SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2000
Commission file number 0-23044
MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 93-0976127
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
10802 Parkridge Boulevard
Reston, VA 20191-5416
(Address of principal (Zip Code)
executive offices)
(703) 758-6000
(Registrant's telephone number,
including area code)
American Mobile Satellite Corporation
(Former name, if changed since last report)
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
Number of shares of Common Stock outstanding at April 30, 2000: 49,501,260
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three months ended March 31,
2000 1999
---- ----
REVENUES
Services $ 17,152 $ 16,164
Sales of equipment 5,018 4,066
----- -----
Total Revenues 22,170 20,230
COSTS AND EXPENSES
Cost of service and operations 18,018 17,870
Cost of equipment sold 5,256 4,528
Sales and advertising 6,226 4,749
General and administrative 21,912 4,769
Depreciation and amortization 9,094 13,772
----- ------
Operating Loss (38,336) (25,458)
Interest and Other Income 5,202 1,739
Interest Expense (14,981) (15,930)
Gain on Conversion of Convertible Note Payable to Related
Party 32,854 --
Unrealized Gain on Convertible Note Payable to Related
Party 3,925 --
Minority Interest in XM Radio's losses 7,342 --
Equity in Loss of XM Radio -- (3,494)
------
NET LOSS BEFORE PREFERRED DIVIDEND (3,994) (43,143)
------- --------
Preferred Dividend Declared by XM Radio (506) --
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS ($4,500) ($43,143)
======== =========
Basic and Diluted Loss Per Share of Common Stock $(0.09) $(1.34)
Weighted-Average Common Shares Outstanding During
the Period 49,094 32,225
See notes to consolidated condensed financial statements.
1
Motient Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands)
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (includes 448,037 from XM Radio) $ 448,631 $ 51,474
Short-term investments -- 69,472
Accounts receivable-trade, net 17,073 16,594
Inventory 36,040 28,616
Prepaid in-orbit insurance 2,045 3,381
Restricted short-term investments 41,038 41,038
Restricted short-term investments of XM Radio 58,817 --
Other current assets 11,910 9,719
------ ------
Total current assets 615,554 220,294
PROPERTY AND EQUIPMENT, net 123,915 116,516
XM RADIO SYSTEM UNDER CONSTRUCTION 432,194 357,278
GOODWILL AND OTHER INTANGIBLES, net 61,346 62,211
RESTRICTED INVESTMENTS 35,115 31,109
RESTRICTED INVESTMENTS OF XM RADIO 79,599 --
DEFERRED CHARGES AND OTHER ASSETS, net 31,872 22,540
---------- --------
Total assets $1,379,595 $809,948
========== ========
See notes to consolidated condensed financial statements.
2
Motient Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands)
March 31, December 31,
2000 1999
--------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 86,586 $ 67,885
Obligations under capital leases due within one year 4,700 6,154
Current portion of vendor financing commitment due to
related party 3,619 1,977
Current portion of deferred trade payables 2,141 3,983
Other current liabilities 1,869 1,646
----- -----
Total current liabilities 98,915 81,645
LONG-TERM LIABILITIES:
Obligations under Senior Notes, net of discount 327,800 327,576
Senior Secured Notes of XM Radio, net of discount 259,528 --
Obligations under New Bank Financing 120,000 85,000
Capital lease obligations 846 247
Net assets acquired in excess of purchase price 1,159 1,333
Vendor financing commitment due to related party 4,339 2,535
Convertible note payable due to related party, at fair
value -- 50,138
Other long-term liabilities 5,087 3,955
----- -----
Total long-term liabilities 718,759 470,784
Total liabilities 817,674 552,429
------- --------
MINORITY INTEREST 513,732 274,745
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock -- --
Common Stock 552 485
Additional paid-in capital 919,127 844,181
Deferred compensation (6,507) (6,536)
Common Stock purchase warrants 56,243 63,290
Unamortized guarantee warrants (16,970) (18,384)
Cumulative loss (904,256) (900,262)
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT) 48,189 (17,226)
----------- ---------
Total liabilities, minority interest, and
stockholders' equity(deficit) $1,379,595 $809,948
========== ========
See notes to consolidated condensed financial statements.
3
Motient Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Three months ended March 31,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,994) $(43,143)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of Guarantee Warrants and debt related
costs 2,942 4,552
Depreciation and amortization 9,094 13,772
Equity in loss of XM Radio -- 3,494
Unrealized gain on marketable securities (3,925) --
Non cash stock compensation of XM Radio 658 --
Gain on conversion of convertible note payable to
related party (32,854) --
Minority Interest (7,342) --
Changes in assets and liabilities, net of acquisitions:
Inventory (7,424) 1,153
Prepaid in-orbit insurance 1,336 1,449
Accounts receivable-- trade (584) (1,427)
Other current assets (2,166) (1,369)
Accounts payable and accrued expenses (1,853) 9,138
Accrued interest Senior Note 10,259 (570)
Deferred trade payables (1,842) (2,092)
Deferred items-- net 1,157 (931)
----- ----
Net cash used in operating activities (36,538) (15,974)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of XM Radio Note Receivable -- (21,419)
Purchase of restricted investments (4,007) (1,424)
Net Purchase/Maturity of XM Radio's short-term
investments 69,472 --
System under construction (62,422) --
Purchase of restricted investments by XM Radio (123,416) --
Other investing activities by XM Radio (18,493) --
Additions to property and equipment (9,825) (2,541)
------ ------
Net cash used in investing activities (148,691) (25,384)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Common Stock 5,168 162
Proceeds from issuance of Common and Preferred Stock
by XM Radio 229,093 --
Proceeds from Senior Secured Notes and Stock Purchase
Warrants issued by XM Radio 325,000 --
Principal payments under capital leases (1,627) (1,322)
Principal payments under Vendor Financing (494) (90)
Proceeds from New Bank Financing 35,000 27,000
Proceeds from note payable to related party -- 21,500
Debt issuance costs (9,754) (46)
-------- -------
Net cash provided by financing activities 582,386 47,204
Net increase in cash and cash equivalents 397,157 5,846
CASH AND CASH EQUIVALENTS, beginning of period 51,474 2,285
-------- ------
CASH AND CASH EQUIVALENTS, end of period $448,631 $8,131
======== ======
See notes to consolidated condensed financial statements.
4
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2000
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (formerly American Mobile Satellite Corporation) is a
leading provider of two-way mobile communications services principally to
business-to-business customers and enterprises. Motient Corporation (with its
subsidiaries, "Motient" or the "Company") serves a variety of markets including
mobile professionals, telemetry, transportation, field service, and nationwide
voice dispatch, to customers in the United States. Motient provides its
industry-leading eLinksm two-way wireless email service to customers accessing
email through corporate servers, Internet Service Providers (ISP) and Mail
Service Provider (MSP) accounts, and paging network suppliers.
As of March 31, 2000, the Company had an equity interest in XM Satellite Radio
Holdings Inc. ("XM Radio") of approximately 34.4% (or 25.5% on a fully diluted
basis); however, the Company continues to control XM Radio through its Board of
Director membership and common stock voting rights. The Company will continue to
consolidate XM Radio until the Company no longer controls XM Radio. The Company
must request and receive FCC approval to relinquish control of XM Radio. On
March 30, 2000, the FCC approved an application filed by XM Radio which would
allow the Company to reduce its ownership of the voting stock of XM Radio to a
minimum of 40%, provided that the Company retains its right to elect a majority
of the directors of XM Radio's Board of Directors. The Company has not elected
to reduce its voting shares in XM Radio and still maintains control of XM Radio.
As a result of acquiring the outstanding debt and equity interest in XM Radio
from another investor in July of 1999 ( the "XM Acquisition"), XM Radio's
financial results for the period July 7, 1999 through March 31, 2000 have been
included in the Company's consolidated condensed financial statements. Prior to
July 7, 1999, the Company's investment in XM Radio was accounted for pursuant to
the equity method of accounting. The operations and financing of XM Radio are
maintained separate and apart from the operations and financing of Motient. XM
Radio completed its initial public offering in October 1999. Please refer to XM
Radio's audited financial statements, included in its reports and filings with
the Securities and Exchange Commission ("SEC"), for more detail about its
business plan, risks, and financial results.
Motient is devoting its efforts to expanding its business. This effort involves
substantial risk. Specifically, 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.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The unaudited consolidated condensed financial statements included herein have
been prepared pursuant to the rules and regulations of the SEC. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. While the Company believes that the disclosures made are
adequate to not make the information misleading, these consolidated condensed
financial statements should be read in conjunction with the consolidated
financial statements and related notes included in the Company's filings and the
filings of XM Radio with the SEC. All filings of the Company before April 24,
2000 can be found under the Company's former name American Mobile Satellite
Corporation.
The consolidated balance sheet as of March 31, 2000, and the consolidated
statements of operations and cash flows for the three months ended March 31,
2000 and 1999, have been prepared by the Company and are unaudited. In the
opinion of management, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2000, and for all periods presented have
been made.
5
Consolidation
The consolidated financial statements include the accounts of Motient, its
wholly owned subsidiaries, and its equity interest in XM Radio. All significant
inter-company transactions and accounts have been eliminated.
Loss Per Share
Basic and diluted loss 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. As a result, the basic
and diluted earnings per share amounts are identical. As of March 31, 2000,
there were approximately 7,143,697 options and warrants that were not included
in this calculation, because the effect would be antidilutive. Net loss
attributable to common shareholders reflects the deduction from net loss of the
Company's share of the preferred stock dividend declared by XM Radio on its
8.25% Series B convertible redeemable preferred stock. The dividend was paid in
shares of Class A common stock on May 1, 2000.
Comprehensive Income
SFAS No. 130, "Reporting of Comprehensive Income" requires "comprehensive
income" and the components of "other comprehensive income" to be reported in the
financial statements and/or notes thereto. Since the Company does not have any
components of "other comprehensive income," reported net income is the same as
"comprehensive income" for the three months ended March 31, 2000 and 1999.
Segment Disclosures
In accordance with SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information," the Company has two operating segments: wireless
communications services and XM Radio's satellite-based digital audio radio
service. The Company provides a wide range of two-way mobile and internet
communications services principally to business-to-business customers and
enterprises. The Company's service covers all of the 50 states, Puerto Rico, the
U.S. Virgin Islands, and hundreds of miles of U.S. coastal waters. XM Radio is
in the process of constructing its satellite system to provide digital radio
programming transmitted from satellites to vehicles, homes, and portable radios.
XM Radio is currently in the development stage and thus has no revenue
generating operations. The following summarizes the Company's core wireless
communications services and equipment revenue by major product lines:
Revenue for the
Three Months Ended
March 31,
2000 1999
---- ----
(in millions)
Data Service $12.5 $12.0
Voice Service 3.5 3.0
Capacity Resellers and Other 1.2 1.1
Equipment 5.0 4.1
New Accounting Pronouncements
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. This
statement was originally effective for the year ended December 31, 2000. In June
1999, FASB issued Statement No. 137, which defers the effective date of
6
Statement No. 133 until fiscal years beginning after June 15, 2000. The Company
does not believe that the adoption of this statement will have a material impact
on its financial position, results of operations and cash flows.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" ("SAB 101"). SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. The Company is
currently evaluating the impact of SAB 101 on its consolidated results of
operations and financial condition. The adoption date for SAB 101 is June 30,
2000 and any change in accounting principle required from adoption of SAB 101
will be reported as a cumulative effect of a change in accounting principle.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44
becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In July 1999, XM Radio repriced certain options. FIN 44 requires that these
options be accounted for as variable from July 1, 2000 until the date the award
is exercised, forfeited, or expires unexercised. For those options that have
vested as of July 1, 2000, compensation cost is recognized only to the extent
that the exercise price exceeds the stock price on July 1, 2000. For those
options that have not vested as of July 1, 2000, the portion of the award's
intrinsic value measured at July 1, 2000 is recognized over the remaining
vesting period. Additional compensation cost is measured for the full amount of
any increases in stock price after the effective date and is recognized over the
remaining vesting period. Any adjustment to compensation cost for further
changes in the stock price after the award vests is recognized immediately. The
effects of implementing FIN 44 may require XM Radio to recognize additional
non-cash compensation commencing in the third quarter of 2000.
Concentrations of Credit Risk
For the three months ended March 31, 2000, four customers accounted for
approximately 32% of the Company's service revenue, with one of those customers
representing approximately 12%.
Other
The Company paid approximately $4.4 million and $2.1 million in the three-month
period ended March 31, 2000 and 1999, respectively, to related parties for
capital assets, service-related obligations, and payments under pre-existing
financing agreements. There were no payments from related parties in the
three-month period ended March 31, 2000 and 1999. Total indebtedness to related
parties at March 31, 2000 was approximately $9.0 million.
3. STOCKHOLDERS' EQUITY
Activity for the quarter in stockholders' equity consists of the following:
Common
Additional Stock
Common Paid-in Purchase
Stock Capital Warrants
----- ------- --------
Balance December 31, 1999 $485 $844,181 $63,290
Warrant Exercises 5 7,776 (7,047)
Stock Option Exercises 62 4,157 --
Capital gain in connection with XM Radio equity
transactions -- 62,828 --
Issuance of shares under Stock Purchase Plan and
award of bonus stock -- 185 --
-- ---- --
Ending Balance March 31, 2000 $552 $919,127 $56,243
==== ========= =======
7
4. LIQUIDITY AND FINANCING
Adequate liquidity and capital are critical for the Company to continue as a
going concern and to fund subscriber acquisition programs necessary to achieve
positive cash flow and profitable operations. The Company expects to continue to
make significant capital outlays to fund interest expense, capital expenditures
and working capital prior to the time it begins to generate positive cash flow
from operations and for the foreseeable future.
The Company's current operating assumptions and projections reflect management's
best estimate of subscriber and revenue growth and operating expenses. The
Company anticipates that capital expenditures, operating losses, working capital
and debt service requirements through 2000, and beyond, can be met by (i) the
borrowings available under the bank financing and the vendor financing, (ii)
proceeds from the exercise of stock options and warrants (iii) proceeds realized
through the sale of inventory relating to our new products-eLink and
MobileMAX2TM, and (iv) additional debt or equity financing transactions. The
Company also believes that its investment in XM Radio may provide the Company,
in the future, with flexibility for obtaining additional liquidity, should that
be necessary. However, there are various restrictions on the Company's ability
to realize liquidity on its investment in XM Radio. The Company's ability to
meet its projections is subject to numerous uncertainties and there can be no
assurance that the Company's current projections regarding the timing of its
ability to achieve positive operating cash flow will be accurate. If the
Company's cash requirements are more than projected, the Company may require
additional financing in amounts which may be material. The type, timing and
terms of financing that the Company selects will be dependent upon its cash
needs, the availability of other 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.
XM Radio is operated, managed, and funded separately from the Company. See
consolidating financial statements in Footnote 7 for XM Radio's separate
financial statements. While the Company does not have any obligation or
commitments to provide additional funding to XM Radio, and does not expect to
provide such funding, it may chose to provide additional financing in the
future. XM Radio will require significant additional funding in the future. The
failure of XM Radio to obtain the necessary financing could have a material
adverse effect on the value of the Company's investment in XM Radio.
On August 3, 1999, the Company raised $116 million, net of underwriting
discounts and expenses, through the issuance of 7.0 million shares of common
stock in a public offering. Of the net proceeds, $59 million was used to pay
down a portion of the Term Loan Facility, and is not available for re-borrowing.
The remainder of the net proceeds were used to pay down a portion of the
Revolving Credit Facility, which are available for re-borrowing as needed for
general working capital purposes.
$335 Million Unit Offering
On March 31, 1998, Motient Holdings Inc. (formerly AMSC Acquisition Company,
Inc.) issued $335 million of Units (the "Units") consisting of 12 1/4% Senior
Notes due 2008 (the "Senior Notes"), and one warrant to purchase 3.75749 shares
of Common Stock of the Company for each $1,000 principal amount of Senior Notes
(the "Warrants") at an exercise price of $12.51 per share. The Warrants were
valued at $8.5 million and are reflected in the balance sheet as a debt
discount. In connection with the Senior Notes, Motient Holdings Inc. purchased
approximately $112.3 million of restricted investments that are restricted for
the payment of the first six interest payments on the Senior Notes. Interest
payments are due semi-annually, in arrears, beginning October 1, 1998. As a
result of the automatic application of certain adjustment provisions following
the issuance of 7.0 million shares in the 1999 public offering, the exercise
price of the warrants associated with the Senior Notes was reduced to $12.28 per
share, the number of shares per warrant was increased to 3.83 shares for each
$1,000 principle amount of Senior Notes, and the aggregate number of shares
issuable upon exercise of such warrants was increased by 24,294. The additional
Senior Note warrants and re-pricing were valued at $440,000. This was recorded
as additional debt discount in the third quarter of 1999.
8
New Bank Financing
In March 1998, the Company also restructured its existing $200 million Bank
Financing (the "New Bank Financing") to provide for two facilities: (i) the
Revolving Credit Facility, a $100 million unsecured five-year reducing revolving
credit facility maturing March 31, 2003, and (ii) the Term Loan Facility, a $100
million five-year, term loan facility with up to three additional one-year
extensions subject to the lenders' approval. The Term Loan Facility was reduced
to $41 million using the proceeds from the stock offering in 1999 and is not
available for re-borrowing. The New Bank Financing is severally guaranteed by
Hughes Electronics Corporation, Singapore Telecommunications Ltd. and Baron
Capital Partners, L.P. (collectively, the "Bank Facility Guarantors"). As of
March 31, 2000, the Company had outstanding borrowings of $41 million under the
Term Loan Facility at 7.1875%, and $79 million under the Revolving Credit
Facility at rates ranging from 7.0625% to 7.1875%.
The Guarantees
In connection with the New Bank Financing, the Bank Facility Guarantors extended
separate guarantees of the obligations of Motient Holdings Inc. and the Company
to the banks, which on a several basis aggregated to $200 million. In their
agreement with Motient Holdings Inc. and the Company (the "Guarantee Issuance
Agreement"), the Bank Facility Guarantors agreed to make their guarantees
available for the New Bank Financing. In exchange for the additional risks
undertaken by the Bank Facility Guarantors in connection with the New Bank
Financing, the Company agreed to compensate the Bank Facility Guarantors,
principally in the form of 1 million additional warrants and re-pricing of 5.5
million warrants previously issued in connection with the original Bank Facility
(together, the "Guarantee Warrants"). The Guarantee Warrants were originally
issued with an exercise price of $12.51, reduced to $7.50 in exchange for the
elimination of certain covenants in the Guarantee Issuance Agreement, and
further reduced to $7.3571 in connection with the automatic application of
certain adjustment provisions following the stock offering in 1999. The
Guarantee Warrants were valued at approximately $21.6 million.
Further, in connection with the Guarantee Issuance Agreement, the Company has
agreed to reimburse the Bank Facility Guarantors in the event that the
Guarantors are required to make payment under the New Bank Financing guarantees,
and, in connection with this reimbursement commitment has provided the Bank
Facility Guarantors a junior security interest with respect to the assets of the
Company, principally its stockholdings in XM Radio and Motient Holdings Inc.
In connection with the New Bank Financing, the Company entered into an interest
rate swap agreement, with an implied annual rate of 6.51%. The swap agreement
reduces the impact of interest rate increases on the Term Loan Facility. The
Company paid a fee of approximately $17.9 million for the swap agreement. Under
the swap agreement, an amount equal to LIBOR plus 50 basis points, is paid on a
quarterly basis directly to the respective banks on behalf of the Company, on a
notional amount of $100 million until the termination date of March 31, 2001. In
connection with the pay down of a portion of the Term Loan Facility in 1999, the
Company reduced the notional amount of its swap agreement from $100 million to
$41 million. The Company is exposed to a credit loss in the event of non-
performance by the counter party under the swap agreement. The Company does not
believe there is a significant risk of non-performance as the counter party to
the swap agreement is a major financial institution.
Other Financing
Motorola has entered into an agreement with the Company to provide up to $10
million of vendor financing, to finance up to 75% of the purchase price of
additional network base stations. As of March 31, 2000, $8.0 million was
outstanding under this facility at interest rates ranging from 13.00% to
13.1838%. The Company has also arranged the financing of certain trade payables,
and as of March 31, 2000, $2.1 million of deferred trade payables were
outstanding at rates ranging from 6.07% to 12.00%.
9
Baron XM Radio Convertible Note
In January 1999 the Company issued to Baron Asset Fund ("Baron"), a stockholder
and guarantor of the Company's Bank Facility, a $21.5 million note convertible
into shares of common stock of XM Radio (the "Convertible Note Payable to
Related Party" or "Baron XM Radio Convertible Note".) The Baron XM Radio
Convertible note was indexed to XM Radio stock. Due to a decrease in value of XM
Radio stock, from December 31, 1999 to January 12, 2000, the Company recorded an
unrealized gain of $3.9 million in the first quarter of 2000. On January 13,
2000, Baron notified the Company of its intention to exchange the Baron XM Radio
Convertible Note for 1,314,914 shares of XM Radio Class B Stock, subsequently
converted to Class A Stock on a one-for-one basis. The exchange of the
convertible note resulted in a non-recurring gain of $32.9 million at March 31,
2000 computed as the difference in the carrying value of the Baron XM Radio
Convertible Note and the Company's cost basis in XM Radio stock exchanged upon
conversion of this note.
XM Radio Financing
In the first quarter of 2000, XM Radio completed a supplemental stock offering
of 4.4 million shares of Class A Common Stock, at $32 per share, and 2.0 million
shares of newly designated Series B convertible redeemable preferred stock, at
$50 per share. The Series B convertible redeemable preferred stock provides for
8.25% cumulative dividends that may be paid in Class A common stock or cash. The
Series B convertible redeemable preferred stock is convertible into Class A
common stock at a conversion price of $40 per share and is redeemable in Class A
common stock on February 3, 2003. Net proceeds raised from this stock offering
were approximately $228.6 million.
In March 2000, XM Radio completed a high yield debt offering of 325,000 units,
each unit consisting of $1,000 principal amount of 14% Senior Secured Notes due
2010 and one warrant to purchase 8.024815 shares of Class A common stock of XM
Radio at an exercise price of $49.50 per share. XM Radio realized net proceeds
of $191.3 million, excluding $123.0 million used to acquire securities which
will be used to pay interest payments due under the notes for the first three
years.
10
In connection with this stock offering and in accordance with Staff Accounting
Bulletin 51 (SAB 51), the Company recorded an increase to its investment in XM
Radio in the first quarter of 2000 of approximately $ 62.8 million to reflect
the increase in the net book value of XM Radio. SAB 51 addresses the accounting
for sale of stock by a subsidiary. Since XM Radio is a development stage
company, SAB 51 requires that the difference in the carrying amount of the
Company's investment in XM Radio and the net book value of XM Radio after the
equity transactions, be reflected as a capital transaction. Accordingly the
$62.8 million increase to the Company's investment in XM Radio, is reflected as
an addition to additional paid-in capital in the accompanying consolidated
condensed balance sheet.
As a result of the conversion of the Baron XM Radio Convertible Note, the
supplemental stock offering by XM Radio, and XM Radio's high yield debt
offering, the Company's voting interest in XM Radio was further reduced to
61.0%, while its equity interest was reduced to 34.4% (or 25.5% on a fully
diluted basis).
5. COMMITMENTS AND CONTINGENCIES
At March 31, 2000, the Company had remaining contractual commitments to purchase
subscriber equipment inventory, primarily related to eLink and MobileMAX2, in
the maximum amount of $36.0 million during 2000 and 2001. The Company has the
right to terminate certain of these commitments by incurring a cancellation
penalty representing a percentage of the unfulfilled portion of the contract. As
of March 31, 2000 the cancellation penalty would have been approximately $6.1
million.
The Company has also contracted for the purchase of $9.5 million of base
stations to expand its coverage and complete certain necessary site build-outs,
$0.1 million for certain software development, and certain other operating
expense contract commitments that total approximately $1.0 million over the next
year.
The aggregate fixed and determinable portion of all inventory commitments and
obligations for other fixed contracts is $46.6 million, of which $29.4 million
is due in 2000 and the remainder of $17.2 million is due in 2001.
XM Radio is also subject to certain commitments and contingencies. XM Radio has
a distribution agreement with General Motors that will require significant
expenditures in the future. Under its satellite contract with Hughes Space and
Communications, Inc., XM Radio will incur payment obligations of approximately
$541.3 million of which $242.8 million had been paid as of March 31, 2000. XM
Radio has signed a contract with LCC International, Inc., for the engineering of
its terrestrial repeater network with total contract payments expected to be
approximately $115 million through 2001. As of March 31, 2000, XM Radio has paid
$10.4 million under this contract. Effective October 1999, XM Radio signed a
contract with Hughes Electronics Corporation for the design, development, and
purchase of terrestrial repeater equipment. The total value of this contract is
$128 million and XM Radio has paid $6.0 million under this contract as of March
31, 2000. On February 16, 2000, XM Radio and Sirius Satellite Radio, a
competitor of XM Radio, signed an agreement to develop a unified standard for
satellite radios to facilitate the ability of consumers to purchase one radio
capable of receiving both XM Radio's and Sirius Satellite Radio's services.
Refer to XM Radio's filings with the SEC for additional information regarding
these contractual commitments.
6. LEGAL AND REGULATORY MATTERS
Like other mobile service providers in the telecommunications industry, the
Company is subject to substantial domestic, foreign and international regulation
including the need for regulatory approvals to operate and expand the satellite
network and operate and modify subscriber equipment.
The ownership and operation of the mobile satellite services system and
ground-based two-way wireless data system are subject to the rules and
regulations of the FCC, which acts under authority granted by the Communications
Act and related federal laws. Among other things, the FCC allocates portions of
the radio frequency spectrum to certain services and grants licenses to and
regulates individual entities using the spectrum. Motient operates pursuant to
various licenses granted by the FCC.
The successful operation of the satellite network is dependent on a number of
factors, including the amount of L-band spectrum made available to the Company
pursuant to an international coordination process. The United States is
11
currently engaged in an international process of coordinating the Company's
access to the spectrum that the FCC has assigned to the Company. This
international coordination process is not yet complete. In the absence of a
coordination agreement, Motient must operate its system on a non- interference
basis. The inability of the United States government to secure sufficient
spectrum could have an adverse effect on the Company's financial position,
results of operations and cash flows.
The Company has the necessary regulatory approvals, some of which are pursuant
to special temporary authority, to continue its operations as currently
contemplated. The Company has filed applications with the FCC and expects to
file applications in the future with respect to the continued operations, change
in operation and expansion of the network and certain types of subscriber
equipment. Certain of its applications pertaining to future service have been
opposed. While the Company, for various reasons, believes that it will receive
the necessary approvals on a timely basis, there can be no assurance that the
requests will be granted, will be granted on a timely basis or will be granted
on conditions favorable to the Company. Any significant changes to the
applications resulting from the FCC's review process or any significant delay in
their approval could adversely affect the Company's financial position, results
of operations and cash flows.
On November 30,1999, the FCC granted two applications to use TMI Communications
and Company, Limited Partnership's (TMI) Canadian- licensed system to provide
service in the United States to up to 125,000 mobile terminals. TMI's system
operates in the MSS L-Band and has a satellite footprint that covers the United
States. Motient is currently appealing the FCC's grant of these applications to
the United States Court of Appeals for the D.C. Circuit. There is no assurance
that this appeal will be successful. TMI's entry into the domestic U.S.
marketplace provides additional competition to Motient and may increase TMI's
demand for spectrum in the international coordination process. The FCC might
grant additional applications to use TMI's system or other foreign-licensed
L-Band systems. Such action would provide additional competition and increase
demand for spectrum in the international coordination process.
Motient is authorized to build, launch, and operate three geosynchronous
satellites in accordance with a specific schedule. Motient is not in compliance
with the schedule for commencement and construction of its second and third
satellites and has petitioned the FCC for changes to the schedule. Certain of
these extension requests have been opposed by third parties. The FCC has not
acted on Motient's requests. The FCC has the authority to revoke the
authorizations for the second and third satellites and in connection with such
revocation could exercise its authority to rescind Motient's license. Motient
believes that the exercise of such authority to rescind the license is unlikely.
The term of the license for each of Motient's three authorized satellites is ten
years, beginning when Motient certifies that the respective satellite is
operating in compliance with Motient's license. The ten-year term of MSAT-2
began August 21, 1995. Although Motient anticipates that the authorization for
MSAT-2 is likely to be extended in due course to correspond to the useful life
of the satellite and a new license granted for any replacement satellites, there
is no assurance of such extension or grants.
XM Radio is also subject to the rules and regulations of the FCC. The FCC has
established certain system development milestones that must be met in order for
XM Radio to maintain its license to operate its satellite system. XM Radio
believes it is in compliance with the FCC milestones.
One of the bidders for the DARS licenses filed an Application for Review by the
FCC of the Licensing Order which granted XM Radio its FCC license. The
Application for Review alleges that a prior XM Radio shareholder had effectively
taken control of XM Radio without the approval of the FCC. The FCC or the U.S.
Court of Appeals has the authority to overturn the award of the FCC license to
XM Radio. XM Radio believes that it should be able to maintain its FCC license
since the party referenced is no longer a stockholder of XM Radio. XM Radio is
unable to predict the outcome of this Application for Review.
In January 1999, a competitor of XM Radio, Sirius Radio, filed an action against
XM Radio for patent infringement. In February 2000, this suit was resolved in
accordance with the terms of a joint development agreement between XM Radio and
Sirius Radio and both companies agreed to cross-license their respective
property.
7. FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Company's acquisition of Motient Communications Company
(formerly known as ARDIS Company) on March 31, 1998, (the "Motient
Communications Acquisition") and related financing discussed above, the Company
12
formed a new wholly-owned subsidiary, Motient Holdings Inc. ("Motient
Holdings"). The Company contributed all of its inter-company notes receivables
and transferred its rights, title and interests in Motient Services Inc. and
certain other subsidiaries that were subsequently dissolved (together with
Motient Communications, the "Subsidiary Guarantors") to Motient Holdings, and
Motient Holdings was the acquirer of Motient Communications and the issuer of
the Senior Notes. Motient Corporation ("Motient Parent") is a guarantor of the
Senior Notes. The Senior Notes contain covenants that, among other things, limit
the ability of Motient Holdings and its Subsidiaries to incur additional
indebtedness, pay dividends or make other distributions, repurchase any capital
stock or subordinated indebtedness, make certain investments, create certain
liens, enter into certain transactions with affiliates, sell assets, enter into
certain mergers and consolidations, and enter into sale and leaseback
transactions.
The Senior Notes are jointly and severally guaranteed on full and unconditional
basis by the Subsidiary Guarantors and Motient Parent. The following unaudited
condensed consolidating information for these entities presents:
o Condensed consolidating balance sheets as of March 31, 2000 and
December 31, 1999 and the condensed consolidating statements of
operations and cash flows for the three months ended March 31, 2000
and 1999.
o Elimination entries necessary to combine the entities comprising Motient.
13
Condensed Consolidating Balance Sheet
As of March 31, 2000
(unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 594 $ -- $ -- $ 594 $ -- $ 448,037 $ -- $ 448,631
Inventory 36,040 -- -- 36,040 -- -- -- 36,040
Prepaid in-orbit insurance 2,045 -- -- 2,045 -- -- -- 2,045
Accounts receivable-- net 17,073 -- -- 17,073 -- -- -- 17,073
Restricted short-term investments -- 41,038 -- 41,038 -- 58,817 -- 99,855
Other current assets 8,192 -- -- 8,192 2,518 1,200 -- 11,910
----- ------ -- ----- ------ ------- ------ ------
Total current assets 63,944 41,038 -- 104,982 2,518 508,054 -- 615,554
PROPERTY AND EQUIPMENT-- NET 128,388 -- (12,422) 115,966 -- 7,949 -- 123,915
SYSTEM UNDER CONSTRUCTION -- -- -- -- -- 437,274 (5,080) 432,194
GOODWILL AND
INTANGIBLES-- NET 50,398 -- -- 50,398 -- 25,037 (14,089) 61,346
INVESTMENT IN XM RADIO -- -- -- -- 234,421 -- (234,421) --
INVESTMENT IN/DUE FROM
SUBSIDIARY -- 192,135 (192,135) -- (196,903) -- 196,903 --
DEFERRED CHARGES AND OTHER
ASSETS-- NET 3,039 25,926 -- 28,965 (11,326) 14,233 -- 31,872
RESTRICTED INVESTMENTS 2,500 19,593 -- 22,093 13,022 79,599 -- 114,714
----- ------ --------- ------ ------- ------ ------- -------
Total assets $248,269 $278,692 $(204,557) $322,404 $41,732 $1,072,146 $(56,687) $1,379,595
======== ======== ========== ======== ======= ========== ========= ==========
14
Condensed Consolidating Balance Sheet
(Continued)
As of March 31, 2000
(unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $25,434 $ 21,128 $ -- $ 46,562 $ 562 $ 39,462 $ -- $ 86,586
Obligations under capital
leases due within one year 4,551 -- -- 4,551 -- 149 -- 4,700
Current portion long-term debt 5,760 -- -- 5,760 -- -- -- 5,760
Other current liabilities -- -- -- -- -- 1,869 -- 1,869
------- -------- -------- -------- ------ -------- -------- --------
Total current liabilities 35,745 21,128 -- 56,873 562 41,480 -- 98,915
DUE TO PARENT/ AFFILIATE 811,306 -- (811,368) (62) (34,019) 62 34,019 --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- -- --
Obligations under Bank Financing -- 79,000 -- 79,000 41,000 -- -- 120,000
Senior Notes, net of discount -- 327,800 -- 327,800 -- 259,528 -- 587,328
Other long-term debt 4,339 -- -- 4,339 -- -- -- 4,339
Capital lease obligations 644 -- -- 644 -- 202 -- 846
Net assets acquired in excess
of purchase price 1,159 -- -- 1,159 -- -- -- 1,159
Other long-term liabilities 1,887 -- -- 1,887 -- 3,200 -- 5,087
----- ------- ----- ------ ------- ------- ----- -------
Total long-term liabilities 8,029 420,800 -- 428,829 27,000 262,930 -- 718,759
Total liabilities 855,080 441,928 (811,368) 485,640 (6,457) 304,472 34,019 817,674
------- ------- --------- ------- -------- ------- ------- -------
MINORITY INTEREST -- -- -- -- -- -- 513,732 513,732
STOCKHOLDERS' EQUITY (DEFICIT) (606,811) (163,236) 606,811 (163,236) 48,189 767,674 (604,438) 48,189
-------- -------- ------- ------- ------- ------- ------ -------
Total liabilities,minority
interest, and stockholders'
equity (deficit) $248,269 $278,692 $(204,557) $322,404 $41,732 $1,072,146 $(56,687) $1,379,595
======== ======== ========= ======== ======= ========== ========== ==========
15
Condensed Consolidating Balance Sheet
As of December 31, 1999
(Unaudited)
(In Thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 776 $ -- -- $ 776 $ -- $ 50,698 $ -- $ 51,474
Short-term investments -- -- -- -- -- 69,472 -- 69,472
Inventory 28,616 -- -- 28,616 -- -- -- 28,616
Prepaid in-orbit insurance 3,381 -- -- 3,381 -- -- -- 3,381
Accounts receivable--net 16,594 -- -- 16,594 -- -- -- 16,594
Restricted short-term investments -- 41,038 -- 41,038 -- -- -- 41,038
Other current assets 6,074 -- -- 6,074 2,568 1,077 -- 9,719
----- ------ ------- ----- ----- ----- ----- ------
Total current assets 55,441 41,038 -- 96,479 2,568 121,247 -- 220,294
PROPERTY AND EQUIPMENT-- NET 126,914 -- (12,949) 113,965 -- 2,551 -- 116,516
SYSTEM UNDER CONSTRUCTION -- -- -- -- -- 362,358 (5,080) 357,278
GOODWILL AND
INTANGIBLES-- NET 51,158 -- -- 51,158 -- 25,380 (14,327) 62,211
INVESTMENT IN XM RADIO -- -- -- -- 190,757 -- (190,757) --
INVESTMENT IN/DUE FROM
SUBSIDIARY -- 176,450 (176,450) -- (148,913) -- 148,913 --
DEFERRED CHARGES AND OTHER
ASSETS-- NET 2,977 26,507 -- 29,484 (10,597) 3,653 -- 22,540
RESTRICTED INVESTMENTS 320 18,360 -- 18,680 12,429 -- -- 31,109
-------- -------- ---------- -------- --------- -------- --------- --------
Total assets $236,810 $262,355 $(189,399) $309,766 $46,244 $515,189 $(61,251) $809,948
======== ======== ========= ======== ======== ======== ======== ========
16
Condensed Consolidating Balance Sheet
(Continued)
As of December 31, 1999
(Unaudited)
(In Thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $31,073 $ 10,866 $ -- $ 41,939 $ 1,266 $ 24,680 $ -- $ 67,885
Obligations under capital
leases due within one year 5,982 -- -- 5,982 -- 172 -- 6,154
Current portion long-term debt 5,960 -- -- 5,960 -- -- -- 5,960
Other current liabilities -- -- -- -- -- 1,646 -- 1,646
------ ------- ------ -------- ------ ------ -------- ------
Total current liabilities 43,015 10,866 -- 53,881 1,266 26,498 -- 81,645
DUE TO PARENT/ AFFILIATE 769,564 -- (769,626) (62) (14,934) 62 14,934 --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- -- --
Obligations under Bank Financing -- 44,000 -- 44,000 41,000 -- -- 85,000
Senior Notes, net of discount -- 327,576 -- 327,576 -- -- -- 327,576
Other long-term debt 2,535 -- -- 2,535 50,138 -- -- 52,673
Capital lease obligations 35 -- -- 35 -- 212 -- 247
Net assets acquired in excess
of purchase price 1,333 -- -- 1,333 -- -- -- 1,333
Other long-term liabilities 555 -- -- 555 -- 3,400 -- 3,955
----- ------- -------- ------- ------ ------ ------- -------
Total long-term liabilities 4,458 385,576 -- 390,034 77,138 3,612 -- 470,784
Total liabilities 817,037 396,442 (769,626) 443,853 63,470 30,172 14,934 552,429
------- ------- --------- ------- ------ ------ ------- -------
MINORITY INTEREST -- -- -- -- -- -- 274,745 274,745
STOCKHOLDERS' EQUITY (DEFICIT) (580,227) (134,087) 580,227 (134,087) (17,226) 485,017 (350,930) (17,226)
-------- -------- ------- -------- ------- ------- ------- -------
Total liabilities,minority
interest, and stockholders'
equity (deficit) $236,810 $262,355 $(189,399) $309,766 $46,244 $515,189 $(61,251) $809,948
======== ======== ========= ======== ======== ======= ======== ========
17
Condensed Consolidating Statement of Operations
Three Months ended March 31, 2000
(Unaudited)
(In thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
REVENUES
Services $ 17,152 $ -- $ -- $ 17,152 $ 1,200 $ -- $ (1,200) $ 17,152
Sales of equipment 5,018 -- -- 5,018 -- -- -- 5,018
------ ------ ------ ------ ------ ------ ------ ------
Total Revenues 22,170 -- -- 22,170 1,200 -- (1,200) 22,170
COSTS AND EXPENSES
Cost of service and operations 18,018 -- -- 18,018 -- -- -- 18,018
Cost of equipment sold 5,256 -- -- 5,256 -- -- -- 5,256
Sales and advertising 6,225 -- -- 6,225 1 -- -- 6,226
General and administrative 6,117 335 -- 6,452 275 16,385 (1,200) 21,912
Depreciation and amortization 8,829 -- -- 8,829 -- 503 (238) 9,094
----- ----- ----- ------- ----- ------ ------ -----
Operating Loss (22,275) (335) -- (22,610) 924 (16,888) 238 (38,336)
Interest and Other Income 90 5,076 (3,843) 1,323 (20) 4,150 (251) 5,202
Gain on Conversion of Convertible Note
Payable to Related Party -- -- -- -- 32,854 -- -- 32,854
Unrealized Gain on Convertible Note
Payable to Related Party -- -- -- -- 3,925 -- -- 3,925
Minority Interest in XM Radio's Losses -- -- -- -- -- -- 7,342 7,342
Equity in Loss of Subsidiaries -- (26,584) 26,584 -- (40,660) -- 40,660 --
Interest Expense (4,399) (13,419) 3,843 (13,975) (1,255) (2) 251 (14,981)
----- ------ ------- ------ -------- -------- ------- ------
NET LOSS BEFORE PREFERRED
STOCK DIVIDEND (26,584) (35,262) 26,584 (35,262) (4,232) (12,740) 48,240 (3,994)
Preferred Stock Dividend Declared -- -- -- -- (506) (1,472) 1,472 (506)
NET LOSS ATTRIBUTABLE TO --------- --------- ------- --------- -------- --------- ------- --------
COMMON SHAREHOLDERS ($26,854) ($35,262) $26,854 ($35,262) ($4,738) ($14,212) $49,712 ($4,500)
========= ======= ======= ========= ======== ========= ======== ========
18
Condensed Consolidating Statement of Operations
Three Months ended March 31, 1999
(Unaudited)
(In Thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ -------- ------ ------------ ------
REVENUES
Services $ 16,164 $ -- $ -- $ 16,164 $ 300 $ (300) $ 16,164
Sales of equipment 4,066 -- -- 4,066 -- -- 4,066
----- ----- ----- ------- ------- ------ -------
Total Revenues 20,230 -- -- 20,230 300 (300) 20,230
COSTS AND EXPENSES
Cost of service and operations 17,870 -- -- 17,870 -- -- 17,870
Cost of equipment sold 4,528 -- -- 4,528 -- -- 4,528
Sales and advertising 4,749 -- -- 4,749 -- -- 4,749
General and administrative 4,543 336 -- 4,879 190 (300) 4,769
Depreciation and amortization 14,298 -- (526) 13,772 -- -- 13,772
------ ----- ------ -------- ------- ------- -------
Operating Loss (25,758) (336) 526 (25,568) 110 -- (25,458)
INTEREST AND OTHER INCOME 69 4,998 (3,886) 1,181 558 -- 1,739
EQUITY IN LOSS OF SUBSIDIARIES -- (29,818) 29,818 -- (40,691) 37,197 (3,494)
INTEREST EXPENSE (4,129) (12,567) 3,886 (12,810) (3,120) -- (15,930)
------ ------- ------ -------- ------- ------- --------
NET LOSS ($29,818) ($37,723) $30,344 ($37,197) ($43,143) $37,197 ($43,143)
========= ========= ======= ========= ========= ========= =========
19
Condensed Consolidating Statement of Cash Flow
Three Months Ended March 31, 2000
(Unaudited)
(In thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($26,584) ($35,262) $26,584 ($35,262) ($4,232) ($12,740) $48,240 ($3,994)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Amortization of Guarantee
Warrants and debt related costs -- 1,342 -- 1,342 1,600 -- -- 2,942
Depreciation and amortization 8,829 -- -- 8,829 -- 503 (238) 9,094
Non cash stock compensation of
XM Radio -- -- -- -- -- 658 -- 658
Minority Interest -- -- -- -- -- -- (7,342) (7,342)
Gain on conversion on convertible
note payable to related party -- -- -- -- (32,854) -- -- (32,854)
Unrealized gain on marketable
securities -- -- -- -- (3,925) -- -- (3,925)
Changes in assets & liabilities
Inventory (7,424) -- -- (7,424) -- -- -- (7,424)
Prepaid in-orbit insurance 1,336 -- -- 1,336 -- -- -- 1,336
Trade accounts receivable (584) -- -- (584) -- -- -- (584)
Other current assets (2,103) -- -- (2,103) 60 (123) -- (2,166)
Accounts payable and accrued
expenses (15,901) 10,262 -- (5,639) (704) 4,490 -- (1,853)
Accrued interest on Senior Note -- 10,259 -- 10,259 -- -- -- 10,259
Deferred trade payables (1,842) -- -- (1,842) -- -- -- (1,842)
Deferred Items-- net 1,276 -- -- 1,276 (119) -- -- 1,157
----- ------- ------ ----- ---- ----- ----- ------
Net cash (used in) provided by
operating activities (42,997) (13,399) 26,584 (29,812) (40,174) (7,212) 40,660 (36,538)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (4,896) -- -- (4,896) -- (4,929) -- (9,825)
System under construction -- -- -- -- -- (62,422) -- (62,422)
Net Purchase/Maturity of
short-term investments -- -- -- -- -- 69,472 -- 69,472
Other investing activities
by XM Radio -- -- -- -- -- (18,493) -- (18,493)
Purchase of long-term, restricted
investments (2,180) (1,234) (3,414) (593) (123,416) -- (127,423)
------- ------- ------ ------- ----- -------- ------ ---------
Net cash used in investing activities (7,076) (1,234) -- (8,310) (593) (139,788) -- (148,691)
20
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent XM Radio Eliminations Parent
---------- -------- ------------ -------- ------ -------- ------------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Common and
Preferred Stock -- -- -- -- 5,168 229,093 -- 234,261
Funding from parent/subsidiary 52,012 (20,367) (26,584) 5,061 35,599 -- (40,660) --
Principal payments under capital
leases (1,627) -- -- (1,627) -- -- -- (1,627)
Principal payments under Vendor
Financing (494) -- -- (494) -- -- -- (494)
Proceeds from Senior Secured Notes
and Stock Purchase Warrants -- -- -- -- -- 325,000 -- 325,000
Proceeds from bank financing -- 35,000 -- 35,000 -- -- -- 35,000
Debt issuance costs -- -- -- -- -- (9,754) -- (9,754)
------- ------- ------- ----- ----- ------- ----- ------
Net cash provided by (used in)
financing activities 49,891 14,633 (26,584) 37,940 40,767 544,339 (40,660) 582,386
Net (decrease)increase in cash
and cash equivalents (182) -- -- (182) -- 397,339 -- 397,157
CASH & CASH EQUIVALENTS, beginning
of period 776 -- -- 776 -- 50,698 -- 51,474
--- ------ ------ ----- ------ ------ ------ -------
CASH & CASH EQUIVALENTS, end of period $594 $ -- $ -- $594 $ -- $448,037 $ -- $448,631
==== ====== ====== ==== ====== ======== ====== ========
21
Condensed Consolidating Statement of Cash Flow
Three Months Ended March 31, 1999
(Unaudited)
(In thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ -------- ------ ------------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss ($29,818) ($37,723) $30,344 ($37,197) ($43,143) $37,197 ($43,143)
Adjustments to reconcile net loss to
net cash (used in) provided by
operating activities:
Amortization of guarantee warrants,
debt discount and issuance costs -- 1,786 -- 1,786 2,766 -- 4,552
Depreciation and amortization 13,772 -- -- 13,772 -- -- 13,772
Equity in loss in XM Radio -- -- -- -- 3,494 -- 3,494
Changes in assets & liabilities
Inventory 1,153 -- -- 1,153 -- -- 1,153
Prepaid in-orbit insurance 1,449 -- -- 1,449 -- -- 1,449
Accounts receivable-- trade (1,427) -- -- (1,427) -- -- (1,427)
Other current assets (1,444) 20 -- (1,424) 55 -- (1,369)
Accounts payable and accrued
expenses (29,338) 38,055 -- 8,717 421 -- 9,138
Accrued interest on Senior Notes -- (570) -- (570) -- -- (570)
Deferred trade payables (2,092) -- -- (2,092) -- -- (2,092)
Deferred items-- net (542) -- -- (542) (389) -- (931)
---- ----- ------ -------- -------- ----- ----
Net cash (used in) provided by
operating activities (48,287) 1,568 30,344 (16,375) (36,796) 37,197 (15,974)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (2,541) -- -- (2,541) -- -- (2,541)
Purchase of XM Radio note receivable -- -- -- -- (21,419) -- (21,419)
Purchase of long-term, restricted
investments (22) (1,217) -- (1,239) (185) -- (1,424)
---- ------- ------ -------- ------- ----- -------
Net cash used in investing
activities (2,563) (1,217) -- (3,780) (21,604) -- (25,384)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Common Stock -- -- -- -- 162 -- 162
Funding from parent 58,108 (27,351) (30,344) 413 36,784 (37,197) --
Principal payments under
capital leases (1,322) -- -- (1,322) -- -- (1,322)
Payments under Vendor Financing (90) -- -- (90) -- -- (90)
Proceeds from bank financing -- 27,000 -- 27,000 -- -- 27,000
Debt issuance costs -- -- -- -- (46) -- (46)
22
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ -------- ------ ------------ ------
Proceeds from note payable to
related party -- -- -- -- 21,500 -- 21,500
------- ------- -------- ------- ------- ------- ------
Net cash provided by (used in)
financing activities 56,696 (351) (30,344) 26,001 58,400 (37,197) 47,204
Net increase in cash and cash
equivalents 5,846 -- -- 5,846 -- -- 5,846
CASH and CASH EQUIVALENTS, beginning
of period 2,285 -- -- 2,285 -- -- 2,285
----- ---- ------ ----- ----- ----- ------
CASH and CASH EQUIVALENTS, end of
period $8,131 $ -- $ -- $8,131 $ -- $ -- $8,131
====== ====== ====== ====== ====== ===== ======
23
PART I- FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes "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 and requirements are forward-looking
statements. These statements can sometimes be identified by our use of
forward-looking words or phrases such as, for example, "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. Factors that may
cause actual results to differ materially from those contemplated by such
forward-looking statements ("Cautionary Statements") include, among others,
those described under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview," and elsewhere in
this quarterly report, including in conjunction with the forward-looking
statements included 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 by the Cautionary Statements. You should carefully review
the risk factors described in our other filings with the Securities and Exchange
Commission (the "SEC") from time to time, including our registration statement
on Form S-3 (File No. 333-81459), our Form 10-K Annual Report filed on March 30,
2000 and Form 10-Q Quarterly Reports to be filed by the Company subsequent to
this Form 10-Q, as well as our other reports and filings with the SEC. In
addition, you are urged to review carefully the Report on Form 8-K, dated
February 25, 2000 (File No. 0-27441) of XM Satellite Radio Holdings Inc. ("XM
Radio") describing the risk factors relating to its business, as well as XM
Radio's Form 10-K Annual Report for 1999 and its other reports filed from time
to time with the SEC.
General
This section provides information which we believe is relevant to an assessment
and understanding of the financial condition and consolidated results of
operations of Motient Corporation (with its subsidiaries, "Motient" or the
"Company"). The discussion should be read in conjunction with the consolidated
financial statements and notes thereto. Motient has six wholly-owned
subsidiaries which, for purposes of this quarterly report, are referred to as
the core wireless business, and a controlling interest in three other
subsidiaries, referred to as XM Radio (defined below). On a consolidated basis,
we refer to these entities as Motient.
Core Wireless Business
We are a leading provider of two-way mobile communications services principally
to business-to-business customers and enterprises. Motient serves a variety of
markets including mobile professionals, telemetry, transportation, field
service, and nationwide voice dispatch, to customers in the United States.
During 1999, we made substantial investments in two new products -- eLinksm and
MobileMAX2TM. Our eLink service is a two-way wireless email device and
electronic organizer that uses our terrestrial network. We believe that this
product will capitalize on the rapid expansion of internet email usage,
particularly in the business-to-business environment. We provide our
industry-leading eLinksm two-way wireless email service to customers accessing
email through corporate servers, Internet Service Providers (ISP) and Mail
Service Provider (MSP) accounts, and paging network suppliers. MobileMAX2 is our
second generation multi-mode mobile data messaging service which uses both our
satellite and terrestrial networks to provide least-cost-routing capabilities.
We believe MobileMAX2 will improve our competitive position in the
transportation industry, since the product has a relatively low cost of entry,
and contains added functionality that should allow us to increase our
penetration of the less-than-truckload market.
We expect that our rollout of eLink and MobileMAX2 will require a significant
investment of financial resources. We believe that the market opportunity
represented by these wireless data offerings is substantial, and we have decided
to focus the majority of our available future resources on expanding our
wireless data business. As a result of these factors and in light of certain
regulatory developments in late 1999 with respect to our satellite voice
business, we expect that the future level of investment in our voice business
and satellite-related product lines will decrease as a percentage of our overall
investment. While we expect that this shift in resources will ultimately yield
an increase in our customer base, we expect that it will have the effect of
driving down average revenue per unit as the percentage of voice customers
decreases.
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XM Radio
As of March 31, 2000, we had an equity interest in XM Satellite Radio Holdings
Inc. ("XM Radio") of approximately 34.4% (or 25.5% on a fully diluted basis) of
the common stock of XM Radio; however, we continue to control XM Radio through
Board of Director membership and common stock voting rights. We will continue to
consolidate XM Radio until we no longer control XM Radio. We must request and
receive FCC approval to relinquish control of XM Radio. Accordingly, the results
of XM Radio are consolidated with our financial statements. On March 30, 2000,
the FCC approved an application filed by XM Radio which would allow us to reduce
our ownership of the voting stock of XM Radio to a minimum of 40%, provided that
we retain our right to elect a majority of the directors of XM Radio's Board of
Directors. We have not elected to reduce our voting shares in XM Radio and thus
still maintain control of XM Radio. The operations and financing of XM Radio are
maintained separate and apart from the operations and financing of Motient (see
discussion of Liquidity and Capital Resources below). XM Radio completed its
initial public offering in October 1999. Please refer to XM Radio's SEC reports
and filings for more detail about its business plan, risks, and financial
results.
Our significant acquisitions in recent years and the impact of consolidating the
results of XM Radio, make period to period comparison of our financial results
less meaningful, and therefore, you should not rely on them as an indication of
future operating performance.
Overview
We have incurred significant operating losses and negative cash flows in each
year since we started operations, due primarily to start-up costs, the costs of
developing and building the networks and the cost of developing, selling and
providing our products and services. We are, and will continue to be, highly
leveraged (see discussion of Liquidity and Capital Resources -- below).
Our future operating results could be adversely affected by a number of
uncertainties and factors, including:
o the launch of new products or the entry into new market segments,
which may require us to continue to incur significant operating
losses,
o our ability to fully recover the value of our inventory in a timely
manner,
o our ability to gain market acceptance of new products and services,
including our new product offerings, eLink and MobileMAX2,
o the timely roll-out of certain key customer initiatives and new
products, including for example MobileMAX2,
o our ability to respond and react to changes in our business and the
industry because we have substantial indebtedness,
o our ability to fund anticipated capital expenditures, operating
losses and debt service requirements and our ability to secure
additional financing as necessary,
o our ability to modify the organization, strategy and product
mix to maximize the market opportunities as the market changes,
o our ability to manage growth effectively,
o competition from existing companies that provide services using
existing communications technologies and the possibility of
competition from companies using new technology in the future,
o our ability to maintain, on commercially reasonable terms or at all,
certain technologies licensed from third parties,
o the loss of one or more of our key customers,
o the timely availability of an adequate supply of subscriber equipment
at competitive price points,
o our ability to expand our networks on a timely basis and at a
commercially reasonable cost, or at all, as additional future demand
increases,
o regulation by the FCC, and technical anomalies that may occur within
the network, which could impact, among other things, customer
performance, satisfaction and revenue under contractual
arrangements with certain customers, or the operation of the
satellite network and the cost, scope or availability of in-orbit
insurance.
Additionally, XM Radio is a development stage company with no revenues, and its
business is subject to a number of significant risks and uncertainties including
the following:
25
o the ability to obtain additional financing necessary to complete the
build out of its system and maintain operations until such time as it
can reach cash flow positive,
o satellite launch failure, destruction or damage during launch, and
premature failure of XM Radio's satellite that will not be fully
covered by insurance,
o the ability of XM Radio to successfully integrate complex
technologies into a technologically feasible configuration,
o the timely availability of XM Radio subscriber equipment at
competitive prices,
o the ability of XM Radio to gain market acceptance of its service,
and
o the ability of XM Radio to achieve profitability given certain
distribution agreement obligations and joint development funding
requirements.
The Company has a significant investment in XM Radio which may be effected by
the foregoing risks and impact the market price of XM Radio's stock. For an
expanded discussion of XM Radio's risk factors, please refer to XM Radio's
Report on Form 8-K dated February 25, 2000 filed with the SEC.
Three Months ended March 31, 2000 and 1999
Revenue and Subscriber Statistics
Service revenues, which includes our data, voice, and capacity reseller
services, approximated $17.2 million for the three months ended March 31, 2000,
which constituted a $1.0 million, or 6% increase over the same period in 1999.
The increase in service revenues quarter over quarter was primarily attributable
to a 34% increase in subscribers, partially offset by average revenue per user
price reductions.
Three Months Ended
March 31,
Summary of Revenue 2000 1999 Change % Change
------------------ ---- ---- ------ --------
(in millions)
Data Service $12.5 $12.0 $ 0.5 4%
Voice Service 3.5 3.0 0.5 17
Capacity Resellers and Other 1.2 1.1 0.1 9
Equipment Revenue 5.0 4.1 0.9 22
--- --- --- --
Total $22.2 $20.2 $2.0 10%
===== ===== ==== ==
The increase in service revenue from voice services was primarily the result of
an increase in our voice subscribers of approximately 5,600 from March 31, 1999
to March 31, 2000. This was offset by a decrease in our average revenue per unit
("ARPU") of 21%, caused by a shift in customer usage to lower-usage emergency
response services and a continued drop in average revenue per user for our
maritime customers. Our data service revenue increased as a result of
approximately 32,400 additional subscribers at March 31, 2000. This was offset
by a 20% decrease in ARPU caused by scheduled calendar year contract price
reductions as well as a shift in customers to our data product line, which
typically has a lower ARPU, and a change in subscriber mix among market
segments. Service revenue from capacity resellers, who handle both voice and
data services, increased primarily as a result of increased contract commitments
from current customers.
The increase in revenue from the sale of equipment reflects the sale of hardware
equipment associated with our eLink and MobileMAX2 service offerings, offset by
a decrease in sales of single-mode and voice equipment, which we expect to
continue as we shift away from the voice business and with the introduction of
MobileMAX2.
As is common in our industry, we report subscriber information and average
revenue per unit per month statistics. Although these measures are not required
under Generally Accepted Accounting Principles ("GAAP"), we believe that this
information helps to demonstrate important trends in our business.
26
Average
Revenue
Subscribers per Unit
Three Months Ended Three Months Ended
March 31, March 31,
2000 1999 2000 1999
---- ---- ---- ----
Data 131,949 99,523 $ 35 $ 44
Voice 19,084 13,435 67 85
------ ------
Total 151,033 112,598 $ 39 $ 49
======= =======
Additionally, our mix of subscribers can be broken down into the following
markets:
As of
March 31,
2000 1999
---- ----
Field Service 30% 44%
Transportation 42% 31%
Telemetry 9% 10%
Maritime 4% 3%
eLink 4% --
Other 11% 12%
As the mix of subscribers shifts more to our data business, and more of the
voice business is handled by resellers, we expect that the overall average
revenue per unit will continue to decline over time towards the average revenue
per unit for data service.
Expenses
Three Months Ended
March 31,
Summary of Expenses 2000 1999 Change % Change
------------------- ---- ---- ------ --------
(in millions)
Cost of Service & Operations $ 18.0 $ 17.9 $ 0.1 1%
Cost of Equipment Sales 5.3 4.5 0.8 18
Sales & Advertising 6.2 4.7 1.5 32
General & Administrative 21.9 4.8 17.1 356
Depreciation & Amortization 9.1 13.8 (4.7) (34)
--- ---- ----- ----
Total $60.5 $45.7 $14.8 32%
===== ===== ===== ==
Effective July 7, 1999, we assumed control of XM Radio and we consolidated its
results with ours from that point forward. Consequently, the March 31, 2000
results reflect the costs of the consolidated entity. The March 31, 1999
expenses do not include XM Radio as it was accounted for under the equity method
of accounting at that point in time.
Cost of service and operations includes costs to support subscribers and to
operate the network. As a percentage of total revenues, cost of service and
operations was 81% for the three months ended March 31, 2000 and 88% for the
same period in 1999. The slight dollar increase in cost of service and
operations was primarily attributable to (i) an increase of $0.6 million for
communication charges associated with increased service usage and costs to
support the terrestrial network, and (ii) an increase of $0.2 million for site
rental costs associated with the terrestrial network, offset by a reduction of
approximately $1.0 million in Year 2000 costs and approximately $0.2 million in
lower in-orbit insurance due a lower fair market value of the satellite. XM
Radio did not incur any cost of service and operations expenses during the
quarter ended March 31, 2000.
The cost of equipment sold increased $0.8 million, or 18%, from $4.5 million for
the three months ended March 31, 1999 to $5.3 million for the three months ended
March 31, 2000. The increase quarter over quarter in the cost of equipment sold
was proportionate to the increase in equipment revenue, which reflects the
roll-out of our MobileMAX2 equipment in the first quarter of 2000 offset by a
decrease in sales of single-mode and voice equipment.
The 32% increase in sales and advertising expenses from the three months ended
March 31, 1999 to the three months ended March 31, 2000 was primarily
attributable to (i) increased employee sales commissions, (ii) increased trade
show activity in the first quarter of 2000 compared to the same period in 1999,
(iii) costs incurred in connection with our company name change in April 2000,
(iv) an increase in advertising in the first quarter of 2000 to heighten our
presence in the marketplace particularly in the transportation market in
anticipation of the rollout of MobileMAX2, and (v) eLink customer acquisition
costs. We expect these costs to continue to increase as we increase our customer
27
acquisitions and brand recognition efforts. XM Radio did not incur any sales and
advertising expenses in the first quarter of 2000.
General and administrative expenses were $21.9 million in the first quarter of
2000, of which $16.4 million were related to XM Radio. Excluding XM Radio
expenses, general and administrative expenses represented 25% and 24% of total
revenue for the three months ended March 31, 2000 and 1999, respectively. The
$0.8 million increase in our core wireless business general and administrative
expenses was attributable to (i) an increase in headcount from the prior year
causing an increase in employee-related costs, and (ii) a $0.1 million increase
in regulatory costs, associated with our appeal of the FCC's decision to grant
applications to competitors to provide mobile satellite services in the United
States. See "Regulation" below.
Depreciation and amortization expenses were $9.1 million in the first quarter of
2000, of which $0.2 million was incurred by XM Radio. Excluding XM Radio,
depreciation and amortization was approximately 41% and 68% of total revenue for
the three months ended March 31, 2000 and 1999, respectively. The $4.9 million
decrease in depreciation and amortization expense was primarily attributable to
the $97.4 million asset impairment charge related to our satellite and satellite
related ground segment assets taken in the fourth quarter of 1999. This will
result in a reduction in depreciation expense of approximately $4.1 million per
quarter.
Interest and other income, including that earned by XM Radio, was $5.2 million
for the first quarter of 2000, as compared to $1.7 million for the same period
in 1999. Excluding $4.2 million of interest earned by XM Radio on its short-term
investments, the decrease of $0.7 million was a result of lower balances on
escrows established with the proceeds from the $335 million debt offering.
We incurred $15.0 million of interest expense in the first quarter of 2000, of
which a minimal amount was incurred by XM Radio, compared to $16.0 million of
interest expense in the first quarter of 1999. The decrease was a result of a
$1.6 million decrease in amortization of debt discount, prepaid interest and
debt offering costs due to the debt discount costs that were written off in 1999
when we extinguished $59 million of debt on the Term Loan Facility, offset by a
$20 million higher debt balance on our Revolving Credit Facility quarter over
quarter. We expect that interest costs will continue to increase as we continue
to draw down on our bank revolver.
In January 1999, we issued a note payable in the amount of $21.5 million to
Baron Asset Fund, a stockholder and a guarantor of our bank facility. The note
was secured and exchangeable for a portion of our shares of XM Radio. Since the
note was indexed to XM Radio stock, which decreased in value from December 1999
to January 2000, we recorded an unrealized gain before the note was exchanged in
the amount of $3.9 million. The note payable was exchanged for XM Radio stock in
January 2000, and we recorded a non-recurring gain of $32.9 million for the
difference between the carrying value of the debt and XM Radio stock exchanged
to settle the obligation.
Net capital expenditures, excluding XM Radio, for the first quarter of 2000 for
property and equipment were $4.9 million compared to $2.5 million in the same
period of 1999. Expenditures consisted primarily of assets necessary to continue
the build out of our terrestrial network. In addition, XM Radio expended $4.9
million in the first quarter of 2000 primarily for office furniture and
equipment.
Net capital expenditures for property under construction represent those costs
associated with the build out of the XM Radio network. It is anticipated that
these expenditures will continue to be significant as XM Radio continues to
build out its satellites and ground segments. For the first quarter of 2000, XM
Radio expended $62.4 million for property under construction.
Liquidity and Capital Resources
Core Wireless Business
Adequate liquidity and capital are critical to our ability to continue as a
going concern and to fund subscriber acquisition programs necessary to achieve
positive cash flow and profitable operations. We expect to continue to make
significant capital outlays to fund interest expense, new product rollouts,
capital expenditures and working capital before we begin to generate positive
cash flow from operations. We expect these outlays to continue for the
foreseeable future.
28
Summary of Liquidity and Financing Sources for Core Wireless Business
Our current operating assumptions and projections reflect our best estimate of
subscriber and revenue growth and operating expenses. We anticipate that capital
expenditures, operating losses, working capital and debt service requirements
through 2000, and beyond, can be met by (i) the borrowings available under the
bank financing and the vendor financing, (ii) proceeds from the exercise of
stock options and warrants (iii) proceeds realized through the sale of inventory
relating to our new products-eLink and MobileMAX2, and (iv) additional debt or
equity financing transactions. We also believe that our investment in XM Radio
may provide us, in the future, with flexibility for obtaining additional
liquidity, should that be necessary. However, there are various restrictions on
our ability to realize liquidity on our investment in XM Radio. Our ability to
meet our projections is subject to numerous uncertainties and we cannot
guarantee that our current projections regarding the timing of our ability to
achieve positive operating cash flow will be accurate. If our cash requirements
are more than projected, we may require additional financing in amounts which
may be material. The type, timing and terms of financing that we select will be
dependent upon our cash needs, the availability of other financing sources and
the prevailing conditions in the financial markets. We cannot guarantee that
additional financing sources will be available at any given time or available on
favorable terms.
Our current financing arrangements are summarized below:
o A $141 million bank financing facility, consisting of (i) a $100
million unsecured five-year reducing revolving credit facility and
(ii) a $41 million five-year term loan facility, with up to three
additional one-year extensions subject to the lenders' approval, which
is secured by the assets of the Company, principally our stockholdings
in XM Radio. The bank financing is severally guaranteed by Hughes
Electronics Corporation, Singapore Telecommunications Ltd., and Baron
Capital Partners, L.P. Both facilities bear interest, generally, at
100 basis points above London Interbank Offered Rate-- LIBOR. Certain
proceeds that we may receive are required to be used to repay and
reduce the bank financing, unless otherwise waived by the lenders and
the guarantors. As of March 31, 2000, the Company had outstanding
borrowings of $41 million under the term loan facility at 7.1875%, and
$79 million under the revolving credit facility at rates ranging from
7.0625% to 7.1875%. Additionally, in connection with the bank
financing, we entered into an interest rate swap agreement which
reduces the impact of interest rate increases on the term loan
facility. Under the swap agreement, we will receive an amount equal to
LIBOR plus 50 basis points, paid directly to the banks on a quarterly
basis, on a notional amount of $41 million until the termination date
of March 31, 2001. The unamortized fee paid for the swap agreement is
reflected as an asset in the accompanying financial statements. We are
exposed to a credit loss in the event the counter party does not
perform under this agreement; however, we do not believe there is a
significant risk of non performance, since the counter party to the
swap agreement is a major financial institution.
o A vendor financing commitment from Motorola, Inc., a stockholder, to
provide up to $10 million of vendor financing to finance up to 75% of
the purchase price of additional terrestrial network base stations.
Loans under this facility bear interest at a rate equal to LIBOR plus
7.0% and are guaranteed by Motient and each of its wholly-owned
subsidiaries. The terms of the facility require that amounts borrowed
be secured by the equipment purchased therewith. As of March 31,
2000, $1.1 million was available under this facility.
o $335 million of senior notes issued at the time of the Motient
Communications Acquisition. The notes bear interest at 12 1/4%
annually and are due in 2008. A portion of the net proceeds of the
sale of the notes were used to finance pledged securities that are
intended to provide for the payment of the first six interest
payments on these notes. Interest payments are due semi-annually, in
arrears, and began on October 1, 1998. The notes were issued by a
subsidiary of Motient, and are fully guaranteed by Motient.
o We have also arranged the financing of certain trade payables, and as
of March 31, 2000, $2.1 million of deferred trade payables were
outstanding at rates ranging from 6.07% to 12.00% and are generally
payable by the end of 2000.
Commitments
At March 31, 2000, we had remaining contractual commitments to purchase
subscriber equipment inventory, primarily related to eLink and MobileMAX2, in
the maximum amount of $36.0 million during 2000 and 2001. We have the right to
terminate certain of these commitments by incurring a cancellation penalty
representing a percentage of the unfulfilled portion of the contract. As of
March 31, 2000 the cancellation penalty would have been approximately $6.1
million.
We have also contracted for the purchase of $9.5 million of base stations to
expand our coverage and complete certain necessary site build-outs, $0.1 million
for certain software development, and certain other operating expense contract
commitments that total approximately $1.0 million over the next year.
29
The aggregate fixed and determinable portion of all inventory commitments and
obligations for other fixed contracts is $46.6 million of which $29.4 million is
due in 2000 and the remainder of $17.2 million is due in 2001.
XM Radio
XM Radio is operated, managed, and funded separately from our core wireless
business. While we do not have any obligation or commitments to provide
additional funding to XM Radio, and do not expect to provide any additional
funding, we may choose to do so in the future. XM Radio will require significant
additional funding in the future. If XM Radio is not successful in obtaining the
additional required financing, our investment in XM Radio could be negatively
impacted.
In the first quarter of 2000, XM Radio raised an additional $228.6 million in
net proceeds through a follow-on offering of 4.4 million shares of its Class A
common stock and 2.0 million shares of Series B convertible redeemable preferred
stock. In March 2000, XM Radio completed a high yield debt offering of 325,000
units, each unit consisting of $1,000 principal amount of 14% Senior Secured
Notes due 2010 and one warrant to purchase 8.024815 shares of Class A common
stock of XM Radio at an exercise price of $49.50 per share. XM Radio realized
net proceeds of $191.3 million, excluding $123.0 million used to acquire
securities which will be used to pay interest payments due under the notes for
the first three years.
XM Radio is also subject to certain commitments and contingencies. XM Radio has
a distribution agreement with General Motors that will require significant
expenditures in the future. Under its satellite contract with Hughes Space and
Communications, Inc., XM Radio will incur payment obligations of approximately
$541.3 million of which $242.8 million had been paid as of March 31, 2000. XM
Radio has signed a contract with LCC International, Inc., for the engineering of
its terrestrial repeater network with total contract payments expected to be
approximately $115 million through 2001. As of March 31, 2000, XM Radio has paid
$10.4 million under this contract. Effective October 1999, XM Radio signed a
contract with Hughes Electronics Corporation for the design, development, and
purchase of terrestrial repeater equipment. The total value of this contract is
$128 million and XM Radio has paid $6.0 million under this contract as of March
31, 2000. On February 16, 2000, XM Radio and Sirius Satellite Radio, a
competitor of XM Radio, signed an agreement to develop a unified standard for
satellite radios to facilitate the ability of consumers to purchase one radio
capable of receiving both XM Radio's and Sirius Satellite Radio's services.
Other
Cash used in operating activities was $36.5 million for the three months ended
March 31, 2000, of which $7.2 million was attributable to XM Radio. Excluding XM
Radio, cash used in operating activities was $29.3 million, compared to $16.0
million for the three months ended March 31, 1999. The increase in cash used in
operating activities was primarily attributable a decrease in net working
capital of $10.8 million primarily due to (i) the build up of inventory for our
new products, without a corresponding amount of sales, caused by the slower
rollout of our new product initiatives and (ii) the timing of payments on
accounts payable. Cash used in investing activities was $148.7 million for three
months ended March 31, 2000, of which $139.8 million was attributable to XM
Radio. Excluding XM Radio, cash used in investing activities was $8.9 million,
compared to $25.4 million for the same period in 1999. This decrease was
primarily attributable to the purchase of the XM Radio Note Receivable in 1999
offset by higher payments in 2000 for property and equipment and the purchase of
$2.5 million additional escrows in 2000 in connection with a vendor requirement
relating to the supply of MobileMAX2 equipment. Cash provided by financing
activities was $582.4 million in the first quarter of 2000, of which $544.3
million was attributable to XM Radio. Excluding XM Radio, cash provided by
financing activities was $38.1 million, compared to $47.2 million in the first
quarter of 1999. This decrease is due to the proceeds received from a related
party in 1999 of $21.5 million offset by $13.0 million higher proceeds in 2000
from bank financing and stock option and warrant exercises. Excluding XM Radio,
proceeds from the issuance of Common Stock in connection with stock option and
warrant exercises as well as stock issued under our employee stock purchase
plan, were $5.2 million and $0.2 million for three months ended March 31 2000,
and 1999, respectively. Excluding XM Radio, payments on long-term debt and
capital leases were $2.1 million and $1.4 million for the three months ended
March 31, 2000 and 1999, respectively. As of March 31, 2000, excluding XM Radio,
we had $594,000 of cash and cash equivalents, working capital of $9.1 million,
and $41.0 million of current investments restricted for the payment of interest.
None of the cash and working capital held by XM Radio is available for use by
the Company.
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Regulation
The ownership and operations of our communication systems are subject to
significant regulation by the FCC, which acts under authority granted by the
Communications Act of 1934, as amended (the "Communications Act"), and related
federal laws. A number of our licenses are subject to renewal by the FCC and,
with respect to our satellite operations, are subject to international frequency
coordination. In addition, current FCC regulations generally limit the ownership
and control of Motient by non-U.S. citizens or entities to 25%. We cannot assure
that the rules and regulations of the FCC will continue to support our
operations as presently conducted and contemplated to be conducted in the
future, or that all existing licenses will be renewed and requisite frequencies
coordinated.
In November 1999 the FCC granted two applications to use a Canadian competitor's
satellite system to provide mobile satellite services in the United States. This
decision represents a departure from the FCC's previous statements that there is
only enough spectrum in the mobile satellite services L-band to authorize a
single mobile satellite services system to provide service in the United States.
While Motient has appealed this decision, there can be no assurances that it
will be overturned. The loss of exclusive right to provide these services will
result in competition from other providers to provide mobile satellite services
and cause us to reduce the prices charged and revenue related to these services.
Accounting Standards
In June 1998, FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires the recognition of all
derivatives as either assets or liabilities measured at fair value. In June
1999, FASB issued Statement No. 137, which defers the effective date of
Statement No. 133 until fiscal years beginning after June 15, 2000. We do not
believe that the adoption of this statement will have a material impact on our
financial position and results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, "Revenue
Recognition" ("SAB 101"). SAB 101 provides guidance on the recognition,
presentation, and disclosure of revenue in financial statements. We are
currently evaluating the impact of SAB 101 on our consolidated results of
operations and financial condition. The adoption date for SAB 101 is June 30,
2000 and any change in accounting principle required from adoption of SAB 101
will be reported as a cumulative effect of a change in accounting principle.
In March 2000, the Financial Accounting Standards Board issued FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44"). FIN 44 further defines the accounting consequence of
various modifications to the terms of a previously fixed stock option or award
under APB Opinion No. 25, Accounting for Stock Issued to Employees. FIN 44
becomes effective on July 1, 2000, but certain conclusions in FIN 44 cover
specific events that occur after either December 15, 1998 or January 12, 2000.
In July 1999, XM Radio repriced certain options. FIN 44 requires that these
options be accounted for as variable from July 1, 2000 until the date the award
is exercised, forfeited, or expires unexercised. For those options that have
vested as of July 1, 2000, compensation cost is recognized only to the extent
that the exercise price exceeds the stock price on July 1, 2000. For those
options that have not vested as of July 1, 2000, the portion of the award's
intrinsic value measured at July 1, 2000 is recognized over the remaining
vesting period. Additional compensation cost is measured for the full amount of
any increases in stock price after the effective date and is recognized over the
remaining vesting period. Any adjustment to compensation cost for further
changes in the stock price after the award vests is recognized immediately. The
effects of implementing FIN 44 may require XM Radio to recognize additional
non-cash compensation commencing in the third quarter of 2000.
31
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 a combination of
fixed and variable rate debt. Currently, except for the interest rate cap
described below, we do not use derivative financial instruments to manage our
interest rate risk. We have minimal cash flow exposure due to general interest
rate changes for our fixed rate, long-term debt obligations. We invest our cash
in short-term commercial paper, investment-grade corporate and government
obligations and money market funds.
Under our Term Loan and Revolving Credit Facility, interest is paid generally at
100 basis points above LIBOR. The exposure to interest rate fluctuations is
limited due to the interest rate paid on a monthly basis being variable and
based on current market conditions. We have also entered into an interest rate
swap agreement which reduces the impact of interest rate increases on the Term
Loan Facility. Under this agreement, we receive an amount equal to LIBOR plus 50
basis points paid directly to the banks on a quarterly basis until the swap
agreement terminates on March 31, 2001. Our Senior Notes bear interest at a
fixed rate of 12 1/4%. We run the risk that market rates will decline and the
required payments will exceed those based on current market rates.
32
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 - Restated Certificate of Incorporation of Motient Corporation
(as restated effective April 24, 2000) (filed herewith).
3.2 - Amended and Restated Bylaws of Motient Corporation (as
amended and restated effective April 24, 2000) (filed
herewith).
27.0 - Financial Data Schedule (filed herewith).
(b) Current Reports on Form 8-K
On April 24, 2000, the Company filed a Current Report on Form 8-K, in
response to Item 5-Other Events, reporting that the Company had changed its
name to Motient Corporation.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
Date: May 12, 2000 /s/W. Bartlett Snell
---------------------------------------------------
W. Bartlett Snell
Senior Vice President and Chief Financial Officer
(principal financial and accounting officer and
Duly Authorized Officer to sign on behalf of the
Registrant)
34
EXHIBIT INDEX
Number Description
3.1 - Restated Certificate of Incorporation of Motient Corporation
(as restated effective April 24, 2000) (filed herewith).
3.2 - Amended and Restated Bylaws of Motient Corporation (as
amended and restated effective April 24, 2000) (filed
herewith).
27.0 - Financial Data Schedule (filed herewith).