SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31,
2001 Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
incorporation or organization)
10802 Parkridge Boulevard
Reston, Virginia 20191-5416
(703) 758-6000
(Address, including zip code, and telephone number,
including area code, of registrant's principal
executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s)), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Number of shares of Common Stock outstanding at May 7, 2001: 49,663,602
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
2001 2000
---- ----
REVENUES
Services $18,007 $ 17,152
Sales of equipment 5,400 5,018
-------- ---------
Total Revenues 23,407 22,170
COSTS AND EXPENSES
Cost of service and operations 18,164 18,018
Cost of equipment sold 5,934 5,256
Sales and advertising 9,649 6,226
General and administrative 6,327 21,912
Depreciation and amortization 8,550 9,094
------- ---------
Operating Loss (25,217) (38,336)
Interest and other income, net 142 5,202
Interest expense (15,426) (14,981)
Gain on note payable to related party -- 36,779
Minority interest -- 7,342
Equity in loss of XM Radio (12,472) --
-------- -------
Loss Before Extraordinary Item, XM Radio Preferred Stock
Dividend and Beneficial Conversion (52,973) (3,994)
Extraordinary Loss on Extinguishment of Debt (1,033) --
-------- -------
Net Loss (54,006) (3,994)
XM Radio Preferred Stock Dividend and Beneficial Conversion -- (506)
--------- -----------
Net Loss Attributable to Common Shareholders $(54,006) $ (4,500)
========= ==========
Basic and Diluted Loss Per Share of Common Stock:
Loss Before Extraordinary Item $(1.07) $ (0.09)
Extraordinary Loss on Extinguishment of Debt
(0.02) --
Net Loss Attributable to Common Shareholders $(1.09) $ (0.09)
========== ==========
Weighted-Average Common Shares Outstanding 49,689 49,094
The accompanying notes are an integral part of these consolidated financial
statements.
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, 2000 December 31, 2000
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (including $0 and $224,903 related to XM Radio) $7,833 $227,423
Accounts receivable-trade, net of allowance for doubtful accounts 21,983 14,421
Inventory 19,954 16,990
Restricted short-term investments (including $0 and $95,277 related to XM Radio) 20,923 115,986
Due from Mobile Satellite Ventures 658 502
Other current assets 36,513 31,095
--------- ---------
Total current assets 107,864 406,417
PROPERTY AND EQUIPMENT, net 112,305 175,706
XM RADIO SYSTEM UNDER CONSTRUCTION -- 800,482
GOODWILL AND OTHER INTANGIBLES, net 51,219 62,468
EQUITY METHOD INVESTMENT - XM RADIO 229,043 --
RESTRICTED INVESTMENTS (including $0 and $65,889 related to XM Radio) 11,347 77,106
DEFERRED CHARGES AND OTHER ASSETS, net of accumulated amortization 24,830 49,535
--------- ---------
Total assets $536,608 $1,571,714
========= ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $57,931 $105,749
Obligations under capital leases due within one year 3,667 4,590
Current portion of vendor financing commitment due to related party 4,111 4,246
Current portion of deferred trade payables 832 2,212
Deferred revenue and other current liabilities 36,118 18,117
--------- ---------
Total current liabilities 102,659 134,914
LONG-TERM LIABILITIES:
Obligations under Senior Notes, net of discount 328,698 328,474
Senior Secured Notes of XM Radio, net of discount -- 261,298
Obligations under Bank Financing 108,750 111,250
Capital lease obligations 8,020 9,230
Vendor financing commitment due to related party 3,316 4,246
Other long-term liabilities 37,136 61,105
--------- ---------
Total long-term liabilities 485,920 775,603
Total liabilities 588,579 910,517
--------- ---------
MINORITY INTEREST -- 648,313
STOCKHOLDERS' (DEFICIT) EQUITY:
Preferred Stock; par value $0.01; authorized 200,000 shares; -- --
Common Stock; voting, par value $0.01; authorized 150,000,000 shares 496 495
Additional paid-in capital 970,576 982,621
Deferred compensation (114) (134)
Common Stock Purchase Warrants 79,447 80,292
Unamortized Guarantee Warrants (9,484) (11,504)
Cumulative loss (1,092,892) (1,038,886)
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY (51,971) 12,884
---------- ---------
Total liabilities, minority interest, and stockholders' (deficit) equity $536,608 $1,571,714
========= ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended March 31,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (54,006) $ (3,994)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of Guarantee Warrants and debt related costs 2,753 2,942
Depreciation and amortization 8,550 9,094
Equity in loss of XM Radio 12,472 --
-- 6,692
Gain on note payable to related party -- (36,779)
6,692
Loss on sale of XM Radio shares 407 --
6,692
Extraordinary loss on extinguishment of debt 1,033 --
6,692
Non-cash stock compensation 595 658
Minority Interest -- (7,342)
Changes in assets and liabilities, net of acquisitions and dispositions:
Inventory (2,964) (7,424)
Accounts receivable-- trade (7,562) (584)
Other current assets (429) (830)
Accounts payable and accrued expenses 8,458 (1,853)
Accrued interest Senior Note 10,259 10,259
Deferred trade payables (1,380) (1,842)
Deferred revenue and other deferred items-- net 1,245 1,157
---------- ----------
Net cash used in operating activities (20,569) (36,538)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted investments (345) (4,007)
Proceeds from the sale of XM Radio stock 33,539 --
Purchase/maturity of restricted investments by XM Radio, net -- (123,416)
Purchase/maturity of short term investments by XM Radio, net -- 69,472
System under construction -- (62,422)
Other XM Radio investing activities -- (18,493)
Additions to property and equipment (3,254) (9,825)
---------- ----------
Net cash provided by (used in) investing activities 29,940 (148,691)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 259 5,168
Proceeds from issuance of equity securities-XM Radio -- 229,093
Proceeds from Senior Secured Notes and Stock Purchases Warrants issued -- 325,000
by XM Radio
Principal payments under capital leases (751) (1,627)
Principal payments under Vendor Financing (1,066) (494)
Repayment of Term Loan (8,500) --
Proceeds from Bank Financing 6,000 35,000
Debt issuance costs -- (9,754)
--------- ----------
Net cash (used in) provided by financing activities (4,058) 582,386
Net increase in cash and cash equivalents 5,313 397,157
CASH AND CASH EQUIVALENTS, beginning of period 2,520 51,474
--------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 7,833 $ 448,631
========= ==========
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
March 31, 2001
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") is 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. Motient provides its eLink(sm) brand
two-way wireless email services to customers accessing email through corporate
servers, Internet Service Providers ("ISP"), Mail Service Provider ("MSP")
accounts, and paging network suppliers. In November 2000, Motient launched its
BlackBerry TM by Motient wireless email solution, developed by Research in
Motion ("RIM") and licensed to operate on Motient's network. BlackBerry TM by
Motient is designed for large corporate accounts operating in a Microsoft
Exchange environment and contains advanced encryption features. Together, the
Company considers these two-way mobile communications services to be its Core
Wireless Business.
Motient is devoting its efforts to expanding its Core Wireless Business. This
effort involves substantial risk. Future operating results will be subject to
significant business, economic, regulatory, technical, and competitive
uncertainties and contingencies. Depending on their extent and timing, these
factors, individually or in the aggregate, could have an adverse effect on the
Company's financial condition and future results of operations.
XM Radio
Additionally, as of March 31, 2001, Motient had an equity interest of
approximately 25.3% (or 15% on a fully diluted basis) in XM Satellite Radio
Holdings Inc. ("XM Radio"), a public company; however, as of December 31, 2000
the Company controlled XM Radio through Board of Director membership and common
stock voting rights. As a result, all of XM Radio's results for the calendar
year 2000 have been included in the Company's consolidated financial statements.
In January 2001, pursuant to Federal Communications Commission ("FCC") approval
authorizing Motient to relinquish control of XM Radio, the number of directors
appointed by the Company to XM Radio's Board of Directors was reduced to less
than 50% of XM Radio directors, and the Company converted a portion of its
super-voting Class B Common Stock of XM Radio to Class A Common Stock. As a
result, the Company ceased to control XM Radio, and, effective January 1, 2001,
accounted for its investment in XM Radio pursuant to the equity method. The
carrying value of the Company's investment in XM Radio pursuant to the equity
method of accounting was $229.0 million (or $15.52 per share) as of March 31,
2001. As of May 9, 2001, the market price of XM Radio common stock was $11.40
per share, $4.12 per share less than the Company's carrying value. Pursuant to
the equity method of accounting, the Company has assessed whether an other than
temporary decline in value of the Company's investment in XM Radio has occurred
and whether a loss should be recognized. Considering market and other
appropriate factors, the Company does not believe that an other than temporary
decline in the value of its investment in XM Radio has occurred; however, these
factors could change and cause the Company to recognize a loss in the future.
Sale of Transportation Business
In November 2000, Motient sold its retail transportation assets to Aether
Systems, Inc. The purchase price for these assets was $45 million, plus the
then-current book value of the inventory for the business. All of this amount
was paid at closing, except for $10 million which was deposited in an escrow
account and will be released to Motient upon satisfaction of certain criteria
with respect to MobileMAX2(TM), and $3.7 million which will be paid to Motient
upon collection of certain accounts receivable. In addition, the Company has the
opportunity to receive up to an additional $22.5 million as an "earn-out"
payment, subject to the satisfaction of certain operating results for the
business during 2001. The contingent escrowed and earn-out payments have not
been recorded by the Company as of March 31, 2001. These amounts will be
recorded as additional sales proceeds when and if received.
Satellite Ventures
In June 2000 the Company formed a new joint venture subsidiary, Mobile Satellite
Ventures LLC ("Satellite Ventures"), in which it owns 80% of the membership
interests. The remaining 20% interest in Satellite Ventures is owned by certain
investors (the "June Investment Agreement").
In January 2001, Motient entered into an agreement, subject to certain
conditions, to amend in several respects the terms of the June 2000 transaction
involving Satellite Ventures. First, the Investors agreed, subject to certain
conditions including approvals by the FCC, to invest an additional $50 million
to become (in the aggregate) the owners of 40% of the outstanding interests of
Satellite Ventures. The Investors will also have an option, exercisable through
June 29, 2002, for an additional $40 million, to increase their ownership in
Satellite Ventures to 50.66% (with each individual Investor's stake being less
than 20%). Second, upon closing of the transaction, TMI Communications & Company
Limited Partnership ("TMI"), the Canadian satellite services provider, will
contribute its satellite communications business assets to Satellite Ventures.
TMI will become the owner of approximately 27% of the outstanding equity of
Satellite Ventures and will also receive a cash payment of $7.5 million, as well
as a $11.5 million 5-year note.
Upon closing of these transactions, which is not scheduled to occur until FCC
approval is received, Motient will sell its remaining satellite business to
Satellite Ventures, in exchange for a cash payment of $45 million and a 5-year,
$15 million note. Upon closing, the Company will own approximately 33% of the
outstanding interests and be the largest single shareholder of Satellite
Ventures. A portion of Satellite Ventures' cash payment to TMI at closing will
be funded by the Company's loan of $2.5 million, in exchange for a note back in
the same amount.
The Investors have certain rights to elect to convert up to $55 million of their
interests in Satellite Ventures into shares of Motient's common stock at a
conversion price which will be set at the time of exercise, between $12 and $20
per share.
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.
The consolidated balance sheet as of March 31, 2001, the consolidated statements
of operations for the three months ended March 31, 2001 and 2000, and cash flows
for the three months ended March 31, 2001 and 2000, 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, 2001, and
for all periods presented have been made.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
As noted above, effective January 1, 2001, the Company's investment in XM Radio
is recorded pursuant to the equity method. For the first quarter of 2001, XM
Radio recorded no revenue, incurred $42.1 million of operating expenses and had
a net loss attributable to common stockholders of $42.7 million.
Additionally, although the Company has an 80% interest in Satellite Ventures,
the minority investors have certain participative rights which provide for their
participation in certain business decisions that may be made in the normal
course of business; therefore, in accordance with Emerging Issues Task Force
Issue No 96-16, the Company's investment in Satellite Ventures is recorded
pursuant to the equity method.
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 quarters ended March 31, 2001 and 2000.
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," as of January 1, 2001, the Company has one operating
segment: its Core Wireless Business. During 2000, as a result of the Company's
consolidation of the results of XM Radio, the Company reported an additional
segment for XM Radio's satellite-based digital audio radio service. The Company
provides its Core Wireless Business to the continental United States, Alaska,
Hawaii, Puerto Rico, the U.S. Virgin Islands, and certain U.S. coastal waters.
The following summarizes the Company's Core Wireless Business revenue by major
market segments:
Three Months Ended March 31,
Summary of Revenue 2001 2000
---- ----
(in millions)
Wireless internet $2.0 $0.3
Field services 5.9 7.0
Transportation 4.1 4.9
Telemetry 0.7 1.1
Voice and other 5.3 3.9
Equipment 5.4 5.0
----- -----
Total $23.4 $22.2
===== =====
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. Net loss attributable to
common shareholders for the quarters ended March 31, 2001 and 2000 includes the
deduction from net loss of the Company's share of XM Radio's 8.25% Series B
convertible redeemable preferred stock dividend. The dividend was paid on May 1,
2001.
New Accounting Pronouncements
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133") 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 September 1999,
FASB issued Statement No. 137, which deferred the effective date of SFAS No. 133
until fiscal years beginning after September 15, 2000. In June 2000, FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends SFAS No. 133. This Statement limits the scope
to certain derivatives and hedging activities. The effective date of SFAS No.
138 is for fiscal years beginning after September 15, 2000. The adoption of SFAS
No. 138 in the first quarter of 2001 did not have a material impact on the
Company's financial position, results of operations and cash flows.
Concentrations of Credit Risk
For the three months ended March 31, 2001, five customers accounted for
approximately 30% of the Company's service revenue, with one customer accounting
for more than 10%.
Other
The Company paid approximately $4.4 million in both the three-month period ended
March 31, 2001 and 2000, 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 periods ended March 31, 2001
and 2000. Total indebtedness to related parties at March 31, 2001 was
approximately $8.4 million. Additionally, the Company recorded revenue from
related parties in the amount of $1.8 million related to the Satellite Ventures'
satellite capacity agreement.
3. STOCKHOLDERS' (DEFICIT) EQUITY
Significant activity in stockholders' equity from December 31, 2000 to March 31,
2001 consists of the following:
Additional Unamortized
Common Paid-in Deferred Common Stock Guarantee
Stock Capital Compensation Purchase Warrants Warrants
----- ------- ------------ ----------------- -----------
Balance December 31, 2000 $495 $982,621 ($134) $80,292 ($11,504)
Warrant exercises -- 845 -- (845) --
Reduction in deferred compensation
on restricted stock -- 575 (575) -- --
Non-cash compensation associated with the
vesting of restricted stock and certain -- (241) 595 -- --
other stock options
Amortization of Guarantee warrants -- -- -- -- 1,279
Reduction of Guarantee warrants related to
extinguishment of debt -- -- -- -- 741
Loss in connection with XM Radio equity
transactions -- (13,722) -- -- --
Issuance of shares under 401(k) Savings
Plan, Stock Purchase Plan, and award of 1 498 -- -- --
bonus stock ---- -------- ------ ------- --------
Ending Balance March 31, 2001 $496 $970,576 ($114) $79,447 ($9,484)
==== ======== ====== ======= ========
On March 6, 2001, XM Radio completed a follow-on offering of 7.5 million Class A
common stock, which yielded net proceeds of $72.0 million. As a result of this
offering, the Company recorded a $13.7 million loss in accordance with Staff
Accounting Bulletin No. 51, which addresses the accounting for sales of stock by
a subsidiary. The loss was recorded in the financial statements as a reduction
to Additional Paid-In Capital.
4. LIQUIDITY AND FINANCING
Adequate liquidity and capital are critical to Motient's ability 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, new product rollouts,
capital expenditures and working capital before it begins to generate positive
cash flow from operations. The Company expects these outlays to continue for the
foreseeable future.
The successful implementation of the Company's business plan requires
substantial funds to finance the maintenance and growth of its operations,
network and subscriber base and to expand into new markets. The Company has an
accumulated deficit and has historically incurred losses from operations which
are expected to continue for additional periods in the future. There can be no
assurance that its operations will become profitable. Additionally, with the
overall decline in the telecommunications sector of the capital markets, the
Company has not been able to access the public markets as anticipated. These
factors, along with the Company's negative operating cash flows have placed
significant pressures on the Company's financial condition and liquidity
position.
In order to work towards adequately funding its projected shortfall, the Company
has executed the following transactions and initiatives in 2001:
o In January and February 2001, the Company sold, in two separate
transactions, 2 million shares of its XM Radio Class A Common Stock, at an
average price of $16.77 per share, for total proceeds of $33.5 million.
Approximately $8.5 million of the proceeds were used to repay and
permanently reduce the Term Facility (as defined below). In exchange for
the Guarantors (as defined below) agreeing to waive certain debt repayment
obligations for the second sale of shares, the Company and the Guarantors
have agreed that the first $16.5 million of proceeds received from the
earlier of (i) the closing of the Satellite Ventures transaction and (ii)
any other reduction event to occur in the year 2002 will be used to pay
down the bank financing.
o On April 3, 2001, Motient received $25 million from Rare Medium Group, Inc.
("Rare Medium"), and issued Rare Medium a note payable for such amount at
12.5% annual interest with a maturity date of September 30, 2001.
Additionally, the Company has the ability to receive up to an additional
$25 million of funding on comparable terms; the amount of such second
tranche will be based on the market price of XM Radio stock. The notes are
collateralized by up to 5 million of the Company's XM Radio shares, and
Rare Medium has the option to exchange the notes for a number of XM Radio
shares equivalent to the principal of the note plus any accrued interest
thereon. Of the first $25 million received by the Company, the Company used
$6.1 million to repay and permanently reduce its Term Facility, and $14.4
million is subject to availability upon the approval of the Guarantors.
As of April 30, 2001, the Company held approximately 14.7 million shares of
XM Radio stock; however, approximately 13.7 million of such shares are
pledged to and held by Rare Medium or the Company's banks and guarantors to
secure the Company's obligations under its bank financings and the note
with Rare Medium. There is no guarantee that the banks and Guarantors would
agree to release any portion of their share of this security to permit the
Company to liquidate its XM Radio shares, or that such approval would be on
terms favorable to the Company. Further, the Company's ability to sell its
shares of XM Radio stock in the public markets is generally limited to the
quarterly volume restrictions under Rule 144 of the Securities Act.
o In April 2001 the Company undertook certain capital and expense reductions,
principally in the areas of employee hiring, advertising and capital
spending. The Company believes that these reductions may result in up to
approximately $15 million of savings in 2001, while not reducing its
ability to sell its products or lower its service levels.
o Additionally, on May 14, 2001, the Company signed a definitive merger
agreement with Rare Medium Group, Inc. See Note 7 - Subsequent Events. The
Company believes that the merger, if consummated, would provide the Company
with additional liquidity and the ability to fund the combined business
into 2002.
The merger agreement provides that if necessary for liquidity purposes
prior to consummation of the merger, and subject to certain conditions, the
Company may either draw upon the second $25 million tranche under the Rare
Medium bridge loan agreement announced in April 2001, or sell up to 2
million additional XM Radio shares, with 50% of such proceeds to be used to
repay the Term Facility. Upon closing of the transaction, the bridge loans
with Rare Medium would be cancelled and any shares of XM Radio stock used
to secure such loans would be released by Rare Medium and returned to the
guarantor collateral pool.
The Company is also a party to the following debt facilities:
Bank Financing
The Company is a party to two bank facilities (the "Bank Financing"): (i) the
Revolving Credit Facility, a $77.25 million unsecured five-year reducing
revolving credit facility maturing September 30, 2003, and (ii) the Term Loan
Facility, a $31.5 million (subsequently reduced to $25.375 million as a result
of the Rare Medium loan, discussed above) five-year, term loan facility with up
to three additional one-year extensions subject to the lenders' approval. The
Bank Financing is severally guaranteed by Hughes Electronics Corporation,
Singapore Telecommunications Ltd. and Baron Capital Partners, L.P.
(collectively, the "Guarantors"). As of April 30, 2001, the Company had
outstanding borrowings of $25.375 million under the Term Loan Facility at 6.2%,
and $77.25 million under the Revolving Credit Facility at 5.9% to 6.4%. As noted
above, proceeds, if any, from the Aether $10 million escrow and the Aether
earn-out will also be used to repay and permanently reduce the Revolving Credit
Facility, and approximately $30.75 million from the exercise of the second
tranche of the Satellite Ventures transaction, if successful, will be used to
repay and permanently reduce the Revolving Credit Facility. If, at any time,
either of, but not both, the Revolving Credit Facility or the Term Loan Facility
are fully repaid, any excess required repayments will be used to repay and
permanently reduce any remaining Bank Financing.
The Guarantees
In connection with the Bank Financing, the Guarantors extended separate
guarantees of the obligations of Motient Holdings Inc. and the Company to the
banks, which on a several basis aggregate to $108.75 million. In April 2001, the
Guarantors agreed to release certain of the shares of XM Radio stock securing
the Company's obligations to the banks and Guarantors to be used as collateral
for the Rare Medium Loan. In exchange for this agreement, the exercise price of
the Guarantee Warrants, issued as part of the original bank financing agreement,
were repriced from $6.25 per share to $1.31 per share, and Singapore Telecom,
which at that time held no Guarantee Warrants, was issued 300,000 new warrants.
The total value of this repricing and issuance was approximately $2.3 million
and will be recorded in the second quarter of 2001 as an increase to the
unamortized guarantee warrants.
In connection with the Bank Financing, the Company entered into an interest rate
swap agreement, with an implied annual rate of 6.51%. The swap agreement reduced
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, was 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.
$335 Million Unit Offering
On March 30, 1998, Motient Holdings 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, subsequently adjusted to
3.83 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,
subsequently adjusted to $12.28 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 were 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. The final payment from
these restricted investments was made on April 2, 2001.
Other Financing
Motorola has entered into an agreement with the Company to provide up to $15
million of vendor financing, to finance up to 75% of the purchase price of
additional network base stations. As of March 31, 2001, $7.4 million was
outstanding under this facility at interest rates ranging from 13.0% to 13.8%,
and $2.2 million was available for borrowing. The Company has also arranged the
financing of certain trade payables, and as of March 31, 2001, $832,000 of
deferred trade payables were outstanding at rates ranging from 5.9% to 7.2%.
Summary of Liquidity and Financing Sources for Core Wireless Business
The Company's current operating assumptions and projections reflect its best
estimate of subscriber and revenue growth and operating expenses. Motient
anticipates that capital expenditures, operating losses, working capital and
debt service requirements through 2001 can be met by (i) cash on hand, (ii)
proceeds from the Rare Medium loan, (iii) its vendor financing, (iv) proceeds
realized through the sale of inventory relating to eLink and BlackBerry TM, (v)
reduction of operating expenditures, (vi) additional debt or equity financing
transactions, (vii) its investment in XM Radio, including approximately 4.7
million shares to be available for liquidity and/or debt reduction after giving
effect to the Rare Medium merger, and (viii) any cash held by Rare Medium that
would be available to the Company if the Rare Medium merger is consummated.
Additionally, the Company has the potential to receive additional funds from the
Aether transaction as well as the Satellite Ventures transaction. The Company's
financial results could deteriorate, and its ability to meet its projections is
subject to numerous uncertainties. There can be no assurance that the current
projections will be achieved. If Motient's cash requirements are more than
projected, it will require additional financing in amounts which may be
material. The type, timing and terms of financing that the Company selects will
be dependent upon the Company's 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. If the Company cannot secure
additional financing as required, it may not be able to continue as a going
concern.
5. COMMITMENTS AND CONTINGENCIES
At March 31, 2001, the Company had remaining contractual commitments to purchase
eLink and other subscriber equipment inventory in the amount of $9.6 million
during 2001. Additionally, the Company has entered into product development
agreements for the purchase of engineering services and for licenses to be used
in future applications of its eLink product. Should the engineering effort prove
successful, the Company has committed to purchase additional subscriber
inventory. These commitments, including the inventory commitment, total
approximately $3.6 million and will be paid during 2001. Should the Company
decide to cancel these agreements, it would incur cancellation penalties of any
remaining unpaid license and non-recurring engineering fees, the cost of any
non-refundable components purchased on behalf of Motient, plus fifty-percent of
any remaining inventory commitment. As of March 30, 2001, this cancellation
penalty would have been approximately $3.2 million.
The aggregate fixed and determinable portion of all commitments for inventory
purchases and other fixed contracts, related to the core wireless business, is
$15.4 million, all of which is due in 2001.
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.
In the first quarter of 2001, the Company applied to assign its existing FCC
licenses, authorizations and pending applications relating to its satellite
operations to a new company, Mobile Satellite Ventures Subsidiary LLC ("MSV
Sub"), that will be a wholly owned subsidiary of Satellite Ventures. In this
application, the Company also sought FCC authority to launch and operate a
next-generation mobile satellite system, which will include the deployment of
satellites and terrestrial base stations operating in the same frequencies as an
integrated network. This application has been opposed by a number of parties,
some of which argue that (i) the combination of our satellite business with that
of TMI will decrease competition; (ii) our proposed use of terrestrial base
stations will cause unacceptable interference to other L-band satellites; and
(iii) the FCC should reallocate spectrum in the L-band to terrestrial use. There
is no assurance that the FCC will grant our application.
7. SUBSEQUENT EVENTS
On May 14, 2001, the Company signed a definitive merger agreement with Rare
Medium through which the Company will acquire 100% of the ownership of Rare
Medium, using a combination of newly issued convertible preferred stock of the
Company, and 9 million shares of XM Radio Class A common stock held by the
Company. In the transaction, each share of Rare Medium's existing common stock
will be exchanged for one-tenth of a share of a new convertible stock with a
liquidation preference of $20.00 per share. Each share of convertible preferred
stock will, in turn, automatically convert into 6.4 shares of Company common
stock, upon the Company's common stock trading above $3.125 per share. It is
expected that approximately 41 million new shares of Company common stock would
be issued upon such automatic conversion.
As part of the merger transaction, the Company will deliver 9 million shares of
XM Radio Class A common stock owned by it, plus approximately $13 million in
cash, to retire all outstanding shares of preferred stock of Rare Medium, which
are held by affiliates of Apollo Management L.P. If the sum of the value of the
XM Radio shares plus the cash is less than $115 million, the Company will issue
a three-year promissory note to Apollo in the amount of any deficiency, which
note will be secured by a second lien on the assets securing the Company's
guaranteed bank debt. The principal amount of this note will be subject to a
downward re-adjustment on September 30, 2001, based on the then-current market
value of XM Radio stock.
The combined company will provide wireless email, internet and corporate
intranet services, as well as software consulting, web based development,
wireless software, and network integration services. The merged companies will
operate as Motient Corporation and will be headquartered in Reston, Virginia.
As of April 30, 2001, Rare Medium had approximately $100 million in cash. A
portion of any cash that remained at Rare Medium at the time of closing would be
used as follows: (i) to repay and permanently reduce the Term Facility and
Revolver by $34 million, (ii) approximately $13 to $14 million to affiliates of
Apollo Management L.P. (Rare Medium's preferred shareholder) to enable Apollo to
replace Baron Capital and Singapore Telecom as Guarantors, and (iii) to fund the
combined business. Further, the Guarantors have required as a condition to the
transaction that the Company sell 1million XM Radio shares to be used as a 100%
reduction in the Bank Facility by September 30, 2001. Hughes has the right to
defer the sale of these shares beyond September 30th.
The merger agreement provides that if necessary for liquidity purposes prior to
consummation of the merger, and subject to certain conditions, the Company may
either draw upon the second $25 million tranche under its bridge loan agreement
with Rare Medium announced in April 2001, or sell up to 2 million additional XM
Radio shares, with 50% of such proceeds to be used to repay the Term Facility.
Upon closing of the transaction, the bridge loans with Rare Medium would be
cancelled and any shares of XM Radio stock used to secure such loans would be
released by Rare Medium and returned to the guarantor collateral pool.
Upon consummation of the merger, the combined companies are expected to be
funded through 2001. It is expected that the Company will enter 2002 with the
following additional potential sources of liquidity: (i) up to 4.7 million XM
Radio shares, (ii) cash on hand at year-end, (iii) potential to earn up to $22.5
million as a result of the purchase price earn-up from the Aether Systems
transaction, all of which would be required to repay debt, (iv) the potential
for $45 million from the second investment of the Mobile Satellite Ventures'
investors, half of which would be used to repay debt, and (v) the potential to
sell for cash some portion of the Rare Medium venture portfolio. It is also
expected that the level of guaranteed debt at year-end 2001 will be reduced to
less than $50 million. All of the foregoing potential sources of liquidity are
subject to the risks and uncertainties described in Note 4 - Liquidity and
Financing.
The consummation of the merger is subject to receipt of all necessary regulatory
approvals and consents, including approvals under the Hart-Scott-Rodino
Antitrust Improvements Act, bank approvals and Rare and Motient shareholder
approvals.
8. FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Company's acquisition of Motient Communications Inc. on
September 30, 1998 (the "Motient Communications Acquisition"), and related
financing discussed above, the Company 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, 2001 and December
31, 2000, the condensed consolidating statements of operations for the
three months ended March 31, 2001 and 2000, and the condensed consolidating
statement of cash flows for the three months ended March 31, 2001 and 2000.
o Elimination entries necessary to combine the entities comprising Motient.
Condensed Consolidating Balance Sheet
As of March 31, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ ------------ ------ ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,833 $ -- $ -- $ 7,833 $ -- $ -- $ 7,833
Accounts receivable -- net 21,983 -- -- 21,983 -- -- 21,983
Inventory 19,954 -- -- 19,954 -- -- 19,954
Restricted short-term investments -- 20,923 -- 20,923 -- -- 20,923
Other current assets 36,423 -- -- 36,423 748 -- 37,171
------ -- -- ------ ------ -- ------
Total current assets 86,193 20,923 -- 107,116 748 -- 107,864
PROPERTY AND EQUIPMENT -- NET 122,621 -- (10,316) 112,305 -- -- 112,305
GOODWILL AND INTANGIBLES -- NET 51,219 -- -- 51,219 -- -- 51,219
EQUITY METHOD INVESTMENT - XM RADIO -- -- -- -- 229,043 -- 229,043
DEFERRED CHARGES AND OTHER ASSETS -- NET 13,668 16,816 -- 30,484 (5,654) -- 24,830
RESTRICTED INVESTMENTS -- 588 -- 588 10,759 -- 11,347
------- --- -- -- -------- -- ------
Total assets $273,701 $38,327 $(10,316) $301,712 $234,896 $ -- $ 536,608
======== ======= ========== ======== ======== ===== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 35,294 $21,194 $ -- $56,488 $1,443 $ -- $ 57,931
Obligations under capital leases due
within one 3,667 -- -- 3,667 -- -- 3,667
year
Current portion long-term debt 4,943 -- -- 4,943 -- -- 4,943
Other current liabilities 36,118 -- -- 36,118 -- -- 36,118
------ ------- ------- ------ ------ -- ------
Total current liabilities 80,022 21,194 -- 101,216 1,443 -- 102,659
DUE TO PARENT/AFFILIATE 842,455 (108,467) (707,564) 26,424 267,924 (294,348) --
LONG-TERM LIABILITIES
Note payable to /from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- --
Obligations under Bank Financing -- 77,250 -- 77,250 31,500 -- 108,750
Senior Notes, net of discount -- 328,698 -- 328,698 -- -- 328,698
Other long-term debt 3,316 -- -- 3,316 -- -- 3,316
Capital lease obligations 8,020 -- -- 8,020 -- -- 8,020
Other long-term 37,136 -- -- 37,136 -- -- 37,136
------ -------- -------- ------ -- -- ------
Total long-term liabilities 48,472 419,948 -- 468,420 17,500 -- 485,920
Total liabilities 970,949 332,675 (707,564) 596,060 286,867 (294,348) 588,579
------- ------- --------- ------- -------- --------- -------
STOCKHOLDERS' (DEFICIT) EQUITY (697,248) (294,348) 697,248 (294,348) (51,971) 294,348 (51,971)
--------- --------- ------- --------- -------- --------- --------
Total Liabilities and Stockholders'
(Deficit) Equity $273,701 $38,327 $(10,316) $301,712 $234,896 $ -- $536,608
======== ======= ========= ======== ======== ========= ========
Condensed Consolidating Balance Sheet
As of December 31, 2000
(unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient XM Motient
Guarantors Holdings Eliminations Holdings Parent Radio Eliminations Parent
---------- -------- ------------ -------- ------ ----- ------------ ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,520 $ -- $ -- $ 2,520 $ -- $224,903 -- $ 227,423
Accounts receivable - trade, net 14,421 -- -- 14,421 -- -- -- 14,421
Inventory 16,990 -- -- 16,990 -- -- -- 16,990
Restricted short-term investments -- 20,709 -- 20,709 -- 95,277 -- 115,986
Investment in/due from subsidiary 502 130,856 (130,856) 502 (253,310) -- 253,310 502
Other current assets 21,423 -- -- 21,423 857 8,815 -- 31,095
-------- -------- --------- -------- ---------- ---------- ---------- ---------
Total current assets 55,856 151,565 (130,856) 76,565 (252,453) 328,995 253,310 406,417
PROPERTY AND EQUIPMENT-- NET 127,044 -- (10,843) 116,201 -- 59,505 -- 175,706
XM RADIO SYSTEM UNDER CONSTRUCTION -- -- -- -- -- 805,563 (5,081) 800,482
GOODWILL AND INTANGIBLES-- NET 51,842 -- -- 51,842 -- 24,001 (13,375) 62,468
INVESTMENT IN XM RADIO -- -- -- -- 288,064 -- (288,064) --
RESTRICTED INVESTMENTS 2 582 -- 584 10,633 65,889 -- 77,106
DEFERRED CHARGES AND OTHER ASSETS--NET
28,130 18,177 -- 46,307 (6,037) 9,265 -- 49,535
--------- -------- --------- -------- ---------- ---------- --------- ----------
Total assets $262,874 $170,324 $(141,699) $291,499 $ 40,207 $1,293,218 $(53,210) $1,571,714
======== ======== ========= ======== ========== =========== ========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued $ 26,628 $11,029 $ -- $ 37,657 $ 1,323 $66,769 $ -- $ 105,749
expenses
Obligations under capital leases
due within one year 4,034 -- -- 4,034 -- 556 -- 4,590
Current portion long-term debt 6,458 -- -- 6,458 -- -- -- 6,458
Deferred revenue and other 17,676 -- -- 17,676 -- 441 -- 18,117
-------- --------- --------- --------- ------- --------- -------- ---------
liabilities
Total current liabilities 54,796 11,029 -- 65,825 1,323 67,766 -- 134,914
DUE TO PARENT/AFFILIATE 808,570 -- (808,633) (63) -- 63 -- --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/ Parent -- 14,000 -- 14,000 (14,000) -- -- --
Obligations under Bank Financing -- 71,250 -- 71,250 40,000 -- -- 111,250
Senior Notes, net of discount -- 328,474 -- 328,474 -- 261,298 -- 589,772
Other long-term debt 4,246 -- -- 4,246 -- -- -- 4,246
Capital lease obligations 7,863 -- -- 7,863 -- 1,367 -- 9,230
Deferred revenue and other 54,333 -- -- 54,333 -- 6,772 -- 61,105
-------- --------- --------- --------- ------- --------- --------- ---------
liabilities
Total long-term liabilities 66,442 413,724 -- 480,166 26,000 269,437 -- 775,603
Total liabilities 929,808 424,753 (808,633) 545,928 27,323 337,266 -- 910,517
MINORITY INTEREST -- -- -- -- -- -- 648,313 648,313
STOCKHOLDERS' EQUITY (DEFICIT) (666,934) (254,429) 666,934 (254,429) 12,884 955,952 (701,523) 12,884
-------- --------- --------- --------- ------- --------- --------- ----------
Total liabilities, minority
interest and stockholders'
equity (deficit) $262,874 $170,324 $(141,699) $291,499 $40,207 $1,293,218 $(53,210) $1,571,714
======== ======== ========= ========= ======= ========== ========= ==========
Condensed Consolidating Statement of Operations
Three Months ended March 31, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ ------------ ------ ------------ ------------
REVENUES
Services $18,007 $ -- $ -- $18,007 $300 $(300) $18,007
Sales of equipment 5,400 -- -- 5,400 -- -- 5,400
----- -- -- ------ -- -- ------
Total Revenues 23,407 -- -- 23,407 300 (300) 23,407
COSTS AND EXPENSES
Cost of service and operations 18,164 -- -- 18,164 -- -- 18,164
Cost of equipment sold 5,934 -- -- 5,934 -- -- 5,934
Sales and advertising 9,649 -- -- 9,649 -- -- 9,649
General and administrative 6,029 321 -- 6,350 277 (300) 6,327
Depreciation and amortization 9,077 -- -- 9,077 (527) -- 8,550
----- -- -- -------- -------- -- --------
Operating Loss (25,446) (321) -- (25,767) 550 -- (25,217)
Interest and Other Income 201 4,022 (3,277) 946 (9) (795) 142
Equity in Loss of Subsidiaries -- (30,314) 30,314 -- (52,466) 39,994 (12,472)
Interest Expense (5,069) (13,381) 3,277 (15,173) (1,048) 795 (15,426)
------- -------- ------ -------- ------- --- --------
Net Loss Before Extraordinary Item (30,314) (39,994) 30,314 (39,994) (52,973) 39,994 (52,973)
Extraordinary Loss on Extinguishment of -- -- -- -- (1,033) -- (1,033)
--------- --------- -------- --------- ------- --------- -------
Debt
Net Loss Attributable Common Shareholders ($30,314) ($39,994) $30,314 ($39,994) ($54,006) $39,994 ($54,006)
========= ========= ======= ========= ========= ======= =========
Condensed Consolidating Statement of Operations
Three Months ended March 31, 2000
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient XM Motient
Guarantors Holdings Eliminations Holdings Parent Radio Eliminations Parent
---------- -------- ------------ -------- ------ ----- ------------ ------
REVENUES
Services $17,152 $-- $ -- $17,152 $300 -- $(300) $17,152
Sales of equipment 5,018 -- -- 5,018 -- -- -- 5,018
----- -- -- ----- -- -- -- -----
Total Revenues 22,170 -- -- 22,170 300 -- (300) 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 5,217 335 -- 5,552 275 16,385 (300) 21,912
Depreciation and amortization 8,829 -- -- 8,829 -- 503 (238) 9,094
----- -- ------- ----- -- --- ----- -----
Operating Loss (21,375) (335) -- (21,710) 24 (16,888) 238 (38,336)
Interest and Other Income 90 5,076 (3,843) 1,323 (20) 4,150 (251) 5,202
Gain on Note Payable to Related Party
-- -- -- -- 36,779 -- -- 36,779
Minority Interest -- -- -- -- -- -- 7,342 7,342
Equity in Loss of Subsidiaries -- (25,684) 25,684 -- (40,660) -- 40,660 --
Interest Expense (4,399) (13,419) 3,843 (13,975) (1,255) (2) 251 (14,981)
------- -------- ----- -------- -------- --------- --- --------
Loss before Extraordinary item (25,684) (34,362) 25,684 (34,362) (5,132) (12,740) 48,240 (3,994)
XM Radio Preferred Stock Dividend -- -- -- -- (506) (1,472) 1,472 (506)
--------- --------- ------- --------- -------- -------- -------- --------
Net Loss ($25,684) ($34,362) $25,684 ($34,362) ($5,638) ($14,212) $49,712 ($4,500)
========= ========= ======= ========= ======== ========= ======== ========
Condensed Consolidating Statement of Cash flow
Three Months Ended March 31, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ ------------ ------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($30,314) ($39,994) $30,314 ($39,994) ($54,006) $39,994 ($54,006)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating activities:
Amortization of Guarantee Warrants
and debt discount and issuance costs -- 1,584 -- 1,584 1,169 -- 2,753
Depreciation and amortization 9,077 -- -- 9,077 (527) -- 8,550
Non cash stock compensation 595 -- -- 595 -- -- 595
Extraordinary loss on extinguishment
of debt -- -- -- -- 1,033 -- 1,033
Equity in loss of XM Radio -- -- -- -- 12,472 -- 12,472
Loss on sale of XM Radio stock -- -- -- -- 407 -- 407
Changes in assets & liabilities
Inventory (2,964) -- -- (2,964) -- -- (2,964)
Trade accounts receivable (7,562) -- -- (7,562) -- -- (7,562)
Other current assets (538) -- -- (538) 109 -- (429)
Accounts payable and accrued expenses 8,431 (94) -- 8,337 121 -- 8,458
Accrued interest on Senior Note -- 10,259 -- 10,259 -- -- 10,259
Deferred trade payables (1,380) -- -- (1,380) -- -- (1,380)
Deferred Items--net 1,955 -- -- 1,955 (710) -- 1,245
----- -- -- ----- ----- -- -----
Net cash (used in) provided by operating (22,700) (28,245) 30,314 (20,631) (39,932) 39,994 (20,569)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (3,254) -- -- (3,254) -- -- (3,254)
Proceeds from the sale of XM Radio stock -- -- -- -- 33,539 -- 33,539
Purchase of long-term, restricted 320 (539) -- (219) (126) -- (345)
--- ----- -- ----- ----- ------ -----
investments
Net cash provided by (used in) investing (2,934) (539) -- (3,473) 33,413 -- 29,940
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuances -- -- -- -- 259 -- 259
Funding from parent/subsidiary 32,764 22,784 (30,314) 25,234 14,760 (39,994) --
Principal payments under capital leases (751) -- -- (751) -- -- (751)
Principal payments under vendor lease (1,066) -- -- (1,066) -- -- (1,066)
Proceeds from bank financing -- 6,000 -- 6,000 -- -- 6,000
Repayment of bank financing -- -- -- -- (8,500) -- (8,500)
-- -- -- ------- ------- -- -------
Net cash provided by (used in) financing 30,947 28,784 (30,314) 29,417 6,519 (39,994) (4,058)
activities
Net increase in cash and cash equivalents 5,313 -- -- 5,313 -- -- 5,313
CASH & CASH EQUIVALENTS, beginning of
period 2,520 -- -- 2,520 -- -- 2,520
----- -- -- ----- -----
CASH & CASH EQUIVALENTS, end of period $ 7,833 $ -- $-- $ 7,833 $ -- $ -- $ 7,833
======= ==== == ======= ==== ==== =======
Condensed Consolidating Statement of Cash Flow
Three Months Ended March 31, 2000
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient XM Motient
Guarantors Holdings Eliminations Holdings Parent Radio Eliminations Parent
---------- -------- ------------ -------- ------ ----- ------------ ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($25,684) ($34,362) $25,684 ($34,362) ($5,132) ($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 discount and issuance 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
Gain on conversion of note payable
to related party -- -- -- -- (36,779) -- -- (36,779)
Minority Interest -- -- -- -- -- -- (7,342) (7,342)
Changes in assets & liabilities
Inventory (7,424) -- -- (7,424) -- -- -- (7,424)
Accounts receivable--trade (584) -- -- (584) -- -- (584)
Other current assets (767) -- -- (767) 60 (123) -- (830)
Accounts payable and accrued expenses (15,901) 10,262 -- (5,639) (704) 4,490 -- (1,853)
Accrued interest on Senior Notes -- 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 (42,097) (12,499) 25,684 (28,912) (41,074) (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 Maturity of short-term investments -- -- -- -- -- 69,472 -- 69,472
Other investing activities of 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) provided by
investing activities (7,076) (1,234) -- (8,310) (593) (139,788) -- (148,691)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of
Common Stock -- -- -- -- 5,168 229,093 -- 234,261
Funding from parent 51,112 (21,267) (25,684) 4,161 36,499 -- (40,660) --
Principal payments under
capital leases (1,627) -- -- (1,627) -- -- -- (1,627)
Principal payments under vendor
Financing (494) -- -- (494) -- -- -- (494)
Proceeds from bank financing -- 35,000 -- 35,000 -- -- -- 35,000
Proceeds from Senior Secured
Notes and Stock Purchase Warrants -- -- -- -- -- 325,000 -- 325,000
Debt issuance costs -- -- -- -- -- (9,754) -- (9,754)
-- -- -- -- -- ------- -- -------
Net cash provided by (used in)
financing activities 48,991 13,733 (25,684) 37,040 41,667 544,339 (40,660) 582,386
Net 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
==== === === ==== ==== ======== === ========
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 contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project," or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
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. 333-42104), our most recent annual
report on Form 10-K, and our quarterly reports on Form 10-Q to be filed after
this quarterly report, as well as our other reports and filings with the SEC. In
addition, you are urged to carefully review the prospectus (including
supplements) included within the registration statement (File No. 333-47570) of
XM Satellite Radio Holdings Inc. ("XM Radio"), and XM Radio's current report on
Form 8-K dated February 21, 2001 (File No. 0-27441), each filed with the SEC,
which describe certain risk factors relating to XM Radio's business, as well as
XM Radio's other reports filed from time to time with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed.
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 four wholly-owned
subsidiaries which, for purposes of this annual report, are referred to as the
core wireless business. On a consolidated basis, we refer to these entities as
Motient.
We also have a less-than 100% interest in Mobile Satellite Ventures LLC
(Satellite Ventures), and XM Satellite Radio Holdings Inc. (XM Radio), which are
not consolidated with Motient.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Our customers use our network and applications for
email messaging and dispatch and voice communications services, enabling
businesses, mobile workers and consumers to transfer electronic information and
messages and access corporate databases and the Internet.
Over the last several years, we have made substantial investments in new
products and services, including our eLink(sm) wireless email service, which we
believe will capitalize on the rapid expansion of Internet email usage and
wireless data, particularly in the business-to-business environment.
Our eLink service is a two-way wireless email device and electronic organizer
that uses our terrestrial network. We provide our eLink brand two-way wireless
email service to customers accessing email through corporate servers, Internet
Service Providers ("ISP"), Mail Service Provider ("MSP") accounts, and paging
network suppliers. In November 2000, we launched our BlackBerry TM by Motient
solution specifically designed for large corporate accounts operating in a
Microsoft Exchange environment. BlackBerry TM is a popular wireless email
solution developed by Research in Motion ("RIM") and is being provided on the
Motient network under license from RIM.
We expect that our rollout of eLink and BlackBerry TM by Motient 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 our previously-announced transactions involving Mobile Satellite Ventures
LLC, 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.
Sale of Retail Transportation Business
In an effort to focus our business on providing wireless data services, we sold
our retail transportation assets to Aether Systems, Inc. ("Aether") on November
29, 2000. Aether purchased the assets comprising our wireless communications
business for the transportation market, including the satellite-only and
MobileMAX2(TM) multi-mode mobile messaging business. Aether acquired all of the
assets used or useful in the retail transportation business, and assumed the
related liabilities. Aether also purchased the existing inventory in the
business, and was granted a perpetual license to use and modify any intellectual
property owned by or licensed to us in connection with the retail transportation
business. See "Liquidity and Capital Resources" for further details of this
transaction.
XM Radio
As of December 31, 2000, we had an equity interest of approximately 33.1% (or
21.3% on a fully diluted basis) in XM Satellite Radio Holdings Inc. ("XM
Radio"), a public company; and, as of December 31, 2000 we controlled XM Radio
through our Board of Director membership and common stock voting rights. As a
result, all of XM Radio's results for the calendar year 2000 have been included
in our consolidated financial statements. In January 2001, pursuant to Federal
Communication Commission ("FCC") approval authorizing Motient to relinquish
control of XM Radio, the number of directors that we appointed to XM Radio's
Board of Directors was reduced to less than 50% of XM Radio's directors, and we
converted a portion of our super-voting Class B Common Stock of XM Radio to
Class A Common Stock. As a result, we ceased to control XM Radio, and, as of
January 1, 2001, we have accounted for our investment in XM Radio pursuant to
the equity method. As of March 31, 2001, we had an equity interest of
approximately 25.3% (15% on a fully diluted basis) in XM Radio.
Satellite Ventures
On June 29, 2000, we formed a new joint venture subsidiary, Satellite Ventures,
in which we own 80% of the membership interests. The remaining 20% interests in
Satellite Ventures are owned by three investors controlled by Columbia Capital,
Spectrum Equity Investors LP, and Telcom Ventures L.L.C. (collectively, the
"Investors"). Satellite Ventures is using our existing satellite network to
conduct research and development activities and exploring the technical,
strategic, and market potential of new wireless voice and data communications
services.
In January 2001, we entered into an agreement, subject to certain conditions, to
amend in several respects the terms of our June 2000 transaction involving
Satellite Ventures. First, the Investors agreed, subject to certain conditions,
to invest an additional $50 million to become (in the aggregate) the owners of
40% of the outstanding interests of Satellite Ventures. The Investors will also
have an option, exercisable through June 29, 2002, for an additional $40
million, to increase their ownership in Satellite Ventures to 50.66% (with each
individual Investor's stake being less than 20%). Second, upon closing of the
transaction, TMI Communications & Company Limited Partnership ("TMI"), the
Canadian satellite services provider, will contribute its satellite
communications business assets to Satellite Ventures, along with our satellite
business assets. TMI will become the owner of approximately 27% of the
outstanding equity of Satellite Ventures. Upon closing of these transactions,
which is not scheduled to occur until FCC approval is received, we will sell our
remaining satellite assets to Satellite Ventures, and will own approximately 33%
of the outstanding interests and be the largest single shareholder of Satellite
Ventures.
Our significant acquisitions in recent years, the sale of the retail
transportation assets to Aether Systems in 2000, and the impact of consolidating
the results of XM Radio for 2000, 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 "Liquidity and Capital Resources" below).
Our future operating results could be adversely affected by a number of
uncertainties and factors, including:
o our ability to secure additional financing necessary to fund anticipated
capital expenditures, operating losses and debt service requirements, and
our dependence on selling XM Radio shares and certain limitations thereon,
o the timely roll-out of certain key customer initiatives and the launch of
new products or the entry into new market segments, which may require us to
continue to incur significant operating losses,
o our ability to realize the earn-out and escrow deferred payments under the
Aether transaction,
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, BlackBerryTM by Motient, and
eLink Fortified with Yahoo!
o our ability to respond and react to changes in our business and the
industry because we have substantial indebtedness,
o our ability to modify our organization, strategy and product mix to
maximize the market opportunities as the market changes, o our ability to
manage growth effectively,
o competition from existing companies that provide services using existing
communications technologies and the possibility of competition from
companies using new technology in the future,
o our ability to maintain, on commercially reasonable terms, or at all,
certain technologies licensed from third parties,
o the loss of one or more of our key customers,
o our ability to attract and retain key personnel,
o the timely availability of an adequate supply of subscriber equipment at
competitive price points, o our dependence on third party distribution
relationships to provide access to potential customers, o our ability to
expand our networks on a timely basis and at a commercially reasonable
cost, or at all, as additional future demand increases,
o our ability to maintain our listing on the Nasdaq National Market and the
impact that would have on an investor's ability to sell shares,
o regulation by the FCC, and
o technical anomalies that may occur within the network, including product
development, 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.
We have a significant investment in XM Radio which may be affected by certain
risks which, in turn, may impact the market price of our stock. For an expanded
discussion of XM Radio's risk factors, please refer to XM Radio's most recently
filed prospectus (including supplements thereto), its most recent Annual Report
on Form 10-K, and its other reports filed from time to time with the SEC.
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:
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 premature failure of XM Radio's satellites that may not be fully covered by
insurance, or natural disasters that could damage the service network or
ground facilities for which there are no backups,
o the failure by satellite and launch contractors to deliver functioning
systems in a timely manner, for which XM Radio may not have adequate
remedies,
o the ability of XM Radio to successfully integrate complex technologies into
a technologically feasible configuration, as well as rapid technological
changes that could make XM Radio's service obsolete,
o the timely availability of XM Radio's subscriber equipment at competitive
prices,
o competition from traditional and emerging audio entertainment providers or
the potential for customers to steal their signals, which could adversely
affect revenues,
o the ability of XM Radio to gain market acceptance of its service,
o the ability of XM Radio to achieve profitability given certain distribution
agreement obligations and joint development funding requirements,
o the ability to maintain, on commercially reasonable terms, or at all,
certain technologies licensed from third parties,
o the ability to respond and react to changes in their business and the
industry because of their substantial debt,
o the ability to attract and retain key employees,
o regulation by the FCC, and
o the potential impact to its stock price as a result of certain preferred
stockholder rights and potential future issuances of common stock.
Three Months Ended March 31, 2001 and 2000
Revenue and Subscriber Statistics
Service revenue, which includes our data, voice, and capacity reseller services,
approximated $18.0 million for the three months ended March 31, 2001, which
constituted an $800,000, or 5% increase over the first quarter of 2000. The
increase in service revenues was attributable to a 50% increase in subscribers,
partially offset by a significant reduction in average revenue per unit ("ARPU")
in most market segments.
Three Months Ended March 31,
Summary of Revenue 2001 2000 Change % Change
---- ---- ------ --------
(in millions)
Wireless internet $2.0 $0.3 $1.7 567
Field services 5.9 7.0 (1.1) (16)
Transportation 4.1 4.9 (0.8) (16)
Telemetry 0.7 1.1 (0.4) (36)
Voice and other 5.3 3.9 1.4 36
Equipment 5.4 5.0 0.4 8
------ ----- ----
Total $ 23.4 $22.2 $1.2 5
====== ===== ====
Our service revenue increased as a result of approximately 75,000 additional
subscribers at March 31, 2001, as compared to March 31, 2000, broken down as
follows:
As of March 31,
2001 2000 Change % Change
---- ---- ------ --------
Wireless internet 63,102 6,234 56,868 912
Field services 45,070 44,885 185 --
Transportation 74,237 62,711 11,526 18
Telemetry 18,059 13,923 4,136 30
Voice and other 25,563 23,280 2,283 10
------ ------ -----
Total 226,031 151,033 74,998 50
======= ======= ====== ===
As is common in our industry, we report subscriber information and ARPU per
month statistics. Although these measures are not recognized under Generally
Accepted Accounting Principles ("GAAP"), we believe that this information helps
to demonstrate important trends in our business.
Average Revenue Per Unit
Subscribers As of March 31,
As of March31,
2001 2000 2001 2000
---- ---- ---- ----
Wireless internet 63,102 6,234 $12 $22
Field services 45,070 44,885 43 51
Transportation 74,237 62,711 18 28
Telemetry 18,059 13,923 14 25
Maritime 6,288 6,030 47 68
Other 19,275 17,250 77 53
------- -------
Total 226,031 151,033 $28 $39
======= =======
Summary of Quarter over Quarter Revenue
o The growth in wireless internet revenue reflects the overall growth in the
number of units, offset by ARPU reductions as a result of a shift towards
more reseller pricing contracts. Our eLink product was introduced in late
1999 and did not begin to achieve a material growth rate until the middle
of 2000 as certain reseller initiatives were launched.
o The decrease in revenue from field services reflects contract renewal rate
reductions that occurred in the first quarter of 2001.
o The decrease in revenue from our transportation product was primarily the
result of the sale of our transportation assets to Aether late in the
fourth quarter of 2000 and the resulting decrease in ARPU as we shifted
from retail rates to our direct customers, to wholesale rates through
Aether. This decrease was partially offset by the increase in the number of
units under our United Parcel Service contract.
o The decrease in telemetry revenue reflects the change from a take or pay
agreement to a usage based agreement with one customer.
o The growth in voice and other revenue was primarily the result of $1.8
million of revenue earned from our contract to provide Satellite Ventures
with satellite capacity as they pursue their research and development
program. This increase was partially offset by ARPU decreases in the
maritime market.
o The increase in equipment revenue is a result of an increase of
approximately $9.0 million in equipment sales for our eLink product lines,
offset by (i) a $165,000 decrease in voice equipment sales and (ii) the
loss of $2.9 million of equipment sales associated with the sale of our
transportation business.
Expenses
Three Months Ended
March 31,
Summary of Expense 2001 2000 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Cost of Service & Operations $18.2 $18.0 $0.2 1%
Cost of Equipment Sales 5.9 5.3 0.6 11
Sales & Advertising 9.6 6.2 3.4 55
General & Administration-core wireless 6.3 5.5 0.8 15
General & Administration-XM Radio -- 16.4 (16.4) (100)
Depreciation & Amortization-core wireless 8.6 8.8 (0.2) (2)
Depreciation & Amortization-XM Radio
-----
-- 0.3 (0.3) (100)
-- ----- -------
Total $48.6 $60.5 $(11.9) (20%)
===== ===== ======= ======
The results for the quarter ended March 31, 2000, included expenses incurred by
XM Radio, as we were required to consolidate their results. As noted above, as
of January 1, 2001, we were no longer required to consolidate the results of XM
Radio.
Cost of service and operations includes costs to support subscribers and to
operate the network. The increase in cost of service and operations was
primarily attributable to (i) a 12% increase in communication charges associated
with an 13% increase in base stations year over year and (ii) a 28% increase for
site rental costs associated with the build out of the terrestrial network. The
increases were partially offset by approximately $2.0 million of costs
associated with the sale of our transportation assets in late 2000.
The increase in cost of equipment sold for the quarter ended March 31,2001, as
compared to the same period in 2000, was a result of our growth in the sales of
our eLink product line, which have a lower revenue per unit as compared to voice
or transportation equipment, offset by the loss of equipment sales as a result
of the sale of our transportation business.
Sales and advertising expenses as a percentage of total revenue were
approximately 41% for the first quarter of 2001, compared to 28% for the same
period in 2000. The increase in sales and advertising expenses quarter over
quarter was primarily attributable to (i) a market awareness advertising
campaign in the first quarter of 2001 to heighten our presence in the
marketplace and to highlight our new product offerings, (ii) advertising and
other costs associated with our roll out of our eLink fortified with Yahoo!(TM)
product, and (iii) eLink subscriber acquisition costs.
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 27% for the first quarter of
2001, compared to 25% for the first quarter of 2000. The increase in 2001 costs
over 2000 costs in our core wireless business general and administrative
expenses was primarily attributable to the vesting of certain restricted stock
grants in the first quarter of 2001.
Depreciation and amortization for the core wireless business was approximately
37% of total revenue for the first quarter of 2001, compared to 40% for the
first quarter of 2000. The decrease in depreciation and amortization expense in
the first quarter of 2001 was primarily attributable to the sale of our
transportation assets in the fourth quarter of 2000 and their associated
depreciation.
Interest and other income was $142,000 for the quarter ended March 31, 2001, as
compared to $5.2 million (of which $4.1 million was earned by XM Radio) for the
quarter ended March 31, 2000. Excluding interest earned by XM Radio, the
$900,000 decrease in interest earned by the core wireless business reflects
reduced interest earned on our escrow established for the Senior Notes as a
result of a lower escrow balance.
We incurred $15.4 million of interest expense in the first quarter of 2001,
compared to $15.0 million during the first quarter of 2000. The $400,000
increase for the quarter was a result of (i) a decrease in amortization of
warrants and (ii) prepaid interest and debt offering costs due to the debt
discount costs that were written off in 2000 and 2001 when we extinguished a
portion of debt under the bank facilities. These decreases were partially offset
by increased vendor debt and capital lease obligations.
Net capital expenditures for the quarter ended March 31, 2001 for property and
equipment were $3.3 million compared to $4.9 million (excluding $4.9 million
incurred by XM Radio) for the comparable period in 2000. Expenditures consisted
primarily of assets necessary to continue the build out of our terrestrial
network.
Net capital expenditures during the first quarter of 2000 for property under
construction represented those costs associated with the build out of the XM
Radio network.
Liquidity and Capital Resources
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.
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 2001 can be met by (i) cash on hand, (ii) proceeds from the Rare loan
(see below) (iii) borrowings available under our vendor financing, (iv) proceeds
realized through the sale of inventory relating to eLink and BlackBerry TM, (v)
reduction of operating expenditures, (vi) additional debt or equity financing
transactions, (vii) our investment in XM Radio, including approximately 4.7
million shares to be available for liquidity and/or debt reduction after giving
effect to the Rare Medium merger, and (viii) cash held by Rare that would be
available to us if the Rare merger is consummated (see below). Additionally, we
have the potential to receive additional funds from the Aether transaction as
well as the Satellite Ventures transaction. Our financial results could
deteriorate, and our ability to meet our projections is subject to numerous
uncertainties, and there can be no assurance that the current projections will
be achieved. If our cash requirements are more than projected, we will require
additional financing in amounts which may be material. The type, timing and
terms of financing that the 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. If we cannot secure
additional financing as may be required, we may not be able to continue as a
going concern.
The successful implementation of our business plan requires substantial funds to
finance the maintenance and growth of our operations, network and subscriber
base and to expand into new markets. We have an accumulated deficit and have
historically incurred losses from operations which are expected to continue for
additional periods in the future. There can be no assurance that our operations
will become profitable. Additionally, with the overall decline in the
telecommunications sector of the capital markets, we have not been able to
access the public markets as anticipated. These factors, along with our negative
operating cash flows, have placed significant pressures on our financial
condition and liquidity position.
In order to work towards adequately funding our projected shortfall, we have
executed the following transactions and initiatives in 2001:
o In January and February 2001, we sold, in two separate transactions, 2
million shares of our XM Radio Class A Common Stock, at an average price of
$16.77 per share, for total proceeds of $33.5 million. Approximately $8.5
million of the proceeds were used to repay and permanently reduce our bank
financing. In exchange for the guarantors agreeing to waive certain debt
repayment obligations for the second sale of shares, we and the guarantors
have agreed that the first $16.5 million of proceeds received from the
earlier of (i) the closing of the Satellite Ventures transaction and (ii)
any other reduction event to occur in the year 2002 will be used to pay
down the bank financing.
o On April 3, 2001, we received $25 million from Rare Medium Group, Inc.
("Rare Medium"), and issued Rare Medium a note payable at 12.5% annual
interest with a maturity date, subject to certain mutually-agreed upon
extensions, of September 30, 2001. Additionally, we have the potential to
receive up to an additional $25 million of funding on comparable terms; the
amount of such second tranche will be based on the market price of XM Radio
stock. The notes are collateralized by up to 5 million of our XM Radio
shares, and Rare has the option to exchange the notes for a number of XM
Radio shares equivalent to the principal of the note plus any accrued
interest thereon. Of the first $25 million that we received, we used $6.1
million to repay and permanently reduce our bank financing, and $14.4
million is subject to availability upon the approval of the guarantors.
As of April 30, 2001, we held approximately 14.7 million shares of XM Radio
stock; however, approximately 13.7 million of such shares are pledged to
and held by Rare Medium or our banks and guarantors to secure our
obligations under our bank financings and the note with Rare Medium. There
is no guarantee that the banks and guarantors would agree to release any
portion of their share of this security to permit us to liquidate our XM
Radio shares, or that such approval would be on terms favorable to us.
Further, our ability to sell our shares of XM Radio stock in the public
markets is generally limited to the quarterly volume restrictions under
Rule 144 of the Securities Act.
The carrying value of our investment in XM Radio pursuant to the equity
method of accounting was $229.0 million (or $15.52 per share) as of March
31, 2001. As of May 9, 2001, the market price of XM Radio common stock was
$11.40 per share, $4.12 per share less than our carrying value. Taking into
consideration market and other appropriate factors, we do not believe that
other than a temporary decline in the value of our investment in XM Radio
has occurred and, accordingly, we have not recognized a loss; however, we
cannot guarantee that a loss will not be recognized in the future.
o In April 2001 we undertook certain capital and expense reductions,
principally in the areas of employee hiring, advertising and capital
spending. We believe that these reductions may result in up to
approximately $15 million of savings in 2001, while not reducing our
ability to sell our products or lower our service levels.
o Additionally, on May 14, 2001, we signed a definitive merger agreement with
Rare Medium through which we will acquire 100% of the ownership of Rare
Medium, using a combination of newly issued convertible preferred stock and
9 million shares of XM Radio Class A common stock that we hold. In the
transaction, each share of Rare Medium's existing common stock will be
exchanged for one-tenth of a share of a new series of our convertible
preferred stock with a liquidation preference of $20.00 per share. Each
share of convertible preferred stock will, in turn, automatically convert
into 6.4 shares of our common stock, upon our stock trading above $3.125
per share. We expect that approximately 41 million new shares of our common
stock would be issued upon such automatic conversion.
As part of the merger transaction, the Company will deliver 9 million
shares of XM Radio Class A common stock owned by it, plus approximately $13
million in cash, to retire all outstanding shares of preferred stock of
Rare Medium, which are held by affiliates of Apollo Management L.P. If the
sum of the value of the XM Radio shares plus the cash is less than $115
million, the Company will issue a three-year promissory note to Apollo in
the amount of any deficiency, which note will be secured by a second lien
on the assets securing the Company's guaranteed bank debt. The principal
amount of this note will be subject to a downward re-adjustment on
September 30, 2001, based on the then-current market value of XM Radio
stock.
The combined company will provide wireless email, internet and corporate
intranet services, as well as software consulting, web based development,
wireless software, and network integration services. The merged companies
will operate as Motient Corporation and will be headquartered in Reston,
Virginia.
As of April 30, 2001, Rare Medium had approximately $100 million in cash. A
portion of any cash that remained at Rare Medium at the time of closing
would be used as follows: (i) to repay and permanently reduce the Term
Facility and Revolver by $34 million, (ii) approximately $13 to $14 million
to affiliates of Apollo Management L.P. (Rare Medium's preferred
shareholder) to enable Apollo to replace Baron Capital and Singapore
Telecom as Guarantors, and (iii) to fund the combined business. Further,
the guarantors have required as a condition to the transaction that we sell
1million XM Radio shares to be used as a 100% reduction in the Bank
Facility by September 30, 2001. Hughes has the right to defer the sale of
these shares beyond September 30th.
The merger agreement provides that if necessary for liquidity purposes
prior to consummation of the merger, and subject to certain conditions, we
may either draw upon the second $25 million tranche under our bridge loan
agreement with Rare Medium announced in April 2001, or sell up to 2 million
additional XM Radio shares, with 50% of such proceeds to be used to repay
the bank financing facility. Upon closing of the transaction, the bridge
loans with Rare Medium would be cancelled and any shares of XM Radio stock
used to secure such loans would be released by Rare Medium and returned to
the guarantor collateral pool.
Upon consummation of the merger, the combined companies are expected to be
funded through 2001. It is expected that the Company will enter 2002 with
the following additional potential sources of liquidity: (i) up to 4.7
million XM Radio shares, (ii) cash on hand at year-end, (iii) potential to
earn up to $22.5 million as a result of the purchase price earn-up from the
Aether Systems transaction, all of which would be required to repay debt,
(iv) the potential for $45 million from the second investment of the Mobile
Satellite Ventures' investors, half of which is required to be used to
repay debt, and (v) the potential to sell for cash and some portion of the
Rare Medium venture portfolio. It is also expected that the level of
guaranteed debt at year-end 2001 will be reduced to less than $50 million.
The foregoing statements regarding potential sources of liquidity are
subject to the risks and uncertainties described above under "Summary of
Liquidity and Financing Sources for Core Wireless Business."
The consummation of the merger is subject to receipt of all necessary
regulatory approvals and consents, including approvals under the
Hart-Scott-Rodino Antitrust Improvements Act, bank approvals and Rare
Medium and Motient shareholder approvals.
Our other current financing arrangements are summarized below:
o A $108.75 million bank financing facility, consisting of (i) a $77.25
million unsecured five-year reducing revolving credit facility, none of
which was available for borrowing as of March 31, 2001, and (ii) a $31.5
million five-year term loan facility, with up to three additional one-year
extensions subject to the lenders' approval, which is secured by our
assets, 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 C 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, 2001, we had outstanding
borrowings of $31.5 million under the term loan facility at approximately
6.2%, and $77.25 million under the revolving credit facility at rates
ranging from 6.0% to 8.0%. On April 11, 2001, as a result of the Rare
Medium Loan, we reduced our term loan facility by an additional $6.125
million, and had a balance outstanding on the term loan of $25.375 million
as of April 30, 2001. Additionally, in connection with the bank financing,
we entered into an interest rate swap agreement which reduced the impact of
interest rate increases on the term loan facility. Under the swap
agreement, which expired in March 2001, we received 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.
As noted below, any proceeds we receive from the Aether escrow or earn-out
will be used to repay and permanently reduce the revolving credit facility.
Additionally, the first $30.75 million of funds from the closing of the
second Satellite Venture's transaction, if successful, will be used to
repay and permanently reduce the revolving credit facility.
o A vendor financing commitment from Motorola, Inc., a stockholder, to
provide up to $15 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 April 30, 2001, there was $2.2 million available
for borrowing under this facility.
o $9.6 million capital lease for network equipment acquired in July 2000. The
lease has a term of three years and an effective interest rate of 14.718%.
o $335 million of senior notes issued in 1998, at the time of the Motient
Communications Acquisition. The notes bear interest at 12.25% annually and
are due in 2008. A portion of the net proceeds of the sale of the notes was
used to finance pledged securities that are intended to provide for the
payment of the first six interest payments on these notes, the last of
which was made on April 2, 2001. 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
April 30, 2001, $400,000 of a deferred trade payable was outstanding at a
rate of 7.24% and is payable by the end of 2001.
Sale of Retail Transportation Business to Aether Systems
In November 2000, we sold our retail transportation assets to Aether Systems,
Inc. The purchase price for these assets was $45 million, plus the then-current
book value of the inventory for the business. All of this amount was paid at
closing, except for $10 million which was deposited in an escrow account and
will be released to Motient upon satisfaction of certain criteria with respect
to MobileMAX2(TM), and $3.7 million which was held back and will be paid to us
upon collection of certain accounts receivable. In addition, we have the
opportunity to receive up to an additional $22.5 million as an "earn-out"
payment, subject to the satisfaction of certain operating results for the
business during 2001. Of the proceeds received at closing, $20 million was used
to immediately repay and permanently reduce the revolving credit facility.
Proceeds, if any, from the $10 million escrow and the $22.5 million earn-out
will be recorded as additional purchase consideration when received and will
also be used to repay and permanently reduce the revolving credit facility.
Commitments
At March 31, 2001, we had remaining contractual commitments to purchase eLink
and other subscriber equipment inventory in the amount of $9.6 million.
Additionally, we have entered into product development agreements for the
purchase of engineering services and for licenses to be used in future
applications of our eLink product. Should the engineering effort prove
successful, we have committed to purchase additional subscriber inventory. These
commitments, including the inventory commitment, total approximately $3.6
million and will be paid during 2001. Should we decide to cancel these
agreements, we would incur cancellation penalties of any remaining unpaid
license and non-recurring engineering fees, the cost of any non-refundable
components purchased on our behalf, plus fifty-percent of any remaining
inventory commitment. As of March 31, 2001, this cancellation penalty would have
been approximately $3.3 million.
The aggregate fixed and determinable portion of all commitments for inventory
purchases and other fixed contracts, related to the core wireless business, is
$15.4 million, all of which 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.
Satellite Ventures
As noted above, in June 2000 we formed a new joint venture subsidiary, Satellite
Ventures, in which we own 80% of the membership interests. The remaining 20%
interest in Satellite Ventures is owned by the Investors.
In January 2001, we entered into an agreement, subject to certain conditions, to
amend in several respects the terms of our June 2000 transaction involving
Satellite Ventures. First, the Investors agreed, subject to certain conditions
including approvals by the FCC, to invest an additional $50 million to become
(in the aggregate) the owners of 40% of the outstanding interests of Satellite
Ventures. The Investors will also have an option, exercisable through June 29,
2002, for an additional $40 million, to increase their ownership in Satellite
Ventures to 50.66% (with each individual Investor's stake being less than 20%).
Second, upon closing of the transaction, TMI Communications & Company Limited
Partnership ("TMI"), the Canadian satellite services provider, will contribute
its satellite communications business assets to Satellite Ventures, along with
our satellite business assets. TMI will become the owner of approximately 27% of
the outstanding equity of Satellite Ventures and will also receive a cash
payment of $7.5 million, as well as a $11.5 million 5-year note.
Upon closing of these transactions, we will sell our remaining satellite assets
to Satellite Ventures, in exchange for a cash payment of $45 million and a
5-year, $15 million note. Upon closing, we will own approximately 33% of the
outstanding interests and be the largest single shareholder of Satellite
Ventures. A portion of Satellite Ventures' cash payment to TMI at closing will
be funded by our loan of $2.5 million, in exchange for a note back in the same
amount.
Under the original transaction, at any time until June 29, 2002, the Investors
had certain rights to elect to convert their interests in Satellite Ventures
into shares of our common stock at a conversion price which will be set at the
time of exercise, between $12 and $20 per share, as specified in the June
Investment Agreement. As part of the January 2001 agreement, this right remains
in place, but is limited to an aggregate of $55 million.
Under the terms of the bank facility waivers received by Motient in connection
with the January 2001 agreement, approximately $30.75 million of all amounts to
be received by Motient from Satellite Ventures in connection with Motient's sale
of its satellite business assets to Satellite Ventures, including the $45
million in cash and $15 million note receivable, will be used to repay
outstanding amounts, and permanently reduce commitments, under Motient's
revolving credit facility.
Summary of Cash Flow for the quarters ended March 31, 2001 and March 31, 2000
Quarter Ended
March 31, 2001 Quarter Ended March 31, 2000 (1)
--------------- --------------------------------
Core Business Core Business XM Radio Consolidated
Cash Used In Operating Activities ($20,569) ($29,326) ($7,212) ($36,538)
Cash Provided by Investing 29,940 (8,903) (139,788) (148,691)
Cash Used in Financing Activities:
Equity issuances 259 5,168 229,093 234,261
Debt payments on capital leases, vendor financing (1,817) (2,121) -- (2,121)
Net funding from (repayment of) notes (2,500) 35,000 325,000 360,000
Other -- -- (9,754) (9,754)
------- ------- ------- -------
Total Used in Financing Activities (4,058) 38,047 544,339 582,386
------- ------ ------- -------
Total Change in Cash $5,313 ($182) $397,339 $397,157
====== ====== ======== ========
Cash and Cash Equivalents $7,833 $594 $448,037 $448,631
Working Capital 5,205 50,065 466,574 516,639
Restricted Investments included in working capital 20,923 41,038 58,817 99,855
(1) As noted above, the three-month period ended March 31, 2000, includes the
results of XM Radio. As of January 1, 2001, results of XM Radio were
recorded on an equity basis.
The $8.8 million decrease in cash used in operating activities for the core
business was primarily attributable to working capital changes primarily within
accounts payable.
The $38.8 million increase in cash used in investing activities of the core
business was primarily attributable to the sale of 2 million shares of our XM
Radio stock for net proceeds of approximately $33.5 million, partially offset by
the purchase, in the first quarter of 2000, of certain restricted investments.
The $42.1 million decrease in cash provided by financing activities in the core
business was a result of (i) the reduction in proceeds from the exercise of
stock option and warrants in the amount of $5.2 million in the first quarter of
2000, as compared to $259,000 in the first quarter of 2001 and (ii) a difference
of $36.5 million in net bank financings from the first quarter of 2000 as
compared to the first quarter of 2001. This change in the use of bank financings
was offset by the sale of XM Radio stock, noted above.
Other
All of our wholly owned subsidiaries are subject to financing agreements that
limit the amount of cash dividends and loans that can be advanced to Motient
Parent. At March 31, 2001, all of the subsidiaries' net assets were restricted
under these agreements. These restrictions will have an impact on our ability to
pay dividends.
Regulation
On November 30, 1999, the FCC granted two applications to use TMI's
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. We appealed the FCC's grant
of these applications to the United States Court of Appeals for the D.C.
Circuit, but the court upheld the FCC's grant. TMI's entry into the domestic
U.S. marketplace may increase TMI's demand for spectrum in the international
coordination process and otherwise make it more difficult for us to secure
access to 20 MHz of spectrum. Since the initial grant to use TMI's system, the
FCC has granted an additional application to use TMI's system and may grant
others. The FCC is also currently considering applications to access the
Inmarsat satellite system in the L-band to provide mobile satellite service in
the United States, which may further adversely impact Motient's ability to
coordinate spectrum access.
On January 16, 2001, we amended our pending application with the FCC to launch
and operate a second-generation mobile satellite system in numerous respects to
seek FCC approval for the transactions involving Satellite Ventures, including
the combination of our satellite communications business with TMI. This
application has been opposed by a number of parties, some of which argue that
(i) the combination of our satellite business with that of TMI will decrease
competition; (ii) our proposed use of terrestrial base stations will cause
unacceptable interference to other L-band satellites; and (iii) the FCC should
reallocate spectrum in the L-band to terrestrial use. There is no assurance that
the FCC will grant our application.
Accounting Standards
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," ("SFAS No. 133") 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 September 1999,
FASB issued Statement No. 137, which deferred the effective date of SFAS No. 133
until fiscal years beginning after September 15, 2000. In June 2000, FASB issued
Statement No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," which amends SFAS No. 133. This Statement limits the scope
to certain derivatives and hedging activities. The effective date of SFAS No.
138 is for fiscal years beginning after September 15, 2000. The adoption of SFAS
No. 138 in the first quarter of 2001 did not have a material impact on our
financial position, results of operations and cash flows.
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 because the interest rate paid on a monthly basis is variable and based
on current market conditions. 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.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.30e - Letter Agreement dated April 2, 2001, between the Company and
Hughes Electronics Corporation, Baron Capital Partners, L.P., and
Singapore Telecommunications Ltd. (filed herewith).
10.32c - Letter Agreement dated April 2, 2001, between the Company and
Hughes Electronics Corporation, Baron Capital Partners, L.P., and
Singapore Telecommunications Ltd. (filed herewith).
10.34i - Waiver, dated April 2, 2001, under the Term Credit Agreement, by
and among the Company, Morgan Guaranty Trust Company of New York,
Toronto Dominion (Texas), Inc., and the other banks party thereto
(filed herewith).
10.35h - Waiver, dated April 2, 2001, under the Revolving Credit
Agreement, by and among the Company, Motient Holdings Inc.,
Morgan Guaranty Trust Company of New York, Toronto Dominion
(Texas), Inc., and the other banks party thereto (filed
herewith).
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)
May 15, 2001 /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)
EXHIBIT INDEX
Number Description
10.30e - Letter Agreement dated April 2, 2001, between the Company and
Hughes Electronics Corporation, Baron Capital Partners, L.P., and
Singapore Telecommunications Ltd. (filed herewith).
10.32c - Letter Agreement dated April 2, 2001, between the Company and
Hughes Electronics Corporation, Baron Capital Partners, L.P., and
Singapore Telecommunications Ltd. (filed herewith).
10.34i - Waiver, dated April 2, 2001, under the Term Credit Agreement, by
and among the Company, Morgan Guaranty Trust Company of New York,
Toronto Dominion (Texas), Inc., and the other banks party thereto
(filed herewith).
10.35h - Waiver, dated April 2, 2001, under the Revolving Credit
Agreement, by and among the Company, Motient Holdings Inc.,
Morgan Guaranty Trust Company of New York, Toronto Dominion
(Texas), Inc., and the other banks party thereto (filed
herewith).