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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, 2003
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
Incorporation or organization) Number)
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 [ ] No[X]
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 [ ] No[X]
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 May 26, 2004: 29,757,310
1
Introductory Note
This quarterly report on Form 10-Q relates to the quarter ended September 30,
2003. We did not file a report on Form 10-Q for this period previously because
we have only recently completed our financial statements for this period.
As we have previously disclosed in prior reports, including most recently in our
quarterly report on Form 10-Q for the quarter ended June 30, 2003 filed on May
14, 2004, we were not able to complete our financial statements for 2002 and
2003 until we resolved the appropriate accounting treatment with respect to
certain transactions that occurred in 2000 and 2001. The transactions in
question involved the formation of and certain transactions with Mobile
Satellite Ventures LP, or MSV, in 2000 and 2001 and the sale of certain of our
transportation assets to Aether Systems, Inc. in 2000. We have resolved these
accounting issues and, on March 22, 2004, we filed our annual report on Form
10-K for the year ended December 31, 2002, as well as our quarterly reports on
Form 10-Q for the quarters ended June 30, 2002 and September 30, 2002.
Concurrently with the filing of these reports, we also filed an amendment to our
quarterly report on Form 10-Q for the quarter ended March 31, 2002 to reflect
restated financial statements for such period. After completion of our annual
and quarterly reports for fiscal year 2002, we subsequently filed our quarterly
reports on Form 10-Q for the quarters ended March 31 and June 30, 2003 on April
26 and May 14, 2004, respectively.
We recently completed our financial statements for the quarter ended September
30, 2003 and those financial statements are included in this report. The 2002
comparative financial statements provided herein have been restated (see Note 2
of notes to consolidated financial statements, "Significant Accounting Policies
- - Restatement of Financial Statements" and Note 6, "Subsequent Events").
There have been a number of significant developments regarding Motient's
business, operations, financial condition, liquidity, and outlook subsequent to
September 30, 2003. Information regarding such matters is contained in this
report in Note 6 ("Subsequent Events") of notes to consolidated financial
statements.
On January 10, 2002, we filed for protection under Chapter 11 of the Bankruptcy
Code. Our Amended Joint Plan of Reorganization was filed with the United States
Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The
plan was confirmed on April 26, 2002, and became effective on May 1, 2002. In
the consolidated financial statements provided herein, all results for periods
prior to May 1, 2002 are referred to as those of the "Predecessor Company" and
all results for periods including and subsequent to May 1, 2002 are referred to
as those of the "Successor Company". Due to the effects of the "fresh start"
accounting, results for the Predecessor Company and the Successor Company are
not comparable (See Note 2 of notes to consolidated financial statements,
"Significant Accounting Policies").
References in this report to "Motient" and "we" or similar or related terms
refer to Motient Corporation and its wholly-owned subsidiaries together, unless
the context of such references requires otherwise.
2
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2003
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Nine Months 4
Ended September 30, 2003 (Successor Company), the Four Months Ended
April 30, 2002 (Predecessor Company) and the Three and Five
Months Ended September 30, 2002 (Successor Company)
Consolidated Balance Sheets as of September 30, 2003 (Successor Company) 5
and December 31, 2002 (Successor Company)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 2003 (Successor Company), the Four 6
Months Ended April 30, 2002 (Predecessor Company) and the Five
Months Ended September 30, 2002 (Successor Company), and
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results 40
of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 63
Item 4. Controls and Procedures 63
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 68
Item 3. Defaults Upon Senior Securities 68
Item 6. Exhibits and Reports on Form 8-K 68
3
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Successor Successor Successor Successor Predecessor
Company Company Company Company Company
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Audited)
REVENUES
Services and related revenue $10,662 $12,953 $38,209 $21,539 $16,809
Sales of equipment 1,389 344 3,204 477 5,564
----- --- ----- --- -----
Total revenues 12,051 13,297 41,413 22,016 22,373
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of services and operations (including 12,461 14,233 39,999 24,359 21,909
stock-based compensation of $24 and $426 for
the three months and nine months ended
September 30, 2003; exclusive of depreciation
and amortization below)
Cost of equipment sold (exclusive of 1,485 438 3,607 1,258 5,980
depreciation and amortization below)
Sales and advertising (including stock-based 1,065 1,754 3,782 3,163 4,287
compensation of $42 and $304 for the three
months and nine months ended September 30, 2003)
General and administrative (including 3,846 3,027 10,393 6,360 4,130
stock-based compensation of $10 and $487 for
the three months and nine months ended
September 30, 2003 and non-cash
consulting expense of $927 for the
three months and nine months ended September
30, 2003)
Restructuring Charge -- 25 -- 25 584
Depreciation and amortization 5,454 5,949 16,312 10,057 6,913
----- ----- ------ ------ -----
Operating loss (12,260) (12,129) (32,680) (23,206) (21,430)
-------- -------- -------- -------- --------
Interest expense, net (1,638) (575) (4,592) (983) (1,850)
Other income, net 192 -- 2,775 15 1,270
Gain (Loss) on disposal of assets 51 (1,193) 51 (1,193) (591)
(Loss) on impairment of intangible asset (5,535) -- (5,535) -- --
Gain on sale of transportation assets -- -- ---- -- 372
Equity in loss of XM Radio and Mobile Satellite
Ventures (3,155) (2,747) (7,768) (4,287) (1,909)
------- ------- ------- ------- -------
(Loss) before reorganization items (22,345) (16,644) (47,749) (29,654) (24,138)
-------- -------- -------- -------- --------
Reorganization items:
Costs associated with debt restructuring -- -- ---- -- (22,324)
Gain on extinguishment of debt -- -- ---- -- 183,725
Gain on fair market adjustment of assets -- -- ---- -- 94,715
------
Net (loss) income $(22,345) $(16,644) $(47,749) $(29,654) $231,978
========= ========= ========= ========= ========
Basic and Diluted (Loss) income Per Share of
Common Stock:
Net (Loss) income, basic and diluted $(0.89) $(0.66) $(1.90) $(1.18) $3.98
======= ======= ======= ======= =====
Weighted-Average Common Shares Outstanding - basic
and diluted 25,170 25,097 25,128 25,097 58,251
====== ======== ====== ======== =======
The accompanying notes are an integral part of these consolidated
financial statements.
4
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
Successor Successor
Company Company
September 30, 2003 December 31, 2002
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $2,843 $5,840
Short-term investments -- 50
Accounts receivable-trade, net of allowance for doubtful accounts of
$1,418 at September 30, 2003 and $1,003 at December 31, 2002 4,937 9,339
Restricted investments -- 554
Inventory 526 1,077
Due from Mobile Satellite Ventures, net 72 234
Deferred equipment costs 4,272 2,755
Assets held for sale 3,366 --
Other current assets 5,684 6,796
----- -----
Total current assets 21,700 26,645
------ ------
RESTRICTED INVESTMENTS 806 --
PROPERTY AND EQUIPMENT, net 35,849 46,405
FCC LICENSES AND OTHER INTANGIBLES, net 79,784 94,921
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 24,725 32,493
DEFERRED CHARGES AND OTHER ASSETS 9,417 1,757
----- -----
Total assets $172,281 $202,221
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $13,696 $13,040
Deferred equipment revenue 4,310 2,861
Deferred revenue and other current liabilities 8,445 5,308
Vendor financing commitment, current 1,020 1,020
Obligations under capital leases, current 2,031 3,031
----- -----
Total current liabilities 29,502 25,260
------ ------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 2,103 3,219
Vendor financing commitment, net of current portion 4,014 4,927
Notes payable, including accrued interest thereon 22,381 20,943
Term credit facility, including accrued interest thereon 4,664 --
Other long-term liabilities 1,961 4,824
----- -----
Total long-term liabilities 35,123 33,913
------ ------
Total liabilities 64,625 59,173
------ ------
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
September 30, 2003 and December 31, 2002, no shares issued or
outstanding at September 30, 2003 or December 31, 2002 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares authorized
and 25,175,434 and 25,097,256 shares issued and outstanding at
September 30, 2003 and at December 31, 2002 252 251
Additional paid-in capital 199,219 197,814
Common stock purchase warrants 15,492 4,541
Accumulated deficit (107,307) (59,558)
--------- --------
STOCKHOLDERS' EQUITY 107,656 143,048
------- -------
Total liabilities and stockholders' equity $172,281 $202,221
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
5
Motient Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Successor Successor Predecessor
Company Company Company
Nine Months Five Months Four Months
Ended September 30, Ended September 30, Ended April 30,
2003 2002 2002
(Unaudited) (Unaudited) (Audited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $ (4,175) $(11,874) $(14,546)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term and restricted investments (202) (50) --
Proceeds from the sale of assets -- 616 --
Proceeds from the sale of transportation assets -- -- 372
Investment in MSV -- (957) --
Additions to property and equipment -- (299) (494)
-------- -------- --------
Net cash (used in) provided by investing activities (202) (690) (122)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities -- -- 17
Proceeds from issuance of equity securities to 401(k) 190
Principal payments under capital leases (2,116) (1,334) (1,273)
Principal payments under Vendor Financing (657) -- --
Proceeds from Term Credit Facility 4,500 -- --
Debt issuance costs (537) -- --
-------- -------- --------
Net cash (used in) provided by financing activities 1,380 (1,334) (1,256)
-------- -------- --------
Net (decrease) increase in cash and cash equivalents (2,997) (13,898) (15,924)
CASH AND CASH EQUIVALENTS, beginning of period 5,840 17,463 33,387
-------- -------- --------
CASH AND CASH EQUIVALENTS, end of period $ 2,843 $ 3,565 $ 17,463
======== ======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(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
eLink SM 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 has six wholly-owned subsidiaries and a 29.5% interest (on a
fully-diluted basis) in Mobile Satellite Ventures LP ("MSV"). For further
details regarding Motient's interest in MSV, please see "- Mobile Satellite
Ventures LP" below and Note 6 ("Subsequent Events -- Developments Relating to
MSV"). 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 expanding 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 placed
significant pressures on Motient's financial condition and liquidity position.
These factors also restrained Motient's ability to accelerate 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, cash
constraints that have limited Motient's ability to generate greater demand,
unanticipated technological and development delays and general economic factors.
Motient's results in recent periods, including the period covered by this
report, have also been hindered by the downturn in the economy and capital
markets. These factors contributed to the Company's decision in January 2002 to
file a voluntary petition for reorganization under Chapter 11 of the United
States Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed
on April 26, 2002 and became effective on May 1, 2002. See Note 2 ("Significant
Accounting Policies -- Motient's Chapter 11 Filing and Plan of Reorganization
and "Fresh-Start" Accounting") below.
7
For a discussion of certain significant recent developments and trends in
Motient's business after the end of the period covered by this report, please
see Note 6 ("Subsequent Events"). The financial results for the period January
1, 2002 to April 30, 2002 are herein referred to as "Predecessor Company"
results and the financial results for all periods after April 30, 2002 are
referred to as "Successor Company" results.
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"),
in which it owned, until November 26, 2001, 80% of the membership interests, in
order to conduct research and development activities. In June 2000, three
investors unrelated to Motient purchased 20% of the interests in MSV for an
aggregate price of $50 million. The minority investors had certain participating
rights which provided for their participation in certain business decisions that
were made in the normal course of business, therefore, the Company's investment
in MSV has been recorded for all periods presented in the consolidated financial
statements pursuant to the equity method of accounting. On November 26, 2001,
Motient sold the assets comprising its satellite communications business to 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 July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While the Company was not obligated to participate in
the offering, the Company's board determined that it was in the Company's best
interests to participate so that its interest in MSV would not be diluted. On
August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to
this offering, and received a new convertible note in such amount. This rights
offering did not impact the Company's ownership position in MSV.
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, pending the
FCC's final rules and regulations. 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 were scheduled for
May 2004.
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. Under the terms of MSV's amended and restated
investment agreement, these investors had the option of investing an additional
$17.6 million in MSV by December 31, 2003; however, if, prior to this time, the
FCC had not issued a decision addressing MSV's petition for reconsideration with
respect to the ATC Order, the option was automatically extended to March 31,
2004. As of the closing of the initial investment on August 21, 2003 and as of
September 30, 2003, the Company's percentage ownership of MSV was approximately
46.5% on an undiluted basis, 32.6% on an "as converted" basis giving effect to
the conversion of all outstanding convertible notes of MSV and 29.5% on a fully
diluted basis.
8
For a discussion of certain additional recent developments regarding MSV,
including recent investments in MSV, please see Note 6 ("Subsequent Events").
New Network Offerings
On May 21, 2003 Motient entered into an authorized agency agreement with Verizon
Wireless. Previously, on March 1, 2003, Motient had entered into a national
premier dealer agreement with T-Mobile USA. These agreements allow Motient to
sell each of T-Mobile's third generation global system for GSM/GPRS, network
subscriptions and Verizon's third generation CDMA/1XRTT network subscriptions
nationwide. Motient is paid for each subscriber put onto either network. Each
agreement allows Motient to continue to actively sell and promote wireless email
and wireless Internet applications to enterprise accounts on networks with
greater capacity and speed, and that are voice capable.
Cost Reduction Actions
Since emerging from bankruptcy in May 2002, 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 financial difficulty of several of the
Company's key resellers, on whom it relies for a majority of its new revenue
growth, and the Company's continued limited liquidity.
The Company has taken a number of steps to reduce operating and capital
expenditures in order to lower its cash burn rate and improve its liquidity
position.
Reductions in Workforce. The Company undertook several reductions in its
workforce, including in March 2003 and February 2004. These actions eliminated
approximately 10% (19 employees) and 32.5% (54 employees), respectively, of its
then-remaining workforce. In the aggregate, the Company has reduced its
workforce by approximately 39% since December 31, 2002 and reduced employee and
related expenditures by approximately $0.5 million per month.
Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the
first quarter of 2003, the Company renegotiated several of its key vendor and
customer arrangements in order to reduce recurring expenses and improve its
liquidity position. In some cases, the Company was able to negotiate a flat rate
reduction for continuing services provided to it by its vendors or a deferral of
payable amounts, and in other cases the Company renegotiated the scope of
services provided in exchange for reduced rates or received pre-payments for
future services. The Company continues to aggressively pursue further vendor
cost reductions where opportunities arise.
In January 2003, the Company negotiated a deferral of approximately $2.6 million
that was owed to Motorola for maintenance services provided pursuant to the
Company's service agreement with Motorola. The Company issued a promissory note
to Motorola for such amount, with the note to be paid off over a two-year period
beginning in January 2004. Also in January 2003, the Company restructured
certain of its vendor obligations to Motorola. The remaining principal
obligation of approximately $3.3 million under this facility was restructured
such that the outstanding amount will be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In March 2004, the
amortization for both of these obligations was reduced to $100,000 in aggregate,
9
effectively extending the amortization period for both obligations. As part this
restructuring, Motient pledged all of the outstanding stock of Motient License,
on a second priority basis, to secure the borrowings under the Motorola
promissory note and vendor financing.
In the first quarter of 2003, the Company also restructured certain of its
capital lease obligations with Hewlett-Packard Corporation to significantly
reduce the monthly amortization requirements of these facilities on an on-going
basis. As part of such negotiations, the Company agreed to fund a letter of
credit in twelve monthly installments during 2003, in the aggregate amount of
$1.125 million, to secure certain payment obligations. This letter of credit
will be released to the Company in fifteen monthly installments beginning in
July 2004, assuming no defaults have occurred and are occurring.
As of April 30, 2004, the aggregate principal amount of the Company's
obligations to Motorola under these facilities was approximately $4.3 million,
and the aggregate principal amount of its obligations to Hewlett-Packard was
approximately $2.9 million. See Note 3 ("Liquidity and Financing") for further
discussion of these financing obligations.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive. See Note 6
("Subsequent Events") for discussion of additional cost reduction actions taken
by the Company subsequent to the end of the period covered by this report.
Changes in Management
On January 17, 2003, David H. Engvall resigned as senior vice president, general
counsel and secretary.
On March 18, 2003, Brandon Stranzl resigned from the board of directors.
On March 20, 2003, Patricia Tikkala resigned as vice president and chief
financial officer.
On April 17, 2003, the board of directors elected Christopher W. Downie to the
position of vice president, chief financial officer and treasurer. Mr. Downie
had previously been a consultant with Communication Technology Advisors LLC
("CTA"), working on Motient matters, since May 2002.
On June 20, 2003, Jared Abbruzzese resigned his position as chairman of the
board. Steven Singer was elected chairman of the board and a new director, Peter
Aquino, was elected to the board. Mr. Aquino is a senior managing director for
CTA.
See Note 6 ("Subsequent Events") for discussion of additional management changes
at the Company subsequent to the end of the period covered by this report.
Change in Accountants
On April 17, 2003, the Company dismissed PricewaterhouseCoopers LLP as its
independent auditors, effective upon the completion of services related to the
audit of the Company's consolidated financial statements for the period May 1,
2002 to December 31, 2002.
Also on April 25, 2003, the Company's board of directors approved the engagement
of Ehrenkrantz Sterling & Co. LLC as its independent auditors to (i) re-audit
10
the Company's consolidated financial statements for the fiscal year ended
December 31, 2000 and the fiscal year ended December 31, 2001, and (ii) audit
the Company's consolidated financial statements for the interim period from
January 1, 2002 to April 30, 2002, and the fiscal year ended December 31, 2003.
See Note 6 ("Subsequent Events") for discussion of additional changes in
accountants subsequent to the end of the period covered by this report. 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 and the
Company's amendment to current report on Form 8-K/A filed with the SEC on March
9, 2004.
Research In Motion Matters
On June 26, 2003, RIM provided the Company with a written End of Life
Notification for the RIM 857 wireless handheld device. This means that RIM will
no longer produce this model of handheld device. The last date for accepting
orders was September 30, 2003, and the last date for shipment of devices was
January 2, 2004. Motient continues to order limited quantities of RIM 857
wireless devices from RIM and Motient has implemented a RIM 857 "equivalent to
new" program. Motient expects that there will be sufficient returned RIM 857s to
satisfy demand for the foreseeable future. During the year ended December 31,
2002 and for the nine months ended September 30, 2003, a majority of Motient's
equipment revenues were attributable to sales of the RIM 857 device, and Motient
estimates that approximately 35% and 49%, respectively, of its monthly recurring
service revenues were derived from wireless messaging that use RIM 857 devices.
Since January 2004, the purchase by the Company and sale of RIM 857 wireless
handheld devices on Motient's network has declined significantly.
See Note 5 ("Legal Matters") for discussion of additional legal matters
pertaining to RIM.
Sale of SMR Licenses to Nextel Communications, Inc.
On July 29, 2003, Motient's wholly-owned subsidiary, Motient Communications,
entered into an asset purchase agreement with Nextel, under which Motient
Communications sold to Nextel certain of its SMR licenses issued by the FCC for
$3.4 million. Motient recorded the transaction in July, 2003 in accordance with
SFAS 144 as an asset held for sale; immediately discontinuing the amortization
of the identified SMR licenses. The closing of this transaction occurred on
November 7, 2003.
See Note 6 ("Subsequent Events") for discussion of additional sales by the
Company of certain of its SMR licenses subsequent to the end of the period
covered by this report.
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, 2003 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, 2003, and for all periods presented
have been made. Footnote disclosure has been condensed or omitted as permitted
in interim financial statements.
11
Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start"
Accounting
On January 10, 2002, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed
with the United States Bankruptcy Court for the Eastern District of Virginia on
February 28, 2002. The cases were jointly administered under the case name "In
Re Motient Corporation, et. al.," Case No. 02-80125. The Company's Plan of
Reorganization was confirmed on April 26, 2002 and the Company's emergence from
bankruptcy became effective on May 1, 2002 (the "Effective Date"). The Company
adopted "fresh start" accounting as of May 1, 2002 in accordance with procedures
specified by AICPA Statement of Position ("SOP") No. 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code". The Company determined
that its selection of May 1, 2002 versus April 26, 2002 for the "fresh-start"
date was more convenient for financial reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to the
consolidated financial statements. All results for periods prior to the
Effective Date are referred to as those of the "Predecessor Company" and all
results for periods including and subsequent to the Effective Date are referred
to as those of the "Successor Company."
In accordance with SOP No. 90-7, the reorganized value of the Company was
allocated to the Company's assets based on procedures specified by Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Each
liability existing at the plan confirmation date, other than deferred taxes, was
stated at the present value of the amounts to be paid at appropriate market
rates. It was determined that the Company's reorganization value computed
immediately before the Effective Date was $234 million. Subsequent to the
determination of this value, the Company determined that the reorganization
value ascribed to MSV did not reflect certain preference rights on liquidation
available to certain equity holders in MSV. Therefore, the reorganization value
of MSV was reduced by $13 million and the Company's reorganization value was
reduced to $221 million. The Company adopted "fresh-start" accounting because
holders of existing voting shares immediately before filing and confirmation of
the plan received less than 50% of the voting shares of the emerging entity and
its reorganization value is less than its postpetition liabilities and allowed
claims, as shown below:
Postpetition current liabilities $49.9 million
Liabilities deferred pursuant to chapter 11 proceedings 401.1 million
-------------
Total postpetition liabilities and allowed claims 451.0 million
Reorganization value (221.0 million)
---------------
Excess of liabilities over reorganization value $(230.0 million)
================
The reorganization value of Motient was determined by considering several
factors and by reliance on various valuation methods. For the valuation of the
core wireless business, consideration was given to discounted cash flows and
price/earnings and other applicable ratios, a liquidation value analysis,
comparable company trading multiples, and comparable acquisition multiple
analysis. The factors considered by Motient included the following:
o Forecasted operating cash flow results which gave effect to the
estimated impact of limitations on the use of available net operating
loss carryovers and other tax attributes resulting from the Plan of
Reorganization and other events,
o The discounted residual value at the end of the forecast period based
on the capitalized cash flows for the last year of that period,
o Market share and position,
o Competition and general economic considerations,
o Projected sales growth, and
o Working capital requirements.
12
For the valuation of the Company's investment in MSV, consideration was given to
the valuation of MSV's equity reflected by recent arms-length investments in
MSV, subsequently adjusted as discussed above.
After consideration of the Company's debt capacity, and after extensive
negotiations among parties in interest, it was agreed that Motient's
reorganization capital structure should be as follows:
Notes payable to Rare Medium and CSFB $19.8 million
Stockholders' Equity 201.2 million
--------------
$221.0 million
==============
The Company allocated the $221.0 million reorganization value among its net
assets based upon its current estimates of the fair value of its assets. In the
case of current assets, with the exception of inventory, the Company concluded
that their carrying values approximated fair values. The values of the Company's
frequencies and its investment in and note receivable from MSV were based on
independent analyses presented to the bankruptcy court and subsequently adjusted
as discussed above. The value of the Company's fixed assets was based upon a
recent valuation of the Company's software and estimates of replacement cost for
network and other equipment, for which the Company believes that its recent
purchases represent a valid data point. The value of the Company's other
intangible assets was based on third party valuations as of May 1, 2002.
In February 2003, the Company engaged a financial advisory firm to prepare a
valuation of software and customer intangibles. Software and customer
intangibles were not taken into consideration when the original fresh-start
balance sheet was determined at May 1, 2002. The changes for the software and
customer contracts are reflected below and in the financial statements and notes
herein.
The effect of the plan of reorganization and application of "fresh-start"
accounting on the Predecessor Company's balance sheet as of April 30, 2002, is
as follows:
13
Debt
Preconfirmation Discharge Reorganized
Predecessor and Exchange Fresh Start Successor
(in thousands) Company(j) of Stock Adjustments Company
---------- -------- ----------- -------
Assets:
Current assets
Cash $17,463 $17,463
Receivables 10,121 10,121
Inventory 8,194 (4,352) 3,842
Deferred equipment costs 11,766 (11,766) (e) --
Other current assets 11,443 11,443
------ ------ ------
Total current assets 58,987 (16,118) 42,869
Property and equipment 58,031 (1,553) (i) 56,478
FCC Licenses and other intangibles 45,610 56,866 (f)(i) 102,476
Goodwill 4,981 (4,981) (i) --
Investment in and notes receivable from MSV 27,262 26,593 (f) 53,855
Other long-term assets 2,864 (1,141) (e) 1,723
----- ------- -----
Total Assets $197,735 $59,666 $257,401
======== ======= ========
Liabilities & Stockholders' (Deficit) Equity
Liabilities Not Subject to Compromise:
Current liabilities:
Current maturities of capital leases $4,096 $4,096
Accounts payable - trade 1,625 1,625
Vendor financing 655 655
Accrued expenses 15,727 15,727
Deferred revenue 23,284 (18,913) (g)(e) 4,371
------ -------- ------
45,387 (18,913) 26,474
Long term liabilities:
Vendor financing 2,661 2,661
Capital lease obligation 3,579 3,579
Deferred revenue 19,931 (16,136) (e)(g) 3,795
Liabilities Subject to Compromise:
Prepetition liabilities 8,785 (8,785) (a) --
Senior note, including accrued interest thereon 367,673 (367,673) (b) --
Rare Medium Note, including accrued interest thereon 27,030 (27,030) (c) --
------ ------- -------- ----------
403,488 (403,488) --
Rare Medium and CSFB Notes -- 19,750 (a)(c) 19,750
---------- ------ -------- ------
Total liabilities 475,046 (383,738) (35,049) 56,259
Stockholders' (deficit) equity:
Common stock - old 584 (584) (h) --
Common stock - new 251 (d) 251
Additional paid-in capital 988,531 (988,531)
197,814 (d)(h) 197,814
Common stock purchase
warrants - old 93,730 (93,730) (h)
Common stock purchase
warrants - new 3,077 (d) 3,077
Deferred stock compensation (336) 336 (h) --
Retained (deficit) earnings (1,359,820) 1,359,820 94,715 --
----------- (183,725) ------ ----------
(94,715) (d)(h)
183,725 (h)
Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142
--------- ------- ------ -------
Total Liabilities & Stockholders' Equity (Deficit) $197,735 $ -- $59,666 $257,401
======== ========= ======= ========
14
(a) Represents the cancellation of the following liabilities:
i. Amounts due to Boeing $1,533
ii. Amounts due to CSFB 2,000
iii. Amounts due to JP Morgan Chase 1,550
iv. Amounts due to Evercore Partners LP ("Evercore") 1,948
v. Amounts due to the FCC 1,003
vi. Other amounts 751
------
$8,785
Liabilities were cancelled in exchange for the following:
a. 97,256 shares of new Motient common stock,
b. a note to CSFB in the amount of $750 and
c. a warrant to Evercore Partners to purchase 343,450 shares of new
Motient common stock, and
d. a note to Rare Medium in the amount of $19,000.
(b) Represents the cancellation of the senior notes in the amount of $367,673,
including interest threron, in exchange for 25,000,000 shares of new
Motient common stock. Certain of the Company's other creditors received an
aggregate of 97,256 shares of the Company's common stock in settlement for
amounts owed to them.
(c) Represents the cancellation of $27,030 of notes due to Rare Medium,
including accrued interest thereon, in exchange for a new note in the
amount of $19,000. The Company also issued CSFB a note in the principal
amount of $750 for certain investment banking services.
(d) Represents the issuance of the following:
i. 25,097,256 shares of new Motient common stock.
ii. warrants to the holders of pre-reorganization common stock
to purchase an aggregate of approximately 1,496,512 shares
of common stock, with such warrants being valued at
approximately $1,100.
iii. a warrant to purchase up to 343,450 shares of common stock
to Evercore, valued at approximately $1,900. The retained
earnings adjustment includes the gain on the discharge of
debt of $183,725.
(e) Represents the write off of deferred equipment costs of $12,907 and
deferred equipment revenue of $12,907 since there is no obligation to
provide future service post "fresh-start".
(f) To reflect the step-up in assets in accordance with the reorganization
value and valuations performed.
(g) Represents the write off of the deferred gain associated with the Company's
sale of its satellite assets to MSV in November 2001 and the write-off of
the unamortized balance of the $15,000 perpetual license sold to Aether in
November 2000, both of which total approximately $22,142, since there is no
obligation to provide future service post-"fresh-start".
(h) To record the cancellation of the Company's pre-reorganization equity and
to reverse the gain on extinguishment of debt of $183,725 and the gain on
fair market adjustment of $94,715.
(i) To record the valuation and resulting increase of customer intangibles of
approximately $11,501 and frequencies of $45,365. The reduction of $4,981
is due to a write-off of goodwill. The reduction of property and equipment
relates to a subsequent reduction in the carrying value of certain software
from $4,942 to $3,389 and the reduction to inventory from $8,194 to $3,842
to its net realizable value.
(j) The balances do not match the balances in the Company's Plan of
Reorganization due to subsequent audit adjustments.
Under the Plan of Reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for 25,000,000
shares of the Company's new common stock. Certain of the Company's other
creditors received an aggregate of 97,256 shares of the Company's new common
stock in settlement for amounts owed to them. These shares were issued following
completion of the bankruptcy claims process; however, the value of these shares
has been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of common stock. The conditions necessary for the
warrants to be exercisable were never met prior to May 1, 2004. Therefore, the
15
warrants expired under their own terms on such date. Also, in July 2002, Motient
issued to Evercore, financial advisor to the creditors' committee in Motient's
reorganization, a warrant to purchase up to 343,450 shares of common stock, at
an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has
a term of five years. If the average closing price of Motient's common stock for
thirty consecutive trading days is equal to or greater than $20.00, Motient may
require Evercore to exercise the warrant, provided the common stock is then
trading in an established public market. The value of this warrant has been
recorded in the financial statements as if it had been issued on May 1, 2002.
Further details regarding the plan are contained in Motient's disclosure
statement with respect to the plan, which was filed as Exhibit 99.2 to the
Company's current report on Form 8-K dated March 4, 2002.
Restatement of Financial Statements
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and years ended December 31, 2000 and 2001, the Company
became aware that certain accounting involving the effects of several complex
transactions from these years, including the formation of and transactions with
a joint venture, MSV, in 2000 and 2001 and the sale of certain of our
transportation assets to Aether in 2000, required revision. In addition, as a
result of the Company's re-audit of the years ended December 31, 2001 and 2000
performed by the Company's current independent accounting firm, Friedman LLP,
successor-in-interest to Ehrenkrantz Sterling & Co. LLC, certain accounting
adjustments were proposed and accepted by the Company. A description of these
adjustments is provided below.
Summary of Adjustments to Prior Period Financial Statements with respect to MSV
and Aether Transactions
The following is a brief description of the material differences between our
original accounting treatment with respect to the MSV and Aether transactions
and the revised accounting treatment that we have concluded was appropriate and
has been reflected in the accompanying financial statements for the respective
periods.
Allocation of initial proceeds from MSV formation transactions in June 2000. In
the June 2000 transaction with MSV, Motient Services received $44 million from
MSV. This amount represented payments due under a research and development
agreement, a deposit on the purchase of certain of Motient's assets at a future
date, and payment for a right for certain of the investors in MSV to convert
their ownership in MSV into shares of common stock of Motient. Since the
combined fair value of the three components exceeded $44 million, based on
valuations of each component, Motient initially allocated the $44 million of
proceeds first to the fair value of the research and development agreement and
then the remaining value to the asset deposit and investor conversion option
based on their relative fair values. Upon review, Motient revised its initial
accounting treatment and allocated the $44 million of proceeds first to the
investor conversion option based on its fair value, and the remainder to the
research and development agreement and asset deposit based on their relative
fair values. The effect of this reallocation increased shareholders' equity at
the time of the initial recording by $12 million, as well as reduced subsequent
service revenue by $2.3 million and $4 million in 2000 and 2001, respectively,
as a result of the lower recorded value allocated to the research and
development agreement. All remaining unamortized balances were written off as
part of the gain on the sale of the satellite assets.
Recording of suspended losses associated with MSV in fourth quarter of 2001.
When the November 2001 sale of the assets of MSV was consummated, Motient and
MSV amended the asset purchase agreement, with Motient agreeing to take a $15
million note as part of the consideration for the sale of the assets to MSV.
Additionally, at the time of this transaction, Motient purchased a $2.5 million
convertible note issued by MSV. As Motient had no prior basis in its investment
in MSV, Motient had not recorded any prior equity method losses associated with
its investment in MSV. When Motient agreed to take the $15 million note as
partial consideration for the assets sold to MSV, Motient recorded its share of
the MSV losses that had not been previously recognized by Motient ($17.5
million), having the effect of completely writing off the notes receivable in
2001.
16
Upon review, Motient determined that it should not have recorded any suspended
losses of MSV, since those losses should have been absorbed by certain of the
senior equity holders in MSV. As a result, Motient concluded that it should not
have written off its portion ($17.5 million) of the prior MSV losses against the
value of both notes in 2001.
Recording of increase in Motient's investment in MSV in November 2001. Also in
the November 2001 transaction, MSV acquired assets from another company, TMI, in
exchange for cash, a note and equity in MSV. Motient initially considered
whether or not a step-up in the value of its investment in MSV was appropriate
for the value allocated to TMI for its equity interest, and determined that a
step-up was not appropriate. Upon review, Motient determined that it should have
recognized a step-up in value of the MSV investment of $12.9 million under Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary",
with an offsetting gain recorded directly to shareholders' equity.
Recognition of gain on sale of assets to MSV in November 2001. Upon the
completion of the November 2001 transactions, Motient determined that 80% of its
gain from the sale of the assets should be deferred, since that was Motient's
equity ownership percentage in MSV at the time the assets were sold to MSV. Upon
review, Motient has determined that it was appropriate to apply Motient's
ownership percentage at the completion of all of the related transactions that
occurred on the same day as the asset sale transaction, since the transactions
were dependent upon one another and effectively closed simultaneously.
Accordingly, Motient should have deferred approximately 48% of the gain
(Motient's equity ownership percentage in MSV following the completion of such
transactions) as opposed to 80%. This change resulted in an increased gain on
the sale of MSV of $7.9 million in 2001.
Allocation of proceeds from the sale of the transportation business to Aether in
November 2000. Motient received approximately $45 million for the sale of its
retail transportation business assets and assumption of its liabilities to
Aether. This consisted of $30 million for the assets, of which $10 million was
held in an escrow account that was subsequently released in the fourth quarter
of 2001 upon the satisfaction of certain conditions, and $15 million for a
perpetual license to use and modify any intellectual property owned or licensed
by Motient in connection with the retail transportation business. In the fourth
quarter of 2000, Motient recognized a gain of $8.9 million, which represented
the difference between the net book value of the assets sold and the $20 million
cash portion of the purchase price for the assets received at closing. Motient
recognized an additional $8.3 million gain in the fourth quarter of 2001 when
the additional $10 million of proceeds were released from escrow. The $1.7
million difference between the proceeds received and the gain recognized is a
result of pricing modifications that were made at the time of the release of the
escrow plus certain compensation paid to former employees of the transportation
business as a result of the certain performance criteria having been met.
Motient deferred the $15 million perpetual license payment, which was then
amortized into revenue over a five-year period, the estimated life of the
customer contracts sold to Aether at the time of the transaction. Upon review,
Motient determined that the $15 million in deferred revenue should be recognized
over a four year period, which represents the life of a network airtime
agreement that Motient entered into with Aether at the time of the closing of
the asset sale. The decrease in the amortization period resulted in increased
revenue of $63,000 and $750,000 in 2000 and 2001, respectively.
Recognition of costs associated with certain options granted to Motient
employees who were subsequently transferred to Aether upon consummation of the
sale of Motient's transportation business to Aether in November 2000. Motient
valued the vested options based on their fair value at the date of the
consummation of the asset sale and recorded that value against the gain on the
sale of the assets to Aether. Upon review, Motient has determined to value these
17
vested options as a repricing under the intrinsic value method, with any charge
recorded as an operating expense. In addition, for each subsequent quarter for
which the unvested options continued to vest, Motient had valued these options
on a fair value basis and recorded any adjustment in value as an operating
expense. Upon review, Motient has determined that any adjustments in value
should have been reflected as an increase or reduction of the gain on the sale
of the assets to Aether. The revised accounting resulted in a reduction in
expenses of $0.8 million in 2000 and an increase in expenses of $1.0 million in
2001.
Summary of Adjustments to Prior Period Financial Statements as a result of
re-audit of years ended December 31, 2000 and 2001
The following is a brief description of the differences between Motient's
original accounting treatment and the revised accounting treatment that it has
concluded was appropriate and has been reflected in the accompanying financial
statements for the respective periods.
Recognition of difference between strike price and fair market value at
measurement date for options issued to ARDIS employees. Motient has restated its
consolidated financial statements to recognize compensation expense related to
the issuance of stock options with an exercise price below fair market value.
The revised accounting resulted in a decrease in net income and a corresponding
increase in additional paid in capital of $1.0 million, $0.6 million and $0.01
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Recognition of adoption of SAB 101,"Revenue Recognition in Financial
Statements". Motient has restated its consolidated financial statements as of
January 1, 2000, based on guidance provided in Securities and Exchange
Commission Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in
Financial Statements", as amended. Motient's adoption of SAB No. 101 resulted in
a change of accounting for certain product shipments and activation fees. The
cumulative effect of the change to retained earnings as of January 1, 2000 was
$4.6 million. The cumulative effect was recognized as income in 2001 as the
amounts were amortized into revenue and ultimately recognized as additional gain
on the sale of the Company's satellite, transportation and certain other assets.
Accrual of advertising expense in December 2000. Motient has restated its
consolidated financial statements in 2000 to recognize an additional $1.1
million in advertising expense previously recognized in 2001.
Recognition of costs associated with inventory write-downs. Motient has restated
its consolidated financial statements in 2000 to recognize an additional $1
million in cost of goods sold for inventory write-downs previously recognized in
2001. In addition, Motient has restated its consolidated financial statements
for the three-months ended March 31, 2002 to recognize an additional $0.4
million in cost of goods sold for inventory write-downs not previously recorded.
Summary of Impact of the Restatement
The revised accounting treatment described above required that certain
adjustments be made to the income statement and balance sheet for the quarter
ended March 31, 2002. As a result of the adoption of fresh-start accounting, the
Successor Company periods ended September 30, 2002 were not restated. The effect
of these adjustments for the quarter ended March 31, 2002 is illustrated in the
table below for reference purposes. Certain of the adjustments are based on
assumptions that we have made about the fair value of certain assets.
18
Quarter Ended
March 31,
2002
----
(in thousands)
Statement of operations data
- ----------------------------
Net Revenue, as previously reported $16,495
Adjustments 188
---
As restated $16,683
=======
Net Operating Loss, as previously reported $(15,970)
Adjustments 208
---
As restated $(15,762)
=========
Net Loss, as previously reported $(32,885)
Adjustments (2,544)
-------
As restated $(35,429)
=========
Basic and Fully Diluted Loss Per Share of Common
Stock, as previously reported $(0.56)
Adjustments (0.05)
------
As restated $(0.61)
=======
Balance sheet data
- ------------------
Total Assets, as previously reported $177,628
Adjustments 27,654
------
As restated $205,282
========
Total Liabilities, as previously reported $485,681
Adjustments (14,122)
--------
As restated $471,559
========
Stockholders' Equity, as previously reported $(308,053)
Adjustments 41,776
------
As restated $(266,277)
==========
Total Liabilities & Stockholders' Equity, as
previously reported $177,628
Adjustments 27,654
------
As restated $205,282
========
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.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less at the time of
acquisition 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.
19
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, 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 Communications, Inc.
("SkyTel"), each accounting for more than 14%. SkyTel accounted for
approximately 15% of the Company's accounts receivable at September 30, 2003.
For the four months ended April 30, 2002, five customers accounted for
approximately 44% of the Company's service revenue, with two customers, UPS and
SkyTel, each accounting for more than 10%. As of December 31, 2002 and April 30,
2002, Skytel represented 14% and 13%, respectively, of the Company's net
accounts receivable. For the five months ended September 30, 2002, five
customers accounted for approximately 47% of the Company's service revenue, with
two of those customers, UPS and SkyTel, each accounting for more than 10%, with
SkyTel accounting for approximately 12.4% of the Company's service revenue.
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
The Company determined that certain adjustments to our historical financial
information for 2000, 2001 and 2002 were required to reflect the effects of
several complex transactions, including the formation of, and transactions with,
MSV. Please see "--Restatement of Financial Statements" and the Company's
current report on Form 8-K dated March 14, 2003 and its annual report on Form
10-K for the year ended December 31, 2002 for a complete discussion of such
adjustments.
The Predecessor Company had no basis in either its $15 million note receivable
from MSV or its $2.5 million convertible note receivable from MSV, as the
Company had fully written these off in 2001 through the recording of its equity
share of losses in MSV. It was determined that Motient should not have recorded
any suspended losses of MSV. As a result, it was concluded that Motient should
not have written off any prior MSV losses against the value of these notes.
As a result of the application of "fresh-start" accounting and the subsequent
modifications described below, the notes and investment in MSV were valued at
fair value and the Company recorded an asset in the amount of approximately
$53.9 million representing the estimated fair value of its investment in and
20
note receivable from MSV. Included in this investment is the historical cost
basis of the Company's common equity ownership of approximately 48% as of May 1,
2002, or approximately $19.3 million. In accordance with the equity method of
accounting, the Company recorded its approximate 48% share of MSV losses against
this basis.
Approximately $21.6 million of the $40.9 million 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. The Company
is amortizing this excess basis in accordance with the pro-rata allocation of
various components of MSV's intangible assets as determined by MSV through
recent 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, 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, after giving effect 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, subject to certain conditions and
priorities with respect to payment of other indebtedness, in certain
circumstances involving the consummation of additional investments in MSV. In
April 2004, MSV repaid $2.0 million of interest and principal outstanding under
this note. For information regarding recent developments involving MSV, please
see Note 6 ("Subsequent Events").
In November 2003, Motient engaged CTA to perform a valuation of its equity
interests in MSV as of December 31, 2002. Concurrent with CTA's valuation,
Motient reduced the book value of its 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 to reflect certain preference rights on liquidation of certain
classes of equity holders in MSV. Including its note receivable from MSV ($13
million at May 1, 2002), the book value of Motient's aggregate interest in MSV
as of May 1, 2002 was reduced from $67 million to $53.9 million. Also, as a
result of CTA's valuation of MSV, Motient determined that the value of its
equity interest in MSV was impaired as of December 31, 2002. This impairment was
deemed to have occurred in the fourth quarter of 2002. Motient reduced the value
of its equity interest in MSV by $15.4 million as of December 31, 2002.
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. For information regarding
recent developments involving MSV, please see Note 6 ("Subsequent Events").
For the three and nine-month periods ended September 30, 2003, MSV had revenues
of $7.8 million and $22.2 million, respectively, operating expenses of $8.9
million and $22.4 million, respectively, and a net loss of $8.4 million and
$21.5 million, respectively. For the five-month period ended September 30, 2002
and four-month period ended April 30, 2002, MSV had revenues of $4.6 million and
$9.0 million, respectively, operating expenses of $3.8 million and $9.3 million,
respectively, and a net loss of $3.8 million and $9.2 million, respectively.
21
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, 2003; 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 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB 101 requires the
deferral of the recognition of revenue and costs related to equipment sold as
part of a service agreement. 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.
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. 101. Selected portions of the FAQ have been
incorporated into SAB No. 104. The adoption of SAB No. 104 will not have a
material impact on the Company's revenue recognition policies.
22
Property and Equipment
Property and equipment are recorded at cost for the Predecessor Company and
adjusted for impairment, and include "fresh-start" adjustments for the Successor
Company. 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 do not significantly increase the
utility or useful life of an asset and are expensed as incurred.
Property and equipment consists of the following:
September 30,
2003
----
Network equipment 53,033
Office equipment and furniture 3,907
Construction in progress 712
--------
57,652
Less accumulated depreciation and amortization (21,803)
--------
Property and equipment, net $35,849
========
The Company recorded depreciation expense for the three and nine months ended
September 30, 2003 of $3.5 million and $10.1 million, respectively. The Company
has assets under capital lease of $5.0 million at September 30, 2003. In May
2004, the Company engaged a financial advisory firm to prepare a valuation of
customer intangibles as of 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
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.
Stock-Based Compensation
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.
23
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 income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Net loss, as reported $(22,345) $(16,644) $(47,749) $(29,654) $231,978
Add: Stock-based employee
compensation expense included in net
income, net of related tax effects 76 --- 1,217 --- ---
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all
awards, net of tax related effects (252) (283) (2,025) (283) (57)
----- ----- ------- ------ -------
Pro forma net loss $(22,521) $(16,927) $(48,557) $(29,937) $231,921
Weighted average common shares
outstanding 25,170 25,097 25,128 25,097 58,251
Earnings per share:
Basic and diluted---as reported $(0.89) $(0.66) $(1.90) $(1.18) $3.98
Basic and diluted---pro-forma $(0.89) $(0.67) $(1.93) $(1.19) $3.98
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:
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Expected life (in years) 9 10 9 10 10
Risk-free interest rate 1.11% 1.71% 1.11% 1.71% 1.71%
Volatility 156% 173% 156% 173% 197%
Dividend yield 0.0% 0.0% 0.0% 0.0% 0.0%
24
Options to purchase 1,631,025 shares and 1,787,900 shares of the Company's
common stock were outstanding at September 30, 2002 and 2003, respectively,
under the Company's 2002 Stock Option Plan. Options to purchase 2,683,626 shares
of the Predecessor Company's stock were outstanding at April 30, 2002. These
options were cancelled as part of the Company's reorganization.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The repricing requires that all options be accounted for in
accordance with variable plan accounting, under which the value of these options
are measured at their intrinsic value and any change in that value is charged to
the income statement each quarter based on the difference (if any) between the
intrinsic value and the then-current market value of the common stock. The other
options are accounted for as a fixed plan and in accordance with intrinsic value
accounting, which requires that the excess of the market price of stock over the
exercise price of the options, if any, at the time that both the exercise price
and the number of options are known be recorded as deferred compensation and
amortized over the option vesting period. For the three and nine months ended
September 30, 2003, the Company recorded a mark-to-market adjustment of $0.1
million and $1.2 million respectively relating to these re-priced options.
In July 2003, the compensation and stock option committee of the Company's board
of directors, acting pursuant to the Company's 2002 stock option plan, granted
26 employees and officers options to purchase an aggregate of 470,000 shares of
the Company's common stock at a price of $5.15 per share. In September 2003, one
additional employee received a grant for 25,000 shares of the Company's common
stock at a price of $5.65 per share. One-half of each option grant vests with
the passage of time and the continued employment of the recipient, in three
equal increments, on the first, second and third anniversary of the date of
grant. The other half of each grant will either vest or be rescinded based on
the performance of the Company in 2004. If vested and not exercised, the options
will expire on the 10th anniversary of the date of grant.
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 the
continental United States, Alaska, Hawaii and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
categories:
25
Predecessor
Successor Company Company
----------------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $6.8 $5.5 $21.7 $8.9 $5.6
Field services 1.9 4.0 7.9 6.9 5.6
Transportation 1.1 2.8 7.0 4.5 4.1
Telemetry 0.6 0.6 1.8 1.0 0.8
Maritime and other 0.3 0.1 0.4 0.2 0.7
--- --- --- --- ---
Service revenue $10.7 13.0 $38.8 21.5 16.8
Equipment revenue 1.4 0.3 3.2 0.5 5.6
--- --- --- --- ---
Total $12.1 $13.3 $42.0 $22.0 $22.4
===== ===== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(Loss) Income Per Share
Basic and diluted (loss) income per common share is computed by dividing income
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.
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, 2003, there were warrants to
acquire approximately 5,664,962 shares of common stock and options outstanding
for 1,787,900 shares that were not included in this calculation because of their
antidilutive effect for the nine months ended September 30, 2003. For the four
month period ended April 30, 2002, all options and warrants had exercise prices
in excess of the fair market value of the Company's common stock, and thus
options and warrants were not factored into the per share calculation. As of
September 30, 2002, there were warrants to acquire approximately 1,839,962
shares of common stock and options outstanding for 1,621,975 shares that were
not included in this calculation because of their antidilutive effect for the
five months ended September 30, 2002.
New Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
26
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148
as of January 1, 2003 and plan to continue to follow the provisions of APB
Opinion No. 25 for accounting for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51," which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. The Company has reviewed the implications that adoption of FIN No. 46
would have on our financial position and results of operations and does not
expect it to have a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that it does not have any financial instruments
that are impacted by SFAS No. 150.
Related Parties
The Company made payments of $208,000 to related parties for
service-related-obligations for the nine-month period ended September 30, 2003,
as compared to no payments made in the four month period ended April 30, 2002
and $408,000 in the five-month period ended September 30, 2002. As of September
30, 2003, the Company had a net due from related parties in the amount of $0.1
million.
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. In May 2002, the Company
entered into a consulting agreement with CTA under which CTA provided consulting
services to the Company. Since September 2002, the Company has extended it
27
consulting agreement with CTA on either three month or month-to-month terms. For
the period September 2002 to May 2003, the monthly fee was $55,000. Beginning in
May 2003, the monthly fee was reduced to $39,000. This agreement was amended,
and the engagement and related payment was modified on January 30, 2004.
On June 20, 2003, Jared Abbruzzese, the chairman of CTA, resigned his position
as Chairman of the Board and Peter D. Aquino, a senior managing director of CTA,
was elected to the Company's Board on June 20, 2003.
On July 29, 2003, Motient entered into a letter agreement with Further Lane
Asset Management Corp. under which Further Lane provides investment advisory
services to Motient. In connection with the execution of this letter agreement,
Motient issued Further Lane a warrant to purchase 200,000 shares of its common
stock. The exercise price of the warrant is $5.10 per share. The warrant is
immediately exercisable upon issuance and has a term of five years. The fair
value of the warrant was estimated at $927,000 using a Black-Scholes model. In
September 2003, the Company recorded a non-cash consultant compensation charge
of $927,000 based on this valuation.
See Note 6 ("Subsequent Events") for further discussion of other subsequent
related party transactions.
3. LIQUIDITY AND FINANCING
Liquidity and Financing Requirements
In January 2002, the Company and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. The Company's Plan of Reorganization was confirmed on April 26,
2002 and became effective on May 1, 2002. After confirmation of the plan,
Motient had approximately $30.7 million of debt, comprised of capital leases,
notes payable to Rare Medium and CSFB and a vendor financing facility with
Motorola, Inc. ("Motorola").
Since emerging from bankruptcy protection in May 2002, the Company has
undertaken a number of actions to reduce its operating expenses and cash burn
rate. Despite these initiatives, the Company continues to be cash flow negative,
and there can be no assurances that Motient will ever be cash flow positive. For
a description of the Company's significant cost reduction initiatives after the
end of the period covered by this report, please see Note 6 ("Subsequent
Events").
The Company's liquidity constraints have been exacerbated by weak revenue growth
since emerging from bankruptcy protection, due to a number of factors including
the weak economy generally and the weak telecommunications and wireless sector
specifically, the financial difficulty of several of the Company's key
resellers, on whom the Company relies for a majority of its new revenue growth,
the loss of UPS as a primary customer, the loss of mobile internet customers due
to churn, the end of life notification with regards to RIM 857 customer devices
and migration of customers to next-generation technologies not carried on
Motient's network, and the Company's continued limited liquidity which has
hindered efforts at demand generation.
In addition to cash generated from operations, the Company holds a $15 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, subject to certain
conditions and priorities with respect to payment of other indebtedness, in
certain circumstances involving the consummation of additional investments in
28
MSV. Under the terms of the Company's $19.75 million of notes issued to Rare
Medium and CSFB in connection with its Plan of Reorganization, in certain
circumstances the Company must use 25% of any proceeds from the repayment of the
$15 million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata
basis. For a discussion of certain recent developments regarding MSV, please see
Note 6 ("Subsequent Events"). There can be no assurance that the MSV note will
be repaid prior to maturity, or at all.
The Company's future financial performance will depend on its ability to
continue to reduce and manage operating expenses, as well as its ability to grow
revenue. The Company's future financial performance could be negatively affected
by unforeseen factors and unplanned expenses.
The Company continues to pursue all potential funding alternatives. Among the
alternatives for raising additional funds are the issuance of debt or equity
securities, other borrowings under secured or unsecured loan arrangements, and
sales of assets. There can be no assurance that additional funds will be
available to the Company on acceptable terms or in a timely manner. The
Company's credit facility also has certain terms and conditions, subject to
limits and waivers, that restrict the Company's ability to issue additional debt
securities and use the proceeds from the sale of assets. The stock purchase
agreement executed by the Company and certain purchasers of its common stock in
April 2004 also limits Motient's ability to raise capital in the future. There
can be no assurance that these restrictions will be waived or modified to allow
the Company to access additional funding. For additional information, please see
Note 6 ("Subsequent Events").
The Company's projected cash requirements are based on certain assumptions about
its business model and projected growth rate, including, specifically, assumed
rates of growth in subscriber activations and assumed rates of growth of service
revenue. While the Company believes these assumptions are reasonable, these
growth rates continue to be difficult to predict and there is no assurance that
the actual results that are experienced will meet the assumptions included in
the Company's business model and projections. If the future results of
operations are significantly less favorable than currently anticipated, the
Company's cash requirements will be more than projected, and it may require
additional financing in amounts that will be material. The type, timing and
terms of financing that the Company obtains will be dependent upon its cash
needs, the availability of financing sources and the prevailing conditions in
the financial markets. The Company cannot guarantee that additional financing
sources will be available at any given time or available on favorable terms.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The successful implementation of
the Company's business plan requires substantial funds to finance the
maintenance and growth of its operations, network and subscriber base and to
expand into new markets. The Company has an accumulated deficit and has
historically incurred losses from operations which are expected to continue for
additional periods in the future. There can be no assurance that its operations
will become profitable. These factors, along with the Company's negative
operating cash flows have placed significant pressures on the Company's
financial condition and liquidity position.
Debt Obligations & Capital Leases
The following table outlines the Company debt obligations and capital leases as
of September 30, 2003.
29
Successor Company
(Unaudited)
September 30, 2003
------------------
(in thousands)
Rare Medium note payable due 2005, $21,531
including accrued interest thereon
CSFB note payable due 2005, 850
including accrued interest thereon
Vendor financing 5,034
Term Credit Facility 4,664
Obligations under Capital Leases 4,134
-----
36,213
Less current maturities 3,051
-----
Long-term debt $33,162
-------
The following table reflects the maturity of these obligations over the next
five years.
Less then After 5
Total 1 year 1-4 years years
----- ------ --------- -----
(in thousands)
Notes Payables $22,381 $-- $22,381 $--
Term Credit Facility 4,664 -- 4,664 --
Capital lease obligations, including interest thereon 4,134 2,031 2,103 --
Vendor financing commitment 5,034 1,020 4,014 --
----- ----- ----- -----
Total Contractual Cash Obligations $36,213 $3,051 $33,162 --
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. The new note was issued by a new subsidiary of Motient Corporation that
owns 100% of Motient Ventures Holding Inc., which owns all of the Company's
interests in MSV. The new note matures on May 1, 2005 and carries interest at
9%. The note allows the Company to elect to accrue interest and add it to the
principal, instead of paying interest in cash. The note requires that it be
prepaid using 25% of the proceeds of any repayment of the $15 million note
receivable from MSV. Please see Note 6 ("Subsequent Events") for further
information with regard to certain payments made on this note subsequent to the
period covered by this report.
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. The new note was issued by a new subsidiary of
Motient Corporation that owns 100% of Motient Ventures Holdings Inc., which owns
all of the Company's interests in MSV. The new note matures on May 1, 2005 and
carries interest at 9%. The note allows the Company to elect to accrue interest
and add it to the principal, instead of paying interest in cash. The Company
must use 25% of the proceeds of any repayment of the $15 million note receivable
from MSV to prepay the CSFB note. Please see Note 6 ("Subsequent Events") for
further information with regard to certain payments made on this note subsequent
to the period covered by this report.
Vendor Financing and Promissory Notes: Motorola had entered into an agreement
with the Company to provide up to $15 million of vendor financing to finance up
to 75% of the purchase price of network base stations. Loans under this facility
bear interest at a rate equal to LIBOR plus 7.0% and are guaranteed by the
30
Company and each subsidiary of Motient Holdings. The terms of the facility
require that amounts borrowed be secured by the equipment purchased therewith.
Advances made during a quarter constitute a loan, which is then amortized on a
quarterly basis over three years. These balances were not impacted by the
Company's Plan of Reorganization. In January 2003, Motient restructured the
then-outstanding principal under this facility of $3.5 million, with such amount
to be paid off in equal monthly installments over a three-year period from
January 2003 to December 2005. In January 2003, Motient also negotiated a
deferral of approximately $2.6 million that was owed for maintenance services
provided pursuant to a separate service agreement with Motorola, and Motient
issued a promissory note for such amount, with the note to be paid off over a
two-year period beginning in January 2004. The interest rate on this promissory
note is LIBOR plus 4%. See Note 6, "Subsequent Events".
Capital Leases: As of September 30, 2003, $4.1 million was outstanding under a
capital lease for network equipment with Hewlett-Packard Financial Services
Company. The lease has an effective interest rate of 12.2%. In January 2003,
this agreement was restructured to provide for a modified payment schedule. We
also negotiated a further extension of the repayment schedule that became
effective upon the satisfaction of certain conditions, including our funding of
a letter of credit in twelve monthly installments beginning in 2003, in the
aggregate amount of $1.125 million, to secure our payment obligations. The
letter of credit will be released in fifteen equal installments beginning in
July 2004, assuming no defaults have occurred or are occurring. The lease
matures December 1, 2005.
Sources of Funding
$12.5 Million Term Credit Facility: On January 27, 2003, the Company's
wholly-owned subsidiary, Motient Communications, closed a $12.5 million term
credit agreement with a group of lenders, including several of the Company's
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 JGD Management Corp. and James G.
Dinan. Bay Harbour 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 May 26, 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
------------------------ ----------------
Bay Harbour Management, L.C. 3,217,396
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
*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.
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 $12.5 million 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
31
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. As of April 1, 2004, the Company had borrowed
$6.0 million under this facility, all of which has since been repaid and may not
be re-borrowed.
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.
The obligations of Motient Communications under the credit agreement are secured
by a pledge of all the assets owned by Motient Communications that can be
pledged as security (including, but not limited to Motient Communication's
shares in Motient License) and are not already pledged under certain other
existing credit arrangements, including under Motient Communications' credit
facility with Motorola and Motient Communications' equipment leasing agreement
with Hewlett-Packard Corporation. Motient Communications owns, directly or
indirectly, all of the Company's assets relating to its terrestrial wireless
communications business. In addition, Motient and its wholly-owned subsidiary,
Motient Holdings Inc., have guaranteed Motient Communications' obligations under
the credit agreement, and the Company has delivered a pledge of the stock of
Motient Holdings Inc., Motient Communications, Motient Services and Motient
License to the lenders. In addition, upon the repayment in full of the
outstanding $19,750,000 in senior notes due 2005 issued by MVH Holdings Inc. to
Rare Medium and CSFB in connection with the Company's approved Plan of
Reorganization, the Company will pledge the stock of MVH Holdings Inc. to the
lenders.
On January 27, 2003, in connection with the signing of the credit agreement,
Motient issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and have been recorded as a debt discount and are
being amortized as additional interest expense over three years, the term of the
related debt. Upon closing of the credit agreement, the Company paid closing and
commitment fees to the lenders of $500,000. These fees have been recorded on the
Company's balance sheet and are being amortized as additional interest expense
over three years, the term of the related debt. Under the credit agreement, the
Company must pay an annual commitment fee of 1.25% of the daily average of
undrawn amounts of the aggregate commitments from the period from the closing
date to December 31, 2003. In December 2003, the Company paid the lenders a
commitment fee of approximately $113,000.
On March 16, 2004, in connection with the execution of the amendment to the
credit agreement, Motient issued warrants to the lenders to purchase, in the
aggregate, 1,000,000 shares of Motient's common stock. The exercise price of the
warrants is $4.88 per share. The warrants were immediately exercisable upon
issuance and have a term of five years. The warrants were valued using a
Black-Scholes pricing model at $6.7 million and will be recorded as a debt
32
discount and will be amortized as additional interest expense over three years,
the term of the related debt. The warrants are also subject to a registration
rights agreement. Under such agreement, Motient agreed to file a registration
statement to register the shares underlying the warrants upon the request of a
majority of the warrant holders, or in conjunction with the filing of a
registration statement in respect of shares of common stock of the Company held
by other holders. Motient will bear all the expenses of such registration. In
connection with the amendment, Motient was required to pay commitment fee to
the lenders of $320,000, which was added to the principal balance of the credit
facility at closing. These fees will be recorded on the Company's balance sheet
and will be amortized as additional interest expense over three years, the term
of the related debt.
In each of April, June and August 2003 and March of 2004, the Company made draws
under the credit agreement in the amount of $1.5 million for an aggregate amount
of $6.0 million. The Company used such funds to fund general working capital
requirements of operations.
For the monthly periods ended April 2003 through December 2003, 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. Ultimately, there can be no
assurances that the liquidity provided by the credit facility will be sufficient
to fund Motient's ongoing operations.
For further information regarding the repayment of outstanding balances under
this term credit facility, please see Note 6, "Subsequent Events". For further
details regarding the term credit facility, please see our annual report on Form
10-K for the year ended December 31, 2002, filed with the SEC on March 22, 2004,
and the exhibits attached thereto.
4. COMMITMENTS AND CONTINGENCIES
As of September 30, 2003, the Company had no contractual inventory commitments.
UPS, the Company's largest customer as of December 31, 2002, has substantially
completed its migration to next generation network technology, and its monthly
airtime usage of the Company's network has declined significantly. UPS was our
second largest customer for the nine months ended September 30, 2003 and our
fourth largest customer for the three months ended September 30, 2003. There are
no minimum purchase requirements under the Company's contract with UPS and the
contract may be terminated by UPS on 30 days' notice at which point any
remaining prepayment would be require to be repaid. While the Company expects
that UPS will remain a customer for the foreseeable future, the bulk of UPS'
units have migrated to another network. As of April 30, 2004, UPS had
approximately 4,720 active units on Motient's network.
Until June 2003, UPS had voluntarily 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. Also, due to a
separate arrangement entered into in 2002 under which UPS prepaid for network
airtime to be used by it in 2004, the Company does not expect that UPS will be
required to make any cash payments to the Company in 2004 for service to be
provided in 2004. Pursuant to such agreement, and, as of April 30, 2004, UPS has
33
not been required to make any cash payments to the Company in 2004, and the
value of the Company's remaining airtime service obligations to UPS in respect
of the prepayment was approximately $4.4 million. The Company is planning a
number of initiatives to offset the loss of revenue and cash flow from UPS,
including the following:
o further reductions in the Company's employee and network
infrastructure costs;
o actions to grow new revenue from the Company's carrier relationships
with Verizon Wireless and T-Mobile, under which the Company will be
selling voice and data services on such carrier's next generation
wireless networks as a master agent;
o actions to grow revenue from the Company's various telemetry
applications and initiatives; and
o enhancements to the Company's liquidity which are expected to involve
the sale of unneeded frequency assets, such as the sales of certain
Specialized Mobile Radio ("SMR") licenses to Nextel.
5. LEGAL AND REGULATORY MATTERS
Legal
Motient filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on January 10, 2002. The Bankruptcy Court confirmed Motient's Plan of
Reorganization on April 26, 2002, and Motient emerged from bankruptcy on May 1,
2002. For further details regarding this proceeding, please see "Motient's
Chapter 11 Filing and Plan of Reorganization and "Fresh Start" Accounting" under
Note 2.
Our rights to use and sell the BlackBerryTM 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 BlackBerryTM 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.
From time to time, Motient is involved in legal proceedings in the ordinary
course of our 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. For a discussion of legal
matters after the end of the period covered by this report, please see Note 6
("Subsequent Events").
Regulatory
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. This notice of proposed rulemaking was
issued by the FCC after a "white paper" proposal was submitted to the FCC by
Nextel Communications Inc. in November 2001 addressing largely the same issues.
34
In its white paper, Nextel proposed that certain of its wireless spectrum in the
700 MHz band, lower 800 MHz band and 900 MHz band be exchanged for spectrum in
the upper 800 MHz band and in the 2.1 GHz band. Nextel's proposal addressed the
problem of interference to public safety agencies by creating blocks of
contiguous spectrum to be shared by public safety agencies. Since the notice of
proposed rulemaking was issued, Motient has been actively participating with
other affected licensees, including Nextel, to reach agreement on a voluntary
plan to re-allocate spectrum to alleviate interference to public safety
agencies. On December 24, 2002, a group of affected licensees, including
Motient, Nextel, and several other licensees, submitted a detailed proposal (the
"Consensus Plan") to the FCC for accomplishing the re-allocation of spectrum
over a period of several years. These parties have also been negotiating a
mechanism by which Nextel would agree to reimburse, up to $850 million, costs
incurred by affected licensees in relocating to different parts of the spectrum
band pursuant to the rebanding plan.
On February 10, 2003, approximately 60 entities filed comments to the proposal
submitted to the FCC on December 24, 2002. Several of the comments addressed the
issue of comparable 800 MHz spectrum for Economic Area ("EA") and the need to
avoid recreating the 800 MHz interference situation when Nextel integrates its
900 MHz spectrum into its integrated dispatch enhanced network, or iDEN. Reply
comments, which were due February 25, 2003, included comments urging the FCC to
conduct its own analysis of the adequacy of the interference protection proposed
in the plan. In mid-April 2003, the FCC's Office of Engineering and Technology
("OET") sent a letter to several manufacturers requesting additional practical,
technical and procedural solutions or information that may have yet to be
considered. Responses were due May 8, 2003. Upon reviewing the filed comments,
OET has indicated that other technical solutions were possible and were being
reviewed by the FCC. To date, no final action has been taken by the FCC. The
Company cannot assure you that its operations will not be affected by this
proceeding. For a discussion of regulatory matters after the end of the period
covered by this report, please see Note 6 ("Subsequent Events").
6. SUBSEQUENT EVENTS
Sale 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 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 (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, the Company signed a registration
rights agreement with the holders of these shares. Among other things, this
registration rights agreement requires the Company 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
1,053,978 shares of its common stock to the investors listed above, at an
exercise price of $5.50 per share. These warrants will vest if and only if
Motient does not meet certain deadlines between June and November 2004, 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
June 30, 2009.
35
In connection with this sale, Motient issued to Tejas Securities Group, Inc.,
Motient's agent for the sale, warrants to purchase 1,000,000 shares of its
common stock. The exercise price of these warrants is $5.50 per share. The
warrants are immediately exercisable upon issuance and have a term of ten years.
Motient also paid Tejas Securities Group, Inc. a placement fee of $350,000 at
closing.
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 $6.7
million. The remaining availability under the credit facility of $5.8 million
will be available for borrowing to the Company until December 31, 2004, subject
to the lending conditions in the credit agreement.
Cost Reduction Actions
The Company has taken a number of steps after the end of the period covered by
this report to reduce operating and capital expenditures in order to lower its
cash burn rate.
Reductions in Workforce. The Company undertook a reduction in its workforce
February 2004. This action eliminated approximately 32.5% (54 employees) of its
then-remaining workforce.
Network Rationalization. The Company is in the process of assessing its wireless
data network in a coordinated effort to reduce network operating costs. One
aspect of this rationalization encompasses reducing unneeded capacity across the
network by deconstructing un-profitable base stations. In certain instances, the
geographic area that the network serves may be reduced by this process. The full
extent of the changes to network coverage have yet to be determined.
Closure of Reston, VA Facility. On July 15, 2003, the Company substantially
completed the transfer of its headquarters from Reston, VA to Lincolnshire, IL,
where the Company already had a facility. This action will reduce the Company's
monthly operating expenses by an amount of approximately $65,000 per month or
$780,000 per year.
Despite these initiatives, the Company continues to be cash flow negative, and
there can be no assurances that it will ever be cash flow positive.
Motorola Debt Obligation Renegotiation
In March 2004, Motient further restructured both the vendor financing facility
and the promissory note to Motorola, primarily to extend the amortization
periods for both the vendor financing facility and the promissory note. Motient
will amortize the combined balances in the amount of $100,000 per month
beginning in March 2004. Motient also agreed that interest would accrue on the
vendor financing facility at LIBOR plus 4%. As part of this restructuring,
Motient agreed to grant Motorola a second lien (junior to the lien held by the
lenders under our term credit facility) on the stock of Motient License. This
pledge secures Motient's obligations under both the vendor financing facility
and the promissory note.
36
Developments Relating to MSV
On April 2, 2004, the additional $17.6 million investment 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 outstanding interest and principal 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 make prepayments under its
existing notes owed to Rare Medium Group, Inc. and Credit Suisse First Boston.
The remainder of the proceeds from this investment will be used by MSV for
general corporate purposes. As of the closing of the additional investment on
April 2, 2004, Motient's percentage ownership of MSV was approximately 46.5% on
an undiluted basis, 32.6% on an "as converted" basis giving effect to the
conversion of all outstanding convertible notes of MSV and 29.5% on a fully
diluted basis.
Agreements with Communication Technology Advisors LLC
On January 30, 2004, the Company engaged CTA to act as chief restructuring
entity. The term of CTA's engagement is currently scheduled to end on August 1,
2004. As consideration for this work, Motient agreed to pay to CTA a monthly fee
of $60,000. The new agreement replaces the Company's existing consulting
arrangement with CTA. 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.
In November 2003, the Company engaged CTA to provide a valuation of its equity
interest in MSV as of December 31, 2002, as described in Note 2. CTA was paid
$150,000 for this valuation.
Management and Board Changes
On May 24, 2004 the board of directors designated Myrna J. Newman, the Company's
controller and chief accounting officer as the Company's principal financial
officer. Simultaneously, the board of directors elected Christopher W. Downie to
the position of executive vice president, chief operating officer and treasurer.
Mr. Downie will remain as the Company's principal executive officer.
On May 6, 2004 the board of directors elected Raymond L. Steele to the Company's
board of directors. The board of directors now consists of six members. Mr.
Steele was also elected to the Company's audit committee.
Also on May 6, the board of directors elected Robert L. Macklin as the Company's
general counsel and secretary.
On March 18, 2004 the board of directors elected Christopher W. Downie to the
position of executive vice president, chief financial officer and treasurer, and
designated Mr. Downie as the Company's principal executive officer.
On February 10, 2004, the Company and Walter V. Purnell, Jr. mutually agreed to
end his employment as president and chief executive officer of Motient and all
of its wholly owned subsidiaries. Concurrently, Mr. Purnell resigned as a
director of such entities and of MSV and all of its subsidiaries.
On February 18, 2004, Daniel Croft, senior vice president, marketing and
business development, and Michael Fabbri, senior vice president, sales, were
relieved of their duties as part of a reduction in force.
37
Change in Accountants
On March 2, 2004, Motient dismissed PricewaterhouseCoopers as its independent
auditors effective immediately. The audit committee of the Company's board of
directors approved the dismissal of PricewaterhouseCoopers.
PricewaterhouseCoopers was previously appointed to audit Motient's consolidated
financial statements for the period May 1, 2002 to December 31, 2002, and, by
its terms, such engagement was to terminate upon the completion of services
related to such audit. PricewaterhouseCoopers did not report on Motient's
consolidated financial statements for such period or for any other fiscal
period. On March 2, 2004, the audit committee engaged Ehrenkrantz Sterling & Co.
LLC as Motient's independent auditors to replace PricewaterhouseCoopers to audit
Motient's consolidated financial statements for the period May 1, 2002 to
December 31, 2002.
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 and
the Company's amendment to current report on Form 8-K/A filed with the SEC on
March 9, 2004.
Legal Matters
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 February 2004
Wireless Matrix informed Motient that it was terminating its agreement with
Motient. Motient does not believe that Wireless Matrix has any valid basis to do
so, and consequently filed the above mentioned claim seeking over $2.6 million
in damages, which amount represents Wireless Matrix's total prospective
commitment under the agreement. On May 10, 2004, Motient received a notice of
counter-claim by Wireless Matrix of approximately $1.0 million, representing
such amounts as Wireless Matrix claims to have made in excess of service
rendered under the agreement. Motient cannot assure you that it can prevail as
to its claim, or that Wireless Matrix will prevail as to its counter-claim, in
any arbitration proceeding.
Regulatory Matters
It has been reported that in March of 2004, the staff of the FCC recommended the
adoption of the plan for the reallocation of the 800 MHz spectrum common known
as the "Consensus Plan". However, the staff apparently also recommended the
rejection of Nextel's offer to pay $850 million to recover the costs of the
re-allocation of the spectrum, as the staff apparently felt this amount to be
insufficient to cover the costs of such re-allocation. On April 8, 2004, Motient
filed a request with the FCC asking that the Commission relocate Motient into
the so called "upper-800 MHz band" as part of the Consensus Plan. We cannot
assure you that our operations will not be affected by this proceeding.
Sale of SMR Licenses to Nextel Communications, Inc.
On December 9, 2003, Motient Communications entered into a second asset purchase
agreement, under which Motient Communications will sell additional 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
38
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 have consented to the sale of these licenses.
Merger of Independent Accountants
On June 1, 2004, Motient's former independent accountants, Ehrenkrantz Sterling
& Co. LLC ("Ehrenkrantz"), merged with the firm of Friedman Alpren & Green LLP.
The new entity, Friedman LLP ("Friedman") has been retained by Motient and the
Audit Committee of Motient's Board of Directors approved this decision on June
4, 2004.
For the period since Ehrenkrantz's appointment through June 4, 2004, there have
been no disagreements with Ehrenkrantz on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of Ehrenkrantz would have
caused them to make reference thereto in their report.
For the period since Ehrenkrantz's appointment through June 4, 2004, there have
been no reportable events (as defined in Regulation S-K Item 304(a)(1)(v)), that
are not otherwise disclosed in Item 4 ("Controls and Procedures") of this
Quarterly Report on Form 10-Q.
Motient has requested that Friedman, as successor-in-interest to Ehrenkrantz,
furnish it with a letter addressed to the SEC stating whether or not it agrees
with the above statements. A copy of Friedman's letter, dated June 7, 2004, is
filed as Exhibit 16.1 to this Form 10-Q.
During the two most recent fiscal years and through June 4, 2004, Motient did
not consult with Friedman Alpren & Green LLP regarding any matter that was the
subject of a "disagreement" with Ehrenkrantz, as that term is defined in Item
304(a)(1)(iv) of Regulation S-K and the related instructions to Item 304 of
Regulation S-K, or with regard to any "reportable event," as that term is
defined in Item 304(a)(1)(v) of Regulation S-K, except as such consultations as
may have been made with former employees of Ehrenkrantz who are now employees of
Friedman.
Motient has provided Friedman with a copy of these statements.
39
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,
2002, 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
Motient's Chapter 11 Filing
On January 10, 2002, Motient and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient's Plan of Reorganization was confirmed on April 26,
2002, and became effective on May 1, 2002. As a result of the reorganization and
the recording of the restructuring transaction and implementation of fresh-start
reporting, our results of operations after April 30, 2002, are not comparable to
results reported in prior periods. See Note 2 of notes to consolidated financial
statements for information on consummation of our Plan of Reorganization and
implementation of "fresh-start" reporting. The discussion of our Plan of
Reorganization should be read in conjunction with the consolidated financial
statements and notes thereto.
General - The Current and Former Components of Motient's Business
This section provides information regarding the various current and prior
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.
40
Motient presently has six wholly-owned subsidiaries and a 29.5% interest (on a
fully-diluted basis) in MSV as of September 30, 2003. For further details
regarding Motient's interest in MSV, please see Note 6 ("Subsequent Events --
Developments Relating to MSV"). 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 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, and a pledge
of the stock of Motient License secures, on a second priority basis, borrowings
under our vendor financing facility with Motorola. For further details regarding
the formation of Motient License, please see Note 3 ("Liquidity and Financing -
Sources of Funding -- $12.5 Million Term Credit Facility") of notes to
consolidated financial statements. 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 June 29, 2000, we formed a joint venture subsidiary, MSV (formerly known as
Mobile Satellite Ventures LLC), in which we owned, until November 26, 2001, 80%
of the membership interests, in order to conduct research and development
activities. In June 2000, three investors unrelated to Motient purchased 20% of
the interests in MSV for an aggregate price of $50 million. The minority
investors had certain participating rights which provided for their
participation in certain business decisions that were made in the normal course
of business, therefore, our investment in MSV has been recorded for all periods
presented in the consolidated financial statements pursuant to the equity method
of accounting. On November 26, 2001, Motient sold the assets comprising its
satellite communications business to MSV, as part of a transaction in which
certain other parties joined MSV, including TMI Communications and Company
Limited Partnership, or 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 a $15 million promissory
note issued by MSV and purchased a $2.5 million convertible note issued by MSV.
In July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While we were not obligated to participate in the
offering, our board determined that it was in our best interests to participate
so that our interest in MSV would not be diluted. On August 12, 2002, we funded
an additional $957,000 to MSV pursuant to this offering, and received a new
convertible note in such amount. This rights offering did not impact our
ownership position in MSV.
41
The $3.5 million of 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. In addition, 25% of the
proceeds of any repayment of the $15.0 million note from MSV must be used to
prepay pro-rata both the Rare Medium and Credit Suisse First Boston Corporation,
or CSFB, notes. The allocation of the 25% of the proceeds will be made in
accordance with Rare Medium's and CSFB's relative outstanding balance at the
time of prepayment. If not repaid earlier, outstanding 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.
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
Motient's promissory note. Under the terms of MSV's amended and restated
investment agreement, these investors had the option of investing an additional
$17.6 million in MSV by December 31, 2003; however, if, prior to this time, the
FCC had not issued a decision addressing MSV's petition for reconsideration
concerning MSV's application with the FCC with respect to MSV's plans for a new
generation satellite system utilizing ancillary terrestrial components, or ATC,
the option was automatically extended to March 31, 2004. As of the closing of
the initial investment on August 21, 2003, Motient's percentage ownership of MSV
was approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis
giving effect to the conversion of all outstanding convertible notes of MSV and
29.5% on a fully diluted basis.
On April 2, 2004, the above-mentioned additional $17.6 million investment 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 outstanding interest and principal 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 make
prepayments under its existing notes owed to Rare Medium Group, Inc. and Credit
Suisse First Boston. The remainder of the proceeds from this investment will be
used for general corporate purposes by MSV. As of the closing of the initial
investment on April 2, 2004, Motient's percentage ownership of MSV was
approximately 46.5% on an undiluted basis, 32.6% on an "as converted" basis
giving effect to the conversion of all outstanding convertible notes of MSV and
29.5% on a fully diluted basis.
Overview of Liquidity and Risk Factors
In January 2002, we and three of our wholly-owned subsidiaries filed voluntary
petitions for reorganization under Chapter 11 of the Federal Bankruptcy Code.
Motient Ventures Holding, Inc. did not file for Chapter 11 and had no activities
during this period. The only asset of this subsidiary is its interest in MSV.
42
Our Plan of Reorganization was confirmed on April 26, 2002 and became effective
on May 1, 2002. The reorganization significantly deleveraged Motient's balance
sheet and significantly reduced Motient's ongoing interest expense. As of the
effective date of the plan, Motient had approximately $30.7 million of debt
(comprised of capital leases, notes payable to Rare Medium and CSFB, and the
outstanding Motorola, Inc. credit facility). As of September 30, 2003, Motient
had approximately $36.2 million of debt.
Effective May 1, 2002, we adopted "fresh-start" accounting, which required that
the $221 million of reorganization value of our net assets be allocated in
accordance with procedures specified by Statement of Financial Accounting
Standards No. 141, "Business Combinations" (See Note 2, "Significant Accounting
Policies").
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 our ability, and our resellers' ability, some of whom are in
bankruptcy, to attract and retain customers, and our ability to
replace revenue formerly contributed by UPS, one of our largest
customers,
o our ability to execute on our business plan with drastically reduced
personnel as a result of several significant reductions in force,
o our ability to further reduce operating expenses and thereby reduce
our cash burn rate,
o our ability to secure additional financing necessary to fund
anticipated capital expenditures, operating losses and any remaining
debt service requirements,
o our ability to convert customers who have purchased devices from us
into active users of our airtime service and thereby generate revenue
growth,
o the timely roll-out of certain key customer initiatives and the launch
of new products or the entry into new market segments, which may
require us to continue to incur significant operating losses,
o our ability to fully recover the value of our inventory in a timely
manner,
o our ability to procure new inventory in a timely manner in the
quantities, quality, price and at the times required,
o our ability to gain market acceptance of products and services,
including eLink and BlackBerryTM by Motient, and our ability to make a
profit thereon,
o our ability to respond and react to changes in our business and the
industry because we have limited liquidity,
o our ability to modify our organization, strategy and product mix to
maximize the market opportunities as the market changes,
o our ability to manage growth effectively,
o competition from existing companies that provide services using
existing communications technologies and the possibility of
competition from companies using new technology in the future,
o our ability to maintain, on commercially reasonable terms, or at all,
certain technologies licensed from third parties, including, but not
limited to, our rights to sell and distribute handheld devices
manufactured by RIM and the wireless email service known as
BlackBerryTM by Motient, which rights may be challenged or jeopardized
as a result of a recent jury verdict finding that certain of RIM's
technology for such products and services infringed certain
intellectual property owned by NTP, Inc.,
43
o our dependence on technology we license from Motorola, which may
become available to our competitors,
o the loss of one ormore of our key customers,
o our ability to retain key personnel, especially in light of our recent
headcount reductions,
o our ability to keep up with new technological developments and
incorporate them into our existing products and services and our
ability to maintain our proprietary information and intellectual
property rights,
o our dependence on third party distribution relationships to provide
access to potential customers,
o our ability to expand our networks on a timely basis and at a
commercially reasonable cost, or at all, as additional future demand
increases,
o the risk that Motient could incur substantial costs if certain
proposals regarding spectrum reallocation, that are now pending with
the FCC, are adopted, and
o regulation by the FCC.
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, 2002.
Results of Operations
Due to the consummation of our bankruptcy and the application of "fresh-start"
accounting, results of operations for the periods after April 30, 2002 are not
comparable to the results for previous periods.
The table below outlines operating results for the Successor Company:
Successor Company
-----------------
Three Months Three Months
Ended Ended
September 30, September 30,
2003 2002
---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $6.8 $5.5
Field Services 1.9 4.0
Transportation 1.1 2.8
Telemetry 0.6 0.6
All Other 0.3 0.1
--- ---
Service Revenue $10.7 $13.0
Equipment Revenue 1.4 0.3
--- ---
Total $12.1 $13.3
===== =====
44
Predecessor
Successor Company Company
----------------- -------
Nine Months Five Months Four Months
Ended Ended Ended
September 30, September 30, April 30,
2003 2002 2002
---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $21.1 $8.9 $5.6
Field Services 7.9 6.9 5.6
Transportation 7.0 4.5 4.1
Telemetry 1.8 1.0 0.8
All Other 0.4 0.2 0.7
--- --- ---
Service Revenue $38.2 $21.5 $16.8
Equipment revenue 3.2 0.5 5.6
--- --- ---
Total $41.4 $22.0 $22.4
===== ===== =====
Successor Company Predecessor Company
----------------- -------------------
Three Months Ended Three Months Ended
September 30, % of Service September 30, % of Service
2003 Revenue 2002 Revenue
---- ------- ---- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $12.4 116% $14.2 109%
Cost of Equipment Sold 1.5 14 0.4 3
Sales and Advertising 1.1 10 1.8 14
General and Administration 3.8 36 3.0 23
Restructuring Charges -- -- -- --
Depreciation and Amortization 5.5 51 5.9 46
--- -- --- --
Total Operating $24.3 227% $25.3 195%
===== ==== ===== ====
Successor Company Predecessor Company
----------------- -------------------
Nine Months Five Months
Ended % of Ended % of Four Months % of
September 30, Service September 30, Service Ended April 30, Service
2003 Revenue 2002 Revenue 2002 Revenue
---- ------- ---- ------- ---- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $40.0 105% $24.4 113% $21.9 130%
Cost of Equipment Sold 3.6 9 1.3 6 6.0 36
Sales and Advertising 3.8 10 3.2 15 4.3 26
General and Administration 10.4 27 6.4 30 4.1 24
Restructuring Charges -- -- -- -- 0.6 4
Depreciation and Amortization 16.3 43 10.1 47 6.9 41
---- -- ---- -- --- --
Total Operating $74.1 194% $45.4 211% $43.8 261%
===== ==== ===== ==== ===== ====
Three and Nine Months Ended September 30, 2003 and 2002
Revenue and Subscriber Statistics
Service revenues approximated $38.2 million for the nine months ended September
30, 2003, which was a $0.1 million decrease as compared to the nine months ended
September 30, 2002. There was an increase in revenue during this period in our
wireless internet market sector which was offset by decreases in field services,
transportation, and other market sectors. It should be noted
45
that UPS deactivated a significant number of their units on our network during
the third quarter of 2003 and revenue from UPS declined materially during this
period. Total revenues approximated $41.4 million for the nine months ended
September 30, 2003, which was a $3.0 million decrease as compared to the nine
months ended September 30, 2002. The decrease was primarily a result the decline
in equipment revenues as a result of our decision to decrease the prices for our
equipment to customers over the course of the second quarter of 2002 due to
lower sales of certain of our customer devices and our assessment of market
conditions, demand and competitive pricing dynamics.
The tables below summarize our revenue for the three and nine months ended
September 30, 2003 and 2002 and our subscriber base as of September 30, 2002 and
2003. An explanation of certain changes in revenue and subscribers is set forth
below.
Three Months Ended September 30,
--------------------------------
Summary of Revenue 2003 2002 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $6.8 5.5 $1.3 24%
Field Services 1.9 4.0 (2.1) (53)
Transportation 1.1 2.8 (1.7) (61)
Telemetry 0.6 0.6 0.0 0
All Other 0.3 0.1 0.2 200
--- --- --- ---
Service Revenue $10.7 13.0 $(2.3) (18)
Equipment Revenue 1.4 0.3 1.1 367
--- --- --- ---
Total $12.1 $13.3 $(1.2) (9)%
===== ===== ====== =====
Nine Months Ended September 30,
-------------------------------
Summary of Revenue 2003 2002 Combined Change % Change
- ------------------ ---- ------------ ------ --------
(in millions) (restated)
Wireless Internet $21.1 $14.5 $6.6 46%
Field Services 7.9 12.5 (4.6) (37)
Transportation 7.0 8.6 (1.6) (19)
Telemetry 1.8 1.8 0.0 0
All Other 0.4 0.9 (0.5) (56)
--- --- ----- ----
Service Revenue $38.2 $38.3 $(0.1) 0
Equipment Revenue 3.2 6.0 (2.8) (46)
--- --- ----- ----
Total $41.4 $44.3 $(2.9) (7)%
===== ===== ====== =====
The make up of our registered subscriber base was as follows:
As of September 30,
-------------------------
2003 2002 Change % Change
---- ---- ------ --------
Wireless Internet 109,164 101,637 7,527 7%
Field Services 18,278 32,244 (13,966) (43)
Transportation 103,324(1) 94,347(1) 8,977 10
Telemetry 31,005 29,267 1,738 6
All Other 868 657 211 32
--- --- --- --
Total 262,639 258,152 4,487 2%
======= ======= ===== ===
(1) Includes 69,897 registered UPS devices as of September 30, 2003, of
which 7,500 were actively passing data traffic, as compared to 69,753
registered UPS devices as of September 30, 2002, of which 59,000 were
actively passing data traffic.
46
o Wireless Internet: Revenue grew from $14.5 million to $21.1 million
for the nine months ended September 30, 2003, as compared to the nine
months ended September 30, 2002. Revenue grew from $5.5 million to
$6.8 million for the three months ended September 30, 2003, as
compared to the three months ended September 30, 2002. The revenue
growth in the Wireless Internet sector during this period represented
our focus during this period on expanding the adoption of eLink and
BlackBerry TM wireless email offerings to corporate customers with
both direct sales people and reseller channel partners. Our existing
reseller channel partners represented a significant portion of the
revenue growth during this period.
o Field Services: Revenue declined from $12.5 million to $7.9 million
for the nine months ended September 30, 2003, as compared to the nine
months ended September 30, 2002. Revenue declined from $4.0 million to
$1.9 million for the three months ended September 30, 2003, as
compared to the three months ended September 30, 2002. The decrease in
revenue from field services was primarily the result of the
termination of several customer contracts since the quarter ended
September 30, 2002, including NCR Corporation, Sears, Bank of America,
Lanier, as well as the general reduction of units and rates across the
remainder our field service customer base, primarily IBM, and certain
consulting revenues included in the first nine months of 2002 that
were not included in the first nine months of 2003.
o Transportation: Revenue declined from $8.6 million to $7.0 million for
the nine months ended September 30, 2003, as compared to the nine
months ended September 30, 2002. Revenue declined from $2.8 million to
$1.1 million for the three months ended September 30, 2003, as
compared to the three months ended September 30, 2002. The decrease in
revenue from the transportation sector was primarily the result of the
elimination, as part of fresh-start accounting, of the recognition of
deferred revenue that resulted from the sale of intellectual property
license sold to Aether Systems Inc. in 2000. In addition, beginning in
July 2003, UPS removed a significant number of their units from our
network and no longer maintained their historical level of payments.
UPS represented $0.4 million of revenue for the three months ended
September 30, 2003, as compared to $2.2 million for the three months
ended September 30, 2002.
o Telemetry: Revenue remained at $1.8 million for the nine months ended
September 30, 2003, as compared to the nine months ended September 30,
2002. Revenue remained at $0.6 million for the three months ended
September 30, 2003, as compared to the three months ended September
30, 2002. While we experienced growth in certain telemetry customer
accounts, this was equally offset by churn or negative rate changes in
other telemetry accounts.
o Other: Revenue declined from $0.9 million to $0.4 million for the nine
months ended September 30, 2003, as compared to the nine months ended
September 30, 2002. Although our registered subscriber base grew
during this period, the decrease in revenue in this category was
primarily the result of the general reduction of rates for service for
certain customers in our other customer base. The increase in revenue
from $0.1 million to $0.3 million for the three months ended September
30, 2003, as compared to the three months ended September 30, 2002 was
attributable to commissions earned via the agency and dealer
agreements with Verizon Wireless and T-Mobile USA.
o Equipment: Revenue declined from $6.1 million to $3.2 million for the
nine months ended September 30, 2003, as compared to the nine months
ended September 30, 2002. The decrease in equipment revenue was
primarily a result of our decision to decrease the prices for our
equipment to customers over the course of the second quarter of 2002
due to lower sales of certain of our customer devices and our
assessment of market conditions, demand and competitive pricing
dynamics. Revenue grew from $0.3 million to
47
$1.4 million for the three months ended September 30, 2003, as compared to
the three months ended September 30, 2002. The increase was primarily the
result of the sales of devices attributable to the 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, 2003 and 2002. An explanation of certain changes in
operating expenses is set forth below.
Three Months Ended September 30,
--------------------------------
Summary of Expenses 2003 2002 Change % Change
- --------------------- ---- ---- ------ --------
(in millions)
Cost of Service and Operations $12.4 $14.2 $(1.8) (13)%
Cost of Equipment Sales 1.5 0.4 1.1 275
Sales and Advertising 1.1 1.8 (0.7) (39)
General and Administration 3.8 3.0 0.8 27
Depreciation and Amortization 5.5 5.9 (0.4) (7)
--- --- ----- ---
Total $24.3 $25.3 $(1.0) (4)%
===== ===== ====== ====
Nine Months Ended September 30,
-------------------------------
Summary of Expenses 2003 2002 Combined Change % Change
- ----------------------- ---- ------------- ------ --------
(in millions) (Restated)
Cost of Service and Operations $40.0 $46.3 $(6.3) (14)%
Cost of Equipment Sales 3.6 7.2 (3.6) (50)
Sales and Advertising 3.8 7.5 (3.7) (49)
General and Administration 10.4 10.5 (0.2) (2)
Restructuring Charges -- 0.6 (0.6) (100)
Depreciation and Amortization 16.3 17.0 (0.6) (4)
---- ---- ----- ---
Total $74.1 $89.1 $(15.0) (17)%
===== ====== ======= =====
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 $46.3 million to $40.0 million for the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002.
Costs of service and operations decreased from $14.2 million to $12.4 million
for the three months ended September 30, 2003 as compared to the three months
ended September 30, 2002. The decrease was partially the result of lower
employee salary and related costs due to the workforce reductions implemented in
July and September of 2002 and March of 2003. In addition, in July 2003, the
Compensation Committee of the Board of Directors approved an aggregate payout of
the 2002 corporate and personal portions of employee bonuses in the amount of
37.5% of the accrued amount. This decision resulted in a reversal of the 2002
bonus accrual during this period. 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 and decreased telecommunications charges as a result of the
negotiation of lower rates under our primary telecommunications contract in the
fourth quarter of 2002 as well as the removal of base stations as part of our
efforts to remove older-generation equipment from our network. This decrease was
also impacted by reductions in network maintenance costs as a result of the
removal of a portion of our base stations from our national maintenance contract
with Motorola, as well as the reduction of the per-base station rates under this
contract in the first quarter of 2003, as well as the removal of base stations
from the network as discussed above. Site lease cost 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. These
decreases were partially offset by compensation expenses associated with stock
options issued to employees in 2003 as compared to 2002.
48
Cost of equipment sold decreased from $7.2 million to $3.6 million for the nine
months ended September 30, 2003 as compared to the nine months ended September
30, 2002. The decrease was the was the result of reduced sales of equipment and
the write-down of the values of the equipment held for sale in the Company's
inventory. The Company wrote down the value of its inventory in the second
quarter of 2002 by $4.5 million. Cost of equipment sold increased to $1.5
million from $0.4 million for the three months ended September 30, 2003 as
compared to the three months ended September 30, 2002. The increase was
primarily the result of the cost of the sales of devices attributable to the
agency and dealer agreements with Verizon Wireless and T-Mobile USA.
Sales and advertising expenses decreased to $1.1 and $3.8 million for the three
and nine months ended September 30, 2003, as compared to $1.8 and $7.5 million
for the three and nine months ended September 30, 2002. Sales and advertising
expenses as a percentage of service revenue were approximately 10% and 10% for
the first three and nine months of 2003, compared to 14% and 20% for the
comparable period of 2002. The decrease in sales and advertising expenses for
the three and nine months ended September 2003 was primarily attributable to
lower employee salary and related costs, including sales commissions, due to the
workforce reductions implemented in July and September 2002 and March 2003, and
the significant reduction in or elimination of sales and marketing programs
after our reorganization in May 2002. In addition, in July 2003, the
Compensation Committee of the Board of Directors approved an aggregate payout of
the 2002 corporate and personal portions of employee bonuses in the amount of
37.5% accrued for this period. This decision resulted in a reversal of the 2002
bonus accrual during this period. These decreases were partially offset by
compensation expense associated with stock options issued to employees in 2003 a
compared to 2002.
General and administrative expenses for the core wireless business decreased
from $10.5 million to $10.4 million for the nine months ended September 30, 2003
as compared to the nine months ended September 30, 2002. The decrease in general
and administrative expenses for the nine months ended September 30, 2003 was
primarily attributable to lower employee salary and related costs due to the
workforce reductions implemented in July and September of 2002 and March of
2003, the closure of our Reston facility in July 2003, lower directors and
officers liability insurance costs subsequent to reorganization, a reduction in
bad debt charges primarily due to the lowering of our reserves, and a $1.0
million expense in April 2002 as a result of our withdrawal from an FCC spectrum
auction. In addition, in July 2003, the Compensation Committee of the Board of
Directors approved an aggregate payout of the 2002 corporate and personal
portions of employee bonuses in the amount of 37.5% accrued for this period.
This decision resulted in a reversal of the 2002 bonus accrual during this
period. These decreases were partially offset by compensation expense associated
with stock options issued to employees in 2003 a compared to 2002. These
decreases were also offset by increases in the consulting costs related to the
engagement of CTA in May 2002 that was continuing for the nine months ended
September 2003, the engagement of Further Lane in July 2003 and the related
compensation costs, and increases in audit, tax and legal fess related to our
fiscal year 2002 audit and re-audits of fiscal year 2001 and 2000, occurring
during the first nine months of 2003. General and administrative expenses
increased to $3.8 million from $3.0 million for the three months ended September
30, 2003, as compared to three months ended September 30, 2002. General and
administrative expenses as a percentage of service revenue were approximately
36% and 27% for the first three and nine months of 2003 as compared to 23% and
27% for 2002. The increase in general and administrative expenses for the three
49
months ended September 30, 2003 was primarily attributable to increases in the
consulting costs discussed above related to CTA and Further Lane as well as a
$168,000 charge related to the settlement of certain salary matters with a
terminated employee.
There were no restructuring charges for the nine months ended September 30,
2003, as compared to $0.6 million for the nine months ended September 30, 2002.
These restructuring charges related to certain employee reduction initiatives
and reorganization expenses.
Depreciation and amortization for the core wireless business decreased to $5.5
and $16.3 million for the three and nine months ended September 30, 2003, as
compared to $5.9 and $17.0 million for the three and nine months ended September
30, 2002. Depreciation and amortization was approximately 51% and 43% of service
revenue for the first three and nine months of 2003, as compared to 45% and 44%
for the first three and nine months of 2002.
Successor Successor Successor Successor Predecessor
Company Company Company Company Company
------- ------- ------- ------- -------
Three Months Three Months Nine Months Five Months Four Months
Ended Ended Ended Ended Ended
September 30, September 30, September 30, September 30, April 30,
2003 2002 2003 2002 2002
---- ---- ---- ---- ----
(in thousands)
Interest expense, net $(1,638) $(575) $(4,592) $(983) $(1,850)
Other income, net 192 -- 2,775 15 1,270
Gain on Disposal of Assets 51 (1,193) 51 (1,193) (591)
(Loss) on impairment of intangible asset (5,535) -- (5,535) -- --
Gain on Sale of Transportation Assets -- -- -- -- 372
Equity in losses of Mobile Satellite Ventures (3,155) (2,747) (7,768) (4,287) (1,909)
Interest expense from May 1, 2002, is associated with our various debt
obligations, including the $19.75 million notes payable to Rare Medium and CSFB,
our capital lease obligations, our vendor financing commitment and our term
credit facility put in place in January of 2003. Interest expense increased for
the three and nine months ended September 30, 2003, as compared to the three and
nine months ended September 30, 2002, due primarily to the amortization of fees
and the value ascribed to warrants provided to the term credit facility lenders
on our closing of our $12.5 million term credit facility in January of 2003. The
Company issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and have been recorded as a debt discount and are
being amortized as additional interest expense over three years, the term of the
related debt. Upon closing of the credit agreement, the Company paid closing and
commitment fees to the lenders of $500,000.
On July 29, 2003, Motient's wholly-owned subsidiary, Motient Communications,
entered into an asset purchase agreement with Nextel, under which Motient
Communications sold to Nextel certain of its SMR licenses issued by the FCC for
$3.4 million. Motient recorded the transaction in July, 2003 as an asset held
for sale; immediately discontinuing the amortization of the identified SMR
licenses. The closing of this transaction occurred on November 7, 2003.
In May 2004, the Company engaged a financial advisory firm to prepare a
valuation of customer intangibles as of 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
50
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
Effective May 1, 2002, we are required to reflect our equity share of the losses
of MSV. We recorded equity in losses of MSV of $3.1 million and $7.8 million for
the three and nine months ended September 30, 2003, as compared to $2.7 million
and $6.2 million for the three and nine months ended September 30, 2002. The MSV
losses for the three and nine months ended September 30, 2003 are Motient's
47.5% and 48% share of MSV's losses for the same period, losses for the three
and nine months ended September 30, 2002 consist of Motient's 48% and 48% share
of the MSV losses to date reduced by the loans in priority. For the three and
nine months ended September 30, 2003, MSV had revenues of $7.8 million and $22.2
million, operating expenses of $8.9 million and $22.4 million and a net loss of
$3.8 million and $9.2 million. For the five-month period ended September 30,
2002 and four-month period ended April 30, 2002, MSV had revenues of $4.6
million and $9.0 million, respectively, operating expenses of $3.8 million and
$9.3 million, respectively, and a net loss of $3.8 million and $9.2 million,
respectively.
Liquidity and Capital Resources
As of September 30, 2003, we had approximately $2.8 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, 2003, a $12.5 million term
credit facility that we entered into on January 27, 2003. On April 7, 2004, we
sold $23.2 million of our common stock to several institutional investors in a
private placement. On April 13, 2004, the Company repaid all of its then owing
principal and interest under its term credit facility. As of April 30, 2004, we
had approximately $16.6 million of cash on hand and short-term investments.
Since emerging from bankruptcy protection in May 2002, we have undertaken a
number of actions to reduce our operating expenses and cash burn rate. Despite
these initiatives, we continue to be cash flow negative and there can be no
assurances that we will ever be cash flow positive. Our liquidity constraints
have been exacerbated by weak revenue growth since emerging from bankruptcy
protection, due to a number of factors including the weak economy generally and
the weak telecommunications and wireless sector specifically, the financial
difficulty of several of our key resellers, on whom we rely for a majority of
our new revenue growth, the loss of UPS as a primary customer, and our continued
limited liquidity which has hindered efforts at demand generation.
In December 2002 we 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, 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. 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.
51
Sources of Financing
$12.5 Million Term Credit Facility: On January 27, 2003, our wholly-owned
subsidiary, Motient Communications, closed a $12.5 million 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. Bay Harbour
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 May 26, 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
------------------------ ----------------
Bay Harbour Management, L.C. 3,217,396
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
*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.
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 $12.5 million 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. As of April 15, 2004, the Company had
borrowed $6.0 million under this facility.
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.
The obligations of Motient Communications under the credit agreement are secured
by a pledge of all the assets owned by Motient Communications that can be
pledged as security (including, but not limited to Motient Communication's
shares in Motient License) and are not already pledged under certain other
existing credit arrangements, including under Motient Communications' credit
52
facility with Motorola and Motient Communications' equipment leasing agreement
with Hewlett-Packard. Motient Communications owns, directly or indirectly, all
of our assets relating to our terrestrial wireless communications business. In
addition, Motient Corporation and its wholly-owned subsidiary, Motient Holdings
Inc., have guaranteed Motient Communications' obligations under the credit
agreement, and we have delivered a pledge of the stock of Motient Holdings Inc.,
Motient Communications, Motient Services and Motient License to the lenders. In
addition, upon the repayment in full of the outstanding $19,750,000 in senior
notes due 2005 issued by MVH Holdings Inc. to Rare Medium and CSFB in connection
with our approved Plan of Reorganization, we will pledge the stock of MVH
Holdings Inc. to the lenders.
On January 27, 2003, in connection with the signing of the credit agreement, we
issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and have been recorded as a debt discount and are
being amortized as additional interest expense over three years, the term of the
related debt. Upon closing of the credit agreement, we paid closing and
commitment fees to the lenders of $500,000. These fees have been recorded on our
balance sheet and are being amortized as additional interest expense over three
years, the term of the related debt. Under the credit agreement, we must pay an
annual commitment fee of 1.25% of the daily average of undrawn amounts of the
aggregate commitments from the period from the closing date to December 31,
2003. In December 2003, we paid the lenders a commitment fee of approximately
$113,000.
On March 16, 2004, in connection with the execution of the amendment to our
credit agreement, we issued warrants to the lenders to purchase, in the
aggregate, 1,000,000 shares of our common stock. The exercise price of the
warrants is $4.88 per share. The warrants were immediately exercisable upon
issuance and have a term of five years. The warrants were valued using a
Black-Scholes pricing model at $6.7 million and were be recorded as a debt
discount and are being amortized as additional interest expense over three
years, the term of the related debt. The warrants are also subject to a
registration rights agreement. Under such agreement, we agreed to file a
registration statement to register the shares underlying the warrants upon the
request of a majority of the warrant holders, or in conjunction with the filing
of a registration statement in respect of shares of our common stock held by
other holders. We will bear all the expenses of such registration. In connection
with the amendment, we were also required to pay commitment fees to the lenders
of $320,000, which were added to the principal balance of the credit facility at
closing. These fees were recorded on our balance sheet and will be amortized as
additional interest expense over three years, the term of the related debt.
In each of April, June and August 2003 and March of 2004, we made draws under
the credit agreement in the amount of $1.5 million for an aggregate amount of
$6.0 million. We used such funds to fund general working capital requirements of
operations. On April 13, 2004, Motient repaid all principal amounts due under
its Credit Facility, including accrued interest thereon, in an amount of $6.7
million. The remaining availability under the Credit Facility of $5.8 million
will remain available for borrowing to the Company until December 31, 2004,
subject to the lending conditions in the agreement.
For the monthly periods ended April 2003 through December 2003, we 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
53
report additional events of default or that the lenders will continue to provide
waivers in such event. Ultimately, there can be no assurances that the liquidity
provided by the credit facility will be sufficient to fund our ongoing
operations.
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 (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 1,053,978 shares of
our common stock to the investors listed, at an exercise price of $5.50 per
share. These warrants will vest if and only if we do not meet certain deadlines
between June and November, 2004, 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 June 30, 2009.
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 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.
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 outstanding interest and principal 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 Group, Inc. and Credit Suisse First Boston,
which are described below.
Outstanding Obligations
As of September 30, 2003, Motient had the following debt obligations, in
addition to the above mentioned $12.5 million credit facility, in place:
Rare Medium Notes: Under our Plan of Reorganization, the Rare Medium notes were
cancelled and replaced by a new note in the principal amount of $19.0 million.
The new note was issued by a new subsidiary of Motient Corporation that owns
100% of Motient Ventures Holding Inc., which owns all of our interests in MSV.
54
The new note matures on May 1, 2005 and carries interest at 9%. The note allows
us to elect to accrue interest and add it to the principal, instead of paying
interest in cash. The note requires that it be prepaid using 25% of the proceeds
of any repayment of the $15 million note receivable from MSV. As described
above, we partially repaid outstanding interest on this note in April 2004.
CSFB Note: Under our Plan of Reorganization, we issued a note to CSFB, in
satisfaction of certain claims by CSFB against Motient, in the principal amount
of $750,000. The new note was issued by a new subsidiary of Motient Corporation
that owns 100% of Motient Ventures Holdings Inc., which owns all of our
interests in MSV. The new note matures on May 1, 2005 and carries interest at
9%. The note allows us to elect to accrue interest and add it to the principal,
instead of paying interest in cash. We must use 25% of the proceeds of any
repayment of the $15 million note receivable from MSV to prepay the CSFB note.
As described above, we partially repaid outstanding interest on this note in
April 2004.
Vendor Financing and Promissory Notes: Motorola had entered into an agreement
with us to provide up to $15 million of vendor financing, to finance up to 75%
of the purchase price of network base stations. Loans under this facility bear
interest at a rate equal to LIBOR plus 7.0% and are guaranteed by us and each
subsidiary of Motient Holdings. The terms of the facility require that amounts
borrowed be secured by the equipment purchased therewith. Advances made during a
quarter constitute a loan, which is then amortized on a quarterly basis over
three years. These balances were not impacted by our Plan of Reorganization. In
January 2003, we restructured the then-outstanding principal under this facility
of $3.5 million, with such amount to be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In January 2003, we
also negotiated a deferral of approximately $2.6 million that was owed for
maintenance services provided pursuant to a separate service agreement with
Motorola, and we issued a promissory note for such amount, with the note to be
paid off over a two-year period beginning in January 2004. The interest rate on
this promissory note is LIBOR plus 4%. In March 2004, we further restructured
both the vendor financing facility and the promissory note, primarily to extend
the amortization periods for both the vendor financing facility and the
promissory note. We will amortize the combined balances in the amount of
$100,000 per month beginning in March 2004. We also agreed that interest would
accrue on the vendor financing facility at LIBOR plus 4%. As part of this
restructuring, we agreed to grant Motorola a second lien (junior to the lien
held by the lenders under our term credit facility) on the stock of Motient
License. This pledge secures our obligations under both the vendor financing
facility and the promissory note.
Capital Leases: As of September 30, 2003, $4.1 million was outstanding under a
capital lease for network equipment with Hewlett-Packard Financial Services
Company. The lease has an effective interest rate of 12.2%. In January 2003,
this agreement was restructured to provide for a modified payment schedule. We
also negotiated a further extension of the repayment schedule that became
effective upon the satisfaction of certain conditions, including our funding of
a letter of credit in twelve monthly installments beginning in 2003, in the
aggregate amount of $1.125 million, to secure our payment obligations. The
letter of credit will be released in fifteen equal installments beginning in
July 2004, assuming no defaults have occurred or are occurring.
We continue to pursue all potential funding alternatives. Among the alternatives
for raising additional funds are the issuances of debt or equity securities,
other borrowings under secured or unsecured loan arrangements, and sales of
assets. There can be no assurance that additional funds will be available to us
on acceptable terms or in a timely manner.
55
We expect to continue to require significant additional funds before we begin to
generate cash in excess of our operating expenses, and do not expect to begin to
generate cash from operations in excess of our cash operating costs until the
first quarter of 2005, at the earliest. Also, even if we begin to generate cash
in excess of our operating expenses, we expect to continue to require
significant additional funds to meet remaining interest obligations, capital
expenditures and other non-operating cash expenses.
We are in the process of evaluating our future strategic direction. We have been
forced to take drastic actions to reduce operating costs and preserve our
remaining cash. For example, in February 2004 we effected a reduction in force
that reduced our workforce from approximately 166 to 112 employees. The
substantial elimination of sales and other personnel may have a negative effect
on our future revenues and growth prospects and our ability to support new
product initiatives and generate customer demand. Cash generated from operations
may not be sufficient to pay all of our obligations and liabilities.
Our projected cash requirements are based on certain assumptions about our
business model and projected growth rate, including, specifically, assumed rates
of growth in subscriber activations and assumed rates of growth of service
revenue. While we believe these assumptions are reasonable, these growth rates
continue to be difficult to predict, and there is no assurance that the actual
results that are experienced will meet the assumptions included in our business
model and projections. If the future results of operations are significantly
less favorable than currently anticipated, our cash requirements will be more
than projected, and we may require additional financing in amounts that will be
material. The type, timing and terms of financing that we select will be
dependent upon our cash needs, the availability of financing sources and the
prevailing conditions in the financial markets. We cannot guarantee that
additional financing sources will be available at any given time or available on
favorable terms.
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The successful implementation of
our business plan requires substantial funds to finance the maintenance and
growth of our operations, network and subscriber base and to expand into new
markets. We have an accumulated deficit and have historically incurred losses
from operations, which are expected to continue for additional periods in the
future. There can be no assurance that our operations will become profitable.
These factors, along with our negative operating cash flows have placed
significant pressures on our financial condition and liquidity position.
Cost 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 several reductions in our workforce,
including in March 2003 and February 2004. These actions eliminated
approximately 10% (19 employees) and 32.5% (54 employees), respectively, of our
then-remaining workforce. In the aggregate, we have reduced its workforce by
approximately 39% since December 31, 2002 and reduced employee and related
expenditures by approximately $0.5 million per month.
Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the
first quarter of 2003, we renegotiated several of our key vendor and customer
arrangements in order to reduce recurring expenses and improve our liquidity
position. In some cases, we were able to negotiate a flat rate reduction for
56
continuing services provided to us by our vendors or a deferral of payable
amounts, and in other cases we renegotiated the scope of services provided in
exchange for reduced rates or received pre-payments for future services. We
continue to aggressively pursue further vendor cost reductions where
opportunities arise.
As discussed above, in January 2003, we negotiated a deferral of approximately
$2.6 million that was owed to Motorola for maintenance services provided
pursuant to the Company's service agreement with Motorola. We issued a
promissory note to Motorola for such amount, with the note to be paid off over a
two-year period beginning in January 2004. Also in January 2003, we restructured
certain of our vendor obligations to Motorola. The remaining principal
obligation of approximately $3.3 million under this facility was restructured
such that the outstanding amount will be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In March 2004, the
amortization for both of these obligations was reduced to $100,000 in aggregate,
effectively extending the amortization period for both obligations. As part this
restructuring, we pledged all of the outstanding stock of Motient License, on a
second priority basis, to secure the borrowings under the Motorola promissory
note and vendor financing.
We also restructured certain of its capital lease obligations with
Hewlett-Packard to significantly reduce the monthly amortization requirements of
these facilities on an on-going basis. As part of such negotiations, we agreed
to fund a letter of credit in twelve monthly installments during 2003, in the
aggregate amount of $1.125 million, to secure certain payment obligations. This
letter of credit will be released to us in fifteen monthly installments
beginning in July 2004, assuming no defaults have occurred and are occurring.
As of May 31, 2004, the aggregate principal amount of our obligations to
Motorola under these facilities was approximately $4.4 million, and the
aggregate principal amount of our obligations to Hewlett-Packard was
approximately $2.9 million.
Network Rationalization. We are in the process of restructuring our wireless
data network in a coordinated effort to reduce network operating costs. One
aspect of this rationalization encompasses reducing unneeded capacity across the
network by deconstructing un-profitable base stations. In certain instances, the
geographic area that the network serves may be reduced by this process. The full
extent of the changes to network coverage have yet to be determined.
Closure of Reston, VA Facility. On July 15, 2003, we substantially completed the
transfer of our headquarters from Reston, VA to Lincolnshire, IL, where we
already had a facility. This action will reduce our monthly operating expenses
by an amount of approximately $65,000 per month or $780,000 per year.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive.
Commitments
As of September 30, 2003, we had no outstanding commitments to purchase
inventory.
Please see Note 6 ("Subsequent Events") of notes to consolidated financial
statements.
57
Summary of Cash Flow for the nine months ended September 30, 2003 (Successor
Company), the five months ended September 30, 2002 (Successor Company) and the
four months ended April 30, 2002 (Predecessor Company)
Successor Successor Predecessor
Company Company Company
--------- -------- -----------
Nine Months Five Months Four Months
Ended Ended Ended
September 30, September 30, April 30,
2003 2002 2002
---- ---- ----
(Unaudited) (Unaudited) (audited)
Cash Flows from Operating Activities: $(4,175) $(11,874) $(14,546)
-------- --------- ---------
Cash Flows from Investing Activities: (202) (690) (122)
---- ---- ----
Cash Flows from Financing Activities:
Equity Issuances -- -- 17
Equity Issuances to 401(k) 190
Principal payments under capital leases (2,116) (1,334) (1,273)
Principal payments under Vendor Financing (657) -- --
Proceeds from Credit Facility Financing 4,500 -- --
Debt issuance costs and other charges (537) -- --
----- ------ ------
Net cash provided by (used in) financing activities 1,380 (1,334) (1,256)
----- ------- -------
Net (decrease) increase in cash and cash equivalents (2,997) (13,898) (15,924)
Cash and Cash Equivalents, beginning of period 5,840 17,463 33,387
----- ------ ------
Cash and Cash Equivalents, end of period $2,843 $3,565 $17,463
====== ====== =======
Cash used in operating activities decreased for the nine months ended September
30, 2003 as compared to the nine months ended September 30, 2002, as a result of
decreases in operating losses, due substantially to our reduction in employee
salary and related expenditures, reductions in network maintenance, site lease
and telecommunications charges, lower insurance costs subsequent to
reorganization, and decreases in funds provided by working capital.
The decrease in cash provided by investing activities for the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002 was
primarily attributable to the purchase of restricted investments in 2002.
The increase in cash provided by financing activities for the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002 was
the result of the proceeds from borrowings under the term credit facility,
offset by vendor debt and capital lease repayments.
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
58
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.
"Fresh-Start" Accounting
In accordance with Statement of Position No. 90-7, effective May 1, 2002, we
adopted "fresh start" accounting and allocated the reorganization value of $221
million to our assets in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations".
We have allocated the $221 million reorganization value among our assets based
upon our estimates of the fair value of our assets and liabilities. In the case
of current assets, we concluded that their carrying values approximated fair
values. The values of our frequencies and our investment in and notes receivable
from MSV were based on independent analyses presented to the bankruptcy court.
The value of our investment in MSV was subsequently modified as it had not been
appropriately calculated as of May 1, 2002 due to certain preference rights for
certain classes of shareholders in MSV. The value of our fixed assets was based
upon an estimate of replacement cost, for which we believe that our recent
purchases represent a valid data point. Software and customer related
intangibles values were determined based on third party valuations as of May 1,
2002.
For a complete description of the application of "Fresh-Start" Accounting,
please refer to Note 2 ("Significant Accounting Policies, Motient's Chapter 11
Filing and Plan of Reorganization and "Fresh-Start" Accounting") of notes to
consolidated financial statements.
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), 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 48% as of May 1, 2002, or approximately $19.3
million. In accordance with the equity method of accounting, we recorded our
approximate 48% share of MSV losses against this basis.
Approximately $21.6 million of the $40.9 million 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
59
recent 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, 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. For further detail on certain payments made on this note
receivable, please see Note 6, "Subsequent Events".
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.
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.
Deferred Taxes
We have generated significant net operating losses for tax purposes through
September 30, 2003. 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. 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
60
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.
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. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 will
not have a material impact on the Company's revenue recognition policies.
Recent Accounting Standards
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
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No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. We have adopted the disclosure requirements of SFAS No. 148
as of January 1, 2003 and plan to continue to follow the provisions of APB
Opinion No. 25 for accounting for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51", which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. We have reviewed the implications that adoption of FIN No. 46 would have
on our financial position and results of operations and do not expect it to have
a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We have determined that there are no financial instruments impacted by
SFAS No. 150.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes related to our credit
facilities. We manage interest rate risk through the use of fixed rate debt.
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.
Effective May 1, 2002, Motient's senior notes were eliminated in exchange for
new common stock of the company. All of Motient's remaining debt obligations are
fixed rate obligations. We do not believe that we have any material cash flow
exposure due to general interest rate changes on these debt obligations.
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 (the "Exchange
Act")) 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), 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 required improvement.
As a result of our evaluation, 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.
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o Second, we have instituted regular bi-quarterly meetings to review
each department's significant activities and respective disclosure
controls and procedures.
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 principal financial officer (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 bi-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.
As a result of these improvements, management believes that its 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.
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;
o 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.
Internal Controls
During the course of the fiscal 2002 year-end closing process and subsequent
audit of the financial statements for the eight month period ended December 31,
2002, our management and our then-current independent auditors,
PricewaterhouseCoopers, identified several matters related to internal controls
that needed to be addressed. Several of these matters were classified by the
auditors as "reportable conditions" in accordance with the standards of the
American Institute of Certified Public Accountants, or AICPA. Reportable
conditions involve matters coming to management's or our auditor's attention
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relating to significant deficiencies in the design or operation of internal
control that, in the judgment management and the auditors, could adversely
affect our ability to record, process, summarize and report financial data in
the financial statements. Our principal executive officer, chief technology
officer, chief accounting officer and audit committee are aware of these
conditions and of our responses thereto, and consider them to be significant
deficiencies as defined in the applicable literature embodying generally
accepted auditing standards, or GAAS. On March 2, 2004, we dismissed
PricewaterhouseCoopers as our independent auditors. PricewaterhouseCoopers has
not reported on Motient's consolidated financial statements for any fiscal
period. On March 2, 2004, we engaged Ehrenkrantz Sterling & Co. LLC as our
independent auditors to replace PricewaterhouseCoopers and audit our
consolidated financial statements for the period May 1, 2002 to December 31,
2002.
The following factors contributed to the significant deficiencies identified by
PricewaterhouseCoopers:
o Rapid shifts in strategy following our emergence from bankruptcy
on May 1, 2002, particularly with respect to a sharply increased
focus on cost reduction measures;
o Significant reductions in workforce following our emergence from
bankruptcy and over the course of 2002 and 2003, in particular
layoffs of accounting personnel, which significantly reduced the
number and experience level of our accounting staff;
o Turnover at the chief financial officer position during the 2002
audit period and subsequently in March of 2003; and
o The closure in mid-2003 of our Reston, VA facility, which
required a transition of a large number of general and
administrative personnel to our Lincolnshire, IL facility.
Set forth below are the significant deficiencies identified by management and
PricewaterhouseCoopers, together with a discussion of our corrective actions
with respect to such deficiencies through May 31, 2004.
PricewaterhouseCoopers recommended several adjustments to the financial
statements for the periods ended April 30, June 30, September 30 and December
31, 2002. During the 2002 audit period, PricewaterhouseCoopers noted several
circumstances where our internal controls were not operating effectively.
Although these circumstances continued in 2003, management began to address
these issues formally in March 2003.
Specifically, PricewaterhouseCoopers noted that:
o Timely reconciliation of certain accounts between the general
ledger and subsidiary ledger, in particular accounts receivable
and fixed assets, was not performed;
o Review of accounts and adjustments by supervisory personnel on
monthly cut-off dates, in particular fixed assets clearing
accounts, accounts receivable reserve and inventory reserve
calculations, was not performed;
o Cut-off of accounts at balance sheet dates related to accounts
payables, accrued expenses and inventories was not achieved; and
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o No formal policy existed to analyze impairment of long-lived
assets on a recurring basis.
PricewaterhouseCoopers recommended that management institute a thorough
close-out process, including a detailed review of the financial statements,
comparing budget to actual and current period to prior period to determine any
unusual items. They also recommended that we prepare an accounting policy and
procedures manual for all significant transactions to include procedures for
revenue recognition, inventory allowances, accounts receivable allowance, and
accruals, among other policies.
In response to these comments, we have taken the following actions:
o In June 2003, we initiated a process of revising, updating and
improving our month-end closing process and created a checklist
containing appropriate closing procedures.
o We have increased our efforts to perform monthly account
reconciliations on all balance sheet accounts in a timely
fashion.
o Beginning in July 2003, on a monthly basis the corporate
controller began reviewing balance sheet account reconciliations.
o We have implemented and distributed a written credit and
collections policy, which includes reserve calculations and
write-off requirements.
o All accounts receivable sub-ledgers are reconciled to the general
ledger monthly, and on a monthly basis inventory reports are
produced, sub-ledgers are reconciled to the general ledger and
the reserve account is analyzed.
o Since September 2003, the fixed assets clearing account is no
longer being used, and all asset additions are reviewed by the
corporate controller to determine proper capitalization and
balance sheet classification.
o As of July 2003, all monthly income statement accounts are
analyzed by the corporate controller prior to release of the
financial statements.
o We are preparing an accounting policy and procedures manual to
include procedures for all significant policies, business
practices, and routine and non-routine procedures performed by
each functional area. Our current goal is to finalize this manual
by July 31, 2004.
o Over the course of the third quarter of 2003, we updated our
procedures for the preparation of a monthly financial reporting
package to include management's discussion and analysis of
results of operations, financial statements, cash and investments
reporting and month-to-month variances. Under these procedures,
departmental results of operations are also prepared and provided
to appropriate department managers on a monthly basis.
In addition to the above, since April 2003 we have reevaluated our staffing
levels, reorganized the finance and accounting organization and replaced ten
accounting personnel with more experienced accounting personnel, including,
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among others, a new chief financial officer, chief accounting officer and
corporate controller, a manager of revenue assurance and a manager of financial
services.
While management has moved expeditiously and committed considerable resources to
address the identified internal control deficiencies, management has not been
able to fully execute all of the salutary procedures and actions it deems
desirable. It will take some additional time to realize all of the benefits of
management's initiatives, and we are committed to undertaking ongoing periodic
reviews of our internal controls to assess the effectiveness of such controls.
We believe the effectiveness of our internal controls is improving and we
further believe that the financial statements included in this quarterly report
on Form 10-Q are fairly stated in all material respects. However, new
deficiencies may be identified in the future. Management expects to continue its
efforts to improve internal controls with each passing quarter.
Our current auditors, Friedman LLP, successors-in-interest to Ehrenkrantz
Sterling & Co. LLC, agree that the matters described above constitute
significant deficiencies and have communicated this view to our audit committee.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see the discussion regarding Legal Proceedings contained in Note 5
("Legal and Regulatory Matters") and Note 6 ("Subsequent Events") of notes to
consolidated financial statements, which is incorporated by reference herein.
Item 3. Defaults Upon Senior Securities
Please see the discussion regarding the defaults under our term credit agreement
contained in Note 3 ("Liquidity and Financing") of notes to consolidated
financial statements, which is incorporated by reference herein.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Current Reports on Form 8-K
On July 29, 2003, the Company filed a Current Report on Form
8-K, in response to Item 5, reporting certain changes to its
board of directors.
On August 6, 2003, the Company filed a Current Report on Form
8-K, in response to Item 5, to report a recent transaction
with Nextel and to provide an update on the status of its
periodic SEC reports.
On November 4, 2003, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report an update of recent
transaction with Nextel, to report the loss of its largest
customer UPS, and to provide an update on the status of its
periodic SEC reports.
On December 11, 2003, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report a recent
transaction with Nextel.
On February 12, 2004, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report the termination of
employment of Walter V. Purnell, Jr. as the Company's
president and chief executive officer, and to provide an
update on the status of its periodic SEC reports.
On February 20, 2004, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report a reduction in
personnel.
On March 9, 2004, the Company filed an amendment to Current
Report on Form 8-K/A, in response to Item 4, to report the
dismissal of PricewaterhouseCoopers as its independent
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auditors for the period May 1, 2002 to December 31, 2002 and
the engagement of Ehrenkrantz Sterling & Co. LLC as the
Company's independent auditors for the period May 1, 2002 to
December 31, 2002.
On April 8, 2004, the Company filed a Current Report on Form
8-K, in response to Items 5 and 7, to report the sale of
4,215,910 shares of its common stock at a per share price of
$5.50 per share
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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)
June 7, 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
16.1 Letter from Friedman LLP to the Securities and Exchange Commission,
dated as of June 7, 2004 (filed herewith)
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)
71