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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 March 31, 2004
Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
Incorporation or organization)
300 Knightsbridge Parkway
Lincolnshire, IL 60069
847-478-4200
(Address, including zip code, and telephone
number, including area code, of
registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No[ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Number of shares of common stock outstanding at June 24, 2004: 29,773,997
1
Introductory Note
This quarterly report on Form 10-Q relates to the quarter ended March 31, 2004.
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 and prior periods.
As we have previously disclosed in prior reports, including most recently in our
quarterly report on Form 10-Q for the quarter ended September 30, 2003 filed on
June 7, 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 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 those 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, June 30 and September 30,
2003 on April 26, May 14 and June 7, 2004, respectively. Concurrently with the
filing of this quarterly report on Form 10-Q, we filed our annual report on Form
10-K for the year ended December 31, 2003.
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 MARCH 31, 2004
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2004 4
Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures 48
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 53
Item 3. Defaults Upon Senior Securities 53
Item 6. Exhibits and Reports on Form 8-K 53
3
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
(Unaudited) (Unaudited)
REVENUES
Services and related revenue $ 9,961 $ 13,563
Sales of equipment 1,539 807
-------- --------
Total revenues 11,500 14,370
-------- --------
COSTS AND EXPENSES
Cost of services and operations (including stock-based compensation of
$505 for the three months ended March 31,2004; exclusive of
depreciation and amortization below) 11,352 13,654
Cost of equipment sold (exclusive of depreciation and amortization below) 1,509 997
Sales and advertising (including stock-based compensation of $360 for the
three months ended March 31, 2004; exclusive of depreciation and
amortization below) 1,032 1,242
General and administrative (including stock-based compensation of $577
for the three months ended March 31, 2003; exclusive of depreciation
and amortization below) 2,352 3,260
Restructuring Charges 1,154 --
Depreciation and amortization 4,273 5,271
-------- --------
Total Costs and Expenses 21,672 24,424
-------- --------
Operating loss (10,172) (10,054)
-------- --------
Interest expense, net (1,766) (1,312)
Other income, net 8 459
Other income from Aether 645 838
(Loss) on asset disposal (2) --
Equity in loss of Mobile Satellite Ventures (2,230) (2,325)
-------- --------
Net (loss) $(13,517) $(12,394)
======== ========
Basic and Diluted (Loss) Per Share of Common Stock:
Net (Loss) basic and diluted $ (0.54) $ (0.49)
======== ========
Weighted-Average Common Shares Outstanding - basic and diluted 25,232 25,097
======== ========
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)
March 31, 2004 December 31, 2003
-------------- -----------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $2,499 $3,618
Restricted cash and short-term investments -- 504
Accounts receivable-trade, net of allowance for doubtful accounts of
$660 at March 31, 2004 and $759 at December 31, 2003 2,708 3,804
Inventory 132 240
Due from Mobile Satellite Ventures, net 90 93
Deferred equipment costs 3,038 3,765
Assets held for sale 535 2,734
Other current assets 2,825 5,091
----- -----
Total current assets 11,827 19,849
------ ------
RESTRICTED INVESTMENTS 1,189 1,091
PROPERTY AND EQUIPMENT, net 29,056 31,381
FCC LICENSES AND OTHER INTANGIBLES, net 72,617 74,021
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 20,380 22,610
DEFERRED CHARGES AND OTHER ASSETS 13,789 8,076
------ ------
Total assets $148,858 $157,028
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $11,559 12,365
Deferred equipment revenue 3,059 3,795
Deferred revenue and other current liabilities 8,553 11,005
Vendor financing commitment, current 1,206 2,413
Obligations under capital leases, current 1,501 1,454
----- -----
Total current liabilities 25,878 31,032
------ ------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 1,253 1,642
Vendor financing commitment, net of current portion 3,119 2,401
Notes payable, including accrued interest thereon 23,385 22,885
Term credit facility, including accrued interest thereon 6,760 4,914
Other long-term liabilities 817 1,347
----- -----
Total long-term liabilities 35,334 33,189
------ ------
Total liabilities 61,212 64,221
------ ------
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at March
31, 2004 and December 31, 2003, no shares issued or outstanding at
March 31, 2004 or December 31, 2003 --- ---
Common Stock; voting, par value $0.01; 100,000,000 shares
authorized and 25,232,286 and 25,196,840 shares issued
and outstanding at March 31, 2004 and at December 31, 2003, respectively 253 252
Additional paid-in capital 200,365 198,743
Common stock purchase warrants 22,225 15,492
Accumulated deficit (135,197) (121,680)
--------- ---------
STOCKHOLDERS' EQUITY 87,646 92,807
-------- --------
Total liabilities and stockholders' equity $148,858 $157,028
======== ========
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)
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(1,759) $(2,191)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from short-term and restricted investments 406 272
Additions to property and equipment (541) (6)
------- -------
Net cash (used in) provided by investing activities (135) 266
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of employee stock options 105 --
Principal payments under capital leases (342) (611)
Principal payments under Vendor Financing (488) (219)
Proceeds from Term Credit Facility 1,500 --
------- -------
Net cash provided by (used in) financing activities 775 (830)
------- -------
Net (decrease) increase in cash and cash equivalents (1,119) (2,755)
------- -------
CASH AND CASH EQUIVALENTS, beginning of period 3,618 5,840
------- -------
CASH AND CASH EQUIVALENTS, end of period $ 2,499 $ 3,085
======= =======
The accompanying notes are an integral part of these consolidated condensed financial statements.
6
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2004
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation and field service. Motient provides its
eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network service providers. Motient also offers BlackBerry
TM by Motient, a wireless email solution developed by Research In Motion Ltd.
("RIM") and licensed to operate on Motient's network. BlackBerry TM by Motient
is designed for large corporate accounts operating in a Microsoft Exchange(R) or
Lotus Notes(R) environment. The Company considers the two-way mobile
communications service described in this paragraph to be its core wireless
business.
Motient 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, the loss of
UPS as a primary customer, 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.
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").
7
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 occurred in May
2004, but a decision has not yet been issued by the court.
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
March 31, 2004, the Company's percentage ownership of MSV was approximately
29.5% on a fully diluted basis.
For a discussion of certain additional recent developments regarding MSV,
including recent investments in MSV, please see Note 6 ("Subsequent Events").
8
Cost Reduction Actions
Several factors have restrained the Company's ability to grow revenue at the
rate it previously anticipated. These factors include the weak economy generally
and the weak telecommunications and wireless sector specifically, the loss of
UPS as a primary customer, the 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 recently 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 a reduction in its workforce in
February 2004. This action eliminated approximately 32.5% (54 employees) of its
workforce and reduced employee and related expenditures by approximately $0.4
million per month.
Refinancing of Vendor Obligations. In March 2004, the Company renegotiated two
outstanding obligations to Motorola Inc., reducing the monthly amortization for
these obligations from approximately $211,000 in aggregate to $100,000 in
aggregate, 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.
As of May 31, 2004, the aggregate principal amount of the Company's obligations
to Motorola under these facilities was approximately $4.2 million. In June,
2004, we reached an agreement to prepay these obligations in a negotiated
settlement with Motorola. Please see Note 3 ("Liquidity and Financing") and
Note 6 ("Subsequent Events") for further discussion of this and other financing
obligations.
Network Rationalization. Motient is currently in the process of assessing its
wireless data network in a coordinated effort to reduce network operating costs
while also focusing on minimizing the potential impact to customer
communications and coverage requirements. This rationalization encompasses,
among other things, reducing unneeded capacity across the network by
deconstructing under-utilized and un-profitable base stations as well as
deconstructing base stations that pass an immaterial amount of customer data
traffic. In some cases, these base stations were originally constructed
specifically to serve customers with nationwide requirements that are no longer
customers of Motient. In certain instances, the geographic area that the network
serves may be reduced by this process and customer communications may be
impacted. Motient has discussed these changes with many of its customers to
assist them in evaluating the potential impact, if any, to their respective
communications requirements. The full extent and effect of the changes to the
network have yet to be determined.
Communication Technology Advisors LLC. Effective January 30, 2004, Motient hired
Communications Technology Advisors LLC, or CTA, to serve as "Chief Restructuring
Entity" and advise the Company on various ways to reduce cash operating
requirements. CTA's engagement is scheduled to end in August 2004. See Note 2
("Related Parties") for further discussion of Motient's relationship with CTA.
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.
9
Changes in Management
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 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.
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.
Please see Note 6, ("Subsequent Events") for further information with regard to
management changes.
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. Ehrenkrantz Sterling & Co. was also engaged to audit
Motient's consolidated financial statements for the period ended December 31,
2003. Please see Note 6, ("Subsequent Events"), for further information with
regard to accountant changes.
For further details regarding the change in accountants, please see the
Company's current report on Form 8-K filed with the SEC in April 23, 2003, the
Company's amendment to current report on Form 8-K/A filed with the SEC on March
9, 2004 and the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2003, filed with the SEC on June 7, 2004.
Sale of SMR Licenses to Nextel Communications, Inc.
On December 9, 2003, Motient Communications entered into an asset purchase
agreement, under which Motient Communications will sell surplus licenses to
Nextel for $2.75 million. In February 2004, the Company closed the sale of
licenses covering approximately $2.2 million of the purchase price, and in April
2004, the Company closed the sale of approximately one-half of the remaining
licenses. The transfer of the other half of the remaining licenses has been
challenged at the FCC by a third-party. While the Company believes, based on the
advice of counsel, that the FCC will ultimately rule in its favor, the Company
cannot assure you that it will prevail, and, in any event, the timing of any
final resolution is uncertain. None of these licenses are necessary for
Motient's future network requirements. Motient has and expects to continue to
use the proceeds of the sales to fund its working capital requirements and for
general corporate purposes. The lenders under Motient Communications' term
credit agreement have consented to the sale of these licenses.
10
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 months ended March 31, 2004
are not necessarily indicative of the results to be expected for any future
period or for the full fiscal year. In the opinion of management, all
adjustments (consisting of normal recurring adjustments unless otherwise
indicated) necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2004, and for all periods presented have
been made. Footnote disclosure has been condensed or omitted as permitted in
interim financial statements.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
Inventory
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, is stated at the lower of cost or
market. Cost is determined using the weighted average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes and records a charge to current period
income when such factors indicate that a reduction to net realizable value is
appropriate. The Company considers both inventory on hand and inventory which it
has committed to purchase, if any.
Periodically, the Company will offer temporary discounts on equipment sales to
customers. The value of this discount is recorded as a cost of sale in the
period in which the sale occurs.
Concentrations of Credit Risk
For the three months ended March 31, 2004, four customers accounted for
approximately 41% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 23%. No one customer
accounted for more than 10% of the Company's net accounts receivable at March
31, 2004.
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.
11
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 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.
Prior to our adoption of "fresh-start" accounting after we emerged from Chapter
11 bankruptcy proceedings on May 1, 2002, the 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
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 $6.2 million of the value attributed to MSV is the excess of fair
value over cost basis and is amortized over the estimated lives of the
underlying MSV assets that gave rise to the basis difference. 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 at "fresh start", 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 accrued interest 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
12
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. There
was no further impairment required as of December 31, 2003 or March 31, 2004.
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 month period ended March 31, 2004, MSV had revenues of $7.7
million, operating expenses of $7.3 million, and a net loss of $6.7 million.
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 March 31, 2004; however, it has had its ability to utilize these losses
limited on two occasions as a result of transactions that caused a change of
control in accordance with the Internal Revenue Service Code Section 382.
Additionally, since the Company has not yet generated taxable income, it
believes that its ability to use any remaining net operating losses has been
greatly reduced; therefore, the Company has established a valuation allowance
for any benefit that would have been available as a result of the Company's net
operating losses.
Revenue Recognition
The Company generates revenue principally through equipment sales and airtime
service agreements, and consulting services. In 2000, the Company adopted Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition," issued by the SEC.
SAB No. 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the deferral of the recognition of revenue and costs related to equipment sold
as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No.104, "Revenue Recognition",
which supersedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB
No. 104's primary purpose is to rescind accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements and to rescind the SEC's
13
"Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers" ("FAQ") issued with SAB No. 104. Selected portions of the FAQ have been
incorporated into SAB No. 104. The adoption of SAB No. 104 did not have a
material impact on the Company's revenue recognition policies.
Revenue is recognized as follows:
Service revenue: Revenues from wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. The Company defers any revenue and costs associated with activation of a
subscriber on its network over an estimated customer life of two years.
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public, and it also sells its
product directly to end-users. Revenue from the sale of the equipment, as well
as the cost of the equipment, are initially deferred and are recognized over a
period corresponding to the Company's estimated customer life of two years.
Equipment costs are deferred only to the extent of deferred revenue.
Property and Equipment
Property and equipment are depreciated over its useful life using the
straight-line method. Assets recorded as capital leases are amortized over the
shorter of their useful lives or the term of the lease. The estimated useful
lives of office furniture and equipment vary from two to ten years, and the
network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance do not significantly increase the
utility or useful life of an asset and are expensed as incurred.
Property and equipment consists of the following:
March 31,
2004
----
Network equipment $36,679
Office equipment and furniture 2,573
Construction in progress ---
-------
39,252
Less accumulated depreciation and amortization (10,196)
-------
Property and equipment, net $29,056
=======
The Company recorded depreciation expense for the three months ended March 31,
2004 of $2.9 million. The Company has assets under capital lease of $4.0 million
at March 31, 2004.
14
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
The Company accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Generally, no expense is recognized related to
the Company's stock options because the option's exercise price is set at the
stock's fair market value on the date the option is granted. In cases where the
Company issues shares of restricted stock, the Company will record an expense
based on the value of the restricted stock on the measurement date.
Options to purchase 1,554,867 shares and 1,253,384 shares of the Company's
common stock were outstanding at March 31, 2004 and 2003, respectively, under
the Company's 2002 Stock Option Plan.
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion
No.25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No.123", which provides optional transition guidance for those companies
electing to voluntarily adopt the accounting provisions of SFAS No. 123. In
addition, SFAS No. 148 mandates certain new disclosures that are incremental to
those required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on (loss) attributable to common
stockholders (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
15
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
Net loss, as reported $(13,517) $(12,394)
Add: Stock-based employee compensation expense included in net
loss, net of related tax effects 1,442 ---
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax related effects (439) (1,631)
----- -------
Pro forma net loss (12,514) (14,025)
Weighted average common shares outstanding 25,232 25,097
Loss per share:
Basic and diluted---as reported $(0.54) $(0.49)
Basic and diluted---pro-forma $(0.50) $(0.56)
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:
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
Expected life (in years) 10 10
Risk-free interest rate 0.88%-0.93% 1.11%
Volatility 146%-162% 130%
Dividend yield 0.0% 0.0%
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:
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $6.2 $7.1
Field Services 1.8 3.2
Transportation 0.9 2.6
Telemetry 0.6 0.6
All Other 0.5 0.1
--- ---
Service revenue 10.0 13.6
Equipment revenue 1.5 0.8
--- ---
Total $11.5 $14.4
===== =====
16
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(Loss)Per Share
Basic and diluted (loss) income per common share is computed by dividing income
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 March 31, 2004 and 2003, there were
warrants to acquire approximately 6,664,962 and 5,464,962, respectively, shares
of common stock and options outstanding for 1,554,867 and 1,253,384,
respectively, shares that were not included in this calculation because of their
antidilutive effect for the three months ended March 31, 2004 and 2003.
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
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 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
17
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 determined that it does not have any variable interest
entities.
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 $201,000 to related parties for service-related
obligations for the three-month period ended March 31, 2004, as compared to
$170,000 for the three month period ended March 31, 2003. As of March 31, 2004,
the Company had a net due to related parties in the amount of $0.3 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, and subsequently as a
consultant to the Company since May 2002. On January 30, 2004, the Company
engaged CTA to act as chief restructuring entity. 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. 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.
See Note 6 ("Subsequent Events") for additional related party activities.
3. LIQUIDITY AND FINANCING
Liquidity and Financing Requirements
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 1 ("Organization and
Business") and Note 6 ("Subsequent Events").
The Company has taken a number of steps recently to reduce operating and capital
expenditures in order to lower its cash burn rate and improve its liquidity
position. The Company undertook a reduction in its workforce in February 2004.
This action eliminated approximately 32.5% (54 employees) of its workforce.
18
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
MSV. Under the terms of the Company's 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 and certain payment with regard to
these notes, 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 and July 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 with regard to recent funding events, 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.
19
Debt Obligations & Capital Leases
The following table outlines the Company debt obligations and capital leases as
of March 31, 2004.
(Unaudited)
March 31, 2004
--------------
(in thousands)
Rare Medium note payable due 2005, including
accrued interest thereon $22,497
CSFB note payable due 2005, including
accrued interest thereon 888
Vendor financing 4,325
Term Credit Facility 6,760
Obligations under Capital Leases 2,754
-----
37,224
Less current maturities 2,707
-----
Long-term debt $34,517
-------
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 $23,385 $---- $23,385 $ ---
Term Credit Facility 6,760 ---- 6,760 ---
Capital lease obligations, including interest thereon 2,754 1,501 1,253 ---
Vendor financing commitment 4,325 1,206 3,119 ---
----- ----- ----- -----
Total Contractual Cash Obligations $37,224 $2,707 $34,517 $----
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 - Developments
Relating to MSV") for further information with regard to certain payments made
on this note subsequent to the period covered by this report.
20
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 -
Developments Relating to MSV") 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 4.0% and are guaranteed by the
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.
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.
As of March 31, 2004, $4.3 million was outstanding under these notes with
Motorola. In June 2004, we reached an agreement to prepay these obligations in a
negotiated settlement with Motorola. Please see Note 6, ("Subsequent Events").
Capital Leases: As of March 31, 2004, $2.8 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. In June 2004, the Company prepaid these obligations in
a negotiated settlement with Hewlett-Packard. Please see Note 6, ("Subsequent
Events").
21
Sources of Funding
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. JGD
Management Corp,James G. Dinan Highland Capital Management and James D. Dondero
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 June 24, 2004 the number of shares of Motient
common stock beneficially owned by the following parties to the term credit
agreement, based solely on filings made by such parties with the SEC:
Name of Beneficial Owner Number of Shares
------------------------ ----------------
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
Highland Capital Management** 4,424,559
James Dondero** 4,424,559
*JGD Management Corp and James G. Dinan share beneficial ownership
with respect to the 2,276,445 shares of our common stock. Mr. Dinan is
the president and sole stockholder of JGD Management Corp, which
manages the other funds and accounts that hold our common stock over
which Mr. Dinan has discretionary investment authority.
** James D. Dondero, a member of Motient's board of directors, is
the President of Highland Capital Management, L.P., which, pursuant to
an arrangement with M&E Advisors, L.L.C., has indirectly made a
commitment under the credit facility.
Under the credit agreement, the lenders have made commitments to lend Motient
Communications up to $12.5 million. The commitments are not revolving in nature
and amounts repaid or prepaid may not be reborrowed. Borrowing availability
under Motient's $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. On April 13, 2004, Motient repaid all
principal amounts then owing under the credit facility, including accrued
interest thereon, in an amount of $6.8 million, which amount may not be
reborrowed.
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.
22
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). 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
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 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 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
23
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.
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing to Motient under the "take-or-pay" agreement between
Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to
purchase certain minimum amounts of air-time on the Motient network. In 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 notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claims to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix, in which Wireless Matrix will pay Motient $1.1
million.
4. COMMITMENTS AND CONTINGENCIES
As of March 31, 2004, the Company had no contractual inventory commitments.
UPS, the Company's largest customer as of December 31, 2002, substantially
completed its migration to next generation network technology in the first six
months of 2003, and its monthly airtime usage of the Company's network declined
significantly beginning in July 2003, and, consequently, so did revenues and
cash flows. UPS was our eighth largest customer for the three months ended March
31, 2004. 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 May 31, 2004, UPS had
approximately 3,800 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 May 31, 2004, UPS has
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 $4.3 million. If UPS terminates the
contract, we will be required to refund any unused portion of the prepayment to
UPS.
24
5. LEGAL AND REGULATORY MATTERS
Legal
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
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. Motient cannot
assure that its operations will not be affected by this proceeding.
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
25
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.
In connection with this sale, Motient issued to Tejas Securities Group, Inc.,
Motient's placement agent for the sale, and certain members of CTA, warrants to
purchase 600,000 and 400,000 shares, respectively, 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 five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing.
The warrants 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.
Additional Sale of Common Stock
On July 1, 2004, we sold 3,500,000 shares of our common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to The Raptor
Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar Rock Fund
L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities Fund,
L.P., York Select, L.P., York Select Unit Trust, York Global Value Partner,
L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity Fund
Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment Fund,
LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Highland
Equity Fund, L.P., Singer Children's Management Trust and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, we signed a registration rights agreement with the holders of these
shares. Among other things, this registration rights agreement requires us to
file and cause to make effective a registration statement permitting the resale
of the shares by the holders thereof. We also issued warrants to purchase an
aggregate of 525,000 shares of our common stock to the investors listed above,
at an exercise price of $8.57 per share. These warrants will vest if and only if
we do not meet certain registration deadlines beginning in 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.
In connection with this sale, we issued to certain CTA affiliates and certain
affiliates of Tejas Securities Group, Inc., our placement agent for the private
placement, warrants to purchase 340,000 and 510,000 shares, respectively, of our
common stock. The exercise price of these warrants is $8.57 per share. The
warrants are immediately exercisable upon issuance and have a term of five
years. We also paid Tejas Securities Group, Inc. a placement fee of $850,000 at
closing. The shares were offered and sold pursuant to the exemption from
registration afforded by Rule 506 under the Securities Act and/or Section 4(2)
of the Securities Act.
Credit Facility Repayment
On April 13, 2004, Motient repaid the all principal amounts then owing under its
term credit facility, including accrued interest thereon, in an amount of $6.8
million. The remaining availability under the credit facility of $5.7 million
will be available for borrowing to the Company until December 31, 2004, subject
to the lending conditions in the credit agreement.
Termination of Motorola and Hewlett-Packard Agreements
In June 2004, the Company negotiated settlements of its entire amounts
outstanding under its financing facility with Motorola and its capital lease
with Hewlett-Packard. The full amount due and owing under these agreements was a
combined $6.8 million. The Company paid or will pay by July 15, 2004 a combined
$3.9 million in cash and will issue a warrant to Motorola to purchase 200,000
shares of the Company's common stock at a price of $8.68, in full satisfaction
of the outstanding balances. In the case of Hewlett-Packard, the Company took
title to all of the leased equipment and software and the letter of credit
securing this lease was cancelled, and in the case of Motorola, there was no
equipment or service that Motorola was obligated to provide. The Company expects
to record a gain on the extinguishment of debt in the second quarter of 2004.
26
Developments Relating to MSV
On April 2, 2004, the additional $17.6 million investment in MSV was
consummated. In connection with this investment, MSV's amended and restated
investment agreement was amended to provide that of the total $17.6 million in
proceeds, $5.0 million was used to repay certain outstanding indebtedness of
MSV, including $2.0 million of accrued interest under the $15.0 million
promissory note issued to 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 29.5%
on a fully diluted basis.
On May 17, 2004, MSV was awarded its first patent on a next generation satellite
system technology containing an ancillary terrestrial component (ATC)
innovation. MSV believes that patent will support its ability to deploy ATC in a
way that minimizes interference to other satellite systems, and addresses ways
to mitigate residual interference levels using interference-cancellation
techniques.
Management and Board Changes
On June 15, 2004, the board of directors designated Jonelle St. John and Raymond
L. Steele as the board's financial experts.
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.
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 to Motient under the "take-or-pay" agreement between
Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to
purchase certain minimum amounts of air-time on the Motient network. In 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 million, representing such
amounts as Wireless Matrix claims to have made in excess of service rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix in which Wireless Matrix will pay Motient $1.1
million.
Changes in Accountants
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC merged with the firm of Friedman
Alpren & Green LLP. The new entity, Friedman LLP has been retained by Motient
and the Audit Committee of Motient's Board of Directors approved this decision
on June 4, 2004.
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project" or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, those under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview - Overview of Liquidity
and Risk Factors," and elsewhere in this quarterly report. All of our subsequent
written and oral forward-looking statements (or statements that may be
attributed to us) are expressly qualified in their entirety by the cautionary
statements referred to above and contained elsewhere in this quarterly report on
Form 10-Q. You should carefully review the risk factors described in our other
filings with the Securities and Exchange Commission from time to time, including
the risk factors contained in our Form 10-K for the period ended December 31,
2003, and our reports on Form 10-K and 10-Q to be filed after this quarterly
report, as well as our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed in these statements.
Overview
General
This section provides information regarding the various current components of
Motient's business, which we believe are relevant to an assessment and
understanding of the financial condition and consolidated results of operations
of Motient.
Motient presently has six wholly-owned subsidiaries and a 29.5% interest (on a
fully-diluted basis) in MSV as of March 31, 2004. 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. For further details regarding
the formation of Motient License, please see Note 3 ("Liquidity and Financing -
28
Sources of Funding -- 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.
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
29
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 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 accrued interest under the $15.0 million
promissory note issued to Motient by MSV. Motient was required to, and paid, 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 remained
approximately 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.
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 March 31, 2004, Motient had
approximately $37.2 million of debt.
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:
30
o We have undergone significant organizational restructuring and we face
substantial operational challenges.
o We are not cash flow positive, and our prospects will depend on our
ability to control our costs while maintaining and improving our
service levels.
o We will need additional liquidity to fund our operations.
o We may not be able to meet our debt obligations, operating expenses,
working capital and other capital expenditures.
o We will continue to incur significant losses.
o We generate a large part of our revenues and cash flows from a small
number of customers, and the loss of one or more key customers could
result in a significant reduction in revenues and cash flows; UPS has
recently deregistered a majority of its units on our network.
o Our growth has been curtailed by funding constraints.
o Our in internal controls may not be sufficient to ensure timely and
reliable financial information.
o We may not be able to realize value from our investment in MSV due to
risks associated with MSV's next-generation business plan.
o Motient may have to take actions which are disruptive to its business
to avoid registration under the Investment Company Act of 1940.
o We could lose market share and revenues as a result of increasing
competition from companies in the wireless communications industry
that have greater resources and name recognition.
o Failure to keep pace with rapidly changing markets for wireless
communications would significantly harm our business.
o The success of our wireless communications business depends on our
ability to enter into and maintain third party distribution
relationships.
o We expect to maintain a limited inventory of devices to be used in
connection with our eLink service, and any interruption in the supply
of such devices could significantly harm our business.
o We cannot guarantee that our suppliers will be able to supply us with
components and devices in the quantities and at the times we require,
or at all.
o If prices charged by suppliers for wireless devices do not decline as
we anticipate, our business may not experience the growth we expect.
o We may not be able to develop, acquire and maintain proprietary
information and intellectual property rights, which could limit the
growth of our business and reduce our market share.
o Patent infringement litigation against Research In Motion may impede
our ability to use and sell certain software and handheld devices.
o Government regulation may increase our cost of providing services,
slow our expansion into new markets, subject our services to
additional competitive pressures and affect the value of our common
stock.
o We face burdens relating to the recent trend toward stricter corporate
governance and financial reporting standards.
o Motient's competitive position may be harmed if the wireless
terrestrial network technology it licenses from Motorola is made
available to competitors.
o Motient could incur substantial costs if it is required to relocate
its spectrum licenses under a pending proposal being considered by the
FCC.
o Our adoption of "fresh-start" accounting may make evaluation our
financial position and results of operations for 2002 and 2003, as
compared to prior periods, more difficult.
o Certain tax implications of our bankruptcy and reorganization may
increase our tax liability.
o There is a very limited public trading market for our common stock,
and our equity securities may continue to be illiquid or experience
significant price volatility.
o We do not expect to pay any dividends on our common stock for the
foreseeable future.
o Future sales of our common stock could adversely affect its price
and/or our ability to raise capital.
31
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's annual report on Form 10-K for the fiscal
year ended December 31, 2003.
Results of Operations
The table below outlines operating results for Motient:
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $6.2 $7.1
Field Services 1.8 3.2
Transportation 0.9 2.6
Telemetry 0.6 0.6
All Other 0.5 0.1
--- ---
Service Revenue 10.0 13.6
Equipment Revenue 1.5 0.8
--- ---
Total $11.5 $14.4
===== =====
Three Months Ended Three Months Ended
March 31, % of Service March 31, % of Service
2004 Revenue 2003 Revenue
---- ------- ---- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $11.3 113% $13.7 101%
Cost of Equipment Sold 1.5 15 1.0 7
Sales and Advertising 1.0 10 1.2 9
General and Administration 2.4 24 3.2 24
Operational Restructuring Costs 1.2 12 -- 0
Depreciation and Amortization 4.3 43 5.3 39
--- --- --- ---
Total Operating $21.7 217% $24.4 180%
===== ==== ===== ====
Three Months Ended March 31, 2004 and 2003
Revenue and Subscriber Statistics
Service revenues approximated $10.0 million for the three months ended March 31,
2004, which was a $3.6 million decrease as compared to the three months ended
32
March 31, 2003. This decrease was a result of a decrease in revenue during this
period in our wireless internet, field services, and transportation market
sectors. Total revenues approximated $11.5 million for the three months ended
March 31, 2004, which was a $2.9 million decrease as compared to the three
months ended March 31, 2003. The decrease was primarily a result of the
decreased service revenues, partially offset by an increase in equipment
revenue.
The tables below summarize our revenue for the three months ended March 31, 2004
and 2003 and our subscriber base as of March 31, 2004 and 2003. An explanation
of certain changes in revenue and subscribers is set forth below.
Three Months Ended March 31,
-------------------------------------
Summary of Revenue 2004 2003 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $6.2 $7.1 $(0.9) (13)%
Field Services 1.8 3.2 (1.4) (44)
Transportation 0.9 2.6 (1.7) (65)
Telemetry 0.6 0.6 0.0 0
All Other 0.5 0.1 0.4 400
--- --- --- ---
Service Revenue 10.0 13.6 (3.6) (26)
Equipment Revenue 1.5 0.8 0.7 88
--- --- --- ---
Total $11.5 $14.4 $(2.9) (20)%
===== ===== ====== =====
The make up of our registered subscriber base was as follows:
As of March 31,
------------------------
2004 2003 Change % Change
---- ---- ------ --------
Wireless Internet 99,574 108,630 (9,056) (8)%
Field Services 15,114 28,599 (13,485) (47)
Transportation (1) 47,877 99,411 (51,534) (52)
Telemetry 30,464 28,878 1,586 5
All Other 813 662 151 23
------- ------ -------- -----
Total 193,842 266,180 (72,338) (27)%
======= ======= ======== =====
(1) Includes 9,658 registered UPS devices as of March 31, 2004, of
which 4,318 were actively passing data traffic, as compared to
69,952 registered UPS devices as of March 31, 2003, of which
60,049 were actively passing data traffic.
o Wireless Internet: Revenue declined from $7.1 million to $6.2 million
for the three months ended March 31, 2004, as compared to the three
months ended March 31, 2003. The revenue decline in the Wireless
Internet sector during this period represented customer losses that we
are experiencing in both our direct and reseller channels as a result
of the migration of wireless internet customers to other networks.
These customer losses have been exacerbated by the `end-of-life'
announcement by RIM for the 857 device, which has negatively impacted
the ability of our resellers to add new devices to our network to
replace those that are migrating from their respective customer bases.
This decline is also the result of Motient's coordinated effort to
actively sell and promote wireless email and wireless Internet
applications to enterprise accounts under our agent relationships with
T-Mobile USA and Verizon Wireless. During the fourth quarter of 2003,
we sold several of our existing customers devices on these networks
that resulted in their termination of devices on our network in the
first quarter of 2004. We received commissions from these carriers for
these sales. We did also continue to experience growth during this
period in several of our other wireless internet accounts.
33
o Field Services: Revenue declined from $3.2 million to $1.8 million for
the three months ended March 31, 2004, as compared to the three months
ended March 31, 2003. The decrease in revenue from field services was
primarily the result of the termination of several customer contracts,
including Sears and Lanier, as well as the general reduction of units
and rates across the remainder our field service customer base,
primarily IBM and Pitney Bowes, and certain consulting revenues
included in the first three months of 2003 that were not included in
the first three months of 2004. This revenue segment was also
negatively impacted by approximately $300,000 by the reclassification
of one of our customers, Lucent, to the wireless internet segment.
o Transportation: Revenue declined from $2.6 million to $0.9 million for
the three months ended March 31, 2004, as compared to the three months
ended March 31, 2003. The decrease in revenue from the transportation
sector was primarily the result of UPS, beginning in July 2003, having
removed a significant number of their units from our network and no
longer maintaining their historical level of payments. UPS represented
$0.3 million of revenue for the three months ended March 31, 2004, as
compared to $2.1 million of revenue for the three months ended March
31, 2003. We did, however, also continue to experience growth during
this period in several of our other transportation accounts, most
notably Aether and Roadnet.
o Telemetry: Revenue remained at $0.6 million for the three months ended
March 31, 2004, as compared to the three months ended March 31, 2003.
While we experienced growth in certain telemetry customer accounts,
including US Wireless Data and USA Technologies, this was equally
offset by churn or negative rate changes in other telemetry accounts,
including most notably SecurityLink, offered by Ameritech.
o Other: Revenue increased from $0.1 million to $0.5 million for the
three months ended March 31, 2004, as compared to the three months
ended March 31, 2003. The increase was attributable to commissions
earned via the agency and dealer agreements with Verizon Wireless and
T-Mobile USA.
o Equipment: Revenue increased from $0.8 million to $1.5 million for the
three months ended March 31, 2004, as compared to the three months
ended March 31, 2003. The increase in equipment revenue was primarily
the result of the sales of devices attributable to agency and dealer
agreements with Verizon Wireless and T-Mobile USA.
The table below summarizes our operating expenses for the three months ended
March 31, 2004 and 2003. An explanation of certain changes in operating expenses
is set forth below.
Three Months Ended March 31,
-------------------------------------
Summary of Expenses 2004 2003 Change % Change
---- ---- ------ --------
(in millions)
Cost of Service and Operations $11.3 $13.7 $(2.4) (18)%
Cost of Equipment Sales 1.5 1.0 0.5 50
Sales and Advertising 1.0 1.2 (0.2) (17)
General and Administration 2.4 3.2 (0.8) (25)
Operational Restructuring Costs 1.2 -- 1.2 --
Depreciation and Amortization 4.3 5.3 (1.0) (19)
--- --- ----- ----
Total $21.7 $24.4 $(2.7) (11)%
===== ===== ====== =====
34
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 $13.7 million to $11.3 million for the three months ended March
31, 2004 as compared to the three months ended March 31, 2003. Cost of service
and operations expenses as a percentage of service revenue were approximately
113% for the first three months of 2004, compared to 101% for the comparable
period of 2003. The decrease in these expenses was partially the result of lower
employee salary and related costs due to the workforce reductions implemented in
March of 2003 and February of 2004. The reduction in force in February of 2004
also resulted in the reversal in the first quarter of 2004 of certain accrued
employee bonuses from prior periods. This decrease was also impacted by the
termination of our national maintenance contract with Motorola at December 31,
2003, as well as the continued removal of older-generation base stations from
the network. We currently perform our maintenance on our base stations by
contracting directly with service shops in respective regions, which has
materially lowered our cost relative to our prior national maintenance contract.
Site lease and telecommunications costs for base station locations also
decreased during this period as a result of the removal of base stations as part
of our efforts to remove older-generation equipment from our network. The
decrease in costs of service and operations was also partially the result of
reductions in hardware and software maintenance costs as a result of the
negotiation of lower rates on maintenance service contracts in 2003, the
reduction of software licenses as a result of having fewer employees and a
decrease in software development costs as a result of a change in capitalization
policy. These decreases were partially offset by compensation expenses
associated with stock options issued to employees in 2003.
Cost of equipment sold increased from $1.0 million to $1.5 million for the three
months ended March 31, 2004 as compared to the three months ended March 31,
2003. 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 $1.0 million for the three months
ended March 31, 2004, as compared to $1.2 million for the three months ended
March 31, 2003. Sales and advertising expenses as a percentage of service
revenue were approximately 10% for the first three months of 2004, compared to
9% for the comparable period of 2003. The decrease in sales and advertising
expenses for the three months ended March 31, 2004 was primarily attributable to
lower employee salary and related costs, including sales commissions, due to
lower sales volumes and the workforce reductions implemented in March 2003 and
February 2004, the reversal of certain prior period accrued compensation as
discussed above and the significant reduction in or elimination of sales and
marketing programs after our reorganization in May 2002. These decreases were
partially offset by compensation expenses associated with stock options issued
to employees in 2003.
General and administrative expenses for the core wireless business decreased
from $3.2 million to $2.4 million for the three months ended March 31, 2004 as
compared to the three months ended March 31, 2003. General and administrative
expenses as a percentage of service revenue were approximately 24% for the first
three months of 2004, compared to 24% for the comparable period of 2003. The
decrease in general and administrative expenses for the three months ended March
31, 2004 was primarily attributable to lower employee salary and related costs
due to the workforce reductions implemented in March of 2003 and February of
2004, the reversal of certain prior period accrued compensation as discussed
above, the closure of our Reston facility in July 2003, lower directors and
officers liability insurance costs subsequent to reorganization and a reduction
35
in bad debt charges primarily due to lower accounts receivables balances as a
result of improvements in our collection capabilities. These decreases were
partially offset by increases in audit and legal fees as a result of our
continuing efforts to be compliant with our financial reporting. These decreases
were partially offset by compensation expenses associated with stock options
issued to employees in 2003.
Operational restructuring costs increased from zero to $1.2 million for the
three months ended March 31, 2004 as compared to the three months ended March
31, 2003. The operational restructuring costs in the first quarter of 2004
resulted from the severance and related salary charges as a result of the
reduction in force in February 2004 and certain costs related to base station
deconstruction.
In the first quarter of 2004, we finalized plans to implement certain base
station rationalization initiatives. This implementation began in the second
quarter of 2004. We are taking these actions in a coordinated effort to reduce
network operating costs while also focusing on minimizing the potential impact
to our customers communications and coverage requirements. This rationalization
encompasses, among other things, the reduction of unneeded capacity across the
network by deconstructing under-utilized and un-profitable base stations as well
as deconstructing base stations that pass an immaterial amount of customer data
traffic. In some cases, these base stations were originally constructed
specifically to serve customers with nationwide requirements that are no longer
customers of Motient. In certain instances, the geographic area that our network
serves may be reduced by this process and customer communications may be
impacted. We have discussed these changes to our network with many of our
customers to assist them in evaluating the potential impact, if any, to their
respective communications requirements. The full extent and effect of the
changes to our network have yet to be determined.
Depreciation and amortization for the core wireless business decreased to $4.3
million for the three months ended March 31, 2004, as compared to $5.3 million
for the three months ended March 31, 2003. Depreciation and amortization was
approximately 43% of service revenue for the first three months of 2004, as
compared to 39% for the first three months of 2003. Depreciation and
amortization expense reduced as a result of our decline in asset value related
to our frequency sale transactions in 2003 and our write-down as of September
2003 of our customer contract related intangibles. In May 2004, the Company
engaged a financial advisory firm to prepare a valuation of customer intangibles
as of September 2003. Due to the loss of UPS as a core customer in 2003 as well
as the migration and customer churn occurring in the Company's mobile internet
base that is impacting the average life of a customer in this base, among other
things, the Company determined an impairment of the value of these customer
contracts was probable. As a result of this valuation, the value of customer
intangibles was determined to be impaired as of September 2003 and was reduced
by $5.5 million.
Three Months Three Months
Ended March 31, Ended March 31,
2004 2003
---- ----
(in thousands)
Interest Expense, net $(1,766) $(1,312)
Other Income, net 8 459
Other Income from Aether 645 838
Loss on Disposal of Assets (2) --
Equity in Losses of Mobile Satellite Ventures (2,230) (2,325)
36
Interest expense increased for the three months ended March 31, 2004, as
compared to the three months ended March 31, 2003, 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 and the subsequent amendment in March 2004. For the original
closing in January 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. For the subsequent closing in March 2004, the Company issued warrants
at closing to the lenders to purchase, in the aggregate, 1,000,000 shares of our
common stock. The exercise price for these warrants is $4.88 per share. The
warrants were immediately exercisable upon issuance and have a term of five
years. The warrants were valued at $6.7 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 amendment, the Company also paid commitment fees to the lenders
of $320,000.
Effective May 1, 2002, we required to reflect our equity share of the losses of
MSV. We recorded equity in losses of MSV of $2.2 million for the three months
ended March 31, 2004, as compared to $2.3 million for the three months ended
March 31, 2003. The MSV losses for the three months ended March 31, 2004 are
Motient's 46.5% of MSV's losses for the same period, losses for the three months
ended March 31, 2003 consist of Motient's 48%share of the MSV losses to date
reduced by the loans in priority. For the three months ended March 31, 2004, MSV
had revenues of $7.7 million, operating expenses of $7.3 million and a net loss
of $6.7 million.
Liquidity and Capital Resources
As of March 31, 2004, we had approximately $2.5 million of cash on hand and
short-term investments. In addition to cash generated from operations, our
principal source of funds was, as of March 31, 2004, a term credit facility that
we entered into on January 27, 2003. On April 7, 2004, we received proceeds of
$23.2 million from the sale of our common stock to several institutional
investors in a private placement. On April 13, 2004, the Company repaid all of
its then owing principal and interest under its term credit facility. As of May
31, 2004, we had approximately $15 million of cash on hand and short-term
investments. On July 1, 2004, we received aggregate proceeds of $30.0 million
from the sale of our common stock to several institutional investors.
Summary of Cash Flow for the three months ended March 31, 2004 and 2003
Three Months Three Months
Ended Ended
March 31, March 31,
2004 2003
---- ----
(Unaudited) (Unaudited)
Cash Flows from Operating Activities: $(1,759) $(2,191)
Cash Flows from Investing Activities: (135) 266
Cash Flows from Financing Activities:
Employee stock options exercised 105 --
Principal payments under capital leases (342) (611)
Principal payments under Vendor Financing (488) (219)
Proceeds from Credit Facility Financing 1,500 --
----- -----
Net cash provided by (used in) financing activities 775 (830)
Net (decrease) increase in cash and cash equivalents (1,119) (2,755)
Cash and Cash Equivalents, beginning of period 3,618 5,840
----- ------
Cash and Cash Equivalents, end of period $2,499 $3,085
====== ======
37
Cash used in operating activities decreased for the three months ended March 31,
2004 as compared to the three months ended March 31, 2003, 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 three months ended
March 31, 2004 as compared to the three months ended March 31, 2003 was
primarily attributable to costs capitalized for the enhancement of our
telecommunications technology from digital and analog circuitry to frame relay
technology, partially offset by the closing of certain of our frequency sale
transactions. This frame relay technology enhancement will continue over the
course of 2004 and is expected to result in materially reduced
telecommunications costs in the second and third quarter of 2004.
The increase in cash provided by financing activities for the three months ended
March 31, 2004 as compared to the three months ended March 31, 2003 was the
result of the proceeds from borrowings under the term credit facility, offset by
vendor debt and capital lease repayments.
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.
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 a reduction in our workforce in February
2004. This action eliminated approximately 32.5% (54 employees), of our
workforce. This action reduced employee and related expenditures by
approximately $0.4 million per month since December 31, 2003.
Refinancing of Vendor Obligations. In March 2004, the Company renegotiated two
outstanding obligations to Motorola Inc., reducing the monthly amortization for
these obligations from approximately $211,000 in aggregate to $100,000 in
aggregate, effectively extending the amortization period for both obligations.
As part of 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. As of May 31, 2004, the aggregate
principal amount of the Company's obligations to Motorola under this facility
was approximately $4.2 million. In June, 2004, we reached an agreement to prepay
these obligations in a negotiated settlement with Motorola. Please see Note 6,
"Subsequent Events".
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 under-utilized and 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.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive.
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
38
be credited against airtime services provided to UPS beginning January 1, 2004,
until the prepayment is fully credited. Based on UPS' current level of network
airtime usage, we do not expect that UPS will be required to make any cash
payments to us in 2004 for service provided during 2004. UPS has substantially
completed its migration to next generation network technology, and its monthly
airtime usage of our network has declined significantly. There are no minimum
purchase requirements under our contract with UPS, and the contract may be
terminated by UPS on 30 days' notice. If UPS terminates the contract, we will be
required to refund any unused portion of the prepayment to UPS. While we expect
that UPS will remain a customer for the foreseeable future, the bulk of UPS'
units have migrated to another network. Until June 2003, UPS had maintained its
historical level of payments to mitigate the near-term revenue and cash flow
impact of its recent and anticipated continued reduced network usage. However,
beginning in July 2003, the revenues and cash flow from UPS declined
significantly.
Sources of Financing
Term Credit Facility: On January 27, 2003, our wholly-owned subsidiary, Motient
Communications, closed a term credit agreement with a group of lenders,
including several of our existing stockholders. The lenders include the
following entities or their affiliates: M&E Advisors, L.L.C., Bay Harbour
Partners, York Capital and Lampe Conway & Co. York Capital is affiliated with
James G. Dinan and JGD Management Corp. James Dondero, Highland Capital
Management , JGD Management Corp. and James G. Dinan each hold 5% or more of
Motient's common stock. The lenders also include Gary Singer, directly or
through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of our directors.
The table below shows, as of June 24, 2004 the number of shares of Motient
common stock beneficially owned by the following parties to the term credit
agreement, based solely on filings made by such parties with the SEC:
Name of Beneficial Owner Number of Shares
------------------------ ----------------
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
Highland Capital Management** 4,424,559
James Dondero** 4,424,559
*JGD Management Corp. and James G. Dinan share beneficial ownership
with respect to the 2,276,445 shares of our common stock. Mr. Dinan is
the president and sole stockholder of JGD Management Corp., which
manages the other funds and accounts that hold our common stock over
which Mr. Dinan has discretionary investment authority.
** James D. Dondero, a member of our board of directors, is the
President of Highland Capital Management, L.P., which, pursuant to an
arrangement with M&E Advisors, L.L.C., has indirectly made a
commitment under the credit facility.
Under the credit agreement, the lenders have made commitments to lend Motient
Communications up to $12.5 million. The commitments are not revolving in nature
and amounts repaid or prepaid may not be reborrowed. Borrowing availability
under Motient's term credit facility terminated on December 31, 2003. On March
16, 2004, Motient Communications entered into an amendment to the credit
facility which extended the borrowing availability period until December 31,
2004. As part of this amendment, Motient Communications provided the lenders
with a pledge of all of the stock of a newly-formed special purpose subsidiary
of Motient Communications, Motient License, which holds all of Motient's FCC
licenses formerly held by Motient Communications.
39
Under this facility, the lenders have agreed to make loans to Motient
Communications through December 31, 2004 upon Motient Communications' request no
more often than once per month, in aggregate principal amounts not to exceed
$1.5 million for any single loan, and subject to satisfaction of other
conditions to borrowing, including certain financial and operating covenants,
contained in the credit agreement.
Each loan borrowed under the credit agreement has a term of three years. Loans
carry interest at 12% per annum. Interest accrues, compounding annually, from
the first day of each loan term, and all accrued interest is payable at each
respective loan maturity, or, in the case of mandatory or voluntary prepayment,
at the point at which the respective loan principal is repaid. Loans may be
prepaid at any time without penalty.
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). 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 principal amount of 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
40
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 are being 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 $6.8
million. The remaining availability under the Credit Facility of $5.7 million
will remain available for borrowing to Motient 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
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 and the shares may not be sold in the United States absent registration
or an applicable exemption from registration requirements. The shares were
offered and sold pursuant to the exemption from registration afforded by Rule
506 under the Securities Act and/or Section 4(2) of the Securities Act. In
connection with this sale, we signed a registration rights agreement with the
holders of these shares. Among other things, this registration rights agreement
requires us to file and cause to make effective a registration statement
permitting the resale of the shares by the holders thereof. We also issued
warrants to purchase an aggregate of 1,053,978 shares of our common stock to the
investors listed above, at an exercise price of $5.50 per share. 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.
Additional sale of Common Stock: On July 1, 2004, we sold 3,500,000 shares of
our common stock at a per share price of $8.57 for an aggregate purchase price
of $30.0 million to The Raptor Global Portfolio Ltd., The Tudor BVI Global
Portfolio, Ltd., The Altar Rock Fund L.P., Tudor Proprietary Trading, L.L.C.,
York Distressed Opportunities Fund, L.P., York Select, L.P., York Select Unit
Trust, York Global Value Partner, L.P., Catalyst Credit Opportunity Fund,
Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Rockbay Capital Fund, LLC,
Rockbay Capital Investment Fund, LLC, Rockbay Capital Offshore Fund, Ltd.,
Glenview Capital Partner, L.P., Glenview Institutional Partners, L.P., Glenview
Capital Master Fund, Ltd., GCM Little Arbor Master Fund, Ltd., OZ Master Fund,
Ltd., OZ Mac 13 Ltd., Fleet Maritime, Inc., John Waterfall, Edwin Morgens,
Greywolf Capital II, L.P., Greywolf Capital Overseas Fund, Highland Equity Focus
Fund, L.P., Singer Children's Management Trust, Highland Equity Fund, L.P., and
Strome Hedgecap Limited. The sale of these shares was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, we signed a registration rights
agreement with the holders of these shares. Among other things, this
registration rights agreement requires us to file and cause to make effective a
registration statement permitting the resale of the shares by the holders
thereof. We also issued warrants to purchase an aggregate of 525,000 shares of
our common stock to the investors listed above, at an exercise price of $8.57
per share. These warrants will vest if and only if we do not meet certain
registration deadlines beginning in 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.
41
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 accrued interest under the $15.0 million promissory note issued to us
by MSV. We were required to use 25% of the $2 million we received in this
transaction, or $500,000, to make prepayments under our existing notes owed to
Rare Medium Group, Inc. and Credit Suisse First Boston, which are described
below.
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 notice of a
counter-claim by Wireless Matrix of approximately $1 million, representing such
amounts as Wireless Matrix claims to have paid in excess of services rendered
under the agreement. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix in which Wireless Matrix will pay Motient $1.1
million.
Outstanding Obligations
As of March 31, 2004, Motient had the following debt obligations, in addition to
the above mentioned term 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.
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 4.0% 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
42
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 amortized 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.
As of March 31, 2004, $4.3 million was outstanding under these notes with
Motorola. In June 2004, we reached an agreement to prepay these obligations in a
negotiated settlement with Motorola. Please see Note 6, ("Subsequent Events").
Capital Leases: As of March 31, 2004, $2.8 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. In June 2004, we
prepaid these obligations in a negotiated settlement with Hewlett-Packard.
Please see Note 6, ("Subsequent Events").
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.
We expect to continue to require significant additional funds before we begin to
generate cash in excess of our operating expenses. It is not clear when, or if,
we will begin to generate cash from operations in excess of our operation
expenses. 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
43
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.
We believe that our available funds, together with existing and anticipated
credit facilities, will be adequate to satisfy our current and planned
operations for at least the next 12 months.
Commitments
As of March 31, 2004, we had no outstanding commitments to purchase inventory.
Critical Accounting Policies and Significant Estimates
Below are our accounting policies which are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates as they require assumptions that are inherently uncertain.
Inventory
- ---------
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, are stated at the lower of cost
or market. Cost is determined using the weighted average cost method. We
periodically assess the market value of our inventory, based on sales trends and
forecasts and technological changes and record a charge to current period income
when such factors indicate that a reduction to net realizable value is
appropriate. We consider both inventory on hand and inventory which we have
committed to purchase, if any. Periodically, we will offer temporary discounts
on equipment purchases. The value of this discount is recorded as a cost of sale
in the period in which the sale occurs.
Investment in MSV and Note Receivable from MSV
- ----------------------------------------------
As a result of the application of "fresh-start" accounting and subsequently
modified (see below), 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 $6.2 million of the value attributed to MSV is the excess of fair
value over cost basis and is amortized over the estimated lives of the
underlying MSV assets that gave rise to the basis difference. We are amortizing
this excess basis in accordance with the pro-rata allocation of various
components of MSV's intangible assets as determined by MSV through independent
valuations. Such assets consist of FCC licenses, intellectual property and
customer contracts, which are being amortized over a weighted-average life of
approximately 12 years.
Additionally, we have recorded the $15.0 million note receivable from MSV, plus
accrued interest thereon at its fair value, estimated to be approximately $13.0
million, at "fresh start" after giving affect to discounted future cash flows at
market interest rates. This note matures in November 2006, but may be fully or
partially repaid prior to maturity in certain circumstances involving the
consummation of additional investments in MSV or upon the occurrence of certain
other events such as issuance of other indebtedness or the sale of assets by
MSV, subject to certain to certain conditions and priorities with respect to
payment of other indebtedness. For further detail on certain payments made on
this note receivable, please see Note 6, "Subsequent Events".
44
In November of 2003, we engaged CTA to perform a valuation of our equity
interests in MSV as of December 31, 2002. As part of this valuation process, we
determined that our equity interest in MSV was not appropriately calculated as
of May 1, 2002 due to certain preference rights for certain classes of
shareholders in MSV. We reduced our equity interest in MSV from $54 million
(inclusive of Motient's $2.5 million convertible note from MSV) to $41 million
as of May 1, 2002. As a result of the valuation of MSV, it was determined that
the value of our equity interest in MSV was impaired as of December 31, 2002
from the value on our balance sheet. This impairment was deemed to have occurred
in the fourth quarter of 2002. We reduced the value of its equity interest in
MSV by $15.4 million as of December 31, 2002. It was determined there was no
further impairment required as of December 31, 2003 and March 31, 2004.
The valuation of our investment in MSV and our note receivable from MSV are
ongoing assessments that are, by their nature, judgmental given that MSV is not
traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in our investment in
MSV and that the MSV note is collectible, there is the inherent risk that this
assessment will change in the future and we will have to write down the value of
this investment and note.
Deferred Taxes
- --------------
We have generated significant net operating losses for tax purposes through
March 31, 2004. We have had our ability to utilize these losses limited on two
occasions as a result of transactions that caused a change of control in
accordance with the Internal Revenue Service Code Section 382. Additionally,
since we have not yet generated taxable income, we believe that our ability to
use any remaining net operating losses has been greatly reduced; therefore, we
have fully reserved for any benefit that would have been available as a result
of our net operating losses.
Revenue Recognition
- -------------------
We generate revenue principally through equipment sales and airtime service
agreements, and consulting services. In 2000, we adopted SAB No. 101 which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. In certain circumstances, SAB No. 101 requires us to defer
the recognition of revenue and costs related to equipment sold as part of a
service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers", or FAQ, issued with SAB No. 101. Selected portions of
the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104
did not have a material impact on our revenue recognition policies.
Revenue is recognized as follows:
Service revenue: Revenues from our wireless services are recognized when the
services are performed, evidence of an arrangement exists, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period. We defer any revenue and costs associated with activation of a
subscriber on our network over an estimated customer life of two years.
45
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.
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.
46
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 it had no 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.
47
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.
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) 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, 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, 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, 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.
48
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 chief financial officer (or persons performing such function,
currently our controller, 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, 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; and
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 Over Financial Reporting
- ------------------------------------------
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
49
American Institute of Certified Public Accountants, or AICPA. Reportable
conditions involve matters coming to management's or our auditor's attention
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. Friedmen LLP, successor-in-interest to Ehrenkrantz Sterling & Co. LLC, was
also engaged to audit our consolidated financial statements for the fiscal
yearended December 31, 2003.
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 June 25, 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;
50
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
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.
51
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,
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, successor-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.
52
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 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
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
53
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)
July 2 , 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)
54
EXHIBIT INDEX
Number Description
10.41 Form of Common Stock Purchase Warrant, dated as of April 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)
55