SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30,
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 November 13, 2001: 55,716,694
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Condensed Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended Nine Months
September 30, Ended September 30,
------------- -------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUES
Services and related revenue $17,660 $19,810 $55,182 $55,182
Sales of equipment 6,787 6,847 16,329 19,333
----- ----- ------ ------
Total Revenues 24,447 26,657 71,511 74,515
COSTS AND EXPENSES
Cost of services and operations 17,929 18,573 55,693 55,365
Cost of equipment sold 9,079 10,678 25,649 23,883
Sales and advertising 5,526 8,633 20,118 22,479
General and administrative 4,272 32,952 15,466 73,528
Restructuring charges 4,739 -- 4,739 --
Depreciation and amortization 8,835 9,932 26,220 28,220
----- ----- ------ ------
Operating Loss (25,933) (54,111) (76,374) (128,960)
Interest and other income, net 178 9,015 591 24,168
Interest expense (16,721) (15,278) (46,971) (46,288)
Gain on Rare Medium Note call option 15,312 -- 1,512 --
Gain on note payable to related party -- -- -- 36,779
Minority interest -- 13,391 -- 24,074
Rare Medium merger costs (4,054) -- (4,054) --
Equity in loss of XM Radio (16,836) -- (40,163) --
-------- --------- -------- -----
Loss Before Extraordinary Item, XM Radio Preferred Stock
Dividend and Beneficial Conversion (48,054) (46,983) (165,459) (90,227)
Extraordinary Loss on Extinguishment of Debt (653) -- (2,578) (417)
----- --------- ------- -----
Net Loss (48,707) (46,983) (168,037) (90,644)
XM Radio Preferred Stock Dividend and Beneficial Conversion -- (46,352) -- (47,603)
-------- -------- --------- --------
Net Loss Attributable to Common Shareholders $(48,707) $(93,335) $(168,037) $(138,247)
========= ========= ========== ==========
Basic and Diluted Loss Per Share of Common Stock:
Loss Before Extraordinary Item $(0.96) $(1.88) $(3.32) $(2.79)
Extraordinary Loss on Extinguishment of Debt (0.01) -- (0.05) (0.01)
------ --------- ------ ------
Net Loss Attributable to Common Shareholders $(0.97) $(1.88) $(3.37) $(2.80)
======= ======= ======= =======
Weighted-Average Common Shares Outstanding 50,313 49,532 49,933 49,378
====== ====== ====== ======
The accompanying notes are an integral part of these consolidated financial
statements.
Motient Corporation and Subsidiaries
Consolidated Condensed Balance Sheets
(in thousands, except share and per share data)
September 30, 2001 December 31, 2000
ASSETS (Unaudited)
CURRENT ASSETS:
Cash and cash equivalents (including $0 and $224,903 related to XM Radio) $3,084 $227,423
Accounts receivable-trade, net of allowance for doubtful accounts 18,328 14,421
Inventory 13,878 16,990
Restricted short-term investments (including $0 and $95,277 related to XM Radio) -- 115,986
Due from Mobile Satellite Ventures 241 502
Deferred equipment costs 21,240 16,173
Other current assets 9,669 14,922
----- -------
Total current assets 66,440 406,417
PROPERTY AND EQUIPMENT, net 100,058 175,706
XM RADIO SYSTEM UNDER CONSTRUCTION -- 800,482
GOODWILL AND OTHER INTANGIBLES, net 52,416 62,468
EQUITY INVESTMENT IN XM RADIO 201,026 --
RESTRICTED INVESTMENTS (including $0 and $65,889 related to XM Radio) 10,928 77,106
DEFERRED CHARGES AND OTHER ASSETS, net of accumulated amortization 17,674 49,535
------ ---------
Total assets $448,542 $1,571,714
======== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $55,633 $105,749
Obligations under Senior Notes, net of discount - in default 329,147 --
Obligations under Bank Financing - in default 96,500 --
Obligations under capital leases due within one year 3,778 4,590
Rare Medium Note Payable, at market, net of discount 52,231 --
Current portion of Vendor Financing - in default 5,295 4,246
Current portion of deferred trade payables -- 2,212
Deferred equipment revenue 21,277 16,173
Deferred revenue and other current liabilities 12,192 1,944
------ ---------
Total current liabilities 576,053 134,914
LONG-TERM LIABILITIES:
Obligations under Senior Notes, net of discount -- 328,474
Senior Secured Notes of XM Radio, net of discount -- 261,298
Obligations under Bank Financing -- 111,250
Capital lease obligations 6,066 9,230
Vendor Financing -- 4,246
Other long-term liabilities 27,987 61,105
------ ---------
Total long-term liabilities 34,053 775,603
------ ---------
Total liabilities 610,106 910,517
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 534 495
Additional paid-in capital 971,334 982,621
Deferred compensation (422) (134)
Common Stock Purchase Warrants 81,773 80,292
Unamortized Guarantee Warrants (7,860) (11,504)
Cumulative loss (1,206,923) (1,038,886)
----------- -----------
STOCKHOLDERS' (DEFICIT) EQUITY (161,564) 12,884
--------- ---------
Total liabilities, minority interest, and stockholders' (deficit) equity $448,542 $1,571,714
======== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
Motient Corporation and Subsidiaries
Consolidated Condensed Statements of Cash Flows
(in thousands)
(Unaudited)
Nine Months Ended September 30,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(168,037) $(90,644)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization of Guarantee Warrants and debt related costs 9,486 8,783
Depreciation and amortization 26,220 28,220
Equity in loss of XM Radio 40,163 --
Gain on Rare Medium Note call option (1,512) --
Gain on note payable to related party -- (36,779)
Loss on sale of XM Radio shares 407 --
Extraordinary loss on extinguishment of debt 2,578 417
Non-cash stock compensation 405 8,264
Minority interest -- (24,074)
Changes in assets and liabilities, net of acquisitions and dispositions:
Inventory 3,112 1,326
Accounts receivable-- trade (3,907) (5,594)
Other current assets 12,439 (4,244)
Accounts payable and accrued expenses 6,271 9,500
Accrued interest Senior Notes 10,259 10,259
Deferred trade payables 19 (1,103)
Deferred revenue and other deferred items-- net (9,804) 15,169
------- ------
Net cash used in operating activities (71,901) (80,500)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from (purchase of) restricted investments 494 (5,030)
Payment of Senior Notes interest from escrow 20,503 20,503
Proceeds from the sale of XM Radio stock 33,539 --
Purchase/maturity of restricted investments by XM Radio, net -- 69,472
Purchase/maturity of short term investments by XM Radio, net -- (347,134)
XM Radio System under construction -- (104,637)
Other XM Radio investing activities -- (55,122)
Asset Sale Agreement to Mobile Satellite Ventures -- 10,836
Additions to property and equipment (7,624) (51,609)
------- --------
Net cash provided by (used in) investing activities 46,912 (462,721)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 402 5,584
Proceeds from Rare Medium Notes 50,000 --
Proceeds from issuance of conversion option to the investors of Mobile
Satellite Ventures -- 18,411
Proceeds from issuance of equity securities-XM Radio -- 436,026
Proceeds from Senior Secured Notes and Stock Purchase Warrants issued
by XM Radio -- 322,898
Principal payments under capital leases (5,840) (3,463)
Principal payments under Vendor Financing (3,197) (2,136)
Repayment of Bank Financing (20,750) (36,000)
Proceeds from Bank Financing 6,000 72,000
Debt issuance costs (1,062) (8,491)
------- -------
Net cash provided by financing activities 25,553 804,829
Net increase in cash and cash equivalents 564 261,608
CASH AND CASH EQUIVALENTS, beginning of period 2,520 51,474
----- ------
CASH AND CASH EQUIVALENTS, end of period $3,084 $313,082
====== ========
The accompanying notes are an integral part of these consolidated financial
statements.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
September 30, 2001
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation, and field service. Motient provides
its eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers ("ISP"), Mail Service
Provider ("MSP") accounts, and paging network suppliers. Motient also offers 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 or Lotus Notes 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. Certain factors
have placed significant pressures on the Company's financial condition and
liquidity position. Among other factors, Motient is currently in default under
its Bank Financing, Senior Notes and Vendor Financing arrangements and recently
commenced negotiations with the various creditors and guarantors of such
facilities to restructure these obligations. See Note 4 - Liquidity and
Financing - Restructuring.
XM Radio
As of December 31, 2000, Motient 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; 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 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,
accounts 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 $201.0 million (or $13.62 per share) as of
September 30, 2001. As of November 9, 2001, the market price of XM Radio common
stock was $6.90 per share, $6.72 per share less than the Company's carrying
value. The market price of XM Radio common stock is volatile and exceeded the
Company's carrying value, at times, during the quarter ended September 30, 2001.
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, as of September 30, 2001 and presently, the Company
does not believe that an other than temporary decline in the value of its
investment in XM Radio occurred; however, these factors could change and cause
the Company to recognize a loss in the future.
In accordance with the terms of the Rare Medium Notes, as amended (see Note 4 -
Liquidity and Financing), on October 12, 2001, the Company exchanged 5 million
XM Radio shares for approximately $26.2 million of principal and accrued
interest on the Rare Medium Notes. The Company realized a $42.0 million loss on
this exchange which will be recorded in the fourth quarter. The loss is computed
as the difference between the carrying value of the XM Radio shares and the Rare
Medium Notes principal and accrued interest repaid. As of October 31, 2001, the
Company owned 9,757,262 shares of common stock of XM Radio, which constituted a
15.8% ownership interest in XM Radio (9.7% on a fully diluted basis).
Sale of Transportation Business
In November 2000, Motient sold assets relating to its retail transportation
business to Aether Systems, Inc. ("Aether"). 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 to 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 sold to
Aether. As of September 30, 2001, approximately $1.1 million of the outstanding
accounts receivable had been received by Motient. On October 11, 2001, the $10
million escrow was paid to Motient and the Company agreed to modify certain of
the pricing related terms of its network capacity agreements with Aether. A gain
representing the difference between the net proceeds of the escrow received and
changes in contract pricing will be recorded in the fourth quarter of 2001.
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 earn-out payment
has not been recorded by the Company as of September 30, 2001. This amount will
be recorded as additional sales proceeds when and if received. As of November 9,
2001, the Company does not expect that it will receive any proceeds from the
earn-out payment.
Satellite Ventures
In June 2000 the Company formed a new joint venture subsidiary, Mobile Satellite
Ventures LLC ("Satellite Ventures"), in which it owned 80% of the membership
interests. The remaining 20% interest in Satellite Ventures was owned by certain
investors (the "Original Investors").
In January 2001, Motient entered into an agreement to amend in several respects
the terms of the June 2000 transaction involving Satellite Ventures. First, the
Original 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 Original
Investors also had 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, would contribute its
satellite communications business assets to Satellite Ventures. TMI would have
become the owner of approximately 27% of the outstanding equity of Satellite
Ventures and would have also received a cash payment of $7.5 million, as well as
a 5-year, $11.5 million note.
Upon closing of these transactions, which was not scheduled to occur until the
FCC approved Satellite Ventures' application for a new generation satellite
system utilizing ancillary terrestrial base stations, Motient would 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 such closing, the
Company would have owned 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 would have been funded by the Company's
loan of $2.5 million, in exchange for a note back in the same amount.
On October 12, 2001, the Company entered into an amended and restated investment
agreement, to amend in several respects the terms of its January 2001
transaction involving Satellite Ventures. The current agreement provides that a
group of investors, including a subsidiary of Rare Medium (the "New Investor"),
as well as the Original Investors and Motient, will invest $55 million in
Satellite Ventures in exchange for convertible notes. The closing of this
transaction is subject to FCC approval of the Company's application to transfer
its FCC licenses to Satellite Ventures. The Company anticipates that closing
should occur by the end of November 2001, but there is no assurance that the
closing will occur by that date, or that it will occur at all. The convertible
notes to be issued by Satellite Ventures will have a 5-year maturity and bear
interest at 10% per annum, payable at maturity. The notes will be convertible
into Class A preferred limited partnership units ("Class A Preferred Units") of
Satellite Ventures. The New Investor will purchase $50 million of the
convertible notes. In addition, Motient's $2.5 million loan to Satellite
Ventures as contemplated by the January transaction agreements, will be in the
form of convertible notes, and the Original Investors will purchase $2.5 million
of convertible notes. Satellite Ventures will use a portion of the funds it
receives from this investment to consummate its existing agreement to combine
our satellite communications business with that of TMI. Upon consummation of
this transaction, the Company will sell its satellite business for consideration
comprised of: (i) a cash deposit of $24 million received in June 2000, (ii) a
note in the amount of $15 million, and (iii) net cash, after Motient's $2.5
million purchase of the convertible note, described above, in the amount of
$42.5 million, of which $4 million will be retained by Satellite Ventures to
fund certain of the Company's future obligations to Satellite Ventures, such as
rent and utilities, for the next 24 months. The Company is obligated to use
$30.5 million of the proceeds received by it in this transaction to repay and
permanently reduce borrowings and commitments under the Revolving Credit
Facility (as described in Note 4). However, as described in Note 4 below, the
banks have declared all amounts under the Term Loan Facility and Revolving
Credit Facility immediately due and payable, and have also demanded payment from
the Guarantors (as described in Note 4) of those facilities. The Company is
engaged in discussions with the Guarantors regarding the potential terms of a
restructuring of its debt obligations and as part of such restructuring will
seek to negotiate to keep these proceeds (see Note 4 - Liquidity and Financing -
Restructuring). Upon closing of the Satellite Ventures transaction, and
assuming that all of the convertible notes issued in such transaction are
converted into Class A Preferred Units, Motient would retain a 33.3% equity
interest in Satellite Ventures.
Satellite Ventures has also filed a separate application with the FCC with
respect to Satellite Ventures' plans for a new generation satellite system
utilizing ancillary terrestrial base stations. Within 90 days of the receipt of
approval from the FCC, and provided that such approval occurs by March 31, 2003,
the Original Investors will invest an additional $50 million in Satellite
Ventures and receive additional Class A Preferred Units. Upon consummation of
such additional investment by the Original Investors, the $11.5 million note to
TMI and the $15 million note to Motient will be repaid in full, and Motient's
ownership interest in Satellite Ventures will be reduced to 25.5%
The Original 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 that will be set at the time of exercise, between $12 and
$20 per share.
Merger Agreement with Rare Medium Group, Inc.
On May 14, 2001, the Company signed a definitive merger agreement with Rare
Medium through which the Company would 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. On October 1, 2001, the Company and Rare Medium announced their mutual
termination of the pending merger. The Company recorded a charge of $4.1 million
in the third quarter of 2001 representing costs incurred by the Company to
pursue this transaction.
On October 12, 2001, the Company repaid approximately $23.8 million, plus
accrued interest, of the $50 million aggregate outstanding principal amount of
exchangeable notes issued by Motient to Rare Medium by delivering to Rare Medium
five million shares of Class A common stock of XM Radio held by the Company. The
Company also signed an agreement with Rare Medium providing that the maturity
date for the remaining outstanding principal and accrued interest amount of
approximately $26.2 million was extended until the earlier of (a) 60 days and
(b) the date on which the Company sells or otherwise transfers more than 1
million shares of XM Radio stock or any interest in Satellite Ventures, and will
be further extended to October 12, 2002 upon Rare Medium receiving a second
priority security interest for such loan in the assets securing the Company's
obligations to its bank lenders and guarantors.
Operational Restructuring
On September 26, 2001, the Company announced a plan to restructure its business
with the goal of achieving earnings before interest, taxes, depreciation and
amortization - or EBITDA, which is not a generally accepted accounting principle
measurement - breakeven in mid- to late-2002. As part of this restructuring, the
Company laid off approximately 25% of its workforce, or 50, 22, and 13 employees
in the Company's operations, sales and marketing and general and administrative
functions, respectively, and canceled certain of its product initiatives. Of
this reduction, approximately 9% represented the termination of consulting
resources and 16% represented direct employees. The Company recorded a
restructuring charge in September 2001 of approximately $4.7 million. This
charge represents $1.6 million of costs directly associated with employee
severance packages, $3.0 million of costs associated with product initiative
cancellations and $0.1 million of costs associated with capital assets that will
no longer be in service. Of the $4.7 million charge, approximately $1.7 million
represents cash outlays remaining to be made over the last quarter of 2001 and
the first quarter of 2002. The balance represents the write off of assets
previously acquired.
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 September 30, 2001, the consolidated
statements of operations for the three and nine months ended September 30, 2001
and 2000, and cash flows for the nine months ended September 30, 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 September 30, 2001, and for all periods presented have been made.
Certain amounts in prior periods have been reclassified to conform to current
period presentation.
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 nine months of 2001, XM
Radio recorded $1,000 of revenue, incurred $146.3 million of operating expenses
and had a net loss attributable to common stockholders of $157.8 million.
Additionally, although as of September 30, 2001, the Company had 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 periods ended September 30, 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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
Summary of Revenue 2001 2000 2001 2000
---- ---- ---- ----
(in millions)
Wireless internet $3.2 $0.8 $7.6 $1.6
Field services 4.4 6.1 15.4 19.8
Transportation 3.6 5.9 11.8 16.6
Telemetry 0.7 1.2 2.1 3.4
Maritime and other 5.7 5.9 18.3 13.8
Equipment 6.8 6.8 16.3 19.3
--- --- ---- ----
Total $24.4 $26.7 $71.5 $74.5
===== ===== ===== =====
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 quarter and nine months ended September 30, 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 for
the third quarter of 2001 was paid on November 1, 2001.
Derivatives
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, with changes in value
reflected as current period income (loss). The effective date of SFAS No. 133,
as amended by SFAS 138, is for fiscal years beginning after September 15, 2000.
Except for the Rare Medium Note embedded call options discussed in the following
paragraph, SFAS No. 133 was not material to the Company's financial position or
results of operations as of or for the periods ended September 30, 2001.
In April and July 2001, the Company sold notes to Rare Medium totaling $50
million. The notes were collateralized by up to 5 million of the Company's XM
Radio shares, and, until maturity, which was extended until October 12, 2001,
Rare Medium had 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 (see
Note 4). The Company has determined the embedded call options in the notes,
which permit Rare Medium to convert the borrowings into shares of XM Radio, to
be derivatives which must be accounted for in accordance with SFAS No.133 and
accordingly recorded a gain in the amount of $15.3 million in the third quarter
of 2001 related to the Rare Medium Note call options which reduced the carrying
value of the options as of September 30, 2001 to less than $1,000 on the
accompanying consolidated condensed balance sheet. On October 12, 2001, the
embedded call options in the Rare Medium Notes expired unexercised.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. The provisions of each statement which apply to goodwill
and intangible assets acquired prior to June 30, 2001 will be adopted by the
Company on January 1, 2002. The Company is in the process of evaluating the
financial statement impact of adoption of SFAS No. 142.
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The entity is
required to capitalize the cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. The standard is
effective for fiscal years beginning after June 15, 2002. On October 3, 2001 the
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" that replaces SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." The statement
requires that all long-lived assets be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured on a net realizable value basis and will not include amounts for future
operating losses. The statement also broadens the reporting requirements for
discontinued operations to include disposal transactions of all components of an
entity (rather than segments of a business). Components of an entity include
operations and cash flows that can be clearly distinguished from the rest of the
entity that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The statement is effective for fiscal years beginning
after December 15, 2001.
The Company is currently evaluating, but has yet to determine, the impact that
adoption of SFAS No. 143 and SFAS No. 144 will have on the Company's financial
statements.)
Concentrations of Credit Risk
For the nine months ended September 30, 2001, five customers accounted for
approximately 29% of the Company's service revenue, with one customer accounting
for more than 10%.
Other
For the first nine months of 2001, the Company paid approximately $762,000 to
related parties for service-related obligations, and received payments for
operating services in the amount of $1.2 million. Net due from related parties
as of September 30, 2001, was approximately $122,000. Additionally, in the first
nine months of 2001, the Company recorded revenue from related parties in the
amount of $5.5 million related to the Satellite Ventures' satellite capacity
agreement. As of September 30, 2001, the Company had $5.5 million of deferred
revenue associated with the remainder of the satellite capacity agreement.
The Company paid approximately $6.9 million in the nine-month period ended
September 30, 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 nine-month period ended September 30, 2000.
The significant decrease in related party transactions is because Motorola, a
major provider of services and equipment to the terrestrial business, is no
longer deemed to be a related party.
During the nine months ended September 30, 2001, the Company recorded inventory
write-downs totaling $5.8 million to cost of equipment sold to reduce certain
inventory amounts to their net realizable value.
3. STOCKHOLDERS' (DEFICIT) EQUITY
Significant activity in stockholders' (deficit) equity from December 31, 2000 to
September 30, 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) --
Repricing and issuance of Guarantee Warrants
associated with the waiver of certain
repayment requirements -- -- -- 2,326 (2,326)
Issuance of restricted stock 32 386 (418) -- --
Non-cash compensation associated with the
vesting of restricted stock and certain -- 275 130 -- --
other stock options
Amortization of Guarantee Warrants -- -- -- -- 4,065
Reduction of Guarantee Warrants related to
extinguishment of debt -- -- -- -- 1,905
Loss in connection with XM Radio equity
transactions -- (14,049) -- -- --
Issuance of shares under 401(k) Savings
Plan, Stock Purchase Plan, and award of
bonus stock 7 1,256 -- -- --
---- -------- ------ ------- -------
Balance September 30, 2001 $534 $971,334 $(422) $81,773 $(7,860)
==== ======== ====== ======= ========
On March 6, 2001, XM Radio completed a follow-on offering of 7.5 million shares
of Class A common stock, which yielded net proceeds to XM Radio 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 ("SAB 51"), which addresses
the accounting for sales of stock by a subsidiary. During the second and third
quarters of 2001, XM Radio issued common shares as dividend payments on its
preferred stock and, as a result, the Company recorded a $643,000 gain and
$970,000 loss, respectively, in accordance with SAB51. These transactions have
been recorded in the financial statements as a change in Additional Paid-In
Capital.
On July 26, 2001, the Company's board of directors approved a 1-for-10 reverse
stock split. The consummation of this reverse split is contingent upon
shareholder approval. Such approval has not been sought, and the Company does
not intend to request this approval in the near future. The reverse split has
not been reflected in the accompanying financial statements.
On September 25, 2001, the Company issued approximately 3.2 million shares of
restricted stock to employees, with a price on the date of issuance of $0.13 per
share, in exchange for approximately 4.3 million outstanding employee stock
options. With the exception of restricted stock issued to employees terminated
on September 26, 2001, which shares vested immediately based on the terminated
employees' then-vested exchanged options, all other shares of restricted stock
issued on September 25, 2001 will be subject to a six month holding period, at
which time the shares of restricted stock will vest in accordance with the
vesting schedule of the options for which the restricted stock was exchanged.
The Company has recorded a deferred compensation charge in the amount of
$418,000 associated with the issuance of these shares. This compensation will be
charged to income over the employees' service period.
4. LIQUIDITY AND FINANCING
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 the Company's 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 its negative operating cash flows have
placed significant pressures on the Company's financial condition and liquidity
position. As a result, the Company is in discussions with its principal
creditors, as described more fully below, to restructure its debt. The Company
anticipates that, if these discussions are successful, this restructuring is
likely to take the form of a reorganization plan under Chapter 11, and it is
currently negotiating with its creditors regarding the possibility of a
"pre-negotiated" or "pre-packaged" reorganization plan. Any restructuring plan
is likely to have a material adverse effect on the ability of the Company's
shareholders to recover their investment in the Company's common stock, with the
value of such common stock likely being significantly reduced or even
eliminated.
The Company expects to continue to require significant additional funds before
it begins to generate cash in excess of its operating expenses, and does not
expect to achieve EBITDA break even until at least the second or third quarter
of 2002. Also, even if the Company begins to generate cash in excess of its
operating expenses, it expects to continue to require significant additional
funds to meet remaining interest obligations, capital expenditures, and other
non-operating cash expenses. The recently-announced Satellite Ventures
transaction, if consummated, will provide additional funding which, if available
to the Company, and together with other available funding sources, the Company
expects should fund operations through 2002. The Company's ability to use the
Satellite Ventures transaction proceeds for operations depends on the Company's
ability to reach a satisfactory agreement with its creditors on an overall plan
to restructure the Company's balance sheet and eliminate or significantly reduce
debt. See "-Restructuring" below. While the Company believes there are potential
alternatives and additional sources of liquidity to fund its operations if the
Satellite Ventures proceeds are insufficient or unavailable, in the current
environment the Company expects that it will be difficult for it to access such
funding sources. In addition, the Company's financial performance could
deteriorate, and there is no assurance that the Company will be able to meet its
financial projections. If the Company's cash requirements are more than it
currently expects, the Company will require additional financing in amounts that
may be material.
The Company has executed the following liquidity-related 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 described below).
o In the second and third quarters of 2001, Motient received a total of $50
million from Rare Medium, and issued Rare Medium notes payable for such
amount at 12.5% annual interest. Of the total of $50 million received by
the Company, the Company used $12.25 million to repay and permanently
reduce its Term Facility, and $36.75 million was used to fund general
operations. These notes were collateralized by 5 million of the Company's
XM Radio shares. On October 12, 2001, in accordance with the terms of the
notes, the Company repaid $26.2 million of the Rare Medium notes,
representing $23.8 million in principal and $2.4 million of accrued
interest, in exchange for 5 million of its XM Radio shares. The $26.2
million of principal and accrued interest remaining outstanding at October
12, 2001, is unsecured. (See also Note 1 - Organization and Business.)
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 lowering its service levels.
o On September 26, 2001, the Company announced an operational restructuring
that included the termination of approximately 25% of its work force. The
total cash outlay of this restructuring is expected to be approximately
$1.7 million over the last quarter of 2001 and the first quarter of 2002
and represents primarily employee severance costs. It is expected that this
reduction in force will save the Company approximately $1.8 million per
quarter, starting in early 2002.
o On October 11, 2001, as noted above, the Company received $10 million that
had been held in escrow as part of the Aether transaction.
o On October 12, 2001, the Company entered into an amended and restated
investment agreement involving Satellite Ventures. It is anticipated that,
upon closing of this transaction, which is expected to occur by the end of
November 2001, the Company would receive net proceeds of $42.5 million from
the Satellite Ventures transaction discussed above.
As of October 31, 2001, all of the Company's 9.7 million shares of XM Radio
stock are pledged to and held by the Company's banks and Guarantors to
secure the Company's obligations under its Bank Financing. At the closing
price of XM Radio stock on October 31, 2001, the total market value of
these shares was $26.8 million less than the total amount of the Company's
outstanding debt under the bank facilities.
The Company is 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 $19.25 million five-year, term loan facility, due March 31, 2003,
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 October 31, 2001, the Company had
outstanding borrowings of $19.25 million under the Term Loan Facility at 4.56%,
and $77.25 million under the Revolving Credit Facility at rates ranging from
3.6% to 4.7%. Additionally, in connection with the bank financing, the Company
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, the Company 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.
On November 6, 2001, the Agent for the bank lenders under the Bank Financing
declared all loans under the Bank Financing immediately due and payable, due to
the existence of several events of default under the Bank Financing, including
the Company's failure to use the $10 million received from Aether to reduce bank
debt, the Company's failure to make its $20.5 million semi-annual interest
payment under the Senior Notes (described below), and the failure of Hughes'
senior unsecured long-term securities to be rated investment grade. On the same
date, the bank lenders sought payment in full from the Guarantors for the
accelerated loan obligations, and such payment is due by November 14, 2001. If
the Guarantors repay all such loans, then the Company would, in turn, have a
reimbursement obligation to the Guarantors in the same amount. In conjunction
with the negotiations with the holders of its Senior Notes on a possible
restructuring of the Senior Notes described below, the Company is discussing
with the Guarantors the terms of a possible restructuring of the Company's
reimbursement obligations to the Guarantors, and as part of such restructuring
the Company is seeking to obtain the approval of the Guarantors to retain all of
the $10 million Aether escrow proceeds as well as all of the net proceeds that
the Company may receive from the Satellite Ventures transaction. The terms of
such restructuring would likely involve the Guarantors receiving a portion of
the collateral securing such obligations, including the approximately 9.7
million shares of XM Radio common stock. There can be no assurance that a
satisfactory resolution with the Guarantors will be achieved. See
"-Restructuring" below.
$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. Interest
payments are due semi-annually, in arrears. As discussed below in greater
detail, the Company failed to make a semi-annual interest payment due October 1,
2001, which failure constitutes an event of default under the Senior Notes. As a
result of the Company's failure to make the required semi-annual interest
payment, the missed interest payment will accrue interest at the annual rate of
13.25%. The Company is currently in discussions with an ad hoc committee of
certain of the holders of the Senior Notes on the terms of a possible
restructuring of the Senior Notes. See "-Restructuring" below.
Other Financings
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 September 30, 2001, $5.3 million was
outstanding under this facility at 10.8%. The Company's failure to make a
required principal payment on its vendor financing with Motorola constitutes an
event of default under that facility, although Motorola has not taken any action
in respect of such default. The Company is engaged in discussions with Motorola
regarding the repayment of this financing.
The Company is party to a 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%. As of September 30, 2001, the balance due on this capital lease was
approximately $9.2 million.
The Company had also arranged the financing of certain trade payables; however,
as of September 30, 2001, all amounts had been repaid.
As a result of the events of default described above, the Company has classified
the Bank Financing, Senior Notes and Motorola Vendor Financing as current
liabilities in the Consolidated Balance Sheet as of September 30, 2001.
Restructuring
As a result of the termination of the Company's merger agreement with Rare
Medium, the Company did not receive the anticipated cash from that transaction
that would have allowed it to fund certain debt and interest payment
obligations. On October 1, 2001, the Company announced that it would not make
the $20.5 million semi-annual interest payment due on such date to the holders
of its Senior Notes. As of October 31, 2001, this failure constitutes an event
of default under the indenture governing the Senior Notes, and the trustee on
its own or the holders of 25% or more of the outstanding principal amount of the
Senior Notes have the right to declare all amounts owed under the Senior Notes
immediately due and payable. Because the Company is in default under the
indenture governing the Senior Notes, it is also in default under the Revolving
Credit Facility and the Term Loan Facility and certain other financing
documents. The Company has recently initiated discussions with an ad hoc
committee of certain holders of the Senior Notes, with a view toward negotiating
a restructuring of the Senior Notes. The Company is also having similar
discussions with its other creditors, including the Guarantors, to whom the
Company has a reimbursement obligation of approximately $96.5 million. The
principal goal of these discussions is to negotiate a mutually agreeable plan to
restructure the Company's debt obligations and thereby significantly reduce the
amount of the Company's debt so that the Company can emerge from the
restructuring as a going concern with a viable plan to achieve EBITDA break even
and profitability. The Company has retained Credit Suisse First Boston
Corporation to act as financial advisor in connection with this restructuring
effort. Because these discussions have only recently begun, it is not certain
when, or if, the discussions will lead to a successful restructuring. We
anticipate that, if these discussions are successful, this restructuring is
likely to take the form of a reorganization plan under Chapter 11, and the
Company is currently negotiating with its creditors regarding the possibility of
a "pre-negotiated" or "pre-packaged" reorganization plan to be filed under
Chapter 11. The Company would expect to emerge from such a proceeding as a
viable going concern in a relatively short period of time. However, there are no
assurances that the Company will be able to do so. Also, any restructuring plan
is likely to have a material adverse effect on the ability of the Company's
shareholders to recover their investment in the Company's common stock, with the
value of such common stock likely being significantly reduced or even
eliminated. Any such restructuring plan is also likely to have a material
adverse effect on the ability of the holders of the Senior Notes and other
Company debt to receive interest and principal payments due them.
While the Company is diligently pursuing a financial restructuring, it is not
able to predict when or if it will be able to arrive at a restructuring plan
acceptable to the holders of the Senior Notes and its other creditors, or
whether it will be able to satisfactorily implement such a plan. If the Company
is not able to negotiate a mutually agreeable plan to restructure its debt with
all creditors, one or more of its creditors could take action to pursue such
creditors' contractual and legal rights against the Company, including, for
example, filing a lawsuit against the Company, issuing a notice of default and
demanding that the maturity of the debt be accelerated, initiating an action to
foreclose on the collateral securing such debt, or filing an involuntary
petition for bankruptcy. If any of these actions are taken, there can be no
assurance that the Company will be able to achieve a satisfactory restructuring
of its capital structure or that it will be able to continue as a going concern.
Summary of Liquidity and Financing Sources for Core Wireless Business
If the Company is successful in restructuring all or a substantial portion of
its debt, and is allowed to retain the $10 million received from the Aether
escrow and the $42.5 million to be received upon the closing of the Satellite
Ventures transaction, as to which there can be no assurance, the Company
anticipates that its funding requirements through 2002 would be met with a
combination of various sources, including (1) cash on hand, (2) proceeds
realized through the sale of inventory relating to eLink and BlackBerry TM, and
(3) the Aether and Satellite Ventures proceeds described above. There can be no
assurance that the foregoing sources of liquidity will provide sufficient funds
in the amounts or at the time that funding is required. In addition, if the
Company's ability to realize such liquidity from any such source is delayed or
the proceeds from any such source are insufficient to meet its expenditure
requirements as they arise, the Company will seek additional equity or debt
financing, although it is unlikely under current conditions that such additional
financing will be available to the Company on reasonable terms, if at all.
Even if the Company begins to generate cash in excess of its operating expenses,
it will still need to obtain additional funds from other sources to meet its
ongoing capital expenditures, working capital requirements and any remaining
principal and interest payments. Assuming that the Company is successful in
renegotiating its various financing arrangements as described above, and after
the $42.5 million of funding is received from the Satellite Ventures
transaction, the Company expects to need up to approximately $10.0 million of
additional cash, which includes fees associated with the debt restructuring, to
fund its business until it achieves positive cash flow. The Company believes
that $15.0 million (plus accrued interest) would be available upon the second
closing of the Satellite Ventures transaction and the associated repayment of
the note to be issued at the closing of the October 2001 Satellite Ventures
transaction. This second closing and note repayment is contingent upon the FCC's
approval of the Satellite Ventures terrestrial re-use application, which may not
occur by the time the Company needs the funds, or may not occur at all.
The foregoing projected cash needs are based on certain assumptions about the
Company's business model and projected growth rate, including, specifically,
assumed rates of growth in subscriber activations and assumed rates of growth of
service revenue. While the Company believes these assumptions are reasonable,
these growth rates are difficult to predict and there is no assurance that the
actual results experienced by the Company will meet the assumptions included in
the Company's business model and projections. If the results of the Company's
operations are less favorable than are currently anticipated, the Company's cash
requirements will be more than projected, and it will require additional
financing in amounts that may be material. The type, timing and terms of
financing that the Company selects will be dependent upon its cash needs, the
availability of financing sources and the prevailing conditions in the financial
markets. The Company cannot guarantee that additional financing sources will be
available at any given time or available on favorable terms.
5. COMMITMENTS AND CONTINGENCIES
At September 30, 2001, the Company had remaining contractual commitments to
purchase eLink and other subscriber equipment inventory in the amount of $1.3
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 $1.7 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 September 30, 2001, this
cancellation penalty would have been approximately $1.0 million.
The aggregate fixed and determinable portion of all commitments for inventory
purchases and other fixed contracts, related to the core wireless business, is
$3.4 million, $2.8 million of which is due in 2001.
6. LEGAL AND REGULATORY MATTERS
Legal Matters
Motient is aware of two purported class action lawsuits filed by holders of Rare
Medium common stock challenging the previously proposed merger of Motient and
Rare Medium Group, Inc. that has been terminated: In re Rare Medium Group, Inc.
Shareholders Litigation, C.A. No. 19979 NC (filed in Delaware Chancery Court),
and Brickell Partners v. Rare Medium Group, Inc., et al., N.Y.S. Index No.
01602694 (filed in the New York Supreme Court). Both complaints name Rare
Medium, members of Rare Medium's board of directors, the holders of Rare Medium
preferred stock and certain of their affiliated entities, and Motient as
defendants. The complaints allege that the defendants breached duties allegedly
owed to the holders of Rare Medium common stock in connection with the merger
agreement, and include allegations that: (1) the holders of Rare Medium
preferred stock engaged in self-dealing in the proposed merger; (2) the Rare
Medium board of directors allegedly breached its fiduciary duties by agreeing to
distribute the merger consideration differently among Rare Medium's common and
preferred shares; and (3) Motient allegedly aided and abetted the supposed
breaches of fiduciary duties.
Rare Medium, Motient, and the holders of Rare Medium preferred stock have filed
motions to dismiss the Delaware complaint, while Rare Medium and the holders of
Rare Medium preferred stock have filed motions to stay discovery in the Delaware
lawsuit. Plaintiffs have failed to respond to any of these motions. In light of
the termination of the proposed merger and the plaintiff's failure to pursue
their claims, Motient believes that the Delaware lawsuit will be dismissed as
moot.
Rare Medium and the holders of Rare Medium preferred stock have also filed a
motion to dismiss or stay the New York lawsuit. Motient was never served with
process in the New York lawsuit, and thus filed no motion to dismiss. However,
Motient has been informed by Rare Medium (1) that Rare Medium intends to move
for a dismissal on mootness grounds in the New York lawsuit, and (2) that the
Plaintiff in the New York lawsuit does not plan to oppose such a motion.
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.
7. SUBSEQUENT EVENTS
As described above (see Note 4), the Company has failed to make certain debt and
principal repayments that were due subsequent to September 30, 2001.
Also as described above (see Note 1), on October 12, 2001, the Company entered
into an amended and restated investment agreement involving Satellite Ventures,
which, if consummated, will result in the Company selling its satellite assets,
including its satellite license, to Satellite Ventures, in exchange for $60
million, $45 million of which is cash and $15 million of which will be in the
form of a note. Consummation of the transaction and subsequent asset sale is
subject to FCC approval of the transfer of the Company's FCC licenses to
Satellite Ventures. The Company anticipates that such approval, and the closing
of this transaction, should occur by the end of November 2001, but there can be
no assurances that the transaction will close by such date, or that it will
occur at all.
8. FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Company's acquisition of Motient Communications Inc. on
March 31, 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 September 30, 2001 and
December 31, 2000, the condensed consolidating statements of operations for
the three and nine months ended September 30, 2001 and 2000, and the
condensed consolidating statement of cash flows for the three and nine
months ended September 30, 2001 and 2000.
o Elimination entries necessary to combine the entities comprising Motient.
Condensed Consolidating Balance Sheet
As of September 30, 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 $ 3,084 $ -- $ -- $ 3,084 $ -- $ -- $ 3,084
Accounts receivable -- net 18,328 -- -- 18,328 -- -- 18,328
Inventory 13,878 -- -- 13,878 -- -- 13,878
Deferred equipment costs 21,240 -- -- 21,240 -- -- 21,240
Other current assets 9,247 -- -- 9,247 663 -- 9,910
----- -------- -- ----- ------ -------- -----
Total current assets 65,777 -- -- 65,777 663 -- 66,440
PROPERTY AND EQUIPMENT -- NET 109,322 -- (9,264) 100,058 -- -- 100,058
GOODWILL AND INTANGIBLES -- NET 52,416 -- -- 52,416 -- -- 52,416
EQUITY INVESTMENT in XM RADIO -- -- -- -- 201,026 -- 201,026
DEFERRED CHARGES AND OTHER ASSETS -- NET 7,819 15,332 -- 23,151 815 (6,292) 17,674
RESTRICTED INVESTMENTS -- 603 -- 603 10,325 -- 10,928
-- --- -- --- ------ -- ------
Total assets $235,334 $ 15,935 $ (9,264) $ 242,005 $212,829 $(6,292) $ 448,542
======= ======== ========= ========= ======== ======== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
----------------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses 31,616 $ 21,189 $ -- $52,805 $ 2,828 $ -- $ 55,633
Obligations under Bank Financing - in default -- 77,250 -- 77,250 19,250 -- 96,500
Senior Notes, net of discount - in default -- 329,147 -- 329,147 -- -- 329,147
Obligations under capital leases due within one 3,778 -- -- 3,778 -- -- 3,778
year
Rare Medium Note payable - at market, net of -- -- -- -- 52,231 -- 52,231
discount
Current portion long-term debt - in default 5,295 -- -- 5,295 -- -- 5,295
Deferred equipment revenue 21,277 -- -- 21,277 -- -- 21,277
Other current liabilities 12,192 -- -- 12,192 -- -- 12,192
------ -- -- ------ -- -- ------
Total current liabilities 74,158 427,586 -- 501,744 74,309 -- 576,053
DUE TO PARENT/AFFILIATE 883,197 (117,859) (765,338) -- 314,084 (314,084) --
LONG-TERM LIABILITIES
Note payable to /from Issuer/Parent -- 14,000 -- 14,000 (14,000) -- --
Capital lease obligations 6,066 -- -- 6,066 -- -- 6,066
Other long-term 27,987 -- -- 27,987 -- -- 27,987
------ -- -- ------ -- -- ------
Total long-term liabilities 34,053 14,000 -- 48,053 (14,000) -- 34,053
Total liabilities 991,408 323,727 (765,338) 549,797 374,393 (314,084) 610,106
------- ------- --------- ------- ------- --------- -------
STOCKHOLDERS' (DEFICIT) EQUITY (756,074) (307,792) 756,074 (307,792) (161,564) 307,792 (161,564)
--------- --------- ------- --------- --------- ------- ---------
Total Liabilities and Stockholders' (Deficit) $235,334 $15,935 $(9,264) $242,005 $212,829 $(6,292) $448,543
======== ======= ======== ======== ======== ======== ========
Equity
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 (260,952) -- 260,952 502
Deferred equipment costs 16,173 -- -- 16,173 -- -- -- 16,173
Other current assets 5,250 -- -- 5,250 857 8,815 -- 14,922
-------- -------- --------- -------- --------- ------- --------- -----------
Total current assets 55,856 151,565 (130,856) 76,565 (260,095) 328,995 260,952 406,417
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 1,605 9,265 (7,642) 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
expenses $ 26,628 $11,029 $-- $ 37,657 $ 1,323 $66,769 $ -- $ 105,749
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 equipment revenue 16,173 -- -- 16,173 -- -- -- 16,173
Deferred revenue and other
liabilities 1,503 -- -- 1,503 -- 441 -- 1,944
-------- ------- -------- ------- ------- --------- -------- -----------
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
liabilities 54,333 -- -- 54,333 -- 6,772 -- 61,105
-------- ------- -------- ------- -------- --------- -------- -----------
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 one year 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 September 30, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ -------- ------ ------------ ------
REVENUES
Services and related revenues $17,660 $-- $-- $17,660 $300 $(300) $17,660
Sales of equipment 6,787 -- -- 6,787 -- -- 6,787
----- -- -- ----- -- -- -----
Total Revenues 24,447 -- -- 24,447 300 (300) 24,447
COSTS AND EXPENSES
Cost of service and operations 17,929 -- -- 17,929 -- -- 17,929
Cost of equipment sold 9,079 -- -- 9,079 -- -- 9,079
Sales and advertising 5,526 -- -- 5,526 -- -- 5,526
General and administrative 3,958 319 -- 4,277 295 (300) 4,272
Restructuring costs 4,739 -- -- 4,739 -- -- 4,739
Depreciation and amortization 9,362 -- -- 9,362 (527) -- 8,835
----- -- -- ----- -------- -- -----
Operating Loss (26,146) (319) -- (26,465) 532 -- (25,933)
Interest and Other Income 91 3,894 (3,831) 154 303 (279) 178
Equity in Loss of Subsidiaries -- (30,100) 30,100 -- (56,652) 39,816 (16,836)
Gain on Rare Medium note call option -- -- -- -- 15,312 -- 15,312
Rare Medium merger costs -- -- -- -- (4,054) -- (4,054)
Interest Expense (4,045) (13,291) 3,831 (13,505) (3,495) 279 (16,721)
------- -------- ----- -------- ------- --- --------
Net Loss Before Extraordinary Item (30,100) (39,816) 30,100 (39,816) (48,054) 39,816 (48,054)
Extraordinary Loss on Extinguishment of -- -- -- -- (653) -- (653)
-- -- -- -- ----- -- -----
Debt
Net Loss Attributable Common Shareholders ($30,100) ($39,816) $30,100 ($39,816) ($48,707) $39,816 ($48,707)
========= ========= ======= ========= ========= ======= =========
Condensed Consolidating Statement of Operations
Three Months ended September 30, 2000
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient XM Motient
Guarantors Holdings Eliminations Holdings Parent Radio Eliminations Parent
---------- -------- ------------ -------- ------ ----- ------------ ------
REVENUES
Services $19,810 $-- $-- $19,810 $300 $-- $(300) $19,810
Sales of equipment 6,847 -- -- 6,847 -- -- -- 6,847
----- -- -- ----- -- -- -- -----
Total Revenues 26,657 -- -- 26,657 300 -- (300) 26,657
COSTS AND EXPENSES
Cost of service and operations 18,573 -- -- 18,573 -- -- -- 18,573
Cost of equipment sold 10,678 -- -- 10,678 -- -- -- 10,678
Sales and advertising 8,632 -- -- 8,632 1 -- -- 8,633
General and administrative 5,593 338 -- 5,931 222 27,118 (319) 32,952
Depreciation and amortization 9,181 -- -- 9,181 -- 991 (240) 9,932
----- -- -- ----- -------- --- ----- -----
Operating Loss (26,000) (338) -- (26,338) 77 (28,109) 259 (54,111)
Interest and Other Income 226 4,514 (3,886) 854 400 8,047 (286) 9,015
Minority Interest in Loss of -- -- -- -- -- -- 13,391 13,391
Subsidiaries
Equity in Loss of Subsidiaries -- (30,028) 30,028 -- (43,089) -- 43,089 --
Interest Expense (4,254) (13,909) 3,886 (14,277) (1,288) 2 285 (15,278)
------- -------- ----- -------- ------- ----- --- --------
Net Loss Before Extraordinary Item,
Preferred Dividend and Beneficial
Conversion Charge (30,028) (39,761) 30,028 (39,761) (43,900) (20,060) 56,738 (46,983)
Preferred Stock Dividend
Requirement and Beneficial -- -- -- -- (46,352) (140,035) 140,035 (46,352)
Conversion Charge ------- ------- ------ ------- -------- --------- ------- --------
Net Loss Attributable to Common
Shareholders ($30,028) ($39,761) $30,028 ($39,761) ($90,252) ($160,095) $196,773 ($93,335)
========= ========= ======= ========= ========= ========== ======== =========
Condensed Consolidating Statement of Operations
Nine Months ended September 30, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- -------- ------------ -------- ------ ------------ ------
ASSETS
------
REVENUES
Services and related revenues $55,182 $-- $-- $55,182 $900 $(900) $55,182
Sales of equipment 16,329 -- -- 16,329 -- -- 16,329
------ -- -- ------ -- -- ------
Total Revenues 71,511 -- -- 71,511 900 (900) 71,511
COSTS AND EXPENSES
Cost of service and operations 55,693 -- -- 55,693 -- -- 55,693
Cost of equipment sold 25,649 -- -- 25,649 -- -- 25,649
Sales and advertising 20,118 -- -- 20,118 -- -- 20,118
General and administrative 14,354 959 -- 15,313 1,053 (900) 15,466
Restructuring costs 4,739 -- -- 4,739 -- -- 4,739
Depreciation and amortization 27,800 -- -- 27,800 (1,580) -- 26,220
------ -- -- ------ -------- -- ------
Operating Loss (76,842) (959) -- (77,801) 1,427 -- (76,374)
Interest and Other Income 437 11,710 (11,449) 698 730 (837) 591
Equity in Loss of Subsidiaries -- (89,141) 89,141 -- (158,672) 118,509 (40,163)
Gain on Rare Medium note call option -- -- -- -- 1,512 -- 1,512
Rare Medium merger costs -- -- -- -- (4,054) -- (4,054)
Interest Expense (12,736) (40,119) 11,449 (41,406) (6,402) 837 (46,971)
-------- -------- ------ -------- ------- --- --------
Net Loss Before Extraordinary Item (89,141) (118,509) 89,141 (118,509) (165,459) 118,509 (165,459)
Extraordinary Loss on Extinguishment of -- -- -- -- (2,578) -- (2,578)
-- -- -- -- ------- -- -------
Debt
Net Loss Attributable Common Shareholders ($89,141) ($118,509) $89,141 ($118,509) ($168,037) $118,509 ($168,037)
========= ========== ======= ========== ========== ======== ==========
Condensed Consolidating Statement of Operations
Nine Months ended September 30, 2000
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient XM Motient
Guarantors Holdings Eliminations Holdings Parent Radio Eliminations Parent
---------- -------- ------------ -------- ------ ----- ------------ ------
REVENUES
Services $55,182 $-- $-- $55,182 $900 $ -- $(900) $55,182
Sales of equipment 19,333 -- -- 19,333 -- -- -- 19,333
------ -- -- ------ -- -- -- ------
Total Revenues 74,515 -- -- 74,515 900 -- (900) 74,515
COSTS AND EXPENSES
Cost of service and operations 55,365 -- -- 55,365 -- -- -- 55,365
Cost of equipment sold 23,883 -- -- 23,883 -- -- -- 23,883
Sales and advertising 22,362 -- -- 22,362 117 -- -- 22,479
General and administrative 15,639 1,016 -- 16,655 862 56,929 (918) 73,528
Depreciation and amortization 26,930 -- -- 26,930 -- 2,005 (715) 28,220
------ -------- -------- ------ ------- ----- ----- ------
Operating Loss (69,664) (1,016) -- (70,680) (79) (58,934) 733 (128,960)
Interest and Other Income 421 14,149 (11,573) 2,997 919 21,046 (794) 24,168
Gain on Conversion of Convertible Note
Payable to Related Party -- -- -- -- 32,854 -- -- 32,854
Unrealized Gain on Convertible Note
Payable to Related Party -- -- -- -- 3,925 -- -- 3,925
Equity in Loss of Subsidiaries -- (82,283) 82,283 -- (124,784) -- 124,784 --
Minority Interest in Loss of -- -- -- -- -- -- 24,074 24,074
Subsidiaries
Interest Expense (13,040) (41,403) 11,573 (42,870) (4,213) -- 795 (46,288)
-------- -------- ------ -------- ------- -------- --- --------
Net Loss before Extraordinary Item,
Preferred Dividend and Beneficial
Conversion Charge (82,283) (110,553) 82,283 (110,553) (91,378) (37,888) 149,592 (90,227)
Extraordinary Loss on Extinguishment of
Debt -- (417) -- (417) -- -- -- (417)
Preferred Stock Dividend Requirement
and Beneficial Conversion Charge -- -- -- -- (47,603) (143,678) 143,678 (47,603)
-- -- -- -- -------- --------- ------- --------
Net Loss Attributable to Common
Shareholders ($82,283) ($110,970) $82,283 ($110,970) ($138,981) ($181,566) $293,270 ($138,247)
========= ========== ======= ========== ========== ========== ======== ==========
Condensed Consolidating Statement of Cash flow
Nine Months Ended September 30, 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 ($89,141) ($118,509) $89,141 ($118,509) ($168,037) $ 118,509 ($ 168,037)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization of Guarantee Warrants and debt
discount and issuance costs -- 5,167 -- 5,167 4,319 -- 9,486
Depreciation and amortization 27,800 -- -- 27,800 (1,580) -- 26,220
Non cash stock compensation 405 -- -- 405 -- -- 405
Market adjustment on Rare Medium note -- -- -- -- (1,512) -- (1,512)
Extraordinary loss on extinguishment of debt -- -- -- -- 2,578 -- 2,578
Equity in loss of XM Radio -- -- -- -- 40,163 -- 40,163
Loss on sale of XM Radio stock -- -- -- -- 407 -- 407
Changes in assets & liabilities
Inventory 3,112 -- -- 3,112 -- -- 3,112
Trade accounts receivable (3,907) -- -- (3,907) -- -- (3,907)
Other current assets 12,245 -- -- 12,245 194 -- 12,439
Accounts payable and accrued expenses 2,634 10,160 -- 12,794 3,736 -- 16,530
Deferred trade payables 19 -- -- 19 -- -- 19
Deferred Items--net (6,212) --- --- (6,212) (3,592) -- (9,804)
------- --- --- ------- ------- -- -------
Net cash (used in) provided by operating (53,045) (103,182) 89,141 (67,086) (123,324) 118,509 (71,901)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Payment of Senior Note interest from escrow -- 20,503 -- 20,503 -- -- 20,503
Additions to property & equipment (7,624) -- -- (7,624) -- -- (7,624)
Proceeds from the sale of XM Radio stock -- -- -- -- 33,539 -- 33,539
Purchase of long-term, restricted 2 184 -- 186 308 -- 494
investments ----- --- -- --- --- -- ------
Net cash provided by (used in) investing (7,622) 20,687 -- 13,065 33,847 -- 46,912
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuances -- -- -- -- 402 -- 402
Funding from parent/subsidiary 70,268 76,495 (89,141) 57,622 60,887 (118,509) --
Proceeds from Rare Medium Note -- -- -- -- 50,000 -- 50,000
Principal payments under capital leases (5,840) -- -- (5,840) -- -- (5,840)
Principal payments under vendor lease (3,197) -- -- (3,197) -- -- (3,197)
Debt issuance costs -- -- -- -- (1,062) -- (1,062)
Proceeds from bank financing -- 6,000 -- 6,000 -- -- 6,000
Repayment of bank financing --- --- -- -- (20,750) -- (20,750)
--- --- -- ------- -------- -- --------
Net cash provided by (used in) financing 61,231 82,495 (89,141) 54,585 89,477 (118,509) 25,553
activities
Net increase in cash and cash equivalants 564 -- -- 564 -- -- 564
CASH & CASH EQUIVALENTS, beginning of
period 2,520 -- -- 2,520 -- -- 2,520
----- -- -- ----- -----
CASH & CASH EQUIVALENTS, end of period $ 3,084 $ -- $-- $ 3,084 $ -- $ -- $3,084
======= ==== == ======= ==== ==== =======
Condensed Consolidating Statement of Cash flow
Nine Months Ended September 30, 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 ($82,283) ($110,970) $82,283 ($110,970) ($91,378) ($37,888) $149,592 ($90,644)
Adjustments to reconcile net
loss to net cash (used in)
provided by operating activities:
Amortization of Guarantee Warrants
and debt discount and
issuance costs -- 5,204 -- 5,204 3,579 -- -- 8,783
Depreciation and amortization 26,930 -- -- 26,930 -- 2,005 (715) 28,220
Non cash stock compensation
of XM Radio -- -- -- -- -- 8,264 -- 8,264
Extraordinary loss on
extinguishment of debt -- 417 -- 417 -- -- -- 417
Minority Interest -- -- -- -- -- -- (24,074) (24,074)
Gain on conversion on convertible
note payable to related party -- -- -- -- (32,854) -- -- (32,854)
Unrealized gain on marketable
securities -- -- -- -- (3,925) -- -- (3,925)
Changes in assets & liabilities
Inventory 1,326 -- -- 1,326 -- -- -- 1,326
Prepaid in-orbit insurance (215) -- -- (215) -- -- -- (215)
Trade accounts receivable (5,594) -- -- (5,594) -- -- -- (5,594)
Other current assets (4,953) -- -- (4,953) 1,272 (348) -- (4,029)
Accounts payable and
accrued expenses (4,053) 10,557 -- 6,504 (238) 13,493 -- 19,759
Deferred trade payables (1,103) -- -- (1,103) -- -- -- (1,103)
Deferred Items--net 14,031 -- -- 14,031 1,138 -- -- 15,169
------ -- -- ------ ----- -- -- ------
Net cash (used in) provided
by operating activities (55,914) (94,792) 82,283 (68,423) (122,406) (14,474) 124,803 (80,500)
CASH FLOWS FROM INVESTING
ACTIVITIES:
Payment of Senior Note interest
from escrow -- 20,503 -- 20,503 -- -- -- 20,503
Additions to property & equipment (14,958) -- -- (14,958) -- (36,651) -- (51,609)
Asset Sale agreement to Motient
Satellite Ventures 10,836 -- -- 10,836 -- -- -- 10,836
System under construction -- -- -- -- -- (347,134) -- (347,134)
Net Purchase/Maturity of
short-term investments -- -- -- -- -- 69,472 -- 69,472
Other investing activities
by XM Radio -- -- -- -- -- (55,122) -- (55,122)
Purchase of long-term, restricted
investments (2,294) (2,579) -- (4,873) (157) (104,637) -- (109,667)
------- ------- -- ------- ----- --------- -- ---------
Net cash (used in) provided
by investing activities (6,416) 17,924 -- 11,508 (157) (474,072) -- (462,721)
CASH FLOWS FROM FINANCING
ACTIVITIES:
Issuance of Common and
Preferred Stock -- -- -- -- 5,584 436,026 -- 441,610
Proceeds from issuance of
conversion option to the
investors of Satellite Ventures -- -- -- -- 18,411 -- -- 18,411
Funding from parent/subsidiary 67,524 39,868 (82,283) 25,109 99,694 -- (124,803) --
Principal payments under
capital leases (3,463) -- -- (3,463) -- -- -- (3,463)
Principal payments under
vendor lease (2,136) -- -- (2,136) -- -- -- (2,136)
Proceeds from Senior Secured
Notes and Stock
Purchase Warrants -- -- -- -- -- 322,898 -- 322,898
Proceeds from bank financing -- 37,000 -- 37,000 (1,000) -- -- 36,000
Debt issuance costs -- -- -- -- (126) (8,365) -- (8,491)
------- --------- -------- --------- --------- ------- ------ -------
Net cash provided by (used in)
financing activities 61,925 76,868 (82,283) 56,510 122,563 750,559 (124,803) 804,829
Net increase in cash and
cash equivalants (405) -- -- (405) -- 262,013 -- 261,608
CASH & CASH EQUIVALENTS,
beginning of period 776 -- -- 776 -- 50,698 -- 51,474
--- -- -- --- ------ ------
CASH & CASH EQUIVALENTS,
end of period $ 371 $ -- $ -- $ 371 $ -- $ 312,711 $ -- $313,082
===== ==== ==== ===== ==== ========= ==== =========
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. Such
forward-looking statements include, but are not limited to, statements contained
in this report concerning (i) timing, execution, and results of our financial
restructuring process, (ii) timing, execution and results of our operational
restructuring process, (iii) our ability to execute our strategies, (iv) our
ability to generate sufficient cash to achieve EBITDA break-even and to become
cash flow positive, and (v) any statements 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-4 (File No. 333-63826), 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 quarterly 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, 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 eLinksm 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. We also offer a BlackBerry TM by Motient solution
specifically designed for large corporate accounts operating in a Microsoft
Exchange and Lotus Notes 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 Satellite Ventures, we are no
longer investing in our voice business or satellite-related product lines. 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.
Certain factors have placed significant pressures on our financial condition and
liquidity position. Among other factors, we are currently in default under our
bank financing, senior notes and vendor financing arrangements and we recently
commenced negotiations with the various creditors and guarantors of such
facilities to restructure these obligations.
Sale of Retail Transportation Business
In an effort to focus our business on providing wireless data services, we sold
the assets comprising our retail transportation business 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 September 30, 2001, we had an equity interest of
approximately 23.5% (14.7% on a fully diluted basis) in XM Radio.
In accordance with the terms of the Rare Medium notes (see "Liquidity and
Capital Resources"), on October 12, 2001, we exchanged 5 million of our XM Radio
shares for approximately $26.2 million of the Rare Medium notes and accrued
interest thereon. We will record a $42.0 million loss in the fourth quarter
associated with this transaction. The loss is computed as the difference between
the carrying value of the XM Radio shares and the Rare Medium notes principal
and accrued interest repaid. As of October 31, 2001, we owned 9,757,262 shares
of common stock of XM Radio, which constituted a 15.8% ownership interest in XM
Radio (9.7% on a fully diluted basis).
Satellite Ventures
On June 29, 2000, we formed a new joint venture subsidiary, Satellite Ventures,
in which we owned 80% of the membership interests. The remaining 20% interests
in Satellite Ventures were owned by three investors controlled by Columbia
Capital, Spectrum Equity Investors LP, and Telcom Ventures L.L.C. (collectively,
the "Original 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, to amend in several respects the
terms of our June 2000 transaction involving Satellite Ventures. First, the
Original 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 Original Investors also had 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, would contribute its satellite communications business assets
to Satellite Ventures, along with our satellite business assets. TMI would have
become the owner of approximately 27% of the outstanding equity of Satellite
Ventures. Upon closing of these transactions, which was not scheduled to occur
until the FCC approved Satellite Ventures' application for a new generation
satellite system utilizing ancillary terrestrial base stations, we would have
sold our remaining satellite assets to Satellite Ventures, and would have owned
approximately 33% of the outstanding interests and would have been the largest
single shareholder of Satellite Ventures.
On October 12, 2001, we entered into an amended and restated investment
agreement, to amend in several respects the terms of our January 2001
transaction involving Satellite Ventures. The current agreement provides that a
group of investors, including a subsidiary of Rare Medium (the "New Investor"),
as well as the Original Investors and Motient, will invest $55 million in
Satellite Ventures in exchange for convertible notes. The closing of this
transaction is subject to FCC approval of the transfer of our FCC licenses to
Satellite Ventures. We anticipate that this transaction should be consummated by
the end of November 2001, but there can be no assurances that it will occur by
such date, or that it will occur at all. The convertible notes to be issued in
such transaction will have a 5-year maturity and bear interest at 10% per annum,
payable at maturity. The convertible notes will be convertible into Class A
preferred limited partnership units of Satellite Ventures. The New Investor will
purchase $50 million of the convertible notes. In addition, Motient's $2.5
million loan to Satellite Ventures as contemplated by the January transaction
agreements, will be in the form of convertible notes, and the Original Investors
will purchase $2.5 million of convertible notes. Satellite Ventures will use a
portion of the funds it receives from this investment to consummate its existing
agreement to combine our satellite communications business with that of TMI. In
this transaction, we will sell our satellite business for consideration
comprised of (i) a cash deposit of $24 million received in June 2000, (ii) a
note in the amount of $15 million and (iii) net cash, after Motient's $2.5
million purchase of the convertible note, mentioned above, in the amount of
$42.5 million, of which $4 million will be held by Satellite Ventures to fund
certain of our future obligations to Satellite Ventures, such as rent and
utilities, for the next 24 months. We are obligated to use $30.5 million of the
proceeds that we will receive in this transaction to repay and permanently
reduce borrowings and commitments under the bank financing. However, as
described below - See "Liquidity and Capital Resources" - the banks have
declared all amounts under the bank financing immediately due and payable, and
have also demanded payment from the guarantors of those facilities. We are
engaged in discussions with the guarantors on the potential terms of a
restructuring of our debt obligations and as part of such restructuring will
seek to negotiate to keep these proceeds. Upon the closing of the current
transaction, and assuming that all of the convertible notes issued in such
transaction are converted into Class A Preferred Units, Motient would retain a
33.3% equity interest in Satellite Ventures
Satellite Ventures has also filed a separate application with the FCC with
respect to Satellite Ventures' plans for a new generation satellite system
utilizing ancillary terrestrial base stations. Within 90 days of the receipt of
approval from the FCC, and provided that such approval occurs by March 31, 2003,
the Original Investors will invest an additional $50 million in Satellite
Ventures and receive additional Class A Preferred Units. Upon consummation of
such additional investment by the Original Investors, the $11.5 million note to
TMI and the $15 million note to Motient will be repaid in full, and Motient's
ownership interest in Satellite Ventures will be reduced to 25.5%
Merger Agreement with Rare Medium
On May 14, 2001, we signed a definitive merger agreement with Rare Medium
through which we would have acquired 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. On October 1, 2001, we and Rare
Medium announced the mutual agreement to terminate the pending merger.
Overview
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.
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 may continue to be, highly
leveraged. These factors and others have placed significant pressures on our
financial condition and liquidity position. As a result, we are in discussions
with our principal creditors, as described more fully below, to restructure our
debt. We anticipate that, if these discussions are successful, this
restructuring is likely to take the form of a reorganization plan under Chapter
11, and we are currently negotiating with our creditors regarding the
possibility of a "pre-negotiated" or "pre-packaged" reorganization plan. Even if
we are successful in our restructuring efforts, we expect to continue to incur
operating losses and negative cash flows for at least several more quarters, and
do not expect to achieve EBITDA (Earnings Before Interest, Taxes, Depreciation
and Amortization) break even until at least the second or third quarter of 2002.
We expect to continue to make significant capital outlays to fund remaining
interest expense, new product rollouts, capital expenditures, and working
capital before we begin to generate cash in excess of our operating expenses. We
expect to require significant additional funds even after we begin to generate
cash in excess of operating expenses. As discussed in greater detail below, the
October 2001 Satellite Ventures transaction will, if consummated, provide
additional funding which, if available to us and together with other available
funding sources, we expect should fund operations through 2002. Our ability to
use the Satellite Ventures' proceeds for operations depends on our ability to
reach a satisfactory agreement with our creditors on an overall plan to
restructure our balance sheet and eliminate or significantly reduce outstanding
debt. See "Liquidity and Capital Resources - Restructuring" below. While we
believe there are potential alternatives and additional sources of liquidity to
fund our operations if the Satellite Ventures proceeds are not available or are
insufficient, in the current environment we expect that it will be difficult for
us to access such funding sources. In addition, our financial performance could
deteriorate, and there is no assurance that we will be able to meet our
financial projections. If our cash requirements are more than we currently
expect, we will require additional financing in amounts that may be material.
For a more detailed discussion of our funding requirements and outlook, see
"Liquidity and Capital Resources - Summary of Liquidity and Financing Sources
for Core Wireless Business."
Our future operating results could be adversely affected by a number of
uncertainties and factors, including:
o our ability to successfully restructure our balance sheet, including the
conversion of most, if not all, of our current debt to equity securities,
o our ability to attract and retain customers in light of our liquidity
issues,
o our ability to secure additional financing necessary to fund anticipated
capital expenditures, operating losses and debt service requirements,
o our ability to convert customers who have purchased devices from us into
active users of our airtime service and thereby generate revenue growth,
o limitations on our ability to sell XM Radio shares for liquidity purposes,
o the timely roll-out of certain key customer initiatives and the launch of
new products or the entry into new market segments, which may require us to
continue to incur significant operating losses,
o our ability to fully recover the value of our inventory in a timely manner,
o our ability to gain market acceptance of new products and services,
including our new product offerings, eLink and BlackBerryTM by Motient,
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 our ability to keep up with new technological developments and incorporate
them into our existing products and services and our ability to maintain
our proprietary information and intellectual property rights,
o 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 out limited disaster recovery system which could hinder or prevent us from
continuing to provide some services to some or all of our customers in the
event of a natural disaster or other occurrence that rendered the system
unavailable,
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.
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 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 and Nine Months Ended September 30, 2001 and 2000
Revenue and Subscriber Statistics
Service revenue, which includes our data, voice, capacity reseller services as
well as royalty income, approximated $55.2 million for the nine months ended
September 30, 2001, which was flat as compared to the first nine months of 2000,
although the mix of the revenue varied. We experienced a 233% growth in
subscribers within our Wireless internet sector, but these subscribers produce a
reduced average revenue per unit, or ARPU, than certain other segments, such as
the voice and retail transportation sectors, in which we saw decreases,
primarily as a result of our sale of the majority of the retail transportation
assets to Aether and our shift away from the voice and satellite business.
Three Months Ended September 30,
Summary of Revenue 2001 2000 Change % Change
---- ---- ------ --------
(in millions)
Wireless internet $3.2 $0.8 $2.4 300
Field services 4.4 6.1 (1.7) (28)
Transportation 3.6 5.9 (2.3) (39)
Telemetry 0.7 1.2 (0.5) (42)
Maritime and other 5.7 5.9 (0.2) (3)
Equipment 6.8 6.8 --- ---
------------- ------------ ------- ---- ----------
Total $ 24.4 $26.7 ($2.3) (9)%
============= ============ =============
Nine Months Ended September 30,
Summary of Revenue 2001 2000 Change % Change
---- ---- ------ --------
(in millions)
Wireless internet $7.6 $1.6 $6.0 375
Field services 15.4 19.8 (4.4) (21)
Transportation 11.8 16.6 (4.8) (29)
Telemetry 2.1 3.4 (1.3) (38)
Maritime and other 18.3 13.8 4.5 33
Equipment 16.3 19.3 (3.0) (16)
------------- ------------ -------------
Total $ 71.5 $74.5 ($3.0) (4)%
============= ============ =============
Overall, we had a 43% increase in subscribers as of September 30, 2001, as
compared to September 30, 2000. This increase was broken down as follows:
As of September 30,
2001 2000 Change % Change
---- ---- ------ --------
Wireless internet 101,923 30,653 71,270 233
Field services 40,163 43,878 (3,715) (8)
Transportation 80,970 73,637 7,333 10
Telemetry 21,386 15,121 6,265 41
Maritime and other 26,376 25,917 459 2
------ ------ ---
Total 270,818 189,206 81,612 43
======= ======= ====== ==========
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
As of September 30,
2001 2000
---- ----
Wireless internet $11 $11
Field services 36 46
Transportation 15 27
Telemetry 11 26
Maritime and other 74 78
Total $23 $37
Summary of Nine Month over Nine Month 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 as well as late quarter loading in the
first and second quarters of 2001. Our eLink product was introduced in late
1999 and did not begin to achieve a significant growth rate until the
middle of 2000 as certain reseller initiatives were launched. Additionally,
a number of our resellers have units in inventory which have not yet become
revenue producing units. Since those units are included in our subscriber
totals, they serve to drive down our ARPU.
o The decrease in revenue and ARPU from field services reflects contract
renewal rate reductions that occurred in the first quarter of 2001.
Additionally, as part of this contract renewal, the customer upgraded to
one of our new devices, which greatly reduced their requirement for spare
units, for which we had previously received revenue. We also experienced
churn of approximately 6,000 registrations to several customers primarily
as a result of downsizings and contract terminations.
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 for 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 maritime and other revenue was primarily the result of (i)
$1.8 million of revenue earned from our contract to provide Satellite
Ventures with satellite capacity as they pursue their research and
development program and (ii) a $1.75 million royalty payment from the
one-time licensing of our network software. This increase was partially
offset by ARPU decreases in the maritime market as a result of more
efficient use of their satellite phones, which resulted in reduced minutes
of use. Excluding the revenue from Satellite Ventures and the royalty
payment, ARPU for Maritime and other was $45 as of September 30, 2001.
o The decrease in equipment revenue is primarily a result of (i) the loss of
$7.6 million of equipment sales associated with the sale of our
transportation business and (ii) a $731,000 decrease in voice equipment
sales. These reductions in equipment revenue were offset by an increase of
approximately $6.8 million in equipment sales for our eLink product lines.
Upon the sale of the voice and other satellite-related assets to Satellite
Ventures, we expect our subscriber count to be reduced by approximately 37,000
units, and our quarterly revenue to decrease by approximately $6.4 million;
however, we believe the impact of the sale of these assets will be approximately
cash flow neutral.
Expenses
Three Months Ended September
30,
Summary of Expense 2001 2000 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Cost of Service & Operations $17.9 $18.6 $(0.7) (4)%
Cost of Equipment Sales 9.1 10.7 (1.6) (15)
Sales & Advertising 5.5 8.6 (3.1) (36)
General & Administration-core wireless 4.3 5.8 (1.5) (26)
General & Administration-XM Radio -- 27.1 (27.1) (100)
Restructuring charge 4.7 -- 4.7 100
Depreciation & Amortization-core wireless 8.9 9.2 (0.3) (3)
Depreciation & Amortization-XM Radio -- 0.8 (0.8) (100)
-- --- -----
Total $50.4 $80.8 $(30.4) (38%)
===== ===== ======= =====
Nine Months Ended September
30,
Summary of Expense 2001 2000 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Cost of Service & Operations $55.7 $55.4 $0.3 -%
Cost of Equipment Sales 25.7 23.9 1.8 8
Sales & Advertising 20.1 22.5 (2.4) (11)
General & Administration-core wireless 15.5 16.6 (1.1) (7)
General & Administration-XM Radio -- 56.9 (56.9) (100)
Restructuring charge 4.7 -- 4.7 100
Depreciation & Amortization-core wireless 26.2 26.9 (0.7) (3)
Depreciation & Amortization-XM Radio -- 1.3 (1.3) (100)
-- ----------- ------------ -----------
Total $147.9 $203.5 $(55.6) (27%)
============ =========== ============ ===========
The results for the nine months ended September 30, 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 $900,000 increase in communication charges
associated with a 10% increase in base stations year over year, (ii) a $1.0
million increase in base station maintenance costs associated with an
approximate 10% increase in the average cost per base station primarily as a
result of new rates under the maintenance contract, (iii) a $1.3 million
increase for site rental costs associated with the 10% increase in base stations
year over year and increased lease rates, and (iv) approximately $1.0 in
licensing and commission payments to third parties with whom we've partnered to
provide certain eLink and Blackberry by Motient services. The increases were
offset by (i) approximately $3.0 million of costs associated with our
transportation assets, which were sold in late 2000 and (ii) a $500,000 decrease
in satellite in-orbit insurance.
The increase in cost of equipment sold for the nine months ended September 30,
2001, as compared to the same period in 2000, was a result of $5.8 million
inventory valuation charges in the second and third quarters of 2001 associated
with our early-generation eLink inventory, as compared to a $3.6 million
inventory charge in the third quarter of 2000. These charges were taken as a
result of evaluating our current sales trends, as well as pricing announcements
made by certain of our competitors. This was offset by a shift from the
higher-cost products associated with our transportation business, as compared to
the lower-cost eLink product line.
Sales and advertising expenses as a percentage of total revenue were
approximately 28% for the first nine months of 2001, compared to 30% for the
same period in 2000. The decrease in sales and advertising expenses period over
period was primarily attributable to a $3.0 million market awareness advertising
campaign in the first quarter of 2001 to heighten our presence in the
marketplace and to support our roll out of our eLink fortified with Yahoo!(TM)
product, offset by (i) approximately $3.8 million of costs related to the those
individuals associated with sales efforts for our transportation business, (ii)
$600,000 of costs associated with our name change in 2000 and (iii) $1.0 million
in savings associated with reductions in various components of costs incurred to
acquire customers.
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 22% for both the first nine
months of 2001 as well as the first nine months of 2000. The decrease in 2001
costs over 2000 costs in our core wireless business general and administrative
expenses was primarily attributable to a $1.3 million charge associated with the
vesting of certain restricted stock grants in the first quarter of 2001, offset
by (i) approximately $1.4 million of savings associated with having fewer
employees throughout the first nine months of 2001, primarily as a result of the
April 2001 cost-saving initiatives as well as the sale of the transportation
assets in late 2000 and (ii) approximately $450,000 of reductions in regulatory
expenditures in the first nine months of 2001 as compared to the same period in
2000.
Restructuring costs of $4.7 million represent those costs associated with the
restructuring program that we announced and implemented on September 26, 2001.
Of these costs, approximately $1.6 million are cash charges that are associated
with severance packages for the approximate 16% of our direct work force that
was laid off. These cash expenditures are, in some cases, expected to carry into
the first quarter of 2002. Approximately $3.0 million of charges were associated
with the termination of a product initiative, and represent primarily non-cash
charges associated with the write off of prepaid advertising costs.
Depreciation and amortization for the core wireless business was approximately
37% of total revenue for the first nine months of 2001, as compared to 36% for
the first nine months of 2000. The slight decrease in depreciation and
amortization expense in the first nine months of 2001 was primarily attributable
to the sale of our transportation assets in the fourth quarter of 2000 and their
associated depreciation.
Interest income was $998,000 for the nine months ended September 30, 2001, as
compared to $24.2 million (of which $21.0 million was earned by XM Radio) for
the nine months ended September 30, 2000. Excluding interest earned by XM Radio,
the $2.2 million 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. The final payment was made out of the
escrow in April 2001. We also recorded a $407,000 charge to other income in 2001
as a result of the loss on the sale of the 2 million XM Radio shares that were
sold in the first quarter of 2001.
We incurred $47.0 million of interest expense in the first nine months of 2001,
compared to $46.3 million during the first nine months of 2000. The $0.7 million
increase for the nine months was a result of (i) increased interest as a result
of the $50 million Rare Medium notes issued in 2001 and (ii) $1.5 million of
interest charges associated with the amortization of the associated with the
Rare Medium Notes discount, offset by (i) a decrease in amortization of warrants
and 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 and (ii) lower average outstanding debt balances on the bank
facilities as a result of repayments made to the bank facilities in the second
half of 2000 and first three quarters of 2001.
Net capital expenditures for the nine months ended September 30, 2001 for
property and equipment were $7.6 million compared to $15.0 million (excluding
$36.7 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.
Liquidity and Capital Resources
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. As a result, we are in discussions with our
principal creditors, as described more fully below, to restructure our debt. We
anticipate that, if these discussions are successful, this restructuring is
likely to take the form of a reorganization plan under Chapter 11, and we are
currently negotiating with our creditors regarding the possibility of a
"pre-negotiated" or "pre-packaged" reorganization plan. Any restructuring plan
is likely to have a material adverse effect on the ability of our shareholders
to recover their investment in our common stock, with the value of such common
stock likely being significantly reduced or even eliminated.
Motient expects to continue to require significant additional funds before it
begins to generate cash in excess of its operating expenses, and does not expect
to achieve EBITDA (Earnings before Interest, Taxes, Depreciation and
Amortization) break even until at least the second or third quarter of 2002.
Also, even if we begin to generate cash in excess of our operating expenses, we
expect to continue to require significant additional funds to meet remaining
interest obligations, capital expenditures, and other non-operating cash
expenses. The Satellite Ventures transaction, if consummated, will provide
additional funding which, if available to us and together with other available
funding sources, we expect should fund operations through 2002. Our ability to
use the Satellite Ventures transaction proceeds for operations depends on our
ability to reach a satisfactory agreement with our creditors on an overall plan
to restructure our balance sheet and eliminate or significantly reduce debt.
While we believe there are potential alternatives and additional sources of
liquidity to fund our operations if the Satellite Ventures proceeds are
insufficient or unavailable, in the current environment we expect that it will
be difficult for us to access such funding sources. In addition, our financial
performance could deteriorate, and there is no assurance that we will be able to
meet our financial projections. If our cash requirements are more than we
currently expect, we will require additional financing in amounts that may be
material.
We have executed the following liquidity-related 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.
o In the second and third quarters of 2001, we received a total of $50
million from Rare Medium Group, Inc. ("Rare Medium"), and issued Rare
Medium notes payable for such amount at 12.5% annual interest. Of the total
of $50 million that we received, we used $12.25 million to repay and
permanently reduce our bank financing, and $36.75 million was used to fund
general operations. These notes were collateralized by 5 million of our XM
Radio shares. On October 12, 2001, in accordance with the terms of the
notes, we repaid $26.2 million of the Rare Medium notes, representing $23.8
million in principal and $2.4 million of accrued interest, in exchange for
5 million of its XM Radio shares. The $26.2 million of principal and
accrued interest remaining outstanding at October 12, 2001, is unsecured.
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 On September 26, 2001, we announced an operational restructuring that
included the termination of approximately 25% of our work force, including
consultants. The total cash outlay of this restructuring is expected to be
approximately $1.7 million over the last quarter of 2001 and the first
quarter of 2002 and represents primarily employee severance costs. It is
expected that this reduction in force will save us approximately $1.8
million per quarter, starting in early 2002.
o On October 11, 2001, as noted above, we received $10 million that had been
held in escrow as part of the Aether transaction.
o On October 12, 2001, we entered into an amended and restated investment
agreement involving Satellite Ventures. It is anticipated that, upon
closing of this transaction, which is expected to occur by the end of
November 2001, we would receive net proceeds of $42.5 million.
As of October 31, 2001, all of the our 9.7 million shares of XM Radio stock
are pledged to and held by our banks and guarantors to secure our
obligations under our bank financings. At the closing price of XM Radio
stock on October 31, 2001, the total market value of these shares was $26.8
million less than the total amount of our outstanding debt under the bank
financings.
The carrying value of our investment in XM Radio pursuant to the equity
method of accounting was $201.0 million (or $13.62 per share) as of
September 30, 2001. As of November 9, 2001, the market price of XM Radio
common stock was $6.90 per share, $6.72 per share less than our carrying
value. Taking into consideration market and other appropriate factors, we
do not believe that an other than temporary decline in the value of our
investment in XM Radio as of September 30, 2001, and presently, occurred
and, accordingly, we have not recognized a loss; however, we cannot
guarantee that a loss will not be recognized in the future.
Our other current financing arrangements are summarized below:
o A $96.5 million bank financing, consisting of (i) a $77.25 million
unsecured five-year reducing revolving credit facility, none of which was
available for borrowing as of September 30, 2001, and (ii) a $19.25 million
five-year term loan facility, maturing on March 31, 2003, 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.
(collectively, the "Guarantors"). Both facilities bear interest at LIBOR
plus 1.0%. As of September 30, 2001, we had outstanding borrowings of
$19.25 million under the term loan facility at approximately 4.56%, and
$77.25 million under the revolving credit facility at rates ranging from
4.5% to 4.9%. 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.
On November 6, 2001, the Agent for the bank lenders under the bank
financing declared all loans under the bank financing immediately due and
payable, due to the existence of several events of default under the bank
financing, including our failure to use the $10 million received from
Aether to reduce bank debt, our failure to make our $20.5 million
semi-annual interest payment under the senior notes, and the failure of
Hughes' senior unsecured long-term securities to be rated investment grade.
On the same date, the bank lenders sought payment in full from the
Guarantors for the accelerated loan obligations, and such payment is due by
November 14, 2001. If the Guarantors repay all such loans, then we would,
in turn, have a reimbursement obligation to the Guarantors in the same
amount. In conjunction with the negotiations with the holders of our senior
notes on a possible restructuring of the senior notes described below, we
are also discussing with the Guarantors the terms of a possible
restructuring of our reimbursement obligations to the Guarantors, and as
part of such restructuring intend to seek the approval of the guarantors to
retain all of the $10 million Aether escrow proceeds as well as all
proceeds that we receive in the Satellite Ventures transaction. The terms
of such restructuring would likely involve the Guarantors receiving a
portion of the collateral securing such obligations, including the
approximately 9.7 million shares of XM Radio common stock. There can be no
assurance that a satisfactory resolution with the Guarantors will be
achieved. See "-Restructuring" below.
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 September 30, 2001, $5.3 million was outstanding
under this facility at 10.8%. Our failure to make a required principal
payment on our vendor financing to Motorola constitutes an event of default
under that facility, although Motorola has not taken any action in respect
of such default. We are engaged in discussions with Motorola regarding the
repayment of this financing.
o A 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%, and as of
September 30, 2001, had a balance of $9.2 million.
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. Interest payments are due semi-annually, in arrears. As
discussed below in greater detail, we failed to make a semi-annual interest
payment due October 1, 2001, which failure constitutes an event of default
under the senior notes. We are currently in discussions with an ad hoc
committee of certain of the holders of the senior notes on the terms of a
possible restructuring of the senior notes. See "-Restructuring" below.
o We had also arranged the financing of certain trade payables; however, as
of September 30, 2001, no deferred trade payables were outstanding.
Restructuring
As a result of the termination of our merger agreement with Rare Medium, we did
not receive the anticipated cash from that transaction that would have allowed
us to fund certain debt and interest payment obligations. On October 1, 2001, we
announced that we would not make the $20.5 million semi-annual interest payment
due on such date to the holders of its senior notes. As of October 31, 2001,
this failure constitutes an event of default under the indenture governing the
senior notes, and the trustee on its own or the holders of 25% or more of the
outstanding principal amount of the senior notes have the right to declare all
amounts owed under the senior notes immediately due and payable. Because we are
in default under the indenture governing the senior notes, we are also in
default under the bank financing and certain other financing documents. We have
recently initiated discussions with an ad hoc committee of certain holders of
the senior notes, with a view toward negotiating a restructuring of the senior
notes. We are also having similar discussions with our other creditors,
including the guarantors, to whom we have a reimbursement obligation of
approximately $96.5 million. The principal goal of these discussions is to
negotiate a mutually agreeable plan to restructure our debt obligations and
thereby significantly reduce the amount of our debt, so that we can emerge from
the restructuring as a going concern with a viable plan to achieve EBITDA break
even and profitability. We have retained Credit Suisse First Boston Corporation
to act as financial advisor in connection with this restructuring effort.
Because these discussions have only recently begun, it is not certain when, or
if, the discussions will lead to a successful restructuring. We anticipate that,
if these discussions are successful, this restructuring is likely to take the
form of a reorganization plan under Chapter 11, and we are currently negotiating
with our creditors regarding the possibility of a "pre-negotiated" or
"pre-packaged" reorganization plan to be filed under Chapter 11. We would expect
to emerge from such a proceeding as a viable going concern in a relatively short
period of time. However, there are no assurances that we will be able to do so.
Also, any restructuring plan is likely to have a material adverse effect on the
ability of our shareholders to recover their investment in our common stock,
with the value of such common stock likely being significantly reduced or even
eliminated. Any such restructuring plan is also likely to have a material
adverse effect on the ability of the holders of the senior notes and other of
our debt to receive interest and principal payments due them.
While we are diligently pursuing a financial restructuring, we are not able to
predict when or if we will be able to arrive at a restructuring plan acceptable
to the holders of the senior notes and our other creditors, or whether we will
be able to satisfactorily implement such a plan. If we are not able to negotiate
a mutually agreeable plan to restructure our debt with all of our creditors, one
or more of our creditors could take action to pursue such creditors' contractual
and legal rights against us, including, for example, filing a lawsuit against
us, issuing a notice of default and demanding that the maturity of the debt be
accelerated, initiating an action to foreclose on the collateral securing such
debt, or filing an involuntary petition for bankruptcy. If any of these actions
are taken, there can be no assurance that we will be able to achieve a
satisfactory restructuring of our capital structure or that we will be able to
continue as a going concern.
Summary of Liquidity and Financing Sources for Core Wireless Business
If we are successful in restructuring all or a substantial portion of our debt,
and are allowed to retain the $10 million received from the Aether escrow and
the $42.5 million that we expect to receive from the Satellite Ventures
transaction, as to which there can be no assurance, we anticipate that our
funding requirements through 2002 would be met with a combination of various
sources, including (1) cash on hand, (2) proceeds realized through the sale of
inventory relating to eLink and BlackBerry TM, and (3) the Aether and Satellite
Ventures proceeds described above. There can be no assurance that the foregoing
sources of liquidity will provide sufficient funds in the amounts or at the time
that funding is required. In addition, if our ability to realize such liquidity
from any such source is delayed or the proceeds from any such source are
insufficient to meet our expenditure requirements as they arise, we will seek
additional equity or debt financing, although it is unlikely under current
conditions that such additional financing will be available to us on reasonable
terms, if at all.
Even if we begin to generate cash in excess of our operating expenses, we will
still need to obtain additional funds from other sources to meet our ongoing
capital expenditures, working capital requirements, and any remaining principal
and interest payments. Assuming that we are successful in renegotiating our
various financing arrangements as described above, and after the $42.5 million
of funding is received from the Satellite Ventures transaction, we expect to
need up to $10.0 million of additional cash, which includes the costs of the
debt restructuring effort, to fund our business until we achieve positive cash
flow. We believe that $15.0 million (plus accrued interest) would be available
upon the second closing of the Satellite Ventures transaction and the associated
repayment of the note to be issued at the closing of the October 2001 Satellite
Ventures transaction. This second closing and note repayment is contingent upon
the FCC's approval of the Satellite Ventures' terrestrial re-use application,
which may not occur by the time we would need the funds, or may not occur at
all.
The foregoing projected cash needs are based on certain assumptions about our
business model and projected growth rate, including, specifically, assumed rates
of growth in subscriber activations and assumed rates of growth of service
revenue. While we believe these assumptions are reasonable, these growth rates
are difficult to predict and there is no assurance that the actual results that
we experience will meet the assumptions included in our business model and
projections. If our results of operations are less favorable than currently
anticipated, our cash requirements will be more than projected, and we will
require additional financing in amounts that may be material. The type, timing
and terms of financing that we select will be dependent upon our cash needs, the
availability of financing sources and the prevailing conditions in the financial
markets. We cannot guarantee that additional financing sources will be available
at any given time or available on favorable terms.
Commitments
At September 30, 2001, we had remaining contractual commitments to purchase
eLink and other subscriber equipment inventory in the amount of $1.3 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 $1.7
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 September 30, 2001, this cancellation penalty would
have been approximately $1.0 million.
The aggregate fixed and determinable portion of all commitments for inventory
purchases and other fixed contracts, related to the core wireless business, is
$3.4 million, of which $2.4 million is due in 2001.
XM Radio
XM Radio is operated, managed, and funded separately from our core wireless
business. While we do not have any obligation or commitments to provide
additional funding to XM Radio, and do not expect to provide any additional
funding, we may choose to do so in the future. XM Radio will require significant
additional funding in the future. If XM Radio is not successful in obtaining the
additional required financing, our investment in XM Radio could be negatively
impacted.
Summary of Cash Flow for the nine months ended September 30, 2001 and September
30, 2000
Nine Months
Ended September
30, 2001 Nine Months Ended September 30, 2000 (1)
-------- ----------------------------------------
Core Business Core Business XM Radio Consolidated
Cash Used In Operating Activities ($71,901) ($66,026) ($14,474) ($80,500)
Cash Provided by (Used in) Investing 46,912 11,351 (474,072) (462,721)
Cash Provided by Financing Activities:
Equity issuances 402 23,995 436,026 460,021
Debt payments on capital leases, vendor financing (9,037) (5,599) --- (5,599)
Net proceeds from debt issuances 35,250 37,000 37,000
High yield financing --- --- 322,898 322,898
Other (1,062) (1,126) (8,365) (9,491)
------- ------- ------- -------
Total Provided by Financing Activities 25,553 54,270 750,559 804,829
------ ------ ------- -------
Total Change in Cash $564 ($405) $262,013 $261,608
==== ====== ======== ========
Cash and Cash Equivalents $3,084 $371 $312,711 $313,082
Working Capital (509,613) 40,401 351,675 392,076
Restricted Investments included in working capital -- (41,038) (93,403) (134,441)
(1) As noted above, the nine month period ended September 30, 2000, includes
the results of XM Radio. As of January 1, 2001, results of XM Radio were
recorded pursuant to the equity method.
The $5.9 million increase in cash used in operating activities for the core
business was a result (i) the impact of the receipt, in 2000, of $14.6 million
of deferred revenue associated with the June 2000 Satellite Ventures'
transaction and (ii) costs associated with the terminated Rare Medium merger,
offset by reduced operating expenses and the timing of certain working capital
changes, primarily within accounts payable and accounts receivable. We expect
that losses going forward will be reduced as a result of the cost saving
measures that we have put into place; however, we will see an offsetting
increase in the cash used in operating activities as we make payments for
equipment inventory prior to the inventory being sold to end users.
The $35.6 million increase in cash provided by 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, as well as
reductions in capital spending for the first nine months of 2001 as compared to
the comparable period in 2000, partially offset by the purchase, in the first
nine months of 2000, of certain restricted investments associated with our
senior notes escrow.
The $28.7 million decrease in cash provided by financing activities in the core
business was a result of (i) the reduction in proceeds from the sale of stock
under the employee stock purchase plan and the exercise of stock options and
warrants in the amount of $5.2 million in the first nine months of 2000, as
compared to $402,000 in the first nine months of 2001, (ii) proceeds of $18.6
million received in the June 2000 Satellite Ventures transaction that were
allocated to the investors' option to convert to Motient common stock, (iii) a
$1.8 million reduction in debt issuance from 2000 to 2001, and (iv) $3.4 million
of vendor debt and capital lease repayments in the first nine months of 2001 as
compared to the comparable period in 2000.
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 September 30, 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.
Derivatives
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, with changes in value
reflected as current period income (loss). The effective date of SFAS No. 133,
as amended by SFAS 138, is for fiscal years beginning after September 15, 2000.
Except for the Rare Medium Note embedded call options discusssed in the
following paragraph, SFAS No. 133 was not material to our financial position or
results of operations as of or for the periods ended September 30, 2001.
In April and July 2001, we sold notes to Rare Medium totaling $50 million. The
notes were collateralized by up to 5 million of our XM Radio shares, and, until
maturity, which was extended until October 12, 2001, Rare Medium had the option
to exchange the note for a number of XM Radio shares equivalent to the principal
of the note plus any accrued interest thereon. We have determined the embedded
call options in the notes, which permit Rare Medium to convert the borrowings
into shares of XM Radio, to be derivatives which must be accounted for in
accordance with SFAS No.133 and accordingly recorded a gain in the amount of
$15.3 million in the third quarter of 2001 related to the Rare Medium Note call
options, which reduced the carrying value of the options as of September 30,
2001 to less than $1,000 on the consolidated condensed balance sheet. On October
12, 2001, the embedded call options in the Rare Medium notes expired
unexercised.
Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141 "Business Combinations" and SFAS No. 142 "Goodwill and Other Intangible
Assets." SFAS No. 141 requires business combinations initiated after June 30,
2001 to be accounted for using the purchase method of accounting, and broadens
the criteria for recording intangible assets separate from goodwill. Recorded
goodwill and intangibles will be evaluated against this new criteria and may
result in certain intangibles being subsumed into goodwill, or alternatively,
amounts initially recorded as goodwill may be separately identified and
recognized apart from goodwill. SFAS No. 142 requires the use of a
nonamortization approach to account for purchased goodwill and certain
intangibles. Under a nonamortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead would be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. We will adopt the provisions of each statement which apply
to goodwill and intangible assets acquired prior to June 30, 2001, on January 1,
2002. We are in the process of evaluating the financial statement impact of
adoption of SFAS No. 142.
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The entity is
required to capitalize the cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. The standard is
effective for fiscal years beginning after June 15, 2002. On October 3, 2001 the
FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" that replaces SFAS 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to be Disposed Of." The statement
requires that all long-lived assets be measured at the lower of carrying amount
or fair value less cost to sell, whether reported in continuing operations or in
discontinued operations. Therefore, discontinued operations will no longer be
measured on a net realizable value basis and will not include amounts for future
operating losses. The statement also broadens the reporting requirements for
discontinued operations to include disposal transactions of all components of an
entity (rather than segments of a business). Components of an entity include
operations and cash flows that can be clearly distinguished from the rest of the
entity that will be eliminated from the ongoing operations of the entity in a
disposal transaction. The statement is effective for fiscal years beginning
after December 15, 2001. We are currently evaluating, but have yet to determine,
the impact that adoption of SFAS No. 143 and SFAS No. 144 will have on our
financial statements.
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, 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.
Motient is subject to fair market value fluctuations of its fixed rate senior
high yield debt. As these high yield securities are freely traded, the fair
market value is impacted by market conditions which are based not only on the
interest rates of the notes, but also on the market's assessment of the risk
associated with these notes. Therefore, Motient does not believe that it is
possible to quantify a fair value fluctuation that may occur solely as a result
of interest rate fluctuations. For the period ended December 31, 2000, the fair
market value of Motient's fixed rate senior high yield notes was $111.6 million,
and as of September 30, 2001 was $70.4 million. The fair value of these notes
would be impacted by $3.35 million for every $0.01 change in the trading price
of the notes.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Motient is aware of two purported class action lawsuits filed by holders of Rare
Medium common stock challenging the previously proposed merger of Motient and
Rare Medium Group, Inc. that has been terminated: In re Rare Medium Group, Inc.
Shareholders Litigation, C.A. No. 19979 NC (filed in Delaware Chancery Court) ,
and Brickell Partners v. Rare Medium Group, Inc., et al., N.Y.S. Index No.
01602694 (filed in the New York Supreme Court) . Both complaints name Rare
Medium, members of Rare Medium's board of directors, the holders of Rare Medium
preferred stock and certain of their affiliated entities, and Motient as
defendants. The complaints allege that the defendants breached duties allegedly
owed to the holders of Rare Medium common stock in connection with the merger
agreement, and include allegations that: (1) the holders of Rare Medium
preferred stock engaged in self-dealing in the proposed merger; (2) the Rare
Medium board of directors allegedly breached its fiduciary duties by agreeing to
distribute the merger consideration differently among Rare Medium's common and
preferred shares; and (3) Motient allegedly aided and abetted the supposed
breaches of fiduciary duties.
Rare Medium, Motient, and the holders of Rare Medium preferred stock have filed
motions to dismiss the Delaware complaint, while Rare Medium and the holders of
Rare Medium preferred stock have filed motions to stay discovery in the Delaware
lawsuit. Plaintiffs have failed to respond to any of these motions. In light of
the termination of the proposed merger and the plaintiff's failure to pursue
their claims, Motient believes that the Delaware lawsuit will be dismissed as
moot.
Rare Medium and the holders of Rare Medium preferred stock have also filed a
motion to dismiss or stay the New York lawsuit. Motient was never served with
process in the New York lawsuit, and thus filed no motion to dismiss. However,
Motient has been informed by Rare Medium (1) that Rare Medium intends to move
for a dismissal on mootness grounds in the New York lawsuit, and (2) that the
Plaintiff in the New York lawsuit does not plan to oppose such a motion.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Description
10.42c - Amendment, dated October 12, 2001, to Amended and Restated
Asset Sale Agreement, dated as of January 8, 2001, between
Mobile Satellite Ventures LLC and Motient Services Inc.
(filed herewith).
10.50a - Amended and Restated Document Standstill and Termination
Agreement, dated as of October 12, 2001 (filed herewith).
10.51b - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 1, 2001 (filed herewith).
10.54a - Letter Agreement, dated October 1, 2001, between Rare Medium
Group, Inc. and Motient Corporation (filed herewith as
Exhibit 10.51b).
10.54b - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 8, 2001 (filed herewith).
10.54c - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 12, 2001 (filed herewith).
10.55 - Amended and Restated Investment Agreement, dated October 12,
2001, by and among Motient Corporation, Mobile Satellite
Ventures LLC, TMI Communications and Company, Limited
Partnership, and the other investors named therein (filed
herewith).
10.56 - Form of Stockholders' Agreement of Mobile Satellite Ventures
GP Inc. (filed herewith).
10.57 - Form of Limited Partnership Agreement of Mobile Satellite
Ventures LP (filed herewith).
10.58 - Form of Convertible Note of Mobile Satellite Ventures LP in
the amount of $50 million, to be issued to MSV Investors LLC
(filed herewith).
10.59 - Form of Promissory Note of Mobile Satellite Ventures LP in
the amount of $15 million to be issued to Motient Services
Inc. (filed herewith).
(b) Current Reports on Form 8-K
On October 1, 2001, the Company filed a Current Report on
Form 8-K, in response to Item 9-Regulation FD Disclosure,
reporting that the Company had issued a news release
regarding cost reduction and certain other matters.
On October 15, 2001, the Company filed a Current Report on
Form 8-K, in response to Item 5-Other Events, reporting that
the Company had entered into an amended investment agreement
involving its satellite communications venture, Mobile
Satellite Ventures LLC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
November 14, 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
10.42c - Amendment, dated October 12, 2001, to Amended and Restated
Asset Sale Agreement, dated as of January 8, 2001, between
Mobile Satellite Ventures LLC and Motient Services Inc.
(filed herewith).
10.50a - Amended and Restated Document Standstill and Termination
Agreement, dated as of October 12, 2001 (filed herewith).
10.51b - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 1, 2001 (filed herewith).
10.54a - Letter Agreement, dated October 1, 2001, between Rare Medium
Group, Inc. and Motient Corporation (filed herewith as
Exhibit 10.51b).
10.54b - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 8, 2001 (filed herewith).
10.54c - Letter Agreement between Rare Medium Group, Inc. and Motient
Corporation, dated October 12, 2001 (filed herewith).
10.55 - Amended and Restated Investment Agreement, dated October 12,
2001, by and among Motient Corporation, Mobile Satellite
Ventures LLC, TMI Communications and Company, Limited
Partnership, and the other investors named therein (filed
herewith).
10.56 - Form of Stockholders' Agreement of Mobile Satellite Ventures
GP Inc. (filed herewith).
10.57 - Form of Limited Partnership Agreement of Mobile Satellite
Ventures LP (filed herewith).
10.58 - Form of Convertible Note of Mobile Satellite Ventures LP in
the amount of $50 million, to be issued to MSV Investors LLC
(filed herewith).
10.59 - Form of Promissory Note of Mobile Satellite Ventures LP in
the amount of $15 million to be issued to Motient Services
Inc. (filed herewith).