SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-23044
---------------
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)
---------------
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, par value $.01 per share, outstanding at
May 1, 2002: 25,000,000
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statement of Operations for the Three
Months Ended March 31, 2002 and 2001 (Unaudited) 3
Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001 (Unaudited) 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and March 31, 2001 (Unaudited) 5
Notes to Consolidated Condensed Financial Statements as
of March 31, 2002 (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 47
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 48
Item 5. Other Information 48
Item 6. Exhibits and Reports on Form 8-K 49
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Item 1. Financial Statements
Motient Corporation and Subsidiaries
(Debtor-in-Possession for the three months ended March 31, 2002)
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited)
Three Months Ended March 31,
2002 2001
---- ----
REVENUES
Services and related revenue $12,279 $18,007
Sales of equipment 4,216 5,400
-------- --------
Total Revenues 16,495 23,407
COSTS AND EXPENSES
Cost of services and operations 15,332 18,164
Cost of equipment sold 4,534 5,934
Sales and advertising 3,870 9,649
General and administrative 3,542 6,327
Depreciation and amortization 5,187 8,550
-------- --------
Operating Loss (15,970) (25,217)
Interest income -- 142
Other income 837 --
Interest expense (contractual amount of $12,223 for the three
months ended March 31, 2002) (1,739) (15,426)
Deferred gain on sale of assets to MSV 1,419 --
Equity in loss of XM Radio -- (12,472)
-------- ---------
Loss before extraordinary item and reorganization items: (15,453) (52,973)
Reorganization items:
Professional fees related to reorganization (4,578) --
Write off of debt financing fees (12,975) --
Interest income 121 --
-------- --------
Loss Before Extraordinary Item (32,885) (52,973)
Extraordinary Loss on Extinguishment of Debt -- (1,033)
-------- ---------
Net Loss Attributable to Common Shareholders $(32,885) $(54,006)
========= =========
Basic and Diluted Loss Per Share of Common Stock:
Loss Before Extraordinary Item $(0.56) $(1.07)
Extraordinary Loss on Extinguishment of Debt -- (0.02)
-------- --------
Net Loss Attributable to Common Shareholders $(0.56) $(1.09)
========== ==========
Weighted-Average Common Shares Outstanding 58,256 49,689
The accompanying notes are an integral part of these consolidated
financial statements.
3
Motient Corporation and Subsidiaries
(Debtor-in-Possession as of March 31, 2002)
Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, 2002 December 31, 2001
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents $21,003 $33,387
Accounts receivable-trade, net of allowance for doubtful accounts 10,972 11,491
Inventory 5,732 6,468
Due from MSV, net 439 521
Deferred equipment costs 11,932 13,662
Other current assets 12,359 16,566
------ --------
Total current assets 62,437 82,095
PROPERTY AND EQUIPMENT, net 60,621 64,001
GOODWILL AND OTHER INTANGIBLES, net 50,914 51,631
DEFERRED CHARGES AND OTHER ASSETS 3,656 11,890
---------- --------
Total assets $177,628 $209,617
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Pre petition liabilities subject to compromise:
Accrued expenses $4,833 $--
Senior Notes, including accrued interest thereon - in default 367,673 --
Rare Medium Note Payable, including accrued interest thereon - 27,030 --
in default -------- --------
Total pre petition liabilities subject to compromise 399,536 --
Current liabilities not subject to compromise:
Accounts payable and accrued expenses 15,024 50,346
Senior Notes, net of discount - in default -- 329,371
Rare Medium Note Payable - in default -- 26,910
Obligations under capital leases due within one year 7,857 8,691
Deferred equipment revenue 11,972 13,662
Deferred revenue and other current liabilities 14,010 15,781
------ ------
Total current liabilities not subject to compromise 48,863 444,761
Total current liabilities 448,399 444,761
LONG-TERM LIABILITIES NOT SUBJECT TO COMPROMISE:
Capital lease obligations 163 257
Vendor financing commitment 3,316 3,316
Other long-term liabilities 33,803 36,752
------ ------
Total long-term liabilities 37,282 40,325
Total liabilities 485,681 485,086
STOCKHOLDERS' DEFICIT:
Preferred Stock; par value $0.01; authorized 200,000 shares; no -- --
shares outstanding
Common Stock; voting, par value $0.01; authorized 150,000,000 shares 584 557
Additional paid-in capital 973,600 973,423
Deferred compensation (151) (247)
Common Stock Purchase Warrants 81,773 81,773
Cumulative loss (1,363,859) (1,330,975)
----------- -----------
STOCKHOLDERS' DEFICIT (308,053) (275,469)
--------- ---------
Total liabilities and stockholders' deficit $177,628 $209,617
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Motient Corporation and Subsidiaries
(Debtor-in-Possession for the three months ended March 31, 2002)
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended March 31,
2002 2001
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before reorganization items $(15,453) $(54,006)
Adjustments to reconcile net loss before reorganization items to
net cash used in operating activities:
Amortization of Guarantee Warrants and debt related costs 56 2,753
Depreciation and amortization 5,187 8,550
Deferred gain on sale of assets to MSV (1,419) --
Equity in loss of XM Radio -- 12,472
Loss on sale of XM Radio stock -- 407
Extraordinary loss on extinguishment of debt -- 1,033
Non-cash stock compensation 96 595
Changes in assets and liabilities:
Inventory 736 (2,964)
Accounts receivable-- trade 519 (7,562)
Other current assets 6,329 (429)
Accounts payable and accrued expenses (2,388) 8,458
Accrued interest Senior Note 1,200 10,259
Deferred trade payables -- (1,380)
Deferred revenue and other deferred items--net (4,857) 1,245
------- --------
Net cash used in operating activities before reorganization
items (9,994) (20,569)
CASH USED BY REORGANIZATION ITEMS:
Reorganization items - professional fees (4,578) --
Professional fees accrued not paid 3,472 --
Interest income 121 --
-------- ------
Net cash used by reorganization items (985) --
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted investments, net -- (345)
Proceeds from the sale of XM Radio stock -- 33,539
Additions to property and equipment (494) (3,254)
------- ------
Net cash (used in) provided by investing activities (494) 29,940
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 17 259
Principal payments under capital leases (928) (751)
Principal payments under Vendor Financing -- (1,066)
Repayment of Term Loan -- (8,500)
Proceeds from Bank Financing -- 6,000
Debt issuance costs -- --
------ -------
Net cash used in financing activities (911) (4,058)
Net (decrease) increase in cash and cash equivalents (12,384) 5,313
CASH AND CASH EQUIVALENTS, beginning of period 33,387 2,520
-------- ------
CASH AND CASH EQUIVALENTS, end of period $21,003 $7,833
======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession as of March 31, 2002)
Notes to Consolidated Condensed Financial Statements
March 31, 2002
(Unaudited)
1. ORGANIZATION, BUSINESS AND LIQUIDITY
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.
The Company considers the two-way mobile communications service described in
this paragraph 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. In recent
periods, certain factors have placed significant pressures on Motient's
financial condition and liquidity position. For a variety of reasons, Motient
has not been able to accelerate revenue growth at the pace required to enable it
to generate cash in excess of its operating expenses. These factors include
competition from other wireless data suppliers and other wireless communications
providers with greater resources, cash constraints that have limited Motient's
ability to generate greater demand, unanticipated technological and development
delays, and general economic factors. During 2001, in particular, Motient's
efforts were also hindered by the downturn in the economy and capital markets.
These factors contributed to the Company's decision to file a voluntary petition
for reorganization under Chapter 11 of the United States Federal Bankruptcy Code
in January 2002. Motient's plan of reorganization was confirmed on April 26,
2002 and became effective on May 1, 2002. See "Motient's Chapter 11 Filing and
Plan of Reorganization" below.
XM Radio
On November 19, 2001, Motient disposed of its equity interest in XM Satellite
Radio Holdings Inc. ("XM Radio"), a public company. For the period from January
1, 2001 through November 19, 2001, the Company accounted for its investment in
XM Radio pursuant to the equity method of accounting.
6
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP, ("MSV"), in which it owned, until November 26, 2001, 80%
of the membership interests. The remaining 20% interests in MSV were owned by
three investors unrelated to Motient; however, the minority investors had
certain participating rights which provided for their participation in certain
business decisions that were made in the normal course of business; therefore,
in accordance with Emerging Issues Task Force Issue No 96-16, the Company's
investment in MSV has been recorded for all periods presented pursuant to the
equity method.
Through November 26, 2001, MSV used the Company's satellite network to conduct
research and development activities. On November 26, 2001, Motient sold the
assets comprising its satellite communications business to MSV, as part of a
transaction in which certain other parties joined MSV, including TMI
Communications and Company Limited Partnership ("TMI"), a Canadian satellite
services provider. In consideration for its satellite business assets, Motient
received the following: (i) a $24 million cash payment in June 2000, (ii) a $41
million cash payment paid at closing on November 26, 2001, net of $4 million
retained by MSV to fund the Company's future sublease obligations to MSV for
rent and utilities, through November 2003, and (iii) a 5-year $15 million note.
In this transaction, TMI also contributed its satellite communications business
assets to MSV. In addition, Motient purchased a $2.5 million convertible note
issued by MSV, and certain other investors, including a subsidiary of Rare
Medium Group, Inc. ("Rare Medium"), purchased a total of $52.5 million of
convertible notes. As of March 31, 2002, the Company had an ownership
percentage, on an undiluted basis, of approximately 48% of MSV.
Assuming that all of MSV's convertible notes are converted into limited
partnership units of MSV, Motient would have a 33.3% equity interest in MSV.
MSV has filed a separate application with the FCC with respect to MSV's plans
for a new generation satellite system utilizing ancillary terrestrial base
stations. Within 90 days of the receipt of approval and final order from the
FCC, and provided that such approval occurs by March 31, 2003, certain of the
investors (excluding Motient) in MSV will invest an additional $50 million in
MSV and receive additional equity interests. Upon consummation of such
additional investment, an $11.5 million note, issued by MSV to TMI and the $15
million note to Motient will be repaid in full, and Motient's ownership interest
in MSV will be reduced to approximately 25.5%. Should the consummation of such
additional investment not occur prior to November 25, 2006, both the $11.5
million note (plus accrued interest thereon) to TMI and the $15.0 million note
(plus accrued interest thereon) to the Company will be due in full.
7
Operational Restructuring
In the third quarter of 2001, the Company restructured 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 late-2002. The Company recorded a restructuring charge in 2001 of
$4.75 million. As of March 31, 2002, the Company had no remaining operational
restructuring liabilities.
8
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 with
the SEC.
The consolidated balance sheet as of March 31, 2002, the consolidated statements
of operations for the three months ended March 31, 2002 and 2001, and cash flows
for the three months ended March 31, 2002 and 2001, have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at March 31, 2002, and
for all periods presented have been made.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
As noted above, effective January 1, 2001, the Company's investment in XM Radio
was recorded pursuant to the equity method of accounting. For the first quarter
of 2001, XM Radio recorded no revenue, incurred $42.1 million of operating
expenses and had a net loss attributable to common stockholders of $42.7
million.
Additionally, the Company's investment in MSV is recorded pursuant to the equity
method of accounting for all periods presented.
Comprehensive Income
Statement of Financial Accounting Standards, ("SFAS") No. 130, "Reporting of
Comprehensive Income" requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements and/or
notes thereto. Since the Company does not have any components of "other
comprehensive income," reported net income is the same as "comprehensive income"
for the quarters ended March 31, 2002 and 2001.
9
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.
SFAS No. 133 was not material to the Company's financial position or results of
operations as of or for the period ended March 31, 2002.
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to the
continental United States, Alaska, Hawaii, and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
segments:
Three Months Ended March 31,
Summary of Revenue 2002 2001
---- ----
(in millions)
Wireless Internet $4.1 $2.0
Field services 4.3 5.9
Transportation 3.0 4.1
Telemetry 0.7 0.7
Maritime and other 0.2 5.3
Equipment 4.2 5.4
------------- -------------
Total $16.5 $ 23.4
============== =============
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.
New Accounting Pronouncements
In January 2002, the Company adopted 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
10
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 will 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 Company had approximately
$5.0 million of recorded goodwill as of January 1, 2002. Based upon the
reorganization value attributed to the Company through the Chapter 11 bankruptcy
process, the Company does not believe that an impairment loss has been incurred.
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. The Company does not
currently have any assets held for retirement, and, accordingly, does not
believe that the adoption of SFAS No. 143 will be material to its financial
statements.
On January 1, 2002, the Company also adopted 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. Based upon the
reorganization value attributed to the Company through the Chapter 11 bankruptcy
process, the Company does not believe that an impairment loss has been incurred.
Concentrations of Credit Risk
For the three months ended March 31, 2002, 4 customers accounted for
approximately 46% of the Company's service revenue, with three of those
customers each accounting for more than 10%.
Other
The Company made no payments to related parties in the three-month period ended
March 31, 2002, as compared to $380,000 in the three-month period ended March
31, 2001, for capital assets and service-related obligations. The Company did
11
not receive any payments from related parties in either of the first three
months of 2002 or 2001. As of March 31, 2002, the Company had a net due from
related parties in the amount of $439,000. For the three months ended March 31,
2001, the Company recorded revenue from related parties in the amount of $1.8
million related to the MSV satellite capacity agreement.
12
3. LIQUIDITY AND FINANCING
Liquidity and Financing Requirements
As described below under "Motient's Chapter 11 Filing and Plan of
Reorganization," in January 2002, the Company and three of its four wholly owned
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Federal Bankruptcy Code. Motient Ventures Holding Inc. did not file for
Chapter 11 and had no activities during this period. The only asset of this
subsidiary is the Company's interest in MSV. As the investment balance in MSV is
$0 as of March 31, 2002, no separate disclosure for this subsidiary is provided.
The Company's plan of reorganization was confirmed on April 26, 2002 and became
effective on May 1, 2002. The reorganization significantly deleveraged Motient's
balance sheet and significantly reduced Motient's ongoing interest expense. As
of the effective date of the plan, Motient had approximately $31.1 million of
debt (comprised of capital leases, note payables to Rare Medium and Credit
Suisse First Boston ("CSFB") and the outstanding Motorola credit facility).
The Company does not expect to achieve EBITDA break even until the fourth
quarter of 2002, at the earliest. Also, even if the Company begins to
generate cash in excess of its operating expenses, it expects to continue
to require additional funds to meet remaining interest obligations, capital
expenditures, and other non-operating cash expenses. The Company believes
that its cash on hand, which, together with other available funding sources
such as net cash from operations and changes in working capital, will be
sufficient to fund operations through 2002. While the Company believes
there are potential alternatives and additional sources of liquidity to
fund the operations if these sources are insufficient, 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 it will be able to meet
its financial projections. If the Company's cash requirements are more than
currently expected, the Company will require additional financing in
amounts that may be material.
Additionally, the capital resources of reorganized Motient may not be sufficient
to permit it to fund its planned launch of new products and services or achieve
operating profitability. Failure to generate or raise sufficient funds may
require the Company to delay or abandon some of its plans, which could harm its
business and competitive position. The Company may meet additional capital needs
by issuing debt or equity securities or borrowing funds from one or more
lenders; however, it may not have timely access to additional financing sources
on acceptable terms. If it does not, it may not be able to expand its
operations, network and services as intended.
Motient's Chapter 11 Filing and Plan of Reorganization
On January 10, 2002, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed
with the U.S. Bankruptcy Court for the Eastern District of Virginia on February
28, 2002. The cases were jointly administered under the case name "In Re Motient
13
Corporation, et. al.," Case No. 02-80125. The plan was confirmed on April 26,
2002, and became effective on May 1, 2002.
Under the plan of reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for approximately
25,000,000 shares of the Company's common stock. Certain of the Company's
creditors will also receive an aggregate of 97,256 shares of the Company's
common stock in settlement for amounts owed to them. These shares will be issued
upon completion of the bankruptcy claims process. Holders of the Company's
pre-reorganization common stock became entitled to receive warrants to purchase
an aggregate of approximately 1,496,512 shares of common stock. Of these,
warrants to purchase an aggregate of approximately 1,481,539 shares are
currently outstanding and warrants to purchase an aggregate of approximately
14,973 shares will be issued once Motient obtains an exemptive order from the
U.S. Department of Labor permitting Motient's 401(k) savings plan to hold the
warrants. The warrants may be exercised to purchase shares of Motient's common
stock at a price of $.01 per share, will expire May 1, 2004, or two years after
the effective date of reorganization, and will not be exercisable unless and
until the average closing price of Motient's common stock for ninety consecutive
trading days is equal to or greater than $15.44 per share. Also, Motient expects
to issue to Evercore Partners LP, financial advisor to the creditors' committee
in Motient's reorganization, a warrant to purchase up to 343,450 shares of
common stock, at an exercise price of $3.95 per share. The warrant will have a
term of five years. If the average closing price of Motient's common stock for
thirty consecutive trading days is equal to or greater than $20.00, Motient may
require Evercore to exercise the warrant, provided the common stock is then
trading in an established public market. Issuance of this warrant is subject to
approval by the Bankruptcy Court of Evercore's fees.
Effects of the Chapter 11 Filing
As a result of its Chapter 11 bankruptcy filing, the Company saw a slower
adoption rate for its services in the first quarter of 2002. In a large customer
deployment, the upfront cost of the hardware can be significant. Because the
hardware generally is usable only on Motient's network, certain customers
delayed adoption while the Company was in Chapter 11. In an effort to accelerate
adoption of its services, the Company did, in the first quarter of 2002, in
selected instances, offer certain incentives for adoption of its services that
were outside of its customary contract terms, such as extended payment terms or
temporary hardware rental. None of these offers were accepted; therefore, there
was no impact to the Company's financial statements. Additionally, certain of
14
the Company's trade creditors required either deposits for future services or
shortened payment terms; however, none of these deposits or changes in payment
terms were material and none of the Company's key suppliers have ceased to do
business with it as a result of our reorganization.
Further details regarding the plan are contained in Motient's Disclosure
Statement with respect to the plan, which was filed as Exhibit 99.2 to the
Company's current report on Form 8-K dated March 4,2002.
Effective May 1, 2002, the Company will adopt "fresh start" accounting, which
requires that the reorganized value of the Company, deemed to be approximately
$234 million, as determined by the court, be allocated to the Company's assets
and liabilities in accordance with Accounting Principles Bulletin Opinion 16
("APB No. 16"), Business Combinations, for transactions reported on the basis of
the purchase method." The Company is in the process of allocating the
reorganization value to specific tangible and intangible assets; however, if any
portion of the Company's reorganization value cannot be attributed to specific
tangible or intangible assets, the Company will report as an intangible asset
"reorganization value in excess of amounts allocable to identifiable assets."
As of March 31, 2002, the Company was a party to the following debt facilities:
Rare Medium: Unsecured note payable to Rare Medium in the amount of $27.0
million of principal and accrued interest thereon. Under the plan of
reorganization, the Rare Medium note was cancelled and replaced by a new note in
the principal amount of $19.0 million. The new note was issued by a new
subsidiary of Motient Corporation that owns 100% of Motient Ventures Holding
Inc., which owns all of the Company's interests in MSV. The new note has a term
of 3 years and carries interest at 9%. The new note allows the Company to elect
to accrue interest and add it to the principal, instead of paying interest in
cash. The note requires that it be prepaid using a pro rata portion of 25% of
the proceeds of any repayment of the $15 million note from MSV.
Vendor Financing: Motorola provides the Company vendor financing to finance up
to 75% of the purchase price of additional network base stations. As of March
31, 2002, $3.3 million was outstanding under this facility at an interest rate
of 9.59%, and no amounts were available for borrowing.
$335 Million Unit Offering: On March 31, 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. As noted above, on
the effective date of the Company's plan of reorganization, this debt was
eliminated and exchanged for new common stock as a result of the implementation
of the Company's plan of reorganization.
Summary of Liquidity and Financing Sources for the Core Wireless Business
15
With the successful restructuring of a substantial portion of the Company's debt
as part of the Chapter 11 reorganization, the Company anticipates that its
funding requirements through 2002 will be met with cash on hand, net cash from
operations, and proceeds realized through the sale of inventory relating to
eLink and BlackBerry TM. The Company's projected cash requirements 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 that are experienced will meet the
assumptions included in the Company's business model and projections. If the
results of operations are less favorable than 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.
Additionally, the Company believes that $11.25 million (plus accrued interest)
would be available upon the second closing of the MSV transaction and the
associated repayment of the $15 million note that was issued to the Company at
the November 2001 closing of the MSV transaction. Upon repayment of this note by
MSV, $3.75 million of the proceeds are required to be used to repay a portion of
the $19 million note payable to Rare Medium and the $750,000 note to CSFB. This
second closing is contingent upon the FCC's approval and final order of MSV's
terrestrial re-use application, which may not occur by the time the Company
would need the funds, or may not occur at all. If the second closing does not
happen prior to November 25, 2006, the $15 million note receivable from MSV,
including accrued interest thereon, becomes due and payable.
4. COMMITMENTS AND CONTINGENCIES
As of March 31, 2002 the Company had no contractual commitments; however, during
April the Company contracted to purchase eLink and other subscriber equipment
inventory in the amount of $2.4 million, all of which will be paid in 2002.
Also at March 31, 2002, the Company had certain contingent and/or disputed
obligations under its satellite construction contract, which contained flight
performance incentives payable by the Company to the contractor if the satellite
performed according to the contract. Upon the implementation of the plan of
reorganization, this contract is terminated, and all amounts owed by the Company
will be converted into shares of new equity of the restructured company.
5. LEGAL AND REGULATORY MATTERS
Legal
16
The Company is aware of a purported class action lawsuit filed by holders of
Rare Medium common stock challenging the previously proposed merger of Motient
and Rare Medium Group, Inc. that was terminated: In re Rare Medium Group, Inc.
Shareholders Litigation, C.A. No. 18879 NC (cases filed in Delaware Chancery
Court between May 15, 2001 and June 7, 2001, and consolidated by the Court on
June 22, 2001). The complaint names 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 complaint alleges 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. The complaint sought to
enjoin the proposed merger, and also sought compensatory damages in an
unspecified amount.
On April 15, 2002, Plaintiffs' counsel informed the Court that Plaintiffs and
the Rare Medium defendants had agreed upon a settlement of the Delaware
litigation, and that they expected to present settlement papers to the Court
dismissing the case by May 15, 2002.
A second lawsuit challenging the previously proposed merger, Brickell Partners
v. Rare Medium Group, Inc. et al., N.Y.S. Index 01602694 was filed in the New
York Supreme Court on May 30, 2001. Rare Medium and the holders of Rare Medium
preferred stock 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 that an unopposed
motion by Rare Medium to dismiss the New York lawsuit as moot was granted on
February 21, 2002, and a judgment dismissing the case was entered by the New
York Court on April 24, 2002.
Regulatory
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the Federal Communications Commission, or FCC, have
in the past materially affected and may in the future materially affect the
telecommunications industry in general, and Motient's wireless business in
particular. In addition, many aspects of regulation at the federal, state and
local level currently are subject to judicial review or are the subject of
administrative or legislative proposals to modify, repeal, or adopt new laws and
administrative regulations and policies. Neither the outcome of these
proceedings nor their impact on Motient's operations can be predicted at this
time.
The ownership and operation of the Company's terrestrial network is subject to
the rules and regulations of the FCC, which acts under authority established by
the Communications Act of 1934 and related federal laws. Among other things, the
FCC allocates portions of the radio frequency spectrum to certain services and
17
grants licenses to and regulates individual entities using that spectrum.
Motient operates pursuant to various licenses granted by the FCC.
The Company is subject to the Communications Assistance for Law Enforcement Act,
or CALEA. Under CALEA, the Company must ensure that law enforcement agencies can
intercept certain communications transmitted over its networks. The deadline for
complying with the CALEA requirements and any rules subsequently promulgated was
June 30, 2000. The Company has pending with the FCC a petition for an extension
of the deadline with respect to certain of its equipment, facilities, and
services and the Company has been working with law enforcement to arrive at an
agreement on a further extension of this deadline and on an extension of the
deadline for other Motient equipment, facilities, and services. It is possible
that the Company may not be able to comply with all of CALEA's requirements or
do so in a timely manner. Where compliance with any requirement is deemed by the
FCC to be not "reasonably achievable," the Company may be exempted from such
requirement. Should the Company not be exempted from complying, of if federal
funds are not available to the Company to assist in the funding of any required
changes, the requirement to comply with CALEA could have a material adverse
effect on the conduct of the Company's business.
The Company is also subject to the FCC's universal service fund, which supports
the provision of affordable telecommunications to high-cost areas, and the
provision of advanced telecommunications services to schools, libraries, and
rural health care providers. All of the terrestrial network revenue falls within
excluded categories, thereby eliminating the Company's universal service
assessments. There can be no assurances that the FCC will retain the exclusions
or its current policy regarding the scope of a carrier's contribution base. The
Company may also be required to contribute to state universal service programs.
The requirement to make these state universal service payments, the amount of
which in some cases may be subject to change and is not yet determined, may have
a material adverse impact on the conduct of the Company's financial results.
The Company believes that it has licenses for a sufficient number of channels to
meet its current capacity needs on the terrestrial network. To the extent that
additional capacity is required, the Company may participate in other upcoming
auctions or acquire channels from other licensees.
In November 2001, Nextel proposed, in a "white paper" to the FCC, that certain
of its wireless spectrum in the 700 MHz band, lower 800 MHz band, and 900 MHz
band be exchanged for spectrum in the upper 800 MHz band and in the 2.1 GHz
band. Nextel stated that it was making this proposal to address existing
inadvertent interference problems for public safety communications systems
caused by the existing spectrum allocation. Nextel's proposal addresses this
problem by creating blocks of contiguous spectrum to be shared by public safety
agencies. The Nextel proposal, as submitted to the FCC, would require either (i)
that Motient continue to operate using its existing lower 800 MHz band spectrum
on a secondary, non-interfering basis with the public safety agencies who would
be relocated in the same spectrum, or (ii) that Motient relocate, at its own
expense, to other spectrum in the 700 MHz or 900 MHz bands. Motient believes it
is highly unlikely that it could continue to operate in the lower 800 MHz bands
on a secondary, non-interfering basis. If Motient is required to relocate to
18
spectrum in the 700 MHz or 900 MHz bands, it would incur substantial operational
and financial costs, including costs relating to: manufacturing replacement
infrastructure and user hardware to operate on Motient's network in the 700 MHz
or 900 MHz bands, disruptions to existing customers as a result of the
relocation to other spectrum bands, possible diminished data speed, and coverage
gaps. There are also potential problems with the 700 MHz and 900 MHz bands that
might make it difficult, if not impossible, for Motient to duplicate its
existing operations in the 800 MHz band.
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. The Company does not believe its
operations will be impacted until the Commission adopts final rules in that
proceeding and it cannot predict what actions the FCC will take.
6. SUBSEQUENT EVENTS
As noted above, the Company's plan of reorganization became effective on May 1,
2002.
7. FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Company's acquisition of Motient Communications Inc. on
September 30, 1998 (the "Motient Communications Acquisition"), and related
financing discussed above, the Company formed a new wholly-owned subsidiary,
Motient Holdings Inc. ("Motient Holdings"). The Company contributed all of its
inter-company notes receivables and transferred its rights, title and interests
in Motient Services Inc. and certain other subsidiaries that were subsequently
dissolved (together with Motient Communications, the "Subsidiary Guarantors") to
Motient Holdings, and Motient Holdings was the acquirer of Motient
Communications and the issuer of the Senior Notes. Motient Corporation ("Motient
Parent") was a guarantor of the Senior Notes (until cancellation of the Senior
Notes in accordance with the implementation of the Company's plan of
reorganization). The Senior Notes contained covenants that, among other things,
limited 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 were jointly and severally guaranteed on full and unconditional
basis by the Subsidiary Guarantors and Motient Parent. The following unaudited
condensed consolidating information for these entities presents:
o Condensed consolidating balance sheets as of March 31, 2002 and
December 31, 2001, the condensed consolidating statements of
operations for the three months ended March 31, 2002 and 2001, and
the condensed consolidating statement of cash flows for the three
months ended March 31, 2002 and 2001.
o Elimination entries necessary to combine the entities
comprising Motient.
19
Condensed Consolidating Balance Sheet
(Debtor-in-Possession)
As of March 31, 2002
(unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,003 $ -- $ -- $ 21,003 $ -- -- $ 21,003
Accounts receivable - trade, net 10,972 -- -- 10,972 -- -- 10,972
Inventory 5,732 -- -- 5,732 -- -- 5,732
Investment in/due from subsidiary 439 -- -- 439 -- -- 439
Deferred equipment costs 11,932 -- -- 11,932 -- -- 11,932
Other current assets 12,359 -- -- 12,359 -- -- 12,359
-------- -------- --------- ----------- -------- ---------- ----------
Total current assets 62,437 -- -- 62,437 -- -- 62,437
PROPERTY AND EQUIPMENT-- NET 60,621 -- -- 60,621 -- -- 60,621
GOODWILL AND INTANGIBLES-- NET 50,914 -- -- 50,914 -- -- 50,914
DEFERRED CHARGES AND OTHER ASSETS--NET 3,656 -- -- 3,656 -- -- 3,656
-------- --------- --------- ----------- -------- ---------- ----------
Total assets $177,628 $ -- $ -- $ 177,628 $ -- $ -- $ 177,628
======== ======== ========= =========== ========= ========== ==========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
PRE PETITION LIABILITES SUBJECT TO
COMPROMISE:
Accrued expenses $ 1,533 $1,750 $ -- $ 3,283 $ 1,550 $ -- $ 4,833
Senior Notes, including accrued
interest thereon - in default -- 367,673 -- 367,673 -- -- 367,673
Rare Medium Note Payable, including
accrued interest thereon-in default -- -- -- -- 27,030 -- 27,030
-------- --------- --------- ----------- ------ ------- ------
Total pre petition liabilities 1,533 369,423 -- 370,956 28,580 -- 399,536
subject to compromise
CURRENT LIABILITIES NOT SUBJECT TO
COMPROMISE:
Accounts payable and accrued expenses 13,755 1,025 -- 14,780 244 -- 15,024
Obligations under capital leases due
within one year 7,857 -- -- 7,857 -- -- 7,857
Deferred equipment revenue 11,972 11,972 -- -- 11,972
Deferred revenue and
other liabilities 14,010 -- -- 14,010 -- -- 14,010
Total current liabilities not -------- ---------- --------- ----------- ------- -------- ------
subject to compromise 47,594 1,025 -- 48,619 244 -- 48,863
Total current liabilities 49,127 370,448 -- 419,575 28,824 -- 448,399
DUE TO PARENT/AFFILIATE 830,391 (91,219) (739,172) -- 290,729 (290,729) --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/Parent -- 11,500 -- 11,500 (11,500) -- --
Vendor Financing Commitment 3,316 -- -- 3,316 -- -- 3,316
Capital lease obligations 163 -- -- 163 -- -- 163
20
Other long-term liabilities 33,803 -- -- 33,803 -- -- 33,803
-------- --------- --------- ----------- ------- -------- ------
Total long-term liabilities 37,282 11,500 -- 48,782 (11,500) -- 37,282
Total liabilities 916,800 290,729 (739,172) 468,357 308,053 (290,729) 485,681
STOCKHOLDERS' (DEFICIT) EQUITY (739,172) (290,729) 739,172 (290,729) (308,053) 290,729 (308,053)
Total liabilities and stockholders' -------- ----------- --------- ------------ --------- ------- ---------
(deficit) equity $177,628 $ -- $ -- $ 177,628 $ -- $ -- $177,628
======== ========= ======== =========== ======== ======== ========
Condensed Consolidating Balance Sheet
As of December 31, 2001
(unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
---------- ------ -------- ------ ------------ ------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 33,387 $ -- $ -- $ 33,387 $ -- -- $33,387
Accounts receivable-trade, net 11,491 -- -- 11,491 -- -- 11,491
Inventory 6,468 -- -- 6,468 -- -- 6,468
Investment in/due from subsidiary 521 -- -- 521 -- -- 521
Deferred equipment costs 13,662 -- -- 13,662 -- -- 13,662
Other current assets 16,113 -- -- 16,113 453 -- 16,566
-------- -------- --------- ------------ ----------- ---------- ---------
Total current assets 81,642 -- -- 81,642 453 -- 82,095
PROPERTY AND EQUIPMENT--NET 64,001 -- -- 64,001 -- -- 64,001
GOODWILL AND INTANGIBLES--NET 51,631 -- -- 51,631 -- -- 51,631
DEFERRED CHARGES AND OTHER
ASSETS--NET 4,487 7,403 -- 11,890 -- 11,890
-------- ---------- --------- ------------ ---------- ---------- ------
Total assets $201,761 $7,403 $ -- $ 209,164 $ 453 $ -- $209,617
======== ========== ========= ============ =========== ========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
expenses $ 17,009 $31,473 $ -- $ 48,482 $ 1,864 $ -- $ 50,346
Senior Notes, net of discount -in
default -- 329,371 -- 329,371 -- -- 329,371
Obligations under capital leases
due within - one year 8,691 -- -- 8,691 -- -- 8,691
Rare Medium Notes - in default -- -- -- -- 26,910 -- 26,910
Deferred equipment revenue 13,662 -- -- 13,662 -- -- 13,662
Deferred revenue and other
liabilities 15,781 -- -- 15,781 -- -- 15,781
-------- ---------- --------- ------------ ----------- ---------- ----------
Total current liabilities 55,143 360,844 -- 415,987 28,774 -- 444,761
DUE TO PARENT/AFFILIATE 828,236 (106,293) (721,943) -- 258,648 (258,648) --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/Parent -- 11,500 -- 11,500 (11,500) -- --
Vendor Financing Commitment 3,316 -- -- 3,316 -- -- 3,316
Capital lease obligations 257 -- -- 257 -- -- 257
Other long-term liabilities 36,752 -- -- 36,752 -- -- 36,752
-------- --------- --------- ------------ ----------- ---------- ----------
Total long-term liabilities 40,325 11,500 -- 51,825 (11,500) -- 40,325
Total liabilities 923,704 266,051 (721,943) 467,812 275,922 (258,648) 485,086
STOCKHOLDERS' (DEFICIT) EQUITY (721,943) (258,648) 721,943 (258,648) (275,469) 258,648 (275,469)
Total liabilities, minority -------- ----------- --------- ------------- ----------- ---------- -----------
21
interest and stockholders'
(deficit)equity $201,761 $7,403 $ -- $ 209,164 $ 453 $ -- $209,617
======== ========== ========= ============ =========== ========== =========
22
Condensed Consolidating Statement of Operations
(Debtor-in-Possession)
Three Months ended March 31, 2002
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
REVENUES
Services $12,279 $-- $-- $12,279 $300 $(300) $12,279
Sales of equipmen 4,216 -- -- 4,216 -- -- 4,216
-------- ----- ----- -------- -------- ------- --------
Total Revenues 16,495 -- -- 16,495 300 (300) 16,495
COSTS AND EXPENSES
Cost of service and operat 15,332 -- -- 15,332 -- -- 15,332
Cost of equipment sold 4,534 -- -- 4,534 -- -- 4,534
Sales and advertising 3,869 -- -- 3,869 1 -- 3,870
General and administrative 3,015 300 -- 3,315 527 (300) 3,542
Depreciation and amortization 5,187 -- -- 5,187 -- -- 5,187
----- ----- ------- ----- ------ ------- -----
Operating Loss (15,442) (300) -- (15,742) (228) -- (15,970)
Other income 837 -- -- 837 -- -- 837
Interest expense (4,164) (1,361) 3,801 (1,724) (120) 105 (1,739)
Equity in loss of subsidiaries -- (17,229) 17,229 -- (32,642) 32,642 --
Deferred gain on sale of
assets to MSV 1,419 -- -- 1,419 -- -- 1,419
--------- ------ ------- ---------- ---------- ------- -----
Net loss before extraordinary item
and Reorganization items (17,350) (18,890) 21,030 (15,210) (32,990) 32,747 (15,453)
Reorganization Items:
Professional fees related to
reorganization -- (4,578) -- (4,578) -- -- (4,578)
Write off of debt financing fees -- (12,975) -- (12,975) -- -- (12,975)
Interest income 121 3,801 (3,801) 121 105 (105) 121
--- --------- --------- -------- -------- ---------- --------
Net Loss Attributable
Common Shareholders ($17,229) ($32,642) $17,229 ($32,642) ($32,885) $32,642 ($32,885)
========= ========= ======= ========= ========= ======= =========
23
Condensed Consolidating Statement of Operations
Three Months ended March 31, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
REVENUES
Services $18,007 $-- $-- $18,007 $300 $(300) $18,007
Sales of equipment 5,400 -- -- 5,400 -- -- 5,400
-------- ----- ----- -------- ----- ------ -------
Total Revenues 23,407 -- -- 23,407 300 (300) 23,407
COSTS AND EXPENSES
Cost of service and operations 18,164 -- -- 18,164 -- -- 18,164
Cost of equipment sold 5,934 -- -- 5,934 -- -- 5,934
Sales and advertising 9,649 -- -- 9,649 -- -- 9,649
General and administrative 6,029 321 -- 6,350 277 (300) 6,327
Depreciation and amortization 9,077 -- -- 9,077 (527) -- 8,550
-------- ----- ----- -------- -------- -------- --------
Operating Loss (25,446) (321) -- (25,767) 550 -- (25,217)
Interest and Other Income 201 4,022 (3,277) 946 (9) (795) 142
Equity in Loss of Subsidiaries -- (30,314) 30,314 -- (52,466) 39,994 (12,472)
Interest Expense (5,069) (13,381) 3,277 (15,173) (1,048) 795 (15,426)
------ -------- ----- -------- ------- --- --------
Net Loss Before Extraordinary Item (30,314) (39,994) 30,314 (39,994) (52,973) 39,994 (52,973)
Extraordinary Loss on Extinguishment
of Debt -- -- -- -- (1,033) -- (1,033)
--------- --------- --------- ---------- ------- --------- -------
Net Loss Attributable Common
Shareholders ($30,314) ($39,994) $30,314 ($39,994) ($54,006) $39,994 ($54,006)
========= ========= ======= ========= ========= ======= =========
24
Condensed Consolidating Statement of Cash Flow
(Debtor-in-Possession)
Three Months Ended March 31, 2002
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
-------- ------ ------------ ------ -------- ------------ -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before reorganization items ($ 17,229) ($ 15,210) $ 17,229 ($15,210) ($ 15,453) $ 15,210 ($ 15,453)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities before reorganization items:
Amortization of Guarantee Warrants and debt
discount and issuance costs -- 56 -- 56 -- -- 56
Depreciation and amortization 5,187 -- -- 5,187 -- -- 5,187
Non cash stock compensation 96 -- -- 96 -- -- 96
Deferred gain on sale of assets to MSV (1,419) (1,419) (1,419)
Changes in assets & liabilities
Inventory 736 -- -- 736 -- -- 736
Trade accounts receivable 519 -- -- 519 -- -- 519
Other current assets 6,329 -- -- 6,329 -- -- 6,329
Accounts payable and accrued expenses (2,318) -- -- (2,318) (70) -- (2,388)
Accrued interest on Senior Note -- 1,200 -- 1,200 -- -- 1,200
Deferred Items--net (4,857) -- -- (4,857) -- -- (4,857)
------- ------- ------- ------- ------- -------- -------
Net cash (used in) provided by operating
activities before reorganization items (12,956) (13,954) 17,229 (9,681) (15,523) 15,210 (9,994)
CASH USED BY REORGANIZATION ITEMS
Reorganization items - professional fees -- (4,578) -- (4,578) -- -- (4,578)
Professional fees accrued not paid -- 3,472 -- 3,472 -- -- 3,472
Interest income -- 121 -- 121 -- -- 121
------ ------ ------ ------ ------ ------ ------
Net cash used by reorganization items -- (985) -- (985) -- -- (985)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property & equipment (494) -- -- (494) -- -- (494)
----- ------ ------- ----- -------- ------ -----
Net cash provided by (used in) investing
activities (494) -- -- (494) -- -- (494)
CASH FLOWS FROM FINANCING ACTIVITES
Proceeds from stock issuances -- -- -- -- 17 -- 17
Funding from parent/subsidiary 1,994 14,939 (17,229) (296) 15,506 (15,210) --
Principal payments under capital leases (928) -- -- (928) -- -- (928)
----- ------- --------- ----- ------ -------- -----
Net cash provided by (used in) financing
activities 1,066 14,939 (17,229) (1,224) 15,523 (15,210) (911)
25
Net increase in cash and cash equivalents (12,384) -- -- (12,384) -- -- (12,384)
CASH & CASH EQUIVALENTS, beginning of
period 33,387 -- -- 33,387 -- -- 33,387
------ ------ ------- ------ ------ --------- ------
CASH & CASH EQUIVALENTS, end of period $ 21,003 $ -- $ -- $ 21,003 $ -- $ -- $ 21,003
======== ======= ======= ======== ======= ======== ========
26
Condensed Consolidating Statement of Cash flow
Three Months Ended March 31, 2001
(Unaudited)
(in thousands)
Consolidated Consolidated
Subsidiary Motient Motient Motient Motient
Guarantors Holdings Eliminations Holdings Parent Eliminations Parent
------------ -------- ------------ ------------ ------ ------------ ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 30,314) ($ 39,994) $ 30,314 ($ 39,994) ($ 54,006) $ 39,994 ($ 54,006)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
Amortization of Guarantee Warrants and debt
discount and issuance costs -- 1,584 -- 1,584 1,169 -- 2,753
Depreciation and amortization 9,077 -- -- 9,077 (527) -- 8,550
Non cash stock compensation 595 -- -- 595 -- -- 595
Extraordinary loss on extinguishment of debt -- -- -- -- 1,033 -- 1,033
Equity in loss of XM Radio -- -- -- -- 12,472 -- 12,472
Loss on sale of XM Radio stock -- -- -- -- 407 -- 407
Changes in assets & liabilities
Inventory (2,964) -- -- (2,964) -- -- (2,964)
Trade accounts receivable (7,562) -- -- (7,562) -- -- (7,562)
Other current assets (538) -- -- (538) 109 -- (429)
Accounts payable and accrued expenses 8,431 (94) -- 8,337 121 -- 8,458
Accrued interest on Senior Note -- 10,259 -- 10,259 -- -- 10,259
Deferred trade payables (1,380) -- -- (1,380) -- -- (1,380)
Deferred Items--net 1,955 -- -- 1,955 (710) -- 1,245
Net cash (used in) provided by operating -------- -------- -------- -------- -------- -------- --------
activities (22,700) (28,245) 30,314 (20,631) (39,932) 39,994 (20,569)
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property & equipment (3,254) -- -- (3,254) -- -- (3,254)
Proceeds from the sale of XM Radio stock -- -- -- -- 33,539 -- 33,539
Purchase of long-term, restricted
investments 320 (539) -- (219) (126) -- (345)
Net cash provided by (used in) investing --- ----- -- ----- ----- ------ -----
activities (2,934) (539) -- (3,473) 33,413 -- 29,940
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuances -- -- -- -- 259 -- 259
Funding from parent/subsidiary 32,764 22,784 (30,314) 25,234 14,760 (39,994) --
Principal payments under capital leases (751) -- -- (751) -- -- (751)
Principal payments under vendor lease (1,066) -- -- (1,066) -- -- (1,066)
Proceeds from bank financing -- 6,000 -- 6,000 -- -- 6,000
Repayment of bank financing -- -- -- -- (8,500) -- (8,500)
Net cash provided by (used in) financing -------- -------- -------- -------- -------- -------- --------
activities 30,947 28,784 (30,314) 29,417 6,519 (39,994) (4,058)
Net increase in cash and cash equivalents 5,313 -- -- 5,313 -- -- 5,313
CASH & CASH EQUIVALENTS, beginning of
period 2,520 -- -- 2,520 -- -- 2,520
----- ------- ------- -------- -------- -------- --------
CASH & CASH EQUIVALENTS, end of period $ 7,833 $ -- $-- $ 7,833 $ -- $ -- $ 7,833
======= ==== == ======= ==== ==== =======
27
28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project," or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements ("Cautionary
Statements") include, among others, those 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
annual report on Form 10-K for the fiscal year ended December 31, 2001, dated
March 24, 2002 (File No. 0-23044), 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.
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.
References in this Quarterly Report "Motient" and "we" or similar or related
terms refer to Motient Corporation and its wholly owned subsidiaries
collectively, unless the context requires otherwise.
Motient's Chapter 11 Filing
On January 10, 2002, Motient and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient's plan of reorganization was confirmed on April 26,
2002, and became effective on May 1, 2002. For a more detailed description of
Motient's Chapter 11 filing and its plan of reorganization, please see
"Liquidity and Capital Resources" below.
General - The Current and Former Components of Motient's Business
This section provides information regarding the various current and prior
components of Motient's business which we believe is relevant to an assessment
and understanding of the financial condition and consolidated results of
operations of Motient Corporation. The sale of our satellite assets to Mobile
Satellite Ventures LP, or MSV, in 2001, makes period to period comparison of our
29
financial results less meaningful, and therefore, you should not rely on them as
an indication of future operating performance. The discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
Motient presently has five wholly-owned subsidiaries and an interest in MSV.
Motient Communications Inc. owns the assets comprising Motient's core wireless
business. The other four subsidiaries hold no material operating assets other
than the stock of other subsidiaries or Motient's interests in MSV. On a
consolidated basis, we refer to Motient Corporation and its five wholly owned
subsidiaries as "Motient." Our indirect, less-than 50 % interest in MSV is not
consolidated with Motient for financial statement purposes.
In recent periods, certain factors have placed significant pressures on our
financial condition and liquidity position. A number of factors were preventing
us from accelerating revenue growth at the pace required to enable us to
generate cash in excess of our operating expenses. These factors included
competition from other wireless data suppliers and other wireless communications
providers with greater resources, cash constraints that have limited our ability
to generate greater demand, unanticipated technological and development delays,
and general economic factors. During 2001, in particular, our efforts were also
hindered by the downturn in the economy and poor capital and financing market
conditions. These factors led us to file a voluntary petition for reorganization
under Chapter 11 of the United States Federal Bankruptcy Code in January 2002.
See "Liquidity and Capital Resources". Having emerged from our reorganization
with a significantly improved balance sheet, we are continuing to focus on
growing our core wireless business.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Our customers use our network for a variety of
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and consumers to transfer
electronic information and messages and access corporate databases and the
Internet.
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 an agreement with RIM.
XM Radio
As of January 1, 2001, we had an equity interest of approximately 33.1% (or
21.3% on a fully diluted basis) in XM Satellite Radio Holdings Inc., or XM
Radio, a public company that launched its satellite radio service toward the end
of 2001, and accounted for our investment in XM Radio pursuant to the equity
30
method of accounting. During 2001, we either sold or exchanged all of our
remaining shares of XM Radio and ceased to hold any interest in XM Radio as of
November 19, 2001.
Mobile Satellite Ventures LP
On June 29, 2000, we formed a joint venture subsidiary, MSV, in which we owned
80% of the membership interests. The remaining 20% interests in MSV were owned
by three investors unrelated to Motient; however, the minority investors had
certain participating rights which provided for their participation in certain
business decisions that were made in the normal course of business; therefore,
in accordance with Emerging Issues Task Force Issue No 96-16, our investment in
MSV has been recorded for all periods presented pursuant to the equity method of
accounting.
Through November 26, 2001, MSV used our satellite network to conduct research
and development activities. On November 26, 2001, we sold the assets comprising
our satellite communications business to MSV, as part of a transaction in which
certain other parties joined MSV, including TMI Communications and Company
Limited Partnership ("TMI"), a Canadian satellite services provider. In
consideration for our satellite business assets, we received the following: (i)
a $24 million cash payment in June 2000, (ii) a $41 million cash payment paid at
closing on November 26, 2001, net of $4 million retained by MSV related to our
sublease of real estate from MSV, and (iii) a 5-year $15 million note. In this
transaction, TMI also contributed its satellite communications business assets
to MSV. In addition, we purchased a $2.5 million convertible note issued by MSV,
and certain other investors, including a subsidiary of Rare Medium Group, Inc.,
purchased a total of $52.5 million of convertible notes. As of March 31, 2002,
we had an equity interest, on an undiluted basis, of approximately 48% in MSV.
Assuming that all of MSV's convertible notes issued in such transaction are
converted into limited partnership units of MSV, Motient would have a 33.3%
equity interest in MSV.
MSV has filed a separate application with the FCC with respect to MSV's plans
for a new generation satellite system utilizing ancillary terrestrial base
stations. Within 90 days of the receipt of approval and final order from the
FCC, and provided that such approval occurs by March 31, 2003, certain of the
investors in MSV, excluding Motient, will invest an additional $50 million in
MSV and receive additional equity interests. Upon consummation of such
additional investment, an $11.5 million note issued by MSV to TMI and the $15
million note to Motient will be repaid in full, and Motient's ownership interest
in MSV will be reduced to approximately 25.5%.
Overview of Liquidity and Risk Factors
Liquidity and Financing Sources
We have incurred significant operating losses and negative cash flows in each
year since we started operations, due primarily to the costs of developing and
building our networks and the cost of developing, selling and providing our
products and services. Prior to filing for protection under Chapter 11, we were
highly leveraged. These factors and others placed significant pressures on our
financial condition and liquidity position. As a result of our plan of
reorganization, our total debt was substantially reduced; however, 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 the fourth quarter of
2002 at the earliest. We expect to continue to make significant capital outlays
31
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 are focusing our efforts on improving our cash flow through growth
in our subscriber base, while maintaining, or even reducing, our operating
expenses. We believe that a large percentage of our costs are fixed; therefore,
we are attempting to increase our revenue without incurring significant cost
increases.
We believe that the cash that we have on hand, together with other available
working capital funding sources, should fund operations through 2002. While we
believe there are potential alternatives and additional sources of liquidity to
fund our operations if these resources 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."
Effects of the Chapter 11 Filing
As a result of our Chapter 11 bankruptcy filing, we saw a slower adoption
rate for our services in the first quarter of 2002. In a large customer
deployment, the upfront cost of the hardware can be significant. Because
the hardware generally is usable only on Motient's network, certain
customers delayed adoption while we were in Chapter 11. In an effort to
accelerate adoption of our services, we did, in selected instances in the
first quarter of 2002, offer certain incentives for adoption of our
services that are outside of our customary contract terms, such as extended
payment terms or temporary hardware rental. None of these offers were
accepted; therefore, these changes in terms were not material to our cash
flow or operations. Additionally, certain of our trade creditors required
either deposits for future services or shortened payment terms; however,
none of these deposits or changes in payment terms were material and none
of our key suppliers have ceased to do business with us as a result of our
reorganization.
Effective May 1, 2002, we will adopt "fresh start" accounting, which requires
that the value of Motient, which was determined by the court to be $234 million,
be allocated to our assets and liabilities in accordance with Accounting
Principles Bulletin Opinion 16, or APB No. 16 Business Combinations, for
transactions reported on the basis of the purchase method. We are in the process
of allocating this reorganization value to specific tangible and intangible
assets; however, if any portion of the reorganization value cannot be attributed
to specific tangible or intangible assets, we will be required to report as an
intangible asset "reorganization value in excess of amounts allocable to
identifiable assets."
Summary of Risk Factors
Additionally, our future operating results could be adversely affected by a
number of uncertainties and factors, including:
o our ability to attract and retain customers,
o our ability to secure additional financing necessary to fund anticipated
capital expenditures, operating losses and any remaining debt service
requirements,
32
o our ability to convert customers who have purchased devices from us into
active users of our airtime service and thereby generate revenue growth,
o the timely roll-out of certain key customer initiatives and the launch of
new products or the entry into new market segments, which may require us to
continue to incur significant operating losses,
o our ability to fully recover the value of our inventory in a timely manner,
o our ability to procure new inventory in a timely manner in the quantities,
quality, price and at the times required,
o our ability to gain market acceptance of new products and services,
including eLink and BlackBerryTM by Motient, and our ability to make a
profit thereon,
o our ability to respond and react to changes in our business and the
industry because we have 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 our dependence on technology we license from Motorola, which may become
available to our competitors,
o the loss of one or more of our key customers,
o our ability to attract and retain key personnel, especially in light of our
recent headcount reductions,
o our ability to keep up with new technological developments and incorporate
them into our existing products and services and our ability to maintain
our proprietary information and intellectual property rights,
o our dependence on third party distribution relationships to provide
access to potential customers,
o our ability to expand our networks on a timely basis and at a commercially
reasonable cost, or at all, as additional future demand increases,
o the risk that Motient could incur substantial costs if certain proposals
regarding spectrum reallocation, that are now pending with the FCC, are
adopted, and
o regulation by the FCC.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's Disclosure Statement with respect to its
Amended Joint Plan of Reorganization, dated February 27, 2002, which was filed
as Exhibit 99.2 to our current report on Form 8-K dated March 4, 2002.
33
34
Three Months Ended March 31, 2002 and 2001
Revenue and Subscriber Statistics
Service revenues approximated $12.3 million for the quarter ended March
31, 2002, which was a $5.7 million reduction as compared to the quarter ended
March 31, 2001. This $5.7 million reduction represents the loss of approximately
$6.3 million of revenue associated with the sale of our satellite assets to MSV
in November 2001, offset by an $0.8 million increase in our core remaining
market sectors. We experienced a 35% growth in subscribers within our Wireless
Internet sector, but these subscribers produced lower average revenue per unit,
or ARPU, than certain other segments, such as the maritime sector, which was
sold as part of our sale of satellite assets to MSV in November 2001.
The tables below summarize our revenue and subscriber base for the quarters
ended March 31, 2002 and 2001. An explanation of certain changes in revenue and
subscribers is set forth below under the caption "Summary of Year over Year
Revenue."
Quarter Ended March 31,
Summary of Revenue 2002 2001 Change % Change
---- ---- ------ --------
(in millions)
Wireless Internet $4.1 $2.0 $2.1 105%
Field services 4.3 5.9 (1.6) (27)
Transportation 3.0 4.1 (1.1) (27)
Telemetry 0.7 0.7 0.0 0
Maritime and other 0.2 5.3 (5.1) (96)
Equipment 4.2 5.4 (1.2) (22)
------------- ------------- ----------
Total $ 16.5 $ 23.4 $(6.9) (29)%
============= ============= ========== ==========
The make up of our subscriber base was as follows:
As of March 31,
2002 2001(1) Change % Change
---- ------- ------ --------
Wireless Internet 85,085 63,102 21,983 35%
Field services 36,161 45,070 (8,909) (20)
Transportation 89,750 74,237 15,513 21
Telemetry 28,486 18,059 10,427 58
Maritime and other 544 25,563 (25,019) (98)
------- ------ --------
Total 240,026 226,031 13,995 6%
======= ======= ====== ==
(1) Subscribers as of March 31, 2001, included approximately 37,600 satellite
units that were transferred to MSV as a result of the sale of the satellite
business in November 2001, approximately 25,000 of which were included in the
Maritime and other sector, 10,000 of which were included in the Transportation
sector, and 2,600 of which were included in the Field Services sector. Excluding
the transfer of these subscribers, we had a 27% increase in subscribers as of
March 31, 2002, as compared to March 31, 2001.
35
As is common in our industry, we report subscriber information and ARPU (Average
Revenue Per Unit) per month statistics. Although these figures are operational
numbers and not financial information recognized under Generally Accepted
Accounting Principles, or GAAP, we believe that this information helps to
demonstrate important trends in our business.
Average Revenue Per Unit
As of March 31,
Adjusted
2002 2001 2001 (1)
---- ---- --------
Wireless Internet $15 $11 $12
Field services 39 40 45
Transportation 11 22 16
Telemetry 9 27 14
Maritime -- 45 --
Other 125 80 70
Average $17 $31 $22
(1) ARPU as of March 31, 2001 has been adjusted to exclude the revenue derived
from the satellite business that was sold to MSV in November 2001.
We include as subscribers those units that are registered on our network and
expected to generate revenue. Recently we completed a study to better understand
the likelihood of revenue growth from registered units which had been sold to
resellers in our Wireless Internet sector. While the resellers do not have a
right to return any units, we believe that a number of units in the reseller
channel are subject to one of a number of possible causes of shrinkage, and
therefore are not likely to be activated over the next several months.
Accordingly, we have reduced the total number of registered units reported as of
March 31, 2002, by approximately 20,000 units. While our resellers have not
requested this adjustment, and these units currently remain registered on the
network, we believe this change more conservatively communicates the revenue
potential of our reported subscriber base. Over time, we expect our reseller's
registered subscriber base to more closely follow growth in revenue in this
sector.
A portion of our registered subscribers are not yet generating revenue.
These inactive units are the result of one or a combination of the following
factors: 1) units sold to the indirect channel partners in Mobile Internet,
Transportation and Telemetry market segments by Motient or other suppliers that
have not yet been sold by the reseller or solution partner to end user
customers, 2) spares that corporate customers purchase and register on the
network in anticipation of future requirements, and 3) seasonal usage by
vertical customers who purchase and register units in excess of their average
requirements in order to meet seasonal peak requirements. As of March 31, 2002,
approximately 61% of the reported subscriber base were active, or revenue
producing units, an increase of 5 points from the end of 2001, the only quarter
for which we have comparable data. The average ARPU for the estimated active
units during the first quarter of 2002 was approximately $30.
Summary of Quarter over Quarter Revenue
o Wireless Internet: Revenue grew from $2.0 to $4.1 million, and our
subscriber base grew from 63,102 to 85,085. The revenue growth in the
Wireless Internet sector represents our continued focus on expanding the
adoption of eLink and BlackBerry wireless email offerings to corporate
customers with both direct sales people and reseller channel partners.
Additional content services are provided by software application partners
for corporate customers to access Intranet and Internet content, as well as
document viewing and other desktop extension applications.
o Field Services: Revenue declined from $5.9 million to $4.3 million, and our
subscriber base declined from 45,070 to 36,161. Approximately 90% of the
decrease in revenue and ARPU from field services was a result of
contractual price reductions put into effect during the latter half of 2001
and first quarter of 2002. The remaining reduction was the result of
internal cutbacks within certain of our customer accounts that have gone
through industry consolidations and downsizings, resulting in fewer active
36
users on the network, as compared to the revenue generated from new
customers that were acquired in the first quarter of 2002.
o Transportation: Revenue declined from $4.1 million to $3.0 million, and our
subscriber base grew from 74,237 to 89,750. The reduction in the revenue
from the transportation sector was almost entirely the result of the sale
of our satellite assets to MSV. Excluding this impact, our reduction in
revenue for the first quarter of 2002, as compared to the first quarter of
2001, was approximately $100,000, which was the result of a contractual
rate reduction in a large contract, offset by increased usage within that
contract.
o Telemetry: Revenue was essentially unchanged from $0.7 million to $0.7
million; however, our subscriber base grew from 18,059 to 28,486. Growth in
revenue by new and existing telemetry customers was offset by contractual
pricing reductions for one of our largest telemetry customers.
o The reduction in maritime and other revenue was primarily the result
of (i) $1.8 million of revenue earned in the first quarter of 2001 from our
contract to provide MSV with satellite capacity as they pursued their
research and development program, as compared to none in the first quarter
of 2002 and (ii) the loss of revenue from the satellite business associated
with the sale of the satellite business in November 2001.
o The decrease in equipment revenue was primarily a result of the sale of our
satellite business and the loss of equipment sales from that business in
the first quarter of 2001.
Expenses
Quarter Ended March 31,
Summary of Expense 2002 2001 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Cost of Service & Operations $15.3 $18.2 $ (2.9) (16)%
Cost of Equipment Sales 4.5 5.9 (1.4) (24)
Sales & Advertising 3.9 9.6 (5.7) (59)
General & Administration 3.6 6.3 (2.7) (43)
Depreciation & Amortization 5.2 8.6 (3.4) (40)
-------- --------- ---------
Total $32.5 $48.6 $ (16.1) (33)%
======== ===== ========= ==========
Cost of service and operations includes costs to support subscribers. The 16%
quarter-over-quarter decrease is made up of the following factors:
1. a $500,000 increase in base station maintenance costs associated with an
approximate 16% increase in the average cost per base station primarily as
a result of new rates that went into effect in the latter half of 2001
under our maintenance contract, as well as a 3% increase in the number of
base stations,
2. a $284,000 increase for site rental costs associated with the 3% increase
in base stations quarter-over-quarter, offset by a 3% average decrease in
the average lease rate, and
3. an increase of approximately $1.2 million 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:
37
1. a 19% reduction, or $816,000 decrease, in communication charges associated
with reductions in the cost of usage as a result of the sale of the
satellite assets and the renegotiation of our telecommunications contract,
offset by cost increases associated with a 3% increase in the number of
terrestrial base stations in service as compared to the first quarter of
2001,
2. a reduction of approximately $1.3 million associated with reduced headcount
levels, primarily as a result of our sale of the satellite assets, as well
as our cost control efforts undertaken in 2001,
3. a $2.3 million decrease in costs associated with the sale of the satellite
assets to MSV, including $1.1 million of in-orbit insurance costs for the
quarter, and
4. a reduction of $100,000 in research and development spending.
The decrease in cost of equipment sold for the quarter ended March 31, 2002, as
compared to 2001, was a result of the sale of the satellite assets to MSV in
November 2001.
Sales and advertising expenses as a percentage of total revenue were
approximately 23% for the first quarter of 2002, compared to 41% for the
comparable period of 2001. The decrease in sales and advertising expenses period
over period was primarily attributable to:
1. a $4.6 million reduction in spending on advertising and trade shows, and
2. a 29%, or $1.0 million, decrease in headcount costs, primarily as a result
of the cost savings initiatives that we undertook in the latter half of
2001 and the first quarter of 2002.
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 21% for the first quarter of 2002
as compared to 27% for 2001. The decrease in 2002 costs over 2001 costs in our
core wireless business general and administrative expenses was primarily
attributable to:
1. a $1.2 million reduction in non cash compensation charges associated with
the vesting of restricted stock,
2. approximately $1.3 million of savings associated with having fewer
employees throughout the first quarter of 2002 as compared to the
comparable period of 2001, primarily as a result of the cost savings
initiatives that we undertook in the latter half of 2001 and the first
quarter of 2002, and
3. approximately $295,000 of reductions in regulatory expenditures in the
first quarter of 2002 as compared to the same period of 2001.
Depreciation and amortization for the core wireless business was approximately
31% of total revenue for the first quarter of 2002, as compared to 37% for the
first quarter of 2001. The $3.4 million decrease in depreciation and
amortization expense in 2002 was primarily attributable to sale of our satellite
assets to MSV in late November 2001 and the associated depreciation on those
assets.
Interest income was $121,000 for the quarter ended March 31, 2002, as compared
to $549,000 million for the quarter ended March 31, 2001. The $428,000 decrease
in interest earned by the core wireless business reflects the loss of any
interest income earned on our escrow established for the senior notes, which was
paid out in full in April 2001. This decrease was offset by the interest earned
on our cash balances in the first quarter of 2002. Motient also earned other
revenue in the amount of $837,000 related to cash received from a former
38
satellite customer to whom we have no further satellite service obligation as a
result of our sale of satellite assets to MSV.
We incurred $1.7 million of interest expense in the first quarter of 2002,
compared to $15.4 million during the first quarter of 2001. The $13.7 million
decrease was a result of:
1. the cessation of interest expense associated with our senior notes and Rare
Medium notes as a result of our bankruptcy filing in January 2002,
2. reduced debt balances during the first quarter of 2002, as compared to the
first quarter of 2001, as a result of the repayments of our bank facilities
in full during 2001, and
3. the elimination of amortization of warrants and prepaid interest and debt
offering costs due to the debt discount costs that were written off in 2001
when we extinguished all of our remaining debt under the bank facilities.
Additionally, in the first quarter of 2002, we recorded debt restructuring costs
in the amount of $17.6 million associated with our Chapter 11 bankruptcy filing.
Of these costs, approximately $13.0 million represented non-cash charges for the
write off of financing fees and debt discounts associated with the placement of
the senior notes. During the first quarter of 2001, we recorded a $407,000 loss
on the sale of 2.0 million of our shares of XM Radio. Also in the first quarter
of 2001, we recorded an extraordinary loss on the extinguishment of debt in the
amount of $1.0 million, representing the pro-rata write off of fees and
unamortized warrants associated with the original placement of bank financing
debt which was repaid and permanently reduced in the first quarter of 2001.
Net capital expenditures for the quarter ended March 31, 2002 for property and
equipment were $494,000 compared to $3.3 million for 2001. Expenditures
consisted primarily of assets necessary to continue the build out of our
terrestrial network. Capital expenditures for the first quarter of 2001 included
the purchase of a block of frequencies.
Liquidity and Capital Resources
As described above, in January 2002, we filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The plan was
confirmed on April 26, 2002, and became effective on May 1, 2002. The
reorganization significantly deleveraged Motient's balance sheet and
significantly reduced Motient's ongoing interest expense. As of May 1, 2002, the
effective date of the plan of reorganization, Motient had approximately $31.1
million of debt (comprised of capital leases, notes payable to Rare Medium and
Credit Suisse First Boston, or CSFB, and the outstanding Motorola credit
facility). However, Motient's business plan will require substantial additional
funds to finance the maintenance and growth of its operations, network and
subscriber base and to expand into new markets.
We do not expect to achieve EBITDA break even until the fourth quarter of
2002, at the earliest. Also, even if we begin to generate cash in excess of our
operating expenses, we expect to continue to require additional funds to meet
remaining interest obligations, capital expenditures, and other non-operating
cash expenses. We believe that the cash that we have on hand, together with
other available funding sources, such as net cash from operations and changes in
working capital, should fund operations through 2002. While we believe there are
potential alternatives and additional sources of liquidity to fund our
39
operations if our cash and other sources are insufficient, in the current
environment we expect that it will be difficult for us to access such additional
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.
Motient's Chapter 11 Filing
Under the plan of reorganization, all then-outstanding shares of our
pre-reorganization common stock and all unexercised options and warrants to
purchase our pre-reorganization common stock were cancelled. The holders of $335
million in senior notes exchanged their notes for approximately 25,000,000
shares of our common stock. Certain of our creditors will also receive an
aggregate of 97,256 shares of our common stock in settlement for amounts owed to
them. These shares will be issued upon completion of the bankruptcy claims
process. Holders of our pre-reorganization common stock became entitled to
receive warrants to purchase an aggregate of 1,496,512 shares of common stock.
Of these, warrants to purchase an aggregate of 1,481,539 shares are currently
outstanding and warrants to purchase an aggregate of 14,973 shares will be
issued once Motient obtains an exemptive order from the U.S. Department of Labor
permitting Motient's 401(k) savings plan to hold the warrants. The warrants may
be exercised to purchase shares of our common stock at a price of $.01 per
share, will expire May 1, 2004, or two years after the effective date of
reorganization, and will not be exercisable unless and until the average closing
price of our common stock for ninety consecutive trading days is equal to or
greater than $15.44 per share. Also, we expect to issue to Evercore Partners LP,
financial advisor to the creditors' committee in our reorganization, a warrant
to purchase up to 343,450 shares of common stock, at an exercise price of $3.95
per share. The warrant will have a term of five years. If the average closing
price of our common stock for thirty consecutive trading days is equal to or
greater than $20.00, we may require Evercore to exercise the warrant, provided
the common stock is then trading in an established public market. Issuance of
this warrant is subject to approval by the Bankruptcy Court of Evercore's fees.
Further details regarding the plan are contained in Motient's Disclosure
Statement with respect to the plan.
Summary of Liquidity and Financing
Currently, Motient has the following sources of financing in place:
o MSV issued a $15 million note to Motient as part of the November 26, 2001
asset sale. The payment of such note by MSV is due the sooner of ninety
40
days from the date of the approval and issuance of the final order by the
FCC of MSV's pending application, or November 25, 2006. There can be no
assurances that this approval will be received in a timely manner, if at
all. Of the $15 million of proceeds from this note, $3.75 million would be
required to be used to prepay a pro-rata portion of the $19 million note
payable to Rare Medium and $750,000 note payable to CSFB.
Motient currently has the following financing obligations outstanding:
o Note payable to Rare Medium in the amount of $19.0 million. The note was
issued by a new subsidiary of Motient Corporation, MVH Holdings Inc., which
owns 100% of Motient Ventures Holding Inc., which owns all of our interests
in MSV. The note has a term of 3 years and carries annual interest at 9%.
The note allows us to elect to accrue interest and add it to the principal,
instead of paying interest in cash. The note requires that it be prepaid
using a pro rata portion of 25% of the proceeds of any repayment of the $15
million note from MSV.
o Note payable to CSFB in the amount of $750,000. The note was also issued by
MVH Holdings Inc. The note has a term of 3 years and carries annual
interest at 9%. The note allows us to elect to accrue interest and add it
to the principal, instead of paying interest in cash. The note requires
that it be prepaid using a pro rata portion 25% of the proceeds of any
repayment of the $15 million note from MSV.
o A vendor financing commitment from Motorola 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
March 31, 2002, $3.3 million was outstanding under this facility at 9.59%.
All principal payments under this arrangement were deferred for twelve
months, with the next scheduled payment due April 1, 2003. No additional
amounts may be drawn under this facility.
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
March 31, 2002, had a balance of $8.3 million. As a result of our default
under the senior notes, as of March 31, 2002, we were deemed to be in
default under the terms of this lease agreement; however, the default was
cured upon the effective date of our plan of reorganization.
We anticipate that our funding requirements through 2002 should be met with a
combination of cash on hand, net cash flow from operations, and proceeds
realized through the sale of inventory relating to eLink and BlackBerry TM. 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. In addition, if the proceeds
41
from any such source are insufficient to meet our expenditure requirements as
they arise, we will be required to 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.
Additionally, we believe that $11.25 million (plus accrued interest) would be
available upon the second closing of the MSV transaction and the associated
repayment of the $15 million note that was issued at the November 2001 closing
of the MSV transaction. This second closing is contingent upon the FCC's
approval and final order of the MSV's terrestrial re-use application, which may
not occur by the time we would need the funds, or may not occur at all.
Commitments
As of April 30, 2002, we had outstanding commitments to purchase inventory in
the amount of approximately $2.4 million, all of which will be paid in 2002.
Also at March 31, 2002, we had certain commitments and contingent liabilities
under our satellite construction contract, which contained flight performance
incentives payable by us to the contractor if the satellite performed according
to the contract. As part of implementation of our bankruptcy plan of
reorganization, all amounts that were deemed to be owed by us under this
contract will be converted into shares of new equity of the restructured
company.
Summary of Cash Flow for the quarter ended March 31, 2002 and March 31, 2001
Quarter Ended March 31,
----------------------
2002 2001
---- ----
Cash Used In Operating and Reorganization Activities ($10,979) ($20,569)
Cash (Used In) Provided by Investing (494) 29,940
Cash Provided by Financing Activities:
Equity issuances 17 259
Debt payments on capital leases, vendor financing (928) (1,817)
Net proceeds from debt issuances - (2,500)
------- -------
Cash Used in Financing Activities (911) (4,058)
----- -------
Total Change in Cash $(12,384) $5,313
========= ======
Cash and Cash Equivalents $21,003 $7,833
Working Capital (384,865) 5,205
Restricted Investments included in working capital -- 20,923
Cash used in operating activities decreased quarter over quarter by
approximately $9.6 million. In 2002, we reduced our operating expenses and
working capital requirements; however, we paid approximately $1.1 million of
costs associated with our bankruptcy filing. We expect that cash used in
42
operating activities will be reduced going forward as a result of the cost
saving measures that we have put into place and our anticipated revenue growth.
The $30.4 million decrease in cash provided by investing activities was
primarily attributable to:
1. the sale in 2001 of 2 million shares of our XM Radio stock for net proceeds
of approximately $33.5 million, offset by
2. a $2.8 million reduction in capital spending.
The $3.1 million decrease in cash used in financing activities was a result of:
1. a net decrease in borrowing of $2.5 million and
2. $890,000 less in the first quarter of 2002, as compared to the first
quarter of 2001, of vendor debt and capital lease repayments, primarily
as a result of our deferral until 2003 of any payments under our vendor
financing agreement.
Other
As of March 31, 2002, all of our wholly owned subsidiaries were subject to
financing agreements that limit the amount of cash dividends and loans that
could have been advanced to Motient Parent. At March 31, 2002, all of the
subsidiaries' net assets were restricted under these agreements. These
restrictions had an impact on our ability to pay dividends. On May 1, 2002, the
effective date of our plan of reorganization, these financing agreements were
terminated as part of the implementation of our plan of reorganization.
Regulation
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the FCC, have in the past materially affected and
may in the future materially affect the telecommunications industry in general,
and our wireless business in particular. In addition, many aspects of regulation
at the federal, state and local level currently are subject to judicial review
or are the subject of administrative or legislative proposals to modify, repeal,
or adopt new laws and administrative regulations and policies. Neither the
outcome of these proceedings nor their impact on our operations can be predicted
at this time.
The ownership and operation of our terrestrial network is subject to the rules
and regulations of the FCC, which acts under authority established by the
Communications Act of 1934 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 that spectrum. We
operate pursuant to various licenses granted by the FCC.
We believe that we have licenses for a sufficient number of channels to meet our
current capacity needs on the terrestrial network. To the extent that additional
capacity is required, we may participate in other upcoming auctions or acquire
channels from other licensees. As part of its new licensing regime, the FCC
permits wide-area geographic licensees, with prior FCC approval, to assign a
portion of their spectrum or a portion of their geographic service area, or a
combination of the two, to another entity. While this authority may increase our
flexibility to acquire additional base stations, the practical utility of these
options is uncertain at this time.
43
We are subject to the Communications Assistance for Law Enforcement Act, or
CALEA. Under CALEA, the Company must ensure that law enforcement agencies can
intercept certain communications transmitted over its networks. The deadline for
complying with the CALEA requirements and any rules subsequently promulgated was
June 30, 2000. We have pending with the FCC a petition for an extension of the
deadline with respect to certain of its equipment, facilities, and services and
we have been working with law enforcement to arrive at an agreement on a further
extension of this deadline and on an extension of the deadline for other of our
equipment, facilities, and services. It is possible that we may not be able to
comply with all of CALEA's requirements or do so in a timely manner. Where
compliance with any requirement is deemed by the FCC to be not "reasonably
achievable," we may be exempted from such requirement. Should we not be exempted
from complying, of if federal funds are not available to us to assist in the
funding of any required changes , the requirement to comply with CALEA could
have a material adverse effect on the conduct of our business.
Motient is subject to the requirements of the FCC's universal service fund,
which supports the provision of affordable telecommunications to high-cost
areas, and the provision of advanced telecommunications services to schools,
libraries, and rural health care providers. Currently excluded from a carrier's
universal service contribution base are end-user revenues derived from the sale
of information and other non-telecommunications services and wholesale revenues
derived from the sale of telecommunications. All of the terrestrial network
revenue falls within the excluded categories, thereby eliminating Motient's
universal service assessments. Current rules also do not require that Motient
impute to its contribution base retail revenues derived when it uses its own
transmission facilities to provide a service that includes both information
service and telecommunications components. There can be no assurances that the
FCC will retain the exclusions described herein or its current policy regarding
the scope of a carrier's contribution base. Motient may also be required to
contribute to state universal service programs. The requirement to make these
state universal service payments, the amount of which in some cases may be
subject to change and is not yet determined, may have a material adverse impact
on the conduct of Motient's business.
In November 2001, Nextel proposed, in a "white paper" to the FCC, that certain
of its wireless spectrum in the 700 MHz band, lower 800 MHz band, and 900 MHz
band be exchanged for spectrum in the upper 800 MHz band and in the 2.1 GHz
band. Nextel stated that it was making this proposal to address existing
inadvertent interference problems for public safety communications systems
caused by the existing spectrum allocation. Nextel's proposal addresses this
problem by creating blocks of contiguous spectrum to be shared by public safety
agencies. The Nextel proposal, as submitted to the FCC, would require either (i)
that we continue to operate using our existing lower 800 MHz band spectrum on a
secondary, non-interfering basis with the public safety agencies who would be
relocated in the same spectrum, or (ii) that we relocate, at our own expense, to
other spectrum in the 700 MHz or 900 MHz bands. We believe it is highly unlikely
that we could continue to operate in the lower 800 MHz bands on a secondary,
non-interfering basis. If we are required to relocate to spectrum in the 700 MHz
or 900 MHz bands, we would incur substantial operational and financial costs,
including costs relating to: manufacturing replacement infrastructure and user
hardware to operate on our network in the 700 MHz or 900 MHz bands, disruptions
to existing customers as a result of the relocation to other spectrum bands,
possible diminished data speed, and coverage gaps. There are also potential
problems with the 700 MHz and 900 MHz bands that might make it difficult, if not
impossible, for us to duplicate our existing operations in the 800 MHz band.
44
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. Motient does not believe its operations
will be impacted until the Commission adopts final rules in that proceeding and
it cannot predict what actions the FCC will take.
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.
SFAS No. 133 was not material to our financial position or results of operations
as of or for the period ended March 31, 2002.
Critical Accounting Policies and Significant Estimates
Below are our accounting policies which are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates as they require assumptions that are inherently uncertain.
Inventory
Inventories, which consist primarily of communication devices, are stated at the
lower of cost or market. Cost is determined using the weighted average cost
method. We periodically assess the market value of our inventory, based on sales
trends and forecasts and technological changes and record a charge to current
period income when such factors indicate that a reduction to net realizable
value is appropriate. We consider both inventory on hand and inventory which we
have committed to purchase.
Revenue Recognition
We generate revenue through equipment sales, airtime service agreements, and
consulting services. In 2000, we adopted Staff Accounting Bulletin No. 101,
"Revenue Recognition" ("SAB 101"), issued by the SEC. SAB 101 provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements. In certain circumstances, SAB 101 requires us to defer the
recognition of revenue and costs related to equipment sold as part of a service
agreement. Revenue is recognized as follows:
Service revenue: Revenues from our wireless services are recognized when the
services are performed, evidence of an arrangement exits, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period.
To date, the majority of our business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. We grant credit
45
based on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. We establish a valuation allowance for
doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. We assess the adequacy of these
reserves quarterly, evaluating factors such as the length of time individual
receivables are past due, historical collection experience, the economic
environment, and changes in credit worthiness of our customers. We believe that
our established valuation allowance was adequate as of March 31, 2002 and 2001.
If circumstances related to specific customers change or economic conditions
worsen such that our past collection experience and assessments of the economic
environment are no longer relevant, our estimate of the recoverability of our
trade receivables could be further reduced.
Equipment and service sales: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
directly to end-users. Revenue from the sale of the equipment as well as the
cost of the equipment, are initially deferred and are generally recognized over
a period corresponding to our estimate of customer life of 2 years. Equipment
costs are deferred only to the extent of deferred revenue.
Consulting services: We occasionally provide consulting services to our
customers. Revenue from such services is generally recognized following the
contract terms as milestones are achieved.
Long-lived assets:
On January 1, 2002, we adopted the provisions of 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 will 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 are in the
process of evaluating, but have yet to determine, the financial statement impact
of adoption of SFAS No. 142 will have on our financial statements. As of January
1, 2002, we had approximately $5.0 million of recorded goodwill. Based upon the
value attributed to Motient through the Chapter 11 bankruptcy process, we do not
believe that an impairment loss has been incurred.
On January 1, 2002, we also adopted 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
46
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. As of January 1, 2002, we had
approximately $5.0 million of recorded goodwill. Based upon the value attributed
to Motient through the Chapter 11 bankruptcy process, we do not believe that an
impairment loss has been incurred.
Our intangible assets consist primarily of our frequencies, which are amortized
using the straight-line method over an estimated useful life of 20 years. Based
upon the valuation ascribed to these assets as part of the Chapter 11 plan of
reorganization, we do not believe that an impairment of these assets exists.
Accounting Standards
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. We do not currently
have any assets held for retirement, and, accordingly, do not believe that the
adoption of SFAS NO. 143 will be material to our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes related to our credit
facilities. We manage interest rate risk through the use of fixed rate debt.
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
As of January 10, 2002, as a result of our Chapter 11 bankruptcy filing, our
senior notes ceased to be interest bearing. Prior to that, these notes bore
interest at a fixed rate of 12.25%, and we ran the risk that market rates would
decline and the required payments would have exceeded those based on current
market rates.
Effective May 1, 2002, Motient's senior notes were eliminated in exchange for
new common stock of the company. All of Motient's remaining debt obligations are
fixed rate obligations. We do not believe that we have any material cash flow
exposure due to general interest rate changes on these debt obligations.
47
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Motient filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code on January 10, 2002. The Bankruptcy Court confirmed Motient's
plan of reorganization on April 26, 2002, and Motient emerged from bankruptcy on
May 1, 2002. For further details regarding this proceeding, please see
"Motient's Chapter 11 Filing and Plan of Reorganization" under Note 4 (Liquidity
and Financing) of Notes to Consolidated Condensed Financial Statements,
contained in Part I of this report, which is incorporated by reference herein.
Motient is aware of two lawsuits challenging the previously proposed merger of
Motient and Rare Medium Group, Inc. that was terminated. For further details
regarding these lawsuits, please see "Legal" under Note 5 (Legal and Regulatory
Matters) of Notes to Consolidated Condensed Financial Statements, contained in
Part I of this report, which is incorporated by reference herein.
Item 5. Other Information
Motient's Board of Directors has set Thursday, July 11, 2002 as the date
for the Company's annual meeting of stockholders for the fiscal year ended
December 31, 2001. The meeting will be held at the Bechtel Building, 1801
Alexander Bell Drive, Reston, Virginia at 9:00 a.m., local time. Only
stockholders of record as of the close of business on the record date, May 31,
2002, are entitled to notice of and to vote at the meeting, in person or by
proxy. Motient expects that it will print and mail proxy materials to
48
stockholders on or about June 7, 2002. The deadline for stockholder submission
of notice of a matter to be submitted by a stockholder for consideration at the
meeting outside of Rule 14a-8 under the Securities and Exchange Act of 1934 is
May 24, 2002.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
49
(b) Current Reports on Form 8-K.
On January 10, 2002, the Company filed a Current Report on Form 8-K, in
response to Item 3, reporting that the Company and three of its
subsidiaries had filed voluntary petitions for relief under Chapter 11 of
the U.S. Bankruptcy Code in the United States Bankruptcy Court for the
Eastern District of Virginia.
On March 4, 2002, the Company filed a Current Report on Form 8-K, in
response to Item 5, reporting that the Company had filed with the
Bankruptcy Court an Amended Joint Plan of Reorganization and a Disclosure
Statement describing the Plan of Reorganization. The Company also reported
that the Bankruptcy Court approved the Disclosure Statement on March 1,
2002, and that the Company expected to begin mailing the documents to
parties in interest on or about March 6, 2002.
On May 2, 2002, the Company filed a Current Report on Form 8-K, in response
to Items 3 and 7, reporting that the Company's Plan of Reorganization under
Chapter 11 of the U.S. Bankruptcy Code had been confirmed by the
Bankkruptcy Court.
50
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
May 8, 2002 /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)
51
EXHIBIT INDEX
Number Description
2.1 - Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of
the Bankruptcy Code, dated February 27, 2002 (Incorporated by
reference to Exhibit 99.2 to the Registrant's Current Report on Form
8-K dated March 4, 2002).
3.1 - Restated Certificate of Incorporation of the Company (as
restated effective May 1, 2002) (Incorporated by reference to Exhibit
3.1 of the Company's Amendment No. 2 to Registration Statement on Form
8-A, filed May 1, 2002).
3.2 - Amended and Restated Bylaws of the Company (as amended and restated
effective) May 1, 2002) (Incorporated by reference to Exhibit 3.2 of
the Company's Amendment No. 2 to Registration Statement on Form 8-A,
filed May 1, 2002).
4.1 - Specimen of Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 of the Company's Amendment No. 2 to
Registration Statement on Form 8-A, filed May 1, 2002).
4.2 - Warrant Agreement between the Registrant and Equiserve Trust
Company, N.A., as warrant agent, dated May 1, 2002 (Incorporated by
reference to Exhibit 4.1 of the Company's Registration Statement on
Form 8-A, filed May 1, 2002).
4.2a - Specimen of Warrant Certificate of the Company (Incorporated by
reference to Exhibit 4.2 of the Company's Registration Statement on
Form 8-A, filed May 1, 2002).
10.1 - Registration Rights Agreement between the Company and
Highland Capital Management, and Morgan Stanley Investment Management,
dated May 1, 2002 (filed herewith).
10.2* - Form of Change of Control Agreement for Officers of the Company
(filed herewith).
10.3 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of
$19.0 million issued to Rare Medium Group, Inc., dated May 1, 2002
(filed herewith).
10.4 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of
$750,000 issued to Credit Suisse First Boston, dated May 1, 2002
(filed herewith).
10.5 - Settlement Agreement by and among the Registrant and Rare Medium
Group, Inc., dated March 28, 2002. (filed herewith)
- ------------------------------------
*Management contract or compensatory plan or arrangement.
52