the registration rights agreement. Therefore, the warrants issued in
this transaction will never vest.
35
The proceeds of this private placement of common stock were used for general
corporate purposes and the repayment of the Rare Medium and CSFB notes.
TERM CREDIT FACILITY: On January 27, 2003, our wholly-owned subsidiary, Motient
Communications, closed a term credit agreement with a group of lenders,
including several of our existing stockholders. The lenders include the
following entities or their affiliates: M&E Advisors, L.L.C., Bay Harbour
Partners, York Capital and Lampe Conway & Co. York Capital is affiliated with
James G. Dinan and JGD Management Corp. James Dondero, Highland Capital
Management, JGD Management Corp. and James G. Dinan each hold 5% or more of
Motient's common stock. The lenders also include Gary Singer, directly or
through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of our directors.
The table below shows, as of November 9, 2004 the number of shares of Motient
common stock beneficially owned by the following parties to the term credit
agreement, based solely on filings made by such parties with the SEC:
NAME OF BENEFICIAL OWNER NUMBER OF SHARES
------------------------ ----------------
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
Highland Capital Management** 4,642,469
James Dondero** 4,642,469
*JGD Management Corp. and James G. Dinan share beneficial ownership
with respect to the 2,276,445 shares of our common stock. Mr. Dinan
is the president and sole stockholder of JGD Management Corp., which
manages the other funds and accounts that hold our common stock over
which Mr. Dinan has discretionary investment authority.
** James D. Dondero, a member of our board of directors, is the
President of Highland Capital Management, L.P., which, pursuant to an
arrangement with M&E Advisors, L.L.C., has indirectly made a commitment
under the credit facility.
Under the credit agreement, the lenders have made commitments to lend Motient
Communications up to $12.5 million. The commitments are not revolving in nature
and amounts repaid or prepaid may not be reborrowed. Borrowing availability
under Motient's term credit facility terminated on December 31, 2003. On March
16, 2004, Motient Communications entered into an amendment to the credit
facility which extended the borrowing availability period until December 31,
2004. As part of this amendment, Motient Communications provided the lenders
with a pledge of all of the stock of a newly-formed special purpose subsidiary
of Motient Communications, Motient License, which holds all of Motient's FCC
licenses formerly held by Motient Communications.
Under this facility, the lenders have agreed to make loans to Motient
Communications through December 31, 2004 upon Motient Communications' request no
more often than once per month, in aggregate principal amounts not to exceed
$1.5 million for any single loan, and subject to satisfaction of other
conditions to borrowing, including certain financial and operating covenants,
contained in the credit agreement.
Each loan borrowed under the credit agreement has a term of three years. Loans
carry interest at 12% per annum. Interest accrues, compounding annually, from
the first day of each loan term, and all accrued interest is payable at each
respective loan maturity, or, in the case of mandatory or voluntary prepayment,
at the point at which the respective loan principal is repaid. Loans may be
prepaid at any time without penalty.
36
For the monthly periods ended April 2003 through December 2003 and for the month
ended September 30, 2004, the Company reported events of default under the terms
of the credit facility to the lenders. These events of default related to
non-compliance with covenants requiring minimum monthly revenue, earnings before
interest, taxes and depreciation and amortization and free cash flow
performance. In each period, the lenders waived these events of default. There
can be no assurance that Motient will not have to report additional events of
default or that the lenders will continue to provide waivers in such event. As
of September 30, 2004, there were no amounts outstanding under the term credit
facility. Ultimately, there can be no assurances that the liquidity provided by
the credit facility will be sufficient to fund Motient's ongoing operations.
MSV NOTE: We own a $15.0 million promissory note issued by MSV in November 2001.
This note matures in November 2006, but may be fully or partially repaid prior
to maturity involving the consummation of additional investments in MSV in the
form of equity, debt or asset sale transactions, subject to certain conditions
and priorities with respect to payment of other indebtedness. Please see "
- -Overview - Mobile Satellite Ventures LP" for further discussion of this note
receivable. Motient also owns an aggregate of $3.5 million of convertible notes
issued by MSV. The convertible notes mature on November 26, 2006, bear interest
at 10% per annum, compounded semiannually, and are payable at maturity. The
convertible notes are convertible, at any time, at our discretion, and
automatically in certain circumstances, into class A preferred units of limited
partnership of MSV. This note, including outstanding interest thereon, was
exchanged on November 12, 2004 for limited partnership units and general partner
shares of MSV. Please see Note 5, "Subsequent Events" for further discussion of
our investments in MSV.
On April 2, 2004, a $17.6 million investment into MSV was consummated. In
connection with this investment, MSV's amended and restated investment agreement
was amended to provide that of the total $17.6 million in proceeds, $5.0 million
was used to repay certain outstanding indebtedness of MSV, including $2.0
million of accrued interest under the $15.0 million promissory note issued to us
by MSV. We were required to use 25% of the $2 million we received in this
transaction, or $500,000, to make prepayments under our existing notes owed to
Rare Medium and CSFB.
LITIGATION PROCEEDS: On April 15, 2004, Motient filed a claim under the rules of
the American Arbitration Association in Fairfax County, VA, against Wireless
Matrix Corporation, a reseller of Motient's services, for the non-payment of
certain amounts due and owing under the "take-or-pay" agreement between Motient
and Wireless Matrix. Under this agreement, Wireless Matrix agreed to purchase
certain minimum amounts of air-time on the Motient network. In June 2004,
Motient reached a favorable out of court settlement with Wireless Matrix in
which Wireless Matrix paid Motient $1.1 million.
OUTSTANDING OBLIGATIONS
As of September 30, 2004, Motient had no outstanding debt obligations.
RARE MEDIUM NOTE: Under the Company's Plan of Reorganization, the Rare Medium
notes were cancelled and replaced by a new note in the principal amount of $19.0
million. On July 15, 2004, the Company paid all principal and interest due and
owing on this note, in the amount of $22.6 million.
37
CSFB NOTE: Under the Company's Plan of Reorganization, the Company issued a note
to CSFB, in satisfaction of certain claims by CSFB against Motient, in the
principal amount of $750,000. On July 15, 2004, the Company paid all principal
and interest due and owing on this note, in the amount of $0.9 million.
We believe that our available funds, together with existing credit facilities,
will be adequate to satisfy our current and planned operations for at least the
next 12 months.
RESTRUCTURING COSTS
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of September 30, 2004, the Company had incurred base station
deconstruct costs of $0.4 million, the loss on the retirement of certain base
station equipment of $2.8 million and termination liabilities of $0.5 million
for site leases no longer required for removed base stations.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2004 to September 30, 2004:
Base Station
Employee Asset Base Station FCC License Site Lease
Terminations Write-Offs Deconstruction Terminations Terminations Total
- ----------------------------------------------------------------------------------------------------------------------
Balance January 1, 2004 $ -- $ -- $ -- $ -- $ -- $ --
- ----------------------------------------------------------------------------------------------------------------------
Restructure Charge (1,107) -- -- -- -- (1,107)
Deductions - Cash 333 -- -- -- -- 333
Deductions - Non-Cash -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance March 31, 2004 (774) -- -- -- -- (774)
- ----------------------------------------------------------------------------------------------------------------------
Restructure Charge -- (2,795) (398) (113) (1,854) (5,160)
Deductions - Cash 242 -- 75 25 61 403
Deductions - Non-Cash -- 2,795 -- -- -- 2,795
- ----------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 (532) -- (323) (88) (1,793) (2,736)
- ----------------------------------------------------------------------------------------------------------------------
Deductions - Cash 132 -- 252 39 416 839
Deductions - Non-Cash -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------
Balance September 30, 2004 $ (400) -- $ (71) $ (49) $(1,377) $(1,897)
- ----------------------------------------------------------------------------------------------------------------------
COMMITMENTS
As of September 30, 2004, we had no outstanding commitments to purchase
inventory.
In December 2002, we entered into an agreement with UPS pursuant to which UPS
prepaid an aggregate of $5 million in respect of network airtime service to be
provided beginning January 1, 2004. The $5 million prepayment will be credited
against airtime services provided to UPS beginning January 1, 2004, until the
prepayment is fully credited. Based on UPS' current level of network airtime
usage, we do not expect that UPS will be required to make any cash payments to
us in 2004 for service provided during 2004. There are no minimum purchase
requirements under our contract with UPS, and the contract may be terminated by
UPS on 30 days' notice. If UPS terminates the contract, we will be required to
refund any unused portion of the prepayment to UPS. The value of our remaining
airtime service obligations to UPS at September 30, 2004 in respect of the
prepayment was approximately $4.1 million.
38
CRITICAL ACCOUNTING POLICIES AND SIGNIFICANT ESTIMATES
Below are our accounting policies, which are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates as they require assumptions that are inherently uncertain.
Inventory
- ---------
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, are stated at the lower of cost
or market. Cost is determined using the weighted average cost method. We
periodically assess the market value of our inventory, based on sales trends and
forecasts and technological changes and record a charge to current period income
when such factors indicate that a reduction to net realizable value is
appropriate. We consider both inventory on hand and inventory which we have
committed to purchase, if any. Periodically, we will offer temporary discounts
on equipment purchases. The value of this discount is recorded as a cost of sale
in the period in which the sale occurs.
Investment in MSV and Note Receivable from MSV
- ----------------------------------------------
As a result of the application of "fresh-start" accounting and subsequently
modified (see below regarding the November 2003 valuation), the notes and
investment in MSV were valued at fair value and we recorded an asset in the
amount of approximately $53.9 million representing the estimated fair value of
our investment in and note receivable from MSV. Included in this investment is
the historical cost basis of our common equity ownership of approximately 46.5%
as of May 1, 2002, or approximately $19.3 million. In accordance with the equity
method of accounting, we recorded our approximate 46.5% share of MSV losses
against this basis.
Approximately $6.2 million of the value attributed to MSV is the excess of fair
value over cost basis and is amortized over the estimated lives of the
underlying MSV assets that gave rise to the basis difference. We are amortizing
this excess basis in accordance with the pro-rata allocation of various
components of MSV's intangible assets as determined by MSV through independent
valuations. Such assets consist of FCC licenses, intellectual property and
customer contracts, which are being amortized over a weighted-average life of
approximately 12 years.
Additionally, we have recorded the $15.0 million note receivable from MSV, plus
accrued interest thereon at its fair value, estimated to be approximately $13.0
million, at "fresh start" after giving affect to discounted future cash flows at
market interest rates. This note matures in November 2006, but may be fully or
partially repaid prior to maturity in certain circumstances involving the
consummation of additional investments in MSV or upon the occurrence of certain
other events such as issuance of other indebtedness or the sale of assets by
MSV, subject to certain to certain conditions and priorities with respect to
payment of other indebtedness. In April 2004, MSV repaid $2.0 of accrued
interest on this note, of which $500,000 was used by Motient to repay accrued
interest owing to Rare Medium and CSFB. This note, including outstanding
interest thereon, was exchanged on November 12, 2004 for limited partnership
units and general partner shares of MSV. Please see Note 5, "Subsequent Events"
for further discussion of our investments in MSV.
39
In November of 2003, we engaged CTA to perform a valuation of our equity
interests in MSV as of December 31, 2002. As part of this valuation process, we
determined that our equity interest in MSV was not appropriately calculated as
of May 1, 2002 due to certain preference rights for certain classes of
shareholders in MSV. We reduced our equity interest in MSV from $54 million
(inclusive of Motient's $2.5 million convertible note from MSV) to $41 million
as of May 1, 2002. As a result of the valuation of MSV, it was determined that
the value of our equity interest in MSV was impaired as of December 31, 2002
from the value on our balance sheet. This impairment was deemed to have occurred
in the fourth quarter of 2002. We reduced the value of its equity interest in
MSV by $15.4 million as of December 31, 2002. It was determined there was no
further impairment required as of December 31, 2003 and September 30, 2004.
The valuation of our investment in MSV and our note receivable from MSV are
ongoing assessments that are, by their nature, judgmental given that MSV is not
traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in our investment in
MSV and that the MSV note is collectible, there is the inherent risk that this
assessment will change in the future and we will have to write down the value of
this investment and note. Please see Note 5, "Subsequent Events" for further
discussion of our investments in MSV.
Deferred Taxes
- --------------
We have generated significant net operating losses for tax purposes through
September 30, 2004. We have had our ability to utilize these losses limited on
two occasions as a result of transactions that caused a change of control in
accordance with the Internal Revenue Service Code Section 382. Additionally,
since we have not yet generated taxable income, we believe that our ability to
use any remaining net operating losses has been greatly reduced; therefore, we
have fully reserved for any benefit that would have been available as a result
of our net operating losses.
Revenue Recognition
- -------------------
We generate revenue principally through equipment sales and airtime service
agreements, and consulting services. In 2000, we adopted SAB No. 101 which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. In certain circumstances, SAB No. 101 requires us to defer
the recognition of revenue and costs related to equipment sold as part of a
service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers", or FAQ, issued with SAB No. 101. Selected portions of
the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did
not have a material impact on our revenue recognition policies.
40
Revenue is recognized as follows:
SERVICE REVENUE: Revenues from our wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. We defer any revenue and costs associated with activation of a
subscriber on our network over an estimated customer life of two years.
To date, the majority of our business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. We grant credit
based on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. We establish a valuation allowance for
doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. We assess the adequacy of these
reserves quarterly, evaluating factors such as the length of time individual
receivables are past due, historical collection experience, the economic
environment and changes in credit worthiness of our customers. If circumstances
related to specific customers change or economic conditions worsen such that our
past collection experience and assessments of the economic environment are no
longer relevant, our estimate of the recoverability of our trade receivables
could be further reduced.
EQUIPMENT AND SERVICE SALES: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
directly to end-users. Revenue from the sale of the equipment as well as the
cost of the equipment, are initially deferred and are recognized over a period
corresponding to our estimate of customer life of two years. Equipment costs are
deferred only to the extent of deferred revenue.
41
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
- ----------------------------------
We maintain disclosure controls and procedures (as defined in Rules 13a-15 and
15d-15 under the Securities Exchange Act of 1934, as amended) that are designed
to ensure that information required to be disclosed in our filings and reports
under the Exchange Act is recorded, processed, summarized and reported within
the periods specified in the rules and forms of the SEC. Such information is
accumulated and communicated to our management, including our principal
executive officer (currently our executive vice president, chief operating
officer and treasurer) and principal financial officer (currently our controller
and chief accounting officer), as appropriate, to allow timely decisions
regarding required disclosure. Our management, including the principal executive
officer (currently our executive vice president, chief operating officer and
treasurer) and the principal financial officer (currently our controller and
chief accounting officer), recognizes that any set of disclosure controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer (currently our executive vice
president, chief operating officer and treasurer) and principal financial
officer (currently our controller and chief accounting officer), of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, we concluded that our disclosure controls and procedures, though not
as mature or as formal as management intends them ultimately to be, are adequate
and effective under the circumstances, and that there are no material
inaccuracies or omissions in this quarterly report on Form 10-Q.
As a result of our evaluation of our disclosure controls and procedures for
reporting periods in 2003, we have taken a number of steps to improve our
disclosure controls and procedures.
o First, we have established a disclosure committee comprised of
senior management and other officers and employees responsible
for, or involved in, various aspects of our financial and
non-financial reporting and disclosure functions. Although we
had not previously established a formal disclosure committee,
the functions performed by such committee were formerly
carried out by senior management and other personnel who now
comprise the disclosure committee.
o Second, we have instituted regular quarterly meetings to
review each department's significant activities and respective
disclosure controls and procedures.
42
o Third, department managers have to document their own
disclosure controls and procedures.
o Fourth, department managers have been tasked with tracking
relevant non-financial operating metrics such as network
statistics, headcount and other pertinent operating
information. Quarterly reports summarizing this information
will be prepared and presented to the disclosure committee and
the principal executive officer (currently our executive vice
president, chief operating officer and treasurer) and chief
financial officer (or persons performing such function,
currently our controller and chief accounting officer).
o Fifth, certain department heads prepare weekly activities
reviews, which are shared with the members of the disclosure
committee as well as the principal executive officer
(currently our executive vice president, chief operating
officer and treasurer) and principal financial officer
(currently our controller and chief accounting officer). These
weekly reviews and the quarterly disclosure committee meetings
and associated reports are intended to help inform senior
management of material developments that affect our business,
thereby facilitating consideration of prompt and accurate
disclosure.
In addition to the initiatives outlined above, we have taken the following steps
to further strengthen our disclosure controls and procedures:
o We conduct and document quarterly reviews of the effectiveness
of our disclosure controls and procedures;
o We circulate drafts of our public filings and reports for
review to key members of the senior management team
representing each functional area; and
In conjunction with the preparation of each quarterly and annual report to be
filed with the SEC, each senior vice president and department head is required
to complete and execute an internal questionnaire and disclosure certification
designed to ensure that all material disclosures are reported.
43
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see the discussion regarding Legal Proceedings contained in Note 4
("Legal and Regulatory Matters") of notes to consolidated financial statements,
which is incorporated by reference herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
SALE OF COMMON STOCK
On July 1, 2004, Motient sold 3,500,000 shares of its common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to The
Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar
Rock Fund L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities
Fund, L.P., York Select, L.P., York Select Unit Trust, York Global Value
Partner, L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity
Fund Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment
Fund, LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Highland
Equity Fund, L.P., Singer Children's Management Trust, and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, Motient signed a registration rights agreement with the holders of
these shares. Among other things, this registration rights agreement requires
Motient to file and cause to make effective a registration statement permitting
the resale of the shares by the holders thereof. Motient also issued warrants to
purchase an aggregate of 525,000 shares of its common stock to the investors
listed above, at an exercise price of $8.57 per share. Motient's registration
statement registering the shares issued in this transaction became effective on
July 13, 2004, prior to the deadline imposed by the registration rights
agreement. Therefore, the warrants issued in this transaction will never vest.
In connection with this sale, Motient issued to certain CTA affiliates and
certain affiliates of Tejas Securities Group, Inc., our placement agent for the
private placement, warrants to purchase 340,000 and 510,000 shares,
respectively, of our common stock. CTA assisted Tejas Securities on certain due
diligence matters for this transaction. The exercise price of these warrants is
$8.57 per share. The warrants are immediately exercisable upon issuance and have
a term of five years. Motient also paid Tejas Securities Group, Inc. a placement
fee of $850,000 at closing. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act.
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The Company filed a registration statement on Forms S-1 with the SEC on July 2,
2004. The Company will not receive any proceeds from the sale of the shares
registered thereby. Motient's Registration Statement became effective on July
13, 2004.
On November 12, 2004, Motient sold 15,353,606 shares of its common stock at a
per share price of $8.57. Motient received aggregate proceeds of $126,397,783,
net of approximately $5,182,620 in commissions paid to Motient's placement
agent, Tejas Securities Group, Inc. The approximately 60 purchasers included
substantially all of the purchasers from the April and July 2004 private
placements, as well multiple new investors. The sale of these shares was not
registered under the Securities Act and the shares may not be sold in the United
States absent registration or an applicable exemption from registration
requirements. The shares were offered and sold pursuant to the exemption from
registration afforded by Rule 506 under the Securities Act and/or Section 4(2)
of the Securities Act. In connection with this sale, Motient signed a
registration rights agreement with the holders of these shares. Among other
things, this registration rights agreement requires Motient to file and cause to
make effective a registration statement permitting the resale of the shares by
the holders thereof. Motient also issued warrants to purchase an aggregate of
approximately 3,838,401 shares of its common stock to the investors listed
above, at an exercise price of $8.57 per share. These warrants will vest if and
only if Motient does not meet certain deadlines between January and March 2005
with respect to certain requirements under the registration rights agreement. If
the warrants vest, they may be exercised by the holders thereof at any time
through November 11, 2009.
Pursuant to terms of this sale, Motient will be permitted, but not required, to
undertake a follow-on rights offering of up to $50 million, at a price equal to
no less than $8.57 per share. Any such rights offering will be limited to
stockholders that did not participate in this private placement, and
participants will not have any right of over-subscription or be able to purchase
more than their pro-rata ownership of Motient.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Please see the discussion regarding the defaults under our term credit agreement
contained in Part I, Item 2 of this Report on From 10-Q, "Management's
Discussion and Analysis of Financial Condition and Results of Operations", under
the subsection "Liquidity and Capital Resources - Sources of Financing."
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ITEM 6. EXHIBITS
The Exhibit Index filed herewith is incorporated herein by reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
November 15, 2004 /s/Christopher W. Downie
-------------------------------------------
Christopher W. Downie
Executive Vice President, Chief Operating
Officer and Treasurer
(principal executive officer and duly
authorized officer to sign on behalf of the
registrant)
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EXHIBIT INDEX
NUMBER DESCRIPTION
10.43 Common Stock Purchase Agreement, dated as of November 12, 2004, by and
among Motient Corporation and the investors listed therein
10.44 Registration Rights Agreement, dated as of November 12, 2004, by and
among Motient Corporation and the investors listed therein
10.45 Form of Common Stock Purchase Warrant, dated as of November 12, 2004
10.46 Purchase Agreement, dated as of November 12, 2004, by and among Motient
Ventures Holding Inc., Mobile Satellite Ventures LP, et al
10.47 Note Exchange Agreement, dated as of November 12, 2004, by and among
Motient Ventures Holding Inc., Mobile Satellite Ventures LP, et al
10.48 Amended and Restated Limited Partnership Agreement, dated as of
November 12, 2004, by and among Motient Ventures Holding Inc., Mobile
Satellite Ventures LP, et al
10.49 Amended and Restated Stockholders Agreement, dated as of November 12,
2004, by and among Motient Ventures Holding Inc., Mobile Satellite
Ventures GP Inc., et al
10.50 Second Amended and Restated Parent Transfer/Drag Along Agreement by
and among Motient Corporation et. al.
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive
Vice President, Chief Operating Officer and Treasurer (principal
executive officer) (filed herewith).
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Controller
and Chief Accounting Officer (principal financial officer) (filed
herewith)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Executive Vice
President, Chief Operating Officer and Treasurer (principal executive
officer) (filed herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Controller and
Chief Accounting Officer (principal financial officer) (filed herewith)
48