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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
COMMISSION FILE NO. 0-23044
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MOTIENT CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 93-0976127
(State or other jurisdiction of (I.R.S. Employee
Incorporation or organization) Identification Number)
300 KNIGHTSBRIDGE PARKWAY
LINCOLNSHIRE, IL 60069
847-478-4200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
Number of shares of common stock outstanding at May 5, 2005: 65,210,910
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MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2005
TABLE OF CONTENTS
PAGE
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months Ended March 31,
2005 and 2004 3
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 22
Item 3. Quantitative and Qualitative Disclosures about Market Risk 35
Item 4. Controls and Procedures 35
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 37
Item 6. Exhibits 37
2
PART I - FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2004
--------------- ---------------
(UNAUDITED) (UNAUDITED)
REVENUES
Services and related revenue $ 4,530 $ 9,961
Sales of equipment 483 1,539
--------------- ---------------
Total revenues 5,013 11,500
--------------- ---------------
COSTS AND EXPENSES
Cost of services and operations (including stock-based
compensation of $1,189 for the three months ended March 31,
2005 and $505 for the three months ended March 31,
2004; exclusive of depreciation and amortization below) 7,540 11,352
Cost of equipment sold (exclusive of depreciation and
amortization below) 461 1,509
Sales and advertising (including stock-based compensation
of $121 for the three months ended March 31, 2005 and $360
for the three months ended March 31, 2004; exclusive of
depreciation and amortization below) 363 1,032
General and administrative (including stock-based compensation
of $10,259 for the three months ended March 31, 2005 and $577
for the three months ended March 31, 2004; exclusive of
depreciation and amortization below) 14,343 2,352
Restructuring Charges 85 1,154
Depreciation and amortization 3,679 4,273
(Gain)/Loss on asset disposal (6) 2
--------------- ---------------
Total Costs and Expenses 26,465 21,674
--------------- ---------------
Operating loss (21,452) (10,174)
--------------- ---------------
Interest expense, net -- (1,766)
Other income, net 80 8
Other income from Aether -- 645
Equity in loss of Mobile Satellite Ventures (7,168) (2,230)
--------------- ---------------
Net (loss) $ (28,540) $ (13,517)
=============== ===============
Basic and Diluted (Loss) Per Share of Common Stock:
Net (Loss), basic and diluted $ (0.48) $ (0.54)
=============== ===============
Weighted-Average Common Shares Outstanding - basic and diluted 59,580 25,232
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
3
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
MARCH 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS (UNAUDITED) (AUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 12,100 $ 16,945
Accounts receivable-trade, net of allowance for doubtful accounts
of $171 at March 31, 2005 and $256 at December 31, 2004 1,574 1,917
Inventory 39 75
Due from Mobile Satellite Ventures, net 5 5
Deferred equipment costs 450 874
Assets held for sale 261 261
Other current assets 1,367 1,348
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Total current assets 15,796 21,425
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RESTRICTED INVESTMENTS 76 76
PROPERTY AND EQUIPMENT, net 14,894 17,261
FCC LICENSES AND OTHER INTANGIBLES, net 66,353 67,649
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 505,446 141,635
DEFERRED CHARGES AND OTHER ASSETS 10 34
------------ ------------
TOTAL ASSETS $ 602,575 $ 248,080
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 6,341 $ 6,327
Deferred equipment revenue 501 933
Deferred revenue and other current liabilities 5,277 5,414
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Total current liabilities 12,119 12,674
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LONG-TERM LIABILITIES
Other long-term liabilities 580 675
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Total long-term liabilities 580 675
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Total liabilities 12,699 13,349
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STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
March 31, 2005 and December 31, 2004, no shares issued or
outstanding at March 31, 2005 or December 31, 2004 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares authorized
and 65,158,568 and 51,544,596 shares issued and outstanding at
March 31, 2005 and at December 31, 2004, respectively 650 516
Additional paid-in capital 740,442 399,635
Common stock purchase warrants 71,333 28,589
Accumulated deficit (222,549) (194,009)
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STOCKHOLDERS' EQUITY 589,876 234,731
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 602,575 $ 248,080
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
MOTIENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
THREE MONTHS THREE MONTHS
ENDED MARCH 31, ENDED MARCH 31,
2005 2004
--------------- ---------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (28,540) $ (13,517)
Adjustments to reconcile net loss to net cash (used in)
operating activities:
Depreciation and amortization 3,679 4,270
Equity in losses of MSV 7,168 2,230
(Gain)/loss on disposal of assets (6) 2
Non cash amortization of deferred financing costs -- 991
Non cash 401(k) match 48 --
Stock based compensation expense 11,569 1,442
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable -- trade 343 1,096
Inventory 36 108
Other current assets 5 4,812
Accounts payable and accrued expenses 14 (730)
Accrued interest -- 526
Deferred revenue and other current liabilities (240) (2,989)
--------------- ---------------
Net cash (used in) operating activities (5,924) (1,759)
--------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property & equipment 6 --
Proceeds (purchase) of restricted investments -- 406
Additions to property and equipment (16) (541)
--------------- ---------------
Net cash (used in)investing activities (10) (135)
--------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 34 --
Stock issuance costs and other charges (9) --
Principal payments under capital leases -- (342)
Principal payments under vendor financing -- (488)
Proceeds from Term Credit Facility -- 1,500
Proceeds from issuance of employee stock options 1,064 105
--------------- ---------------
Net cash provided by financing activities 1,089 775
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Net (decrease) in cash and cash equivalents (4,845) (1,119)
CASH AND CASH EQUIVALENTS, beginning of period 16,945 3,618
--------------- ---------------
CASH AND CASH EQUIVALENTS, end of period $ 12,100 $ 2,499
=============== ===============
The accompanying notes are an integral part of these consolidated financial statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
1. ORGANIZATION AND BUSINESS
OVERVIEW
Motient is a nationwide provider of two-way, wireless mobile data services and
wireless internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, Motient primarily generates revenue from the sale of airtime on its
"DataTac" network and from the sale of communications devices, which are
manufactured by other companies. Motient's customers use the DataTac network and
Motient's wireless applications for wireless email messaging and wireless data
communications services. This enables businesses, mobile workers and consumers
to wirelessly transfer electronic information and messages and to wirelessly
access corporate databases and the Internet. The network is designed to offer a
broad array of wireless data services, such as:
o two-way mobile Internet services, each providing personal
consumers and corporate customers with wireless access to a
broad range of email and information services;
o wireless data systems used by companies involved in data
transmission and processing, used to connect remote equipment,
such as wireless point-of-sale terminals, with a central
monitoring facility; and
o mobile data and mobile management systems used by
transportation and other companies to wirelessly coordinate
remote, mobile assets and personnel.
In addition to selling wireless data services that use its own network, Motient
is also a reseller of airtime on the Cingular and Sprint wireless networks.
Motient has reseller agreements with these companies that allow us to sell and
promote wireless data applications and solutions to its customers using these
networks, which are more modern and have greater capacity than its own, while
still maintaining a direct relationship with the customer, since "back office"
functions like customer support, application design and implementation, and
billing, among other support services, are handled by Motient.
These arrangements allow Motient to provide integrated wireless data solutions
to its customers using a variety of networks. In December 2004, Motient launched
a new set of products and services designed to provide these integrated wireless
data solutions to its customers called iMotient Solutions(TM). iMotient allows
Motient's customers to use these multiple networks via a single connection to
Motient's back-office systems, providing a single alternative for application
and software development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT, and our own DataTac network.
Once connected to iMotient, customers will receive proprietary applications and
services that reduce airtime usage, improve performance and reduce costs.
6
As of May 1, 2005, Motient's terrestrial wireless two-way data network covers a
geographic area populated by more than 195 million people and is comprised of
over 1,200 base stations that provide service to over 400 of the nation's
largest cities and towns, including all primary metropolitan statistical areas,
commonly known as "MSAs." Subscriber units, which may be mobile or stationary,
receive and transmit wireless data messages to and from these terrestrial base
stations via radio frequencies. Terrestrial messages are then routed to their
destination via data switches that Motient owns, which connect to the public
data network. Motient's network is a wireless packet-switched network based on
technologies developed prior to newer networks built around CDMA or GSM
technologies, and, unlike those networks, cannot accommodate wireless telephony.
Over the course of 2004, Motient implemented and completed certain initiatives
to rationalize the size of its network, primarily to remove unprofitable base
stations and reduce unneeded coverage.
During the first quarter of 2005, Motient initiated a plan to refocus its
DataTac network primarily on the top 40 MSAs. This plan involves the
decommissioning of DataTac network components and termination of service in
previously served MSAs other than the top 40. Given the similar coverage
profiles of the Cingular and Sprint networks, the significantly increased
bandwidth capabilities of these networks relative to DataTac and the
concentration of Motient's revenues in the top 40 MSAs, Motient determined that
this plan best allowed it to match its network infrastructure costs with its
revenue base, while continuing to meet the needs of as many of its customers as
possible. Motient has notified its customers of this change in its network
coverage and this decommissioning will begin on June 1, 2005. Motient is making
every effort to provide any impacted customers with alternatives to migrate
their services and applications either to its new iMotient Solutions(TM)
platform, or to other networks using its agreements with RACO Wireless, Inc. and
eAccess Solutions, Inc.
In addition, Motient owns a 49% interest in Mobile Satellite Ventures LP, or
MSV. Motient's website is www.motient.com.
MOBILE SATELLITE VENTURES LP
BUSINESS
MSV is a provider of mobile satellite-based communications services. MSV
currently uses two satellites to provide service, which allow customers access
to satellite-based wireless data, voice, fax and dispatch radio services almost
anywhere in North and Central America, northern South America, the Caribbean,
Hawaii and in various coastal waters.
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry
Canada, has access to more than 25 MHz of L-band spectrum that is authorized for
use in every market in North America. The L-band spectrum is positioned within
the range of frequencies used by terrestrial wireless providers in North
America.
7
MSV is also developing a next-generation system, a hybrid satellite/terrestrial
wireless network over North America that MSV expects will utilize new satellites
working with MSV's patented "ancillary terrestrial component" technology. MSV
will be able to deploy terrestrial two-way radio network technology in thousands
of locations across the United States, allowing subscribers to integrate
satellite-based communications services with more traditional land-based
wireless communications services. MSV is headquartered in Reston, VA, with an
office in Ottawa, ON, Canada.
MSV is structured as a limited partnership, of which Motient is one of the
limited partners. Motient holds a proportionate ownership interest in the
corporate general partner. Motient has certain rights to appoint directors to
the sole general partner of the limited partnership, but does not have any
direct or indirect operating control over MSV.
As of May 1, 2005, we have a 49% direct and indirect interest in MSV. For the
three month period ended March 31, 2005, MSV had revenues of $7.2 million,
operating expenses of $24.8 million and a net loss of $16.2 million.
HISTORY
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to MSV, as part of a transaction in which certain other
parties joined MSV, including TMI Communications and Company Limited Partnership
("TMI"), a Canadian satellite services provider. In this transaction, TMI also
contributed its satellite communications business assets to MSV. At the
conclusion of this transaction and several minor secondary financings, Motient's
ownership interest in MSV was 29.5% (assuming conversion of all outstanding
convertible notes). In a subsequent financing on November 12, 2004, Motient
acquired additional interests in MSV in exchange for cash and the conversion and
cancellation of all outstanding notes issued to Motient by MSV (including all
accrued interest thereon), and as a result increased its ownership to 38.6%.
On February 9, 2005, Motient entered into a merger agreement with Telcom
Satellite Ventures Inc. and Telcom Satellite Ventures II Inc. and simultaneously
consummated the transactions contemplated thereby, pursuant to which Telcom
merged with and into MVH Holdings Inc., a direct and wholly-owned subsidiary of
Motient, in a tax free reorganization in which MVH is the surviving company. In
exchange for 2,296,835 MSV limited partnership units held by the Telcom entities
(and the corresponding MSV GP shares), and Telcom's rights to receive TerreStar
common stock, Motient issued to Telcom's stockholders 8,187,804 shares of its
common stock.
Concurrently with this merger, Motient (through MVH) also purchased 373.7 shares
of common stock of Spectrum Space Equity Investors IV, Inc. and two other
related entities, representing approximately 66.3% of the outstanding common
stock of each of such entities, and 221.2 shares of common stock of Columbia
Space Partners, Inc. and two other related entities, representing approximately
27.8% of the outstanding common stock of such entities. In total, Motient issued
8
to the Spectrum entities and Columbia entities a total of 4,516,978 shares of
Motient common stock in a private placement in exchange for indirect ownership
through the Spectrum and Columbia entities of 1,267,098 MSV units, the
corresponding MSV GP shares, and the proportionate number of rights to receive
TerreStar common stock.
To the extent that MSV will need future cash to support its operations, Motient
is under no contractual obligation to provide it, and the value of our
investment in MSV could be negatively impacted if MSV cannot meet any such
funding requirements.
MSV'S NEXT-GENERATION COMMUNICATIONS SYSTEM: ATC
In February 2003, the FCC adopted an order governing ancillary terrestrial
component, or ATC, technology, giving mobile satellite operators broad authority
to use their assigned spectrum to operate an ATC. ATC technology allows a
wireless provider to use satellite communications technology in conjunction with
more traditional land-based wireless communications technologies, allowing a
user to utilize a signal from both satellite and terrestrial locations,
depending on a variety of technical and cost concerns. ATC can enhance satellite
availability, efficiency and economic viability by terrestrially reusing at
least some of the frequencies that are allocated to the satellite systems. An
appeal of this decision has been filed before a federal court. We cannot predict
the outcome of this pending appeal.
Without ATC, it may be challenging for mobile satellite systems to reliably
serve densely populated areas, because the satellite's signal may be blocked by
high rise structures and may not penetrate into buildings. As a result, the
satellite spectrum may be underutilized or unused in such areas. The use of ATC
retransmission can reduce or eliminate this problem.
The ATC Order established a set of preconditions and technical limits for ATC
operations, as well as an application process for ATC approval of the specific
system incorporating the ATCs that the licensee intends to use. On November 18,
2003, MSV filed an application with the FCC to expand the use of its L-band
spectrum and construct its next-generation hybrid network with ATC. On November
8, 2004 the FCC issued an order granting MSV the first ATC license ever granted
by the FCC. The FCC also approved several of MSV's waiver requests, allowing MSV
to further enhance its service coverage, but it specifically deferred its ruling
on other MSV waiver requests. The order sets forth various limitations and
conditions necessary to the use of ATC by MSV, but there can be no assurances
that such conditions will be satisfied by MSV, or that such limitations will not
be unnecessarily burdensome to MSV. One of MSV's competitors has asked the FCC
to review the November 8, 2004 decision. We cannot predict the outcome of this
review. On February 25, 2005, the FCC issued a revised set of rules following a
detailed multi-year process for the use of ATC. The rules expanded the technical
and operational flexibility of ATC Services allowing for greater capacity in
both the uplink and downlink directions. These rules are subject to challenge at
the FCC or before a federal court.
TERRESTAR NETWORKS INC.
In February 2002, MSV established TerreStar Networks Inc., a wholly owned
subsidiary, to develop business opportunities related to the proposed receipt of
certain licenses in the 2 GHz band, also known as the "S-band". On December 20,
2004, MSV issued rights to receive an aggregate of 23,265,428 shares of common
stock of TerreStar (representing all of the shares of TerreStar common stock),
owned by MSV, to the limited partners of MSV, pro rata in accordance with each
limited partner's percentage ownership in MSV.
9
REGULATORY MATTERS
The February 2003 order from the FCC authorizing ATC is applicable, in general,
to the S-band. However, TerreStar has not applied for ATC authority, and there
are several regulatory conditions that must be satisfied prior to any grant of
ATC authority by the FCC to TerreStar. As a result, Motient can provide no
assurances that ATC authority will be granted if and when TerreStar applies for
such authority.
TMI holds the approval issued by Industry Canada for a 2 GHz space station
authorization and related spectrum licenses for the provision of Mobile
Satellite Service, or MSS, in the 2 GHz band, as well as an authorization from
the FCC for the provision of MSS in the 2 GHz band. These authorizations are
subject to various milestones relating to the construction, launch, and
operational date of the system. TMI is obligated to transfer the Canadian
authorizations to an entity designated by TerreStar that is eligible to hold the
Canadian authorizations, subject to obtaining the necessary Canadian regulatory
approvals.
In December 2002, TMI and TerreStar jointly applied to the FCC for authority to
transfer TMI's MSS authorization to TerreStar. However, certain wireless
carriers urged the FCC to cancel TMI's MSS authorization, and to dismiss the
application to transfer TMI's MSS authorization to TerreStar. In February 2003,
the FCC's International Bureau adopted an order canceling TMI's MSS
authorization due to an alleged failure to enter into a non-contingent satellite
construction contract before the specified first milestone date, and dismissing
the application for TMI to transfer its MSS authorization to TerreStar.
In June 2004, upon review of the International Bureau's decision, the FCC agreed
to waive aspects of the first milestone requirement applicable to TMI's MSS
authorization and, therefore, also reinstated that authorization, along with the
application to transfer TMI's MSS authorization to TerreStar. The FCC also
modified the milestone schedule applicable to TMI's MSS authorization. TMI
recently certified to the FCC its compliance with the second and third
milestones under its MSS authorization. The FCC is currently reviewing that
certification for compliance with the requirements of TMI's MSS authorization.
The application to transfer TMI's MSS authorization to TerreStar is still
pending before the FCC. The remaining milestones relate to satellite launch and
operation, and are in November 2007 and 2008, respectively.
In September 2004, the FCC issued an order allowing PCS operation in the
1995-2000 MHz band, which may be adjacent to the 2 GHz frequencies ultimately
assigned to TMI. TerreStar has commented in the proceedings to establish service
rules for the 1995-2000 MHz band. There can be no assurance that the FCC will
not adopt service rules that will create interference to MSS operators in the 2
GHz band, including TerreStar.
SATELLITE CONSTRUCTION CONTRACT
During 2002 and in connection with its contractual obligations to TMI, TerreStar
entered into a contract to purchase a satellite system, including certain ground
infrastructure for use with the 2 GHz band. The satellite represents one
component of a communications system that would include ground-switching
infrastructure, launch costs, and insurance. Total cost of this system could
exceed $500 million, excluding the cost of a necessary back-up satellite. In
order to finance future payments, TerreStar will be required to obtain
10
additional debt or equity financing, or may enter into various joint ventures to
share the cost of development. There can be no assurance that such financing or
joint venture opportunities will be available to TerreStar or available on terms
acceptable to TerreStar.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared by the Company and are
unaudited. The results of operations for the three months ended March 31, 2005
are not necessarily indicative of the results to be expected for any future
period or for the full fiscal year. In the opinion of management, all
adjustments (consisting of normal recurring adjustments unless otherwise
indicated) necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2005, and for all periods presented, have
been made. Footnote disclosure has been condensed or omitted as permitted in
interim financial statements.
CONSOLIDATION
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
CASH EQUIVALENTS
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
CONCENTRATIONS OF CREDIT RISK
For the three months ended March 31, 2005, four customers accounted for
approximately 49% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 24%. As of March 31,
2005, one customer, RIM, accounted for more than 20% of our net accounts
receivable. No other single customer accounted for more than 7% of our net
accounts receivable. RIM also accounted for more than 14% of the Company's net
accounts receivable at December 31, 2004. For the three months ended March 31,
2004, four customers accounted for approximately 41% of the Company's service
revenue, with one customer, SkyTel, accounting for more than 23%. No single
customer accounted for more than 10% of the Company's net accounts receivable at
March 31, 2004. In March 2005, IBM notified the Company that they were
terminating their contract as of March 31, 2005. IBM represented $0.6 million of
revenue for the first three months of 2005, or approximately 12% of revenues for
this period.
The revenue attributable to such customers varies with the level of network
airtime usage consumed by such customers, and none of the service contracts with
such customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods.
11
INVESTMENT IN MSV
The Company uses the equity method of accounting for its investment in MSV. The
company considers whether the fair value of its investment has declined below
its carrying value whenever adverse events or circumstances indicate that the
recorded value may not be recoverable. If the Company considers such decline to
be other than temporary, a write down would be recorded to estimate fair value.
DEFERRED TAXES
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured.
REVENUE RECOGNITION
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not
have a material impact on the Company's revenue recognition policies.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF)
No. 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES, which
is being applied on a prospective basis. The consensus addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values. The consensus also supersedes
certain guidance set forth in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin Number 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number
104 (SAB 104).
12
Revenue is recognized as follows:
SERVICE REVENUE: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectability is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers and amortizes any revenue and costs
associated with activation of a subscriber on the Company's network over an
estimated customer life of two years.
The Company packages airtime usage on its network that involves a wide variety
of volume packaging, anything from a 35 kilobytes per month plan up to unlimited
kilobyte usage per month, with various gradations in between. Discounts may be
applied when comparing one customer to another, and such service discounts are
recorded as a reduction of revenue when granted.
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. The Company establishes 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. The Company assesses 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 the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
EQUIPMENT AND SERVICE SALES: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of March 31, 2005 and 2004, the Company had capitalized a total of $0.5
million and $3.1 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $0.5 million and $3.0 million, respectively.
PROPERTY AND EQUIPMENT
Property and equipment are depreciated over its useful life using the
straight-line method. Assets recorded as capital leases are amortized over the
shorter of their useful lives or the term of the lease. The estimated useful
13
lives of office furniture and equipment vary from two to ten years, and the
network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance that do not significantly increase the
utility or useful life of an asset are expensed as incurred.
RESTRUCTURING AND IMPAIRMENT CHARGES
In February 2004 and March 2005, the Company reduced its workforce by 54 and 11
employees, respectively. In accordance with SEC Staff Accounting Bulletin No.
100 - Restructuring and Impairment Charges and EITF No. 94.3, the Company
recorded a liability for the severance, employee benefits and estimated payroll
taxes of $1.1 million and $0.1 million respectively related to the reduction in
workforce.
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of March 31, 2005, the Company had incurred base station deconstruct
costs of $0.5 million, the loss on the retirement of certain base station
equipment of $2.8 million and termination liabilities of $1.1 million for site
leases no longer required for removed base stations. The Company recorded these
charges in accordance with SEC Staff Accounting Bulletin No. 100 - Restructuring
and Impairment Charges and EITF No. 94.3.
ADVERTISING COSTS
Advertising costs (inclusive of airtime commissions) are charged to operations
in the year incurred.
STOCK-BASED COMPENSATION
The Company accounts for stock options issued to non-employees, under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation." The Company's issuance of employee stock options is accounted for
using the intrinsic value method under APB Opinion No. 25, Accounting for Stock
issued to Employees ("APB 25").
Statement of Financial Accounting Standards No. 123 "Accounting for Stock --
based Compensation," ("SFAS No. 123") as amended by Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation --
Transition and Disclosure" requires the Company to provide pro forma information
regarding net earnings and earnings per common share as if compensation cost for
the Company's stock options had been determined in accordance with the fair
value based method prescribed in SFAS No. 123.
We have granted stock options to our employees at exercise prices equal to or
greater than the fair value of the shares at the date of grant and accounted for
these stock option grants in accordance with APB 25. Under APB 25, when stock
options are issued with an exercise price equal to the market price of the
underlying stock on the date of grant, no compensation expense is recognized in
the statement of operations. Because we recognized that APB 25 was in the
process of being rescinded, in 2004 we amended our stock option plan to provide
for the grants of restricted stock and other forms of equity compensation in
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addition to stock options. In December 2004, APB 25 was replaced by Statement of
Financial Accounting Standards No. 123 (Revised) ("Statement 123(R)") which will
be effective for all accounting periods beginning after December 15, 2005. The
Company will adopt Statement 123(R) on January 1, 2006, and will be required to
recognize an expense for the fair value of its outstanding stock options. Under
Statement 123(R), The Company must determine the transition method to be used at
the date of adoption, the appropriate fair value model to be used for valuing
share-based payments and the amortization method for compensation cost. The
transition methods include prospective and retroactive adoption methods. Under
the retroactive method, prior periods may be restated either as of the beginning
of the year of adoption or for all periods presented. The prospective option
requires that compensation expense be recorded for all unvested stock options
and restricted stock at the beginning of the first quarter of adoption of
Statement 123(R), while the retroactive option would record compensation expense
for all unvested stock options and restricted stock beginning with the first
period restated. Both transition methods would require management to make
accounting estimates. The Company has not yet concluded which method it will
utilize, nor has it determined what the impact will be on its earnings per
share.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
--------------- ---------------
Net loss, as reported $ (28,540) $ (13,517)
Add: Stock-based employee compensation expense included in net
loss, net of related tax effects 11,569 1,442
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards, net
of tax related effects (12,940) (439)
--------------- ---------------
Pro forma net loss (29,911) (12,514)
Weighted average common shares outstanding 59,580 25,232
Loss per share:
Basic and diluted---as reported $ (0.48) $ (0.54)
Basic and diluted---pro-forma $ (0.50) $ (0.50)
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Three Months Three Months
Ended March 31, 2005 Ended March 31, 2004
-------------------- --------------------
Expected life (in years) 10 10
Risk-free interest rate 2.28%-2.69% 0.88%-0.93%
Volatility 456%-650% 146%-162%
Dividend yield 0.0% 0.0%
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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's core customer base can be generally divided
into five broad categories, Wireless Internet, Field Services, Transportation,
Telemetry and Other. Wireless Internet primarily consists of customers using the
Company's network and applications to access certain internet functions, like
email. Devices and airtime used by transportation and shipping companies, or by
personnel in the field service industries (such as repair personnel), for
dispatching, routing and other vital communications functions are known as
transportation and field service, respectively. Telemetry typically covers
devices and airtime to connect remote equipment, such as wireless point-of-sale
terminals, with a central monitoring facility. Other revenues may consist of
sales commissions, consulting fees, or other fees. The following summarizes the
Company's core wireless business revenue by these market categories:
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
---- ----
Summary of Revenue
------------------
(in millions)
Wireless Internet $2.6 $6.2
Field Services 0.8 1.8
Transportation 0.6 0.9
Telemetry 0.4 0.6
All Other 0.1 0.5
--- ---
Service revenue 4.5 10.0
Equipment revenue 0.5 1.5
--- ---
Total $5.0 $11.5
==== =====
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(LOSS) PER SHARE
Basic and diluted (loss) income per common share is computed by dividing income
(loss) 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.
Basic and diluted (loss) income per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
16
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for all
periods. As a result, the basic and diluted earnings per share amounts for all
periods presented are the same. As of March 31, 2005 and 2004, there were
warrants to acquire approximately 7,173,408 and 6,664,962, respectively, shares
of common stock and options outstanding for 410,339 and 1,554,867, respectively,
shares that were not included in this calculation because of their antidilutive
effect for the three months ended March 31, 2005 and 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Under SFAS No. 123R companies
are required to record compensation expense for all share based payment award
transactions measured at fair value. This statement is effective for quarters
ending after December 15, 2005. We have not yet determined the impact of
applying the various provisions of SFAS No. 123R.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment
of ARB No. 43, Chapter 4," to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied,
will have an impact on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, EXCHANGES OF NONMONETARY ASSETS
- -- AN AMENDMENT OF APB OPINION NO. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS
(SFAS 153). SFAS 153 eliminates the exception from fair value measurement for
nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, ACCOUNTING FOR NONMONETARY TRANSACTIONS, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS 153
specifies that a non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by the Company in the third quarter of 2005.
The Company is currently evaluating the effect that the adoption of SFAS 153
will have on its consolidated results of operations and financial condition but
does not expect it to have a material impact.
RELATED PARTIES
The Company made cash payments of $1.2 million to related parties for
service-related obligations for the three-month period ended March 31, 2005, as
compared to $0.2 million for the three month period ended March 31, 2004. These
payments were primarily made to CTA, a consulting and private advisory firm
specializing in the technology and telecommunications sectors. CTA has been
engaged to act as chief restructuring entity of Motient. As consideration for
this work, Motient has agreed to pay to CTA a monthly fee of $60,000.
17
In February 2005, Motient issued approximately 95,000 shares of restricted
common stock, with a value of $2.8 million, to CTA in exchange for certain
investment-banking services undertaken pursuant to Motient's acquisition of the
MSV interests of the Telcom, Columbia and Spectrum entities. CTA assigned
approximately $1.1 million to Starrett Consulting, LLC, an entity controlled by
Gary Singer, brother of Steven Singer, Motient's chairman.
3. COMMITMENTS AND CONTINGENCIES
As of March 31, 2005, the Company had no contractual inventory commitments.
In December 2002, Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. As of March 31, 2005, the Company's
remaining airtime service obligation to UPS in respect of the prepayment was
approximately $3.9 million. In April 2005, this agreement was amended to require
that UPS use at least $1.5 million of airtime between January 1, 2005 and March
31, 2006, and in exchange, Motient would repay in April 2006, in cash, an amount
equal to the amount of airtime used by UPS during such time period. Both UPS'
usage and Motient's repayment will be credited against the remaining airtime
obligation. As a result of this amendment, the maximum prepaid airtime service
obligation will be $0.9 million in May 2006. The parties have not yet reached
agreement regarding the use or repayment of any remaining prepaid airtime
service obligation, but Motient can provide no assurance that it will not be
required to repay such amount to UPS.
4. LEGAL AND REGULATORY MATTERS
LEGAL
In March 2005, Research In Motion Ltd. (RIM) settled on outstanding patent
infringement lawsuit related to RIM's BlackBerry handheld device and software,
which Motient supports on its DataTac wireless network. As a result of this
settlement, RIM and its customers, including Motient, may use the BlackBerry
device and software without any further interference from NTP, Inc., the holder
of the disputed patents.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
REGULATORY
In order to address certain concerns from wireless users in the public safety
community, such as fire and police departments, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel Communications Inc. will occupy spectrum in the 1.9 GHz band in
exchange for, among other things, (1) relocating and retuning public safety
licensees in the 800 MHz band, and (2) consolidating its own 800MHz frequencies
in the so-called "upper 800" MHz band. On April 8, 2004, Motient filed a request
with the FCC asking that the FCC relocate its 800MHz band frequencies into the
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"Guard Band", which is that portion of the 800 MHz frequency band immediately
adjacent to the upper-800 as part of the 800 MHz reconfiguration plan. On August
6, 2004, the FCC released the text of its July 8, 2004 order. The text of the
order did not grant Motient's request, but neither did it explicitly deny it. On
December 2, 2004, Motient filed comments with the FCC seeking to clarify and
implement Motient's original request of April 8, 2004. On December 22, 2004, the
FCC clarified that Motient would generally be allowed, subject to certain
conditions, to move its 800 MHz frequencies to the upper-800 MHz band. Motient
cannot assure you that its operations will be not affected by the adoption or
implementation of this order or any subsequent addenda.
As a result of Motient's ongoing network rationalization efforts, its 800 MHz
FCC licenses may be lost in markets to which we are discontinuing service.
Motient believes that the value of its FCC licenses in these smaller markets is
very small compared to the value of its FCC licenses in the top 40 MSAs. While
Motient is taking steps to avoid this possibility, and while it believes that
any such losses would not be material to its business, Motient can provide no
assurance that any such losses would not negatively impact its business.
5. SUBSEQUENT EVENTS
SALE OF PREFERRED STOCK
On April 15, 2005, Motient sold 408,500 shares of non-voting Series A Cumulative
Convertible Preferred Stock, $0.01 par value in a private placement exempt from
the registration requirements of the Securities Act of 1933. Motient received
cash proceeds, net of $17.2 million in placement agent commissions (before
escrowing a portion of the proceeds as required under the terms of the preferred
stock, described below) of approximately $391 million. The purchasers under the
Securities Purchase Agreement included most of the purchasers from Motient's
November 2004 private placement, as well as several new investors.
Motient covenanted that it intends to use part of the proceeds of this issuance
to, among other things, purchase newly issued common stock of TerreStar Networks
Inc., a 97% owned subsidiary of Mobile Satellite Ventures, LP. Motient
anticipates that such purchase of common stock would occur in connection with a
spin-off of TerreStar to the limited partners of MSV and would result in Motient
gaining a majority interest in TerreStar. Motient and TerreStar Networks have
not entered into definitive documents regarding any such investment by Motient,
and the consummation of this transaction will not occur until the parties have,
among other things, received all applicable regulatory approvals and negotiated
and executed definitive documentation. Accordingly, Motient can provide no
assurances that this transaction will ever be consummated. The remaining
proceeds (or all of the proceeds, if the purchase of TerreStar common stock is
never consummated) will be used for a variety of purposes, including general
corporate purposes.
In connection with the sale of preferred stock, Motient also entered into a
registration rights agreement with the purchasers. Under this agreement, Motient
is obligated to use its reasonable best efforts to cause a registration
statement on Form S-1 (or if available S-3) relating to the resale by the
purchasers of the Motient shares of common stock issuable upon conversion of the
preferred stock or the warrants issued in connection therewith, to be filed with
the SEC on or prior to June 24, 2005, and will use its best efforts to cause the
19
registration statement to become effective as soon as possible, but in no event
later than (i) August 8, 2005 if the registration statement is not reviewed by
the Securities and Exchange Commission (the "SEC") or (ii) September 7, 2005 if
the Registration Statement is reviewed by the SEC.
In connection with the sale of the preferred stock, Motient granted warrants
exercisable for an aggregate of 154,109 shares of Motient common stock to the
purchasers. The warrants have a term of five years and an exercise price equal
to $26.51 per share. Each warrant shall become exercisable if the registration
statement is not filed or declared effective in accordance with the time limits
described above, or if the registration statement is filed and declared
effective but shall thereafter cease to be effective for a period of time that
exceeds 30 days in the aggregate in any twelve-month period. Each warrant will
vest as to 1/365th of the shares of common stock underlying the warrant for (i)
each day after June 24, 2005 on which the registration statement has not yet
been filed, (ii) each day after August 8, 2005 or September 7, 2005, as
applicable, that the registration statement has not been declared effective or
(iii) each day after the registration statement first becomes effective that
Motient is unable to keep it effective in accordance with the time periods and
terms described above.
The sale of these shares of preferred stock was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act as a sale not involving any public offering, under which offers
and sales were made to Qualified Institutional Buyers as such term is defined
under the rules and regulations under the Securities Act. In connection with
such sale of preferred stock, Motient also issued, for no separate
consideration, warrants to purchase up to 154,109 shares of Motient common
stock.
The rights, preferences and privileges of the Series A Preferred are contained
in a Certificate of Designations of the Series A Cumulative Convertible
Preferred Stock. The following is a summary of these rights, preferences and
privileges:
o The Series A Preferred Stock is non-voting, except as required
by applicable law.
o From April 15, 2005 to April 15, 2007, Motient is required to
pay dividends in cash at a rate of 5.25% per annum (the "Cash
Rate") on the shares of Series A Preferred. Motient was
required to place the aggregate amount of these cash
dividends, $42,892,500, in an escrow account. These cash
dividends will be paid to the holders of Series A Preferred
from this escrow account in four semi-annual payments, unless
earlier paid pursuant to the terms described below.
o From April 15, 2007 to April 15, 2010, Motient is required to
pay dividends on each share of Series A Preferred either in
cash at the Cash Rate or in shares of Motient common stock at
a rate of 6.25% per annum.
o If any shares of Series A Preferred remain outstanding on
April 15, 2010, Motient is required to redeem such shares for
an amount equal to the purchase price paid per share plus any
accrued but unpaid dividends on such shares.
20
o Each holder of shares of Series A Preferred shall be entitled
to convert their shares into shares of Motient common stock at
any time. Each share of Series A Preferred will initially be
convertible into 30 shares of Motient common stock. Upon
conversion, any accrued but unpaid dividends on such shares
will also be issued as shares of common stock, in a number of
shares determined by dividing the aggregate value of such
dividend by $33.33. In addition, if the conversion takes place
prior to April 15, 2007 (or if any amounts remain in the
escrow account on such date), the converting holder will be
entitled to the portion of the escrow account per share of
Series A Preferred Stock equal to $105.00 minus all dividends
that have been paid on such share from the escrow account
(such amount, the "Escrow Portion"). Upon conversion, all
amounts paid to holders of Series A Preferred will be paid in
shares of Motient common stock.
o Upon a change in control of Motient, each holder of Series A
Preferred shall be entitled to require Motient to redeem such
holder's shares of Series A Preferred for an amount in cash
equal to $1,080 per share plus all accrued and unpaid
dividends on such shares. In addition if the change in control
takes place prior to April 15, 2007 (or if any amounts remain
in the escrow account on such date), the holder electing to
have such shares redeemed will be entitled to the Escrow
Portion remaining as to such share.
o No dividends may be declared or paid, and no funds shall be
set apart for payment, on shares of Motient common stock,
unless (i) written notice of such dividend is given to each
holder of shares of Series A Preferred not less than 15 days
prior to the record date for such dividend and (ii) a
registration statement registering the resale of the
Conversion Shares has been filed with the SEC and is effective
on the date Motient declares such dividend.
o Upon the liquidation, dissolution or winding up of Motient,
the holders of Series A Preferred are entitled to receive,
prior and in preference to any distributions to holders shares
of Motient common stock, an amount equal to $1,000 per share
plus all accrued and unpaid dividends on such shares. In
addition if the liquidation, dissolution or winding up takes
place prior to April 15, 2007 (or if any amounts remain in the
escrow account on such date), the holder of each share of
Series A Preferred will be entitled the Escrow Portion
remaining as to such share.
ELECTION OF DIRECTOR
On May 3, 2005 the board elected C. Gerald Goldsmith to serve on the Board of
Directors.
21
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This quarterly report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project" or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, those under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview - Overview of Liquidity
and Risk Factors," and elsewhere in this quarterly report. All of our subsequent
written and oral forward-looking statements or statements that may be attributed
to us are expressly qualified in their entirety by the cautionary statements
referred to above and contained elsewhere in this quarterly report on Form 10-Q.
You should carefully review the risk factors described in our other filings with
the Securities and Exchange Commission from time to time, including the risk
factors contained in our Form 10-K for the period ended December 31, 2004, and
our reports on Form 10-K and 10-Q to be filed after this quarterly report, as
well as our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed in these statements.
OVERVIEW
GENERAL
This section provides information regarding the various components of Motient's
business, which we believe are relevant to an assessment and understanding of
the financial condition and consolidated results of operations of Motient.
We are a nationwide provider of two-way, wireless mobile data services and
mobile internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we generate revenue primarily from the sale of airtime on our network
and from the sale of communications devices to our customers. Our customers use
our network and our wireless applications for wireless email messaging and
wireless data transmission, enabling businesses, mobile workers and consumers to
wirelessly transfer electronic information and messages and to access corporate
databases and the Internet.
In addition to selling wireless data services that use its own network, Motient
is also a reseller of airtime on the Cingular and Sprint wireless networks.
These arrangements allow Motient to provide integrated wireless data solutions
to its customers using a variety of networks. In December 2004, Motient launched
22
a new set of products and services designed to provide these integrated wireless
data solutions to its customers called iMotient Solutions(TM). iMotient allows
Motient's customers to use these multiple networks via a single connection to
Motient's back-office systems, providing a single alternative for application
and software development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT and our own DataTac network.
Once connected to iMotient, customers will receive proprietary applications and
services that reduce airtime usage, improve performance and reduce costs.
Motient has not yet generated material revenues from iMotient Solutions, but it
anticipates that iMotient revenues will increase over the course of 2005.
Motient cannot anticipate whether these revenues will increase rapidly enough to
offset anticipated revenue declines in other segments of its business.
Motient has six wholly-owned subsidiaries and a 49% interest in Mobile Satellite
Ventures LP, a provider of wireless, satellite-based, communications services,
as of May 1, 2005. As Motient owns less than 50% of MSV, Motient has no
operating control of MSV. Motient Communications Inc. owns the assets comprising
Motient's core wireless business, except for Motient's FCC licenses, which are
held in a separate subsidiary, Motient License Inc. Motient's other four
subsidiaries hold no material operating assets other than the stock of other
subsidiaries and Motient's interests in MSV. On a consolidated basis, we refer
to Motient Corporation and its six wholly-owned subsidiaries as "Motient." Our
less-than 50% voting interest in MSV is not consolidated with Motient for
financial statement purposes. Rather, we account for our interest in MSV under
the equity method of accounting.
SUMMARY OF RISK FACTORS
In addition to the challenge of growing revenue as described above, our future
operating results could be adversely affected by a number of uncertainties and
factors, including:
o WE HAVE UNDERGONE SIGNIFICANT ORGANIZATIONAL RESTRUCTURING AND
WE FACE SUBSTANTIAL OPERATIONAL CHALLENGES.
o WE ARE NOT AND MAY NEVER BE CASH FLOW POSITIVE, AND OUR
PROSPECTS WILL DEPEND ON OUR ABILITY TO CONTROL OUR COSTS
WHILE MAINTAINING AND IMPROVING OUR SERVICE LEVELS.
o WE WILL NEED ADDITIONAL LIQUIDITY TO FUND OUR OPERATIONS.
o WE WILL CONTINUE TO INCUR SIGNIFICANT LOSSES.
o WE GENERATE A LARGE PART OF OUR REVENUES AND CASH FLOWS FROM A
SMALL NUMBER OF CUSTOMERS, AND THE LOSS OF ONE OR MORE KEY
CUSTOMERS COULD RESULT IN A SIGNIFICANT REDUCTION IN REVENUES
AND CASH FLOWS.
o OUR GROWTH HAS BEEN CURTAILED BY FUNDING CONSTRAINTS.
o WE FACE BURDENS RELATING TO THE RECENT TREND TOWARD STRICTER
CORPORATE GOVERNANCE AND FINANCIAL REPORTING STANDARDS.
o WE MAY NOT BE ABLE TO REALIZE VALUE FROM OUR INVESTMENT IN MSV
DUE TO RISKS ASSOCIATED WITH MSV'S NEXT-GENERATION BUSINESS
PLAN.
o MOTIENT MAY HAVE TO TAKE ACTIONS WHICH ARE DISRUPTIVE TO ITS
BUSINESS TO AVOID REGISTRATION UNDER THE INVESTMENT COMPANY
ACT OF 1940.
o WE COULD LOSE MARKET SHARE AND REVENUES AS A RESULT OF
INCREASING COMPETITION FROM COMPANIES IN THE WIRELESS
COMMUNICATIONS INDUSTRY THAT HAVE GREATER RESOURCES AND NAME
RECOGNITION.
o FAILURE TO KEEP PACE WITH RAPIDLY CHANGING MARKETS FOR
WIRELESS COMMUNICATIONS WOULD SIGNIFICANTLY HARM OUR BUSINESS.
o THE SUCCESS OF OUR WIRELESS COMMUNICATIONS BUSINESS DEPENDS ON
OUR ABILITY TO ENTER INTO AND MAINTAIN THIRD PARTY
DISTRIBUTION RELATIONSHIPS.
23
o WE EXPECT TO MAINTAIN A LIMITED INVENTORY OF DEVICES TO BE
USED IN CONNECTION WITH OUR WIRELESS INTERNET SERVICE, AND ANY
INTERRUPTION IN THE SUPPLY OF SUCH DEVICES COULD SIGNIFICANTLY
HARM OUR BUSINESS.
o WE MAY NOT BE ABLE TO DEVELOP, ACQUIRE AND MAINTAIN
PROPRIETARY INFORMATION AND INTELLECTUAL PROPERTY RIGHTS,
WHICH COULD LIMIT THE GROWTH OF OUR BUSINESS AND REDUCE OUR
MARKET SHARE.
o GOVERNMENT REGULATION MAY INCREASE OUR COST OF PROVIDING
SERVICES, SLOW OUR EXPANSION INTO NEW MARKETS, SUBJECT OUR
SERVICES TO ADDITIONAL COMPETITIVE PRESSURES AND AFFECT THE
VALUE OF OUR COMMON STOCK.
o MOTIENT'S COMPETITIVE POSITION MAY BE HARMED IF THE WIRELESS
TERRESTRIAL NETWORK TECHNOLOGY IT LICENSES FROM MOTOROLA IS
MADE AVAILABLE TO COMPETITORS.
o WE DO NOT EXPECT TO PAY ANY DIVIDENDS ON OUR COMMON STOCK FOR
THE FORESEEABLE FUTURE.
o FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS
PRICE AND/OR OUR ABILITY TO RAISE CAPITAL.
o FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROL
OVER FINANCIAL REPORTING IN ACCORDANCE WITH RULES OF THE
SECURITIES AND EXCHANGE COMMISSION PROMULGATED UNDER SECTION
404 OF THE SARBANES-OXLEY ACT COULD HARM OUR BUSINESS AND
OPERATING RESULTS AND/OR RESULT IN A LOSS OF INVESTOR
CONFIDENCE IN OUR FINANCIAL REPORTS, WHICH COULD IN TURN HAVE
A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND STOCK PRICE.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's annual report on Form 10-K for the fiscal
year ended December 31, 2004.
RESULTS OF OPERATIONS
SUBSCRIBER STATISTICS
Our customer base can be generally divided into five broad categories, Wireless
Internet, Field Services, Transportation, Telemetry and Other. Wireless Internet
primarily consists of customers using our network and applications to access
certain internet functions, like email. Devices and airtime used by
transportation and shipping companies, or by personnel in the field service
industries (such as repair personnel), for dispatching, routing and other vital
communications functions are known as Transportation and Field Service,
respectively. Telemetry typically covers devices and airtime used to connect
remote equipment, such as wireless point-of-sale terminals, with a central
monitoring facility. An explanation of certain changes in revenue and
subscribers is set forth below. Other revenues may consist of sales commissions,
consulting fees, or other fees.
The table below summarizes the make up of our registered subscriber base.
Wireless devices may be divided into three categories, registered, billable and
active. Registered devices represent devices that our customers have registered
for use on our network. Certain numbers of these devices may be kept in
inventory by our customers for future use and generally are not revenue
producing. Customers then move such inventory into a production status upon
which it typically becomes billable and generates revenue. However, billable
units may not pass traffic and thus will not be counted as active. We count a
device as active when it is removed from inventory by the customer and transmits
greater than zero kilobytes of data traffic.
24
As of March 31,
2005(1) 2004(1) % Change
------- ------- --------
Registered Billable Active Registered Billable Active Registered Billable Active
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Wireless Internet 48,823 28,523 15,359 99,574 59,657 43,044 (51)% (52)% (64)%
Field Services 5,615 6,723 3,211 15,114 14,748 9,286 (63) (54) (65)
Transportation 48,513 40,383 40,517 47,877 40,473 40,757 1 0 (1)
Telemetry 28,026 21,124 10,497 30,464 25,418 14,745 (8) (17) (26)
All Other 579 495 90 813 554 507 (29) (11) (82)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total 131,556 97,248 70,124 193,842 140,850 108,339 (32)% (31)% (35)%
======= ======= ======= ======= ======= ======= ======= ======= =======
1) Reflects deregistration of units by SkyTel on December 30, 2004 of
approximately 30,000 units and deregistration of 9,000 units in the
first quarter of 2005 by certain other resellers.
In the fourth quarter of 2004, we performed an analysis of our registered user
devices from our larger resellers, which represent a majority of our registered
user devices not in service. Given the decline in our wireless internet base in
2004, the end-of-life of the RIM 857 devices and the general availability of
next-generation devices that were voice capable from wireless carrier such as
T-Mobile and Verizon, we determined that many of the devices registered by our
resellers on our network were not likely to be put back in service on our
network. As a result, during the fourth quarter of 2004 and the first quarter of
2005 approximately 39,000 user devices were deregistered from our network, of
which approximately 30,000 were de-registered by SkyTel Communications, Inc. on
December 30, 2004. The remaining 9,000 were deregistered during the first
quarter of 2005. The de-registration of these user devices did not impact our
revenue or our billable and active user devices and we believe that our
registered device counts now provide a more accurate representation of user
devices held in inventory by our customers that may be put back in service by
our customers in the future.
REVENUES
The tables below set forth, for the periods indicated, a year-over-year
comparison of the key components of revenue.
Three Months Ended March 31,
--------------------------------
Summary of Revenue 2005 2004 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $2.6 $6.2 (3.6) (58)%
Field Services 0.8 1.8 (1.0) (56)
Transportation 0.6 0.9 (0.3) (33)
Telemetry 0.4 0.6 (0.2) (33)
All Other 0.1 0.5 (0.4) (80)
--- --- ----- ----
Service Revenue 4.5 10.0 (5.5) (55)
Equipment Revenue 0.5 1.5 (1.0) (68)
--- --- ----- ----
Total $5.0 $11.5 $(6.5) (57)%
==== ===== ====== =====
The decrease in service revenue was the result of a decrease in revenue in our
all our market segments, primarily as a result of migration by our customers to
newer technologies with capabilities that our network is not capable of
supporting (such as voice enabled handheld devices), or more modern networks
with greater capacity than our own (such as so-called 2G or 3G networks from
providers such as Sprint, Cingular, Verizon or T-Mobile). We believe that our
25
network reduction efforts, announced to our customers in the first quarter, may
have also caused negative pressure on our revenues as certain customer may have
elected to terminate service with Motient in favor of other alternative wireless
carriers. If we cannot generate additional revenue from other sources to offset
this lost revenue, our overall revenues will decline in the future. The decrease
in total revenue was primarily a result of decreased service and equipment
revenues.
During the first quarter of 2005, Motient initiated a plan to refocus its
DataTac network primarily on the top 40 MSAs. This plan involves the
decommissioning of DataTac network components and termination of service in
previously served MSAs other than the top 40. Given the similar coverage
profiles of the Cingular and Sprint networks, the significantly increased
bandwidth capabilities of these networks relative to DataTac and the
concentration of our revenues in the top 40 MSAs, we determined that this plan
best allowed us to match our network infrastructure costs with our revenue base,
while continuing to meet the needs of as many of our customers as possible. We
have notified our customers of this change in our network coverage and this
decommissioning will begin on June 1, 2005. We are making every effort to
provide any impacted customers with alternatives to migrate their services and
applications either to our new iMotient Solutions(TM) platform, or to other
networks using our agreements with RACO Wireless, Inc. and eAccess Solutions,
Inc. These network changes may put negative pressure on our revenues in all
market segments in 2005 as customers may elect to pursue other alternative
network carriers with alternative coverage. We are making every effort to retain
our customers or migrate them to our iMotient Solutions(TM) product and
services, but Motient can make no assurances that it will be able to retain
these customers.
By revenue segment, we note that:
o Wireless Internet: The revenue decline in the Wireless Internet sector
during this period represented customer losses that we are experiencing
in both our direct and reseller channels as a result of the migration
of Wireless Internet customers to other networks with additional
features, such as voice-capable wireless internet devices. These
customer losses have been exacerbated because Research in Motion, or
RIM, no longer manufactures any devices which will operate on our
DataTac network, which has and will continue to negatively impact the
ability of our resellers to add new devices to our network to replace
those that are migrating from their respective customer bases. These
factors, in addition to our network reduction efforts discussed above,
may lead to additional declining Wireless Internet revenues in 2005.
Motient is currently exploring ways to offer Wireless Internet services
under our iMotient Solutions(TM) platform, but Motient can make no
assurances that it will ever be able to effective offer such a product.
o Field Services: The decrease in field service revenue was primarily the
result of the termination of several customer contracts, including
Brinks, Bannex, Pitney Bowes and Schindler, as well as the general
reduction of units and/or rates across the remainder of our field
service customer base. Our network changes, discussed above, may put
negative pressure on our revenues in this market segment in 2005,
however, we believe that the technology requirements of this market
segment are more compatible with our network than the Wireless Internet
market segment, our most significant market segment, and we are making
efforts to grow this segment. In addition, Motient believes that this
market segment will potentially present new opportunities to generate
new revenues with our iMotient Solutions(TM) products and service.
26
o Transportation: The decrease in revenue from the transportation sector
was primarily the result of UPS removing units from our network. UPS
represented $154,000 of revenue for the three months ended March 31,
2005, as compared to $274,000 of revenue for the three months ended
March 31, 2004. We did, however, also continue to experience growth
during this period in other transportation accounts, most notably
Geologic Solutions, formerly d/b/a Aether Systems.. Our network
changes, discussed above, may put negative pressure on our revenues in
this market segment in 2005, however, we believe that the technology
requirements of this market segment are more compatible with our
network than the Wireless Internet market segment and we are making
efforts to grow this segment. In addition, Motient believes that this
market segment will potentially present new opportunities to generate
new revenues with our iMotient Solutions(TM) products and services.
o Telemetry: While we experienced revenue growth in certain telemetry
customer accounts, this revenue growth was equally offset by customer
losses or negative rate changes in other telemetry accounts. Our
network changes, discussed above, may put negative pressure on our
revenues in this market segment in 2005, however, we believe that the
technology requirements of this market segment are more compatible with
our network than the Wireless Internet market segment and we are making
efforts to grow this segment. In addition, Motient believes that this
market segment will potentially present new opportunities to generate
new revenues with our iMotient Solutions(TM) products and services.
o All Other: The decrease in other revenue was primarily due to the
termination of our agreements with Verizon and T-Mobile, which allowed
us to sell and promote wireless email and wireless internet
applications on their networks. Unless we refocus our efforts in this
revenue segment to a different vendor/strategy, we do not expect to
generate significant revenues in this product segment in the future.
Revenues from our iMotient Solutions(TM) products and services have
been included in this other revenue segment but were immaterial for the
first quarter of 2005.
o Equipment: The decrease in equipment revenues for the three months
ended March 31, 2005 was the result of the decline sales of devices
attributable to our now-terminated agency and dealer agreements with
Verizon and T-Mobile.
OPERATING EXPENSES
The table below summarizes our operating expenses for the three months ended
March 31, 2005 and 2004. An explanation of certain changes in operating expenses
is set forth below.
Three Months Ended March 31,
---------------------------------
Summary of Expenses 2005 (1) 2004 (2) Change % Change
------------------- -------- -------- ------ --------
(in millions)
Cost of Service and Operations $7.5 $11.3 (3.8) (34)%
Cost of Equipment Sales 0.5 1.5 (1.0) (67)
Sales and Advertising 0.4 1.0 (0.6) (60)
General and Administration 14.3 2.4 11.9 496
Operational Restructuring Costs 0.1 1.2 (1.1) (92)
Depreciation and Amortization 3.7 4.3 (0.6) (14)
(Gain)/Loss on Asset Disposal (0.0) 0.0 (0.0) (400)
----- --- ----- -----
Total $26.5 $21.7 $4.8 22%
===== ===== ==== ==
(1) Includes compensation expense of $11.6 million related to the market value
of stock options.
(2) Includes compensation expense of $1.4 million related to the market value
of stock options.
27
o Cost of Service and Operations: Our largest single cost center is the
cost of service and operations, which includes costs to support
subscribers, such as network telecommunications charges and site rent
for network facilities, network operations employee salary and related
costs, network and hardware and software maintenance charges, among
other things. The decrease in these expenses was partially the result
of lower employee salary and related costs due to a workforce reduction
implemented in February 2004. The decrease in these expenses was also
partially the result of lower fees paid to RIM for licensing Blackberry
as a result of the decline of Wireless Internet units and revenues,
which fees we anticipate will continue to decline in the future as
well. The decrease in these expenses was also impacted by the continued
removal of older-generation base stations from the network and the
removal of base stations under our network rationalization efforts
initiated in the second quarter of 2004 and the resulting decreases in
telecommunications, base station maintenance and site lease related
expenses. As we continue to remove base stations from the network, we
anticipate that these costs will continue to decrease. The decrease in
costs of service and operations was also partially the result of
reductions in hardware and software maintenance costs as a result of
the negotiation of lower rates on maintenance service contracts in
2004. These decreases were partially offset by compensation expenses
associated with stock options issued to employees of $1.2 million for
the three months ended March 31, 2005. Compensation expenses associated
with stock options issued to employees totaled $0.5 million for the
three months ended March 31, 2004. Excluding these compensation
charges, cost of service and operations decreased $4.5 million, or 42%,
for the three months ended March 31, 2005 as compared to the same
period in 2004. Given our ongoing cost-reduction efforts, we expect
these costs to continue to decrease. The extent of the decrease will
depend both upon our ability to successfully manage our cost-reduction
efforts as well as the necessity for these expenditures in the future
if our customer base declines.
o Cost of Equipment: The decrease in cost of equipment for the three
months ended March 31, 2005 was the result of the elimination of sales
of devices attributable to agency and dealer agreements with Verizon
Wireless and T-Mobile USA. Our efforts to sell under our agent
relationships with T-Mobile USA and Verizon Wireless were reduced
significantly in the third and fourth quarter of 2004 and these
contracts were terminated in the fourth quarter of 2004 to accommodate
our agreements with Sprint and Cingular. As our sales of these devices
will decrease in the future, so will these costs.
o Sales and Advertising: The decrease in sales and advertising expenses
for the three months ended March 31, 2005 was primarily attributable to
lower employee salary and related costs, including sales commissions,
due to lower sales volumes and the workforce reductions implemented in
February 2004. These decreases were partially offset by compensation
expenses associated with stock options issued to employees of $0.1
million for the three months ended March 31, 2005. Compensation
expenses associated with stock options issued to employees totaled $0.3
million for the three months ended March 31, 2004. Excluding these
compensation charges, sales and advertising expense decreased $0.4
million, or 57%, for the three months ended March 31, 2005 as compared
to the same period in 2004. We anticipate that these costs will
increase in the future in conjunction with our increasing efforts to
sell and promote our iMotient Solutions(TM) platform.
28
o General and Administrative: The increase in general and administrative
expenses was primarily attributable to increases in legal, audit,
regulatory fees, fees paid to consultants and compensation expenses
associated with stock options issued to employees. A consulting fee of
$3.7 million, consisting of $0.9 million in cash and 95,000 shares of
stock valued at $2.8 million, was paid to CTA and related parties in
the first quarter of 2005 for services rendered in conjunction with the
acquisition of further MSV interests from Telcom Ventures, Columbia
Capital and Spectrum Equity in February 2005. Our audit expenses
increased materially due to our requirements to comply with
Sarbanes-Oxley guidelines for 2004. Legal fees increased materially as
a result of the corporate finance transaction work related to the
November 2004 private placement and the February purchases of
additional interests from MSV. These increases were partially offset by
lower employee salary and related costs due to the workforce reductions
implemented in February 2004 and lower directors and officers liability
insurance costs. Compensation expenses associated with stock options
issued under the Company's stock option plan and the stock issued to
CTA totaled $10.3 million for the three months ended March 31, 2005.
Compensation expenses associated with stock options issued to employees
totaled $0.6 million for the three months ended March 31, 2004.
Excluding these compensation charges, general and administrative
expenses increased $2.2 million, or 122%, for the three months ended
March 31, 2005 as compared to the same period in 2004. We anticipate
that these costs will decline in the future in conjunction with the
completion of our initial Sarbanes-Oxley report and our overall
cost-cutting efforts.
o Restructuring Charges: The operational restructuring charges of $0.1
million in the first quarter of 2005 and $1.2 million in the first
quarter of 2004, resulted from the severance and related salary charges
as a result of the reductions in force in March 2005 and February 2004,
respectively.
o Depreciation and Amortization: Depreciation and amortization expense
reduced as a result of our decline in asset value related to network
reduction efforts in 2004 and our write-down of related assets and
reduced amortization as a result of our additional impairment of our
customer contract intangibles in December 2004. As a result of
continued network restructuring initiatives planned in 2005, we expect
depreciation and amortization to continue to decrease in 2005.
OTHER EXPENSES & INCOME
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
---- ----
(in thousands)
Interest Expense, net $0 $(1,766)
Other Income, net 80 8
Other Income from Aether 0 645
Equity in Losses of Mobile Satellite Ventures (7,168) (2,230)
29
Interest expense decreased for the three months ended March 31, 2005 as compared
to March 31, 2004, due to the April 2004 repayment of our term credit facility
and its subsequent termination on December 31, 2004. Interest expense is
presented net of interest income on the interest accrued on our note receivable
from MSV. As a result of November 2004 investment transaction into MSV, the
principal and interest outstanding under our note receivable from MSV was
converted into limited partnership units in MSV.
Other Income increased for the three months ended March 31, 2005 as compared to
March 31, 2004 due to the interest income on our bank balances.
Given our recent private placements of common stock and our repayment of our
outstanding debt, we expect not to incur any interest expense in the future. We
have no current plans to seek any additional debt financing.
We recorded equity in losses of MSV of $7.2 million for the three months ended
March 31, 2005, as compared to $2.2 million for the same period in 2004. The
2005 MSV losses are Motient's 38.6% and 48.84% of MSV's losses for the same
period, and losses for 2004 are Motient's 46.5% of MSV's losses for the same
period. For the three months ended March 31, 2005, MSV had revenues of $7.2
million, operating expenses of $24.8 million and a net loss of $16.2 million.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2005, we had approximately $12.1 million of cash on hand and
short-term investments. The increase of $9.6 million from March 31, 2004 is
mainly attributable to an increase in cash provided by financing activities,
offset by decreases in net cash used in operating and investing activities, as
described below. Our principal source of funds is currently, and as of March 31,
2005, cash on hand.
SUMMARY OF CASH FLOW FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
Three Months Three Months
Ended Ended
March 31, March 31,
2005 2004
(Unaudited) (Unaudited)
----------- -----------
Cash Flows from Operating Activities: $ (5,924) $ (1,759)
Cash Flows from Investing Activities: (10) (135)
Cash Flows from Financing Activities:
Proceeds from issuance of employee stock options 1,064 105
Proceeds from issuance of equity securities 34 --
Stock issuance costs and other charges (9) --
Principal payments under capital leases -- (342)
Principal payments under Vendor Financing -- (488)
Proceeds from Term Credit Facility -- 1,500
-------- --------
Net cash provided by (used in) financing activities 1,089 775
-------- --------
Net (decrease) increase in cash and cash equivalents (4,845) (1,119)
Cash and Cash Equivalents, beginning of period 16,945 3,618
-------- --------
Cash and Cash Equivalents, end of period $ 12,100 $ 2,499
======== ========
30
Cash used in operating activities increased primarily as a result of decreases
in funds provided by revenue and increases in certain fees and expenses related
to financial reporting requirements and corporate finance transactions. While we
are attempting to reduce cash used in operating activities as a result of our
cost cutting efforts and through our attempts to increase our revenues by
focusing on our iMotient Solutions(TM) products and services, it is possible
revenue declines will be sufficient to offset or overtake the cash saved by our
cost cutting efforts in the future.
The decrease in cash used in investing activities was attributable to lower
capital equipment purchases in the first three months of 2005 as compared to the
same period in 2004.
The increase in cash provided by financing activities was the result of the
proceeds from the exercise of certain employee stock options and warrants,
offset by expenses related to our November 12, 2004 PIPE. In addition, certain
debt obligations were repaid in the first three months of 2004 as compared to no
such repayments in the first three months of 2005.
We believe that our funds available at March 31, 2005, together with the
proceeds from our April 15, 2005 private placement of preferred stock, our
planned rights offering and the proceeds from the exercise of warrants and
options, will be adequate to satisfy our current and planned operations for at
least the next 12 months. We have no definite plans with respect to the
acquisition of any additional debt or equity financing beyond the April 2005
private placement of our series A preferred stock. However, to the extent that
we require additional liquidity to fund our operations, we may undertake
additional debt or equity financings.
OUTSTANDING OBLIGATIONS
As of March 31, 2005, Motient had no outstanding debt obligations.
RESTRUCTURING COSTS
In February 2004, the Company recorded a restructuring charge for a workforce
reduction of $1.1 million. In June 2004, the Company recorded a restructuring
charge of $5.1 million related to certain network rationalization initiatives,
consisting of base station deconstruct costs of $0.5 million, the loss on the
retirement of certain base station equipment of $2.8 million and termination
liabilities of $1.8 million for site leases no longer required for removed base
stations. In March 2005, the Company recorded a restructuring charge for a
further workforce reduction of $0.1 million. Of these amounts, as of March 31,
2005, the Company had incurred workforce reduction cost of $0.8 million, base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.1
million for site leases no longer required for removed base stations.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2004 to March 31, 2005:
31
Base Station
Employee Asset Base Station FCC License Site Lease
Terminations Write-Offs Deconstruction Terminations Terminations Total
------------ ---------- -------------- ------------ ------------ -----
Balance January 1, 2004 $ -- $ -- $ -- $ -- $ -- $ --
- --------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (1,107) -- -- -- -- (1,107)
Deductions - Cash 333 -- -- -- -- 333
Deductions - Non-Cash -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2004 (774) -- -- -- -- (774)
- --------------------------------------------------------------------------------------------------------------------------------
Restructure Charge -- (2,795) (398) (113) (1,854) (5,160)
Deductions - Cash 242 -- 75 25 61 403
Deductions - Non-Cash -- 2,795 -- -- -- 2,795
- --------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 (532) -- (323) (88) (1,793) (2,736)
- --------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 132 -- 252 39 416 839
Deductions - Non-Cash -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 2004 (400) -- (71) (49) (1,377) (1,897)
- --------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 50 -- 71 54 435 610
Deductions - Non-Cash -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 (350) -- -- 5 (942) (1,287)
- --------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (85) -- -- -- -- (85)
Deductions - Cash 39 -- -- -- 197 236
Deductions - Non-Cash -- -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2005 $ (396) -- -- $ 5 $ (745) $(1,136)
COMMITMENTS
As of March 31, 2005, we had no outstanding commitments to purchase inventory.
In December 2002 Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. As of March 31, 2005, the Company's
remaining airtime service obligation to UPS in respect of the prepayment was
approximately $3.9 million. In April 2005, this agreement was amended to require
that UPS use at least $1.5 million of airtime between January 1, 2005 and March
31, 2006, and in exchange, Motient would repay in April 2006, in cash, an amount
equal to the amount of airtime used by UPS during such time period. Both UPS'
usage and Motient's repayment will be credited against the remaining airtime
obligation. As a result of this amendment, the maximum prepaid airtime service
obligation will be $0.9 million in May 2006. The parties have not yet reached
agreement regarding the use or repayment of any remaining prepaid airtime
service obligation, but Motient can provide no assurance that it will not be
required to repay such amount to UPS.
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.
32
Investment in MSV and Note Receivable from MSV
- ----------------------------------------------
The Company uses the equity method of accounting for its investment in MSV. The
company considers whether the fair value of its investment has declined below
its carrying value whenever adverse events or circumstances indicate that the
recorded value may not be recoverable. If the Company considers such decline to
be other than temporary, a write down would be recorded to estimate fair value.
Deferred Taxes
- --------------
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured.
Revenue Recognition
- -------------------
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not
have a material impact on the Company's revenue recognition policies.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF)
No. 00-21, ACCOUNTING FOR REVENUE ARRANGEMENTS WITH MULTIPLE DELIVERABLES, which
is being applied on a prospective basis. The consensus addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values. The consensus also supersedes
certain guidance set forth in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin Number 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS (SAB
101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number
104 (SAB 104).
Revenue is recognized as follows:
SERVICE REVENUE: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectability is probable. Service discounts and
33
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers and amortizes any revenue and costs
associated with activation of a subscriber on the Company's network over an
estimated customer life of two years.
The Company packages airtime usage on its network that involves a wide variety
of volume packaging, anything from a 35 kilobytes per month plan up to unlimited
kilobyte usage per month, with various gradations in between. Discounts may be
applied when comparing one customer to another, and such service discounts are
recorded as a reduction of revenue when granted.
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. The Company establishes 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. The Company assesses 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 the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
EQUIPMENT AND SERVICE SALES: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of March 31, 2005 and 2004, the Company had capitalized a total of $0.5
million and $3.1 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $0.5 million and $3.0 million, respectively.
34
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
- ----------------------------------
We have performed an evaluation under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934. As of the end of the period covered by this report (March 31, 2005), our
disclosure controls and procedures were not effective because of the material
weaknesses in internal control over financial reporting described below.
Material Weaknesses
- -------------------
The following two material weaknesses have been identified by management,
including our principal executive officer and principal financial officer.
1. Management identified a material weakness relating to the lack of
information security and access to initiate, authorize, and record
transactions in all functional areas relating to the financial
reporting software application.
2. Management identified the following significant deficiencies that when
aggregated give rise to a material weakness. Management identified
certain control procedures that were not sufficiently documented
relating to a) information technology back-up and recovery, b)
operating systems access, c) firewall protections, as well as, d)
control policies and procedures in certain transaction cycles.
Management also identified various segregation of duties deficiencies
in a) information security and access to non-financial reporting
software applications, b) program change management in the customer
management and billing systems and c) over the initiation,
authorization, review and transaction recording for certain transaction
cycles and non-routine transaction processing.
Additionally, management identified a lack of sufficient oversight and
review of the processes involved in the financial close and reporting
process, in particular as it relates to several complex and
sophisticated transactions.
These deficiencies in the design and implementation of the Company's internal
control over financial reporting did not result in an actual misstatement to the
financial statements. However, due to (a) the significance of the potential
material misstatement that could have resulted due to the deficient controls and
(b) the absence of other mitigating controls, there is more than a remote
likelihood that a material misstatement of the interim and annual financial
statements would not have been prevented or detected.
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Actions Taken to Correct Material Weaknesses
- --------------------------------------------
We have taken the following actions to remediate the above identified material
weaknesses:
With respect to our first material weakness (the lack of information security
and access to initiate, authorize, and record transactions in all functional
areas relating to the financial reporting software application), we have
prevented access to the software applications that certain management level
personnel previously had, which permitted them to change or record transactions
in our financial reporting software application. We plan to conduct further
review and evaluation of the access to our financial reporting software
applications by all personnel, and to reassign the access rights used to control
the financial reporting process.
With respect to our second material weakness, which was an aggregation of
significant deficiencies that, individually, did not rise to the level of a
material weakness, but in aggregate did, we have taken the following steps:
o We have begun drafting, and are in the process of
implementing, remedial control procedures to address: (i)
information technology back-up and recovery, (ii) operating
systems access, (iii) firewall protections, and (iv) control
policies and procedures in certain transaction cycles.
o We are in the process of implementing additional monitoring
activities, as well as evaluating job responsibilities, in
order to improve internal controls related to (i) our
information security and access to non-financial reporting
software applications, (ii) our program change management in
customer management and billing systems, and (iii) the
initiation, authorization, review and transaction recording
for certain transaction cycles and non-routine transaction
processing.
o We have enhanced our corporate accounting function by creating
and filling the new position of Assistant Controller. We
believe that the control deficiencies involving (i)
segregation of duties, (ii) lack of sufficient oversight and
review of the processes involved in the financial close and
reporting process, in particular as it relates to complex and
sophisticated transactions, and (iii) lack of control policy
documentation, will be remedied with the addition of this
additional resource.
We believe that the corrective actions described above, taken as a whole, will
remediate the internal control deficiencies identified in this report, but the
Company and the Audit Committee will continue to monitor the effectiveness of
these actions and will make any other changes or take such other actions as
management determines to be appropriate.
36
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Please see the discussion regarding Legal Proceedings contained in Note 4
("Legal and Regulatory Matters") of notes to consolidated financial statements,
which is incorporated by reference herein.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Please see the discussion regarding the sale of preferred stock contained in
Note 5 ("Subsequent Events") of notes to consolidated financial statements,
which is incorporated by reference herein.
Please see the discussion regarding the sale of common stock to Telcom Satellite
Ventures, Columbia Space Partners and Spectrum Space Equity Investors, et al,
contained in Note 1 ("Organization and Business - Mobile Satellite Ventures LP -
History") of notes to consolidated financial statements, which is incorporated
by reference herein.
No securities were repurchased during the first quarter of 2005.
ITEM 6. EXHIBITS
The Exhibit Index filed herewith is incorporated herein by reference.
37
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 10, 2005 /s/ Christopher W. Downie
-----------------------------------------
Christopher W. Downie
Executive Vice President, Chief Operating
Officer and Treasurer
(principal executive officer and duly
authorized officer to sign on behalf of
the registrant)
38
EXHIBIT INDEX
NUMBER DESCRIPTION
3.1 - Certificate of Designations of the Series A Cumulative
Convertible Preferred Stock (incorporated by reference to
Exhibit 3.1 to the Company's Current Report on Form 8-K filed
on April 18, 2005)
10.56 - Consent Agreement, dated January 27, 2005, by and among
Columbia Space (QP), Inc., et al(incorporated by reference to
Exhibit 10.56 to the Company's Registration Statement on Form
S-1/A filed on February 14, 2005)
10.57 - Merger Agreement, dated as of February 9, 2005, by and among
Motient Corporation, Telcom Satellite Ventures Inc., et
al(incorporated by reference to Exhibit 10.57 to the Company's
Registration Statement on Form S-1/A filed on February 14,
2005)
10.58 - Form of Stock Purchase Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.58 to the Company's
Registration Statement on Form S-1/A filed on February 14,
2005)
10.59 - Registration Rights Agreement, dated February 9, 2005 by and
among Motient Corporation, Telcom Satellite Ventures Inc., et
al (incorporated by reference to Exhibit 10.59 to the
Company's Registration Statement on Form S-1/A filed on
February 14, 2005)
10.60 - Form of Warrant to purchase Motient common stock, dated
February 9, 2005 (incorporated by reference to Exhibit 10.60
to the Company's Registration Statement on Form S-1/A filed on
February 14, 2005)
10.61 - Form of Stockholder's Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.61 to the Company's
Registration Statement on Form S-1/A filed on February 14,
2005)
10.62 - Securities Purchase Agreement dated April 15, 2005 by and
among the Registrant and the Purchasers listed on Schedule 1
thereto (incorporated by reference to Exhibit 10.1 to the
Company's Current Report on Form 8-K filed on April 18, 2005)
10.63 - Registration Rights Agreement dated April 15, 2005 by and
among the Registrant and the Purchasers listed on Schedule 1
thereto (incorporated by reference to Exhibit 10.2 to the
Company's Current Report on Form 8-K filed on April 18, 2005)
10.64 - Form of Common Stock Purchase Warrant (incorporated by
reference to Exhibit 10.3 to the Company's Current Report on
Form 8-K filed on April 18, 2005)
39
31.1 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the
Executive Vice President, Chief Operating Officer and
Treasurer (principal executive officer) (filed herewith).
31.2 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the
Controller and Chief Accounting Officer (principal financial
officer) (filed herewith)
32.1 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Executive Vice President, Chief Operating Officer and
Treasurer (principal executive officer) (filed herewith).
32.2 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of
the Controller and Chief Accounting Officer (principal
financial officer) (filed herewith)
40