SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
Incorporation or organization)
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 [ ] No[ X ]
Number of shares of Common Stock outstanding at May 1, 2002: 25,000,000
1
MOTIENT CORPORATION
FORM 10-Q/A
FOR THE PERIOD ENDED MARCH 31, 2002
TABLE OF CONTENTS
PAGE
PART I
FINANCIAL INFORMATION
Introductory Note 3
Item 1. Financial Statements
Consolidated Statement of Operations for the Three Months Ended March 31, 2002 (Restated)
and 2001 (Restated) 4
Consolidated Balance Sheets as of March 31, 2002 (Restated) and December 31, 2001
(Restated) 5
Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002
(Restated) and March 31, 2001 (Restated) 6
Notes to Consolidated Financial Statements as of March 31, 2002 (Restated) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
(Restated) 31
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures. 48
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 53
Item 6. Exhibits and Reports on Form 8-K 53
2
Introductory Note
As previously disclosed in our Current Report on Form 8-K dated March 14, 2003,
in November 2002 we initiated a process to seek the concurrence of the staff of
the Securities and Exchange Commission, or SEC, with respect to our conclusions
of the appropriate accounting treatment for certain transactions that occurred
in 2000 and 2001 involving Mobile Satellite Ventures LP, or MSV, and Aether
Systems, Inc. This process was completed in March 2003. The staff of the SEC did
not object to certain aspects of our prior accounting with respect to the MSV
and Aether transactions, but did object to other aspects of our prior accounting
for these transactions. For a description of the material differences between
our original accounting treatment with respect to the MSV and Aether
transactions and the revised accounting treatment that we concluded is
appropriate as a result of this process, please see our Current Report on Form
8-K dated March 14, 2003.
We recently completed our financial statements as of and for the year ended
December 31, 2002 and as of and for the three and six months ended June 30, 2002
and the three and nine months ended September 30, 2002 to reflect the revised
accounting treatment with respect to the MSV and Aether transactions that was
agreed to be appropriate as a result of the process described above. In
addition, as a result of our reaudit of the years ended December 31, 2000 and
2001 performed by our current independent accounting firm, Ehrenkrantz Sterling
& Co. LLC, certain additional financial statement adjustments were proposed and
accepted by us for the periods noted above. This amendment to our
previously-filed quarterly report on Form 10-Q for the quarter ended March 31,
2002 is being filed to report restated financial statements for the periods
included herein to give effect to the revised accounting treatment (See Note 1,
"Restatement of Financial Statements"). Concurrently with this report, we are
also filing our quarterly reports on Form 10-Q for the quarters ended June 30,
2002 and September 30, 2002 and our annual report on Form 10-K for the year
ended December 31, 2002. The 2001 comparative financial statements provided
herein and therein have been restated and have been reviewed by Ehrenkrantz
Sterling & Co. LLC.
There have been a number of significant developments regarding Motient's
business, operations, financial condition, liquidity, and outlook subsequent to
March 31, 2002. This amendment to our previously filed report on Form 10-Q for
the quarter ended March 31, 2002 generally does not contain information
regarding such developments. Instead, this amendment to our previously filed
report on Form 10-Q for such quarter generally contains the same information
included at the time of the original filing of such report, except for the
restated financial statements and corresponding disclosures regarding such
restated figures described above. We urge you to read our quarterly reports on
Form 10-Q for the quarters ended June 30, 2002 and September 30, 2002 and our
annual report on Form 10-K for the year ended December 31, 2002, as well as our
other reports and filings with the SEC filed after the date hereof, for more
information regarding recent developments and current matters.
On January 10, 2002, we filed for protection under Chapter 11 of the Bankruptcy
Code. Our Amended Joint Plan of Reorganization was filed with the United States
Bankruptcy Court for the Eastern District of Virginia on February 28, 2002. The
plan was confirmed on April 26, 2002, and became effective on May 1, 2002.
References in this quarterly report to "Motient" and "we" or similar or related
terms refer to Motient Corporation and its wholly-owned subsidiaries together,
unless the context of such references requires otherwise.
3
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
(Debtor-in-Possession for the three months ended March 31, 2002)
Consolidated Statements of Operations
(in thousands, except per share data)
(Unaudited, restated)
Three Months Ended March 31,
----------------------------
2002 2001
(restated) (restated)
REVENUES
Services and related revenue $12,467 $17,165
Sales of equipment 4,216 5,400
-------- --------
Total Revenues 16,683 22,565
COSTS AND EXPENSES
Cost of services and operations, exclusive of depreciation and amortization 15,332 18,250
Cost of equipment sold, exclusive of depreciation and amortization 4,534 5,934
Sales and advertising 3,286 8,518
General and administrative 3,522 6,972
Restructuring charges 584 --
Depreciation and amortization 5,187 8,551
-------- --------
Operating Loss (15,762) (25,660)
Interest income -- 549
Other income 837 --
Interest expense (contractual amount of $12,223 for the three months ended (1,739) (15,426)
March 31, 2002)
Loss on disposal of assets (20) (407)
Aether Employee Option Vesting -- (499)
Loss on extinguishment of debt -- (1,033)
Equity in loss of Mobile Satellite Ventures (1,313) --
Equity in loss of XM Radio -- (12,472)
-------- ---------
Loss before reorganization items: (17,997) (54,948)
Reorganization items:
Professional fees related to reorganization (4,578) --
Write off of debt financing fees (12,975) --
Interest income 121 --
-------- --------
Net Loss Attributable to Common Shareholders $(35,429) $(54,948)
========= =========
Basic and Diluted Loss Per Share of Common Stock:
Net Loss Attributable to Common Shareholders $(0.61) $(1.11)
========== =========
Weighted-Average Common Shares Outstanding 58,256 49,639
The accompanying notes are an integral part of these
consolidated financial statements.
4
Motient Corporation and Subsidiaries
(Debtor-in-Possession as of March 31, 2002)
Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, 2002 December 31, 2001
(restated) (restated)
ASSETS (unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $21,003 $33,387
Accounts receivable-trade, net of allowance for doubtful accounts 10,972 11,491
Inventory 5,291 6,027
Due from MSV, net 439 521
Deferred equipment costs 11,932 13,662
Other current assets 12,359 16,566
------ --------
Total current assets 61,996 81,654
PROPERTY AND EQUIPMENT, net 60,621 64,001
GOODWILL AND OTHER INTANGIBLES, net 50,914 51,631
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 28,096 30,126
DEFERRED CHARGES AND OTHER ASSETS 3,655 13,053
-------- --------
Total assets $205,282 $240,465
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Pre petition liabilities subject to compromise:
Accrued expenses $4,833 $--
Senior Notes, including accrued interest thereon - in default 367,673 --
Rare Medium Note Payable, including accrued interest thereon - in default 27,030 --
-------- --------
Total pre petition liabilities subject to compromise 399,536 --
Current liabilities not subject to compromise:
Accounts payable and accrued expenses 15,024 50,274
Senior Notes, net of discount - in default -- 329,371
Rare Medium Note Payable - in default -- 26,910
Obligations under capital leases due within one year 7,857 8,691
Deferred equipment revenue 11,972 13,662
Deferred revenue and other current liabilities 11,900 12,054
------ ------
Total current liabilities not subject to compromise 46,753 440,962
------ -------
Total current liabilities 446,289 440,962
------- -------
LONG-TERM LIABILITIES NOT SUBJECT TO COMPROMISE:
Capital lease obligations 163 257
Vendor financing commitment 3,316 3,316
Other long-term liabilities 21,791 27,079
------ ------
Total long-term liabilities 25,270 30,652
------ ------
Total liabilities 471,559 471,614
------- -------
STOCKHOLDERS' DEFICIT:
Preferred Stock; par value $0.01; authorized 200,000 shares; no shares -- --
outstanding
Common Stock; voting, par value $0.01; authorized 150,000,000 shares; 584 557
58,212,787 outstanding
Additional paid-in capital 988,532 988,355
Deferred compensation (336) (433)
Common Stock purchase warrants 93,730 93,730
Accumulated deficit (1,348,787) (1,313,358)
----------- -----------
STOCKHOLDERS' DEFICIT (266,277) (231,149)
--------- ---------
Total liabilities and stockholders' deficit $205,282 $240,465
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
5
Motient Corporation and Subsidiaries
(Debtor-in-Possession for the three months ended March 31, 2002)
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited, restated)
Three Months Ended March 31,
----------------------------
2002 2001
(restated) (restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before reorganization items $(17,997) $(54,948)
Adjustments to reconcile net loss before reorganization items to net cash
used in operating activities:
Depreciation and amortization 5,187 8,550
Equity in loss of Mobile Satellite Ventures 1,313 --
Aether employee option vesting 20 499
Equity in loss of XM Radio -- 12,472
Loss on sale of XM Radio stock -- 407
Income (loss) on extinguishment of debt -- 1,033
Non-cash stock compensation 76 1,240
Amortization of debt issuance costs 56 2,753
Changes in assets and liabilities:
Inventory 736 (2,964)
Accounts receivable-- trade 519 (7,562)
Other current assets 6,329 (429)
Accounts payable and accrued expenses (2,388) 7,327
Accrued interest Senior Note 1,200 10,259
Deferred trade payables -- (1,380)
Deferred revenue and other deferred items-- net (5,045) 2,174
------- --------
Net cash used in operating activities before reorganization items (9,994) (20,569)
CASH USED BY REORGANIZATION ITEMS:
Reorganization items - professional fees (4,578) --
Professional fees accrued not paid 3,472 --
Interest income 121 --
-------- ------
Net cash used by reorganization items (985) --
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of restricted investments, net -- (345)
Proceeds from sale of transportation assets -- --
Proceeds from the sale of XM Radio stock -- 33,539
Additions to property and equipment (494) (3,254)
------- ------
Net cash (used in) provided by investing activities (494) 29,940
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 17 259
Principal payments under capital leases (928) (751)
Principal payments under Vendor Financing -- (1,066)
Repayment of Term Loan -- (8,500)
Proceeds from Bank Financing -- 6,000
-- -----
Net cash used in financing activities (911) (4,058)
Net (decrease) increase in cash and cash equivalents (12,384) 5,313
CASH AND CASH EQUIVALENTS, beginning of period 33,387 2,520
-------- ------
CASH AND CASH EQUIVALENTS, end of period $21,003 $7,833
======= ======
The accompanying notes are an integral part of these
consolidated financial statements.
6
MOTIENT CORPORATION AND SUBSIDIARIES
(Debtor-in-Possession as of March 31, 2002)
Notes to Consolidated Condensed Financial Statements
March 31, 2002
(Unaudited, restated)
1. ORGANIZATION, BUSINESS AND LIQUIDITY
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation, and field service. Motient provides
its eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network suppliers. Motient also offers its BlackBerry TM by
Motient wireless email solution, developed by Research In Motion ("RIM") and
licensed to operate on Motient's network. BlackBerry TM by Motient is designed
for large corporate accounts operating in a Microsoft Exchange or Lotus Notes
environment and contains advanced encryption features. The Company considers the
two-way mobile communications service described in this paragraph to be its core
wireless business.
Motient is devoting its efforts to expanding its core wireless business. This
effort involves substantial risk. Future operating results will be subject to
significant business, economic, regulatory, technical, and competitive
uncertainties and contingencies. Depending on their extent and timing, these
factors, individually or in the aggregate, could have an adverse effect on the
Company's financial condition and future results of operations. In recent
periods, certain factors have placed significant pressures on Motient's
financial condition and liquidity position. For a variety of reasons, Motient
has not been able to accelerate revenue growth at the pace required to enable it
to generate cash in excess of its operating expenses. These factors include
competition from other wireless data suppliers and other wireless communications
providers with greater resources, cash constraints that have limited Motient's
ability to generate greater demand, unanticipated technological and development
delays, and general economic factors. During 2001, in particular, Motient's
efforts were also hindered by the downturn in the economy and capital markets.
These factors contributed to the Company's decision to file a voluntary petition
for reorganization under Chapter 11 of the United States Federal Bankruptcy Code
in January 2002. Motient's plan of reorganization was confirmed on April 26,
2002 and became effective on May 1, 2002. See "Motient's Chapter 11 Filing and
Plan of Reorganization" below.
XM Radio
On November 19, 2001, Motient disposed of its remaining equity interest in XM
Satellite Radio Holdings Inc. ("XM Radio"), a public company. For the period
from January 1, 2001 through November 19, 2001, the Company accounted for its
investment in XM Radio pursuant to the equity method of accounting. For the
first quarter of 2001, XM Radio recorded no revenue, incurred $42.1 million of
operating expenses and had a net loss attributable to common stockholders of
$42.7 million.
7
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP, ("MSV"), in which it owned, until November 26, 2001, 80%
of the membership interests, in order to conduct research and development
activities. The remaining 20% interests in MSV were owned by three investors
unrelated to Motient; however, the minority investors had certain participating
rights which provided for their participation in certain business decisions that
were made in the normal course of business; therefore, in accordance with
Emerging Issues Task Force Issue (EITF) No. 96-16, "Investor's Accounting for an
Investee When the Investor Has a Majority of the Voting Interest but the
Minority Shareholder or Shareholders Have Certain Approval or Veto Rights", the
Company's investment in MSV has been recorded for all periods presented pursuant
to the equity method.
Through November 26, 2001, MSV used the Company's satellite network to conduct
research and development activities. On November 26, 2001, Motient sold the
assets comprising its satellite communications business to MSV, as part of a
transaction in which certain other parties joined MSV, including TMI
Communications and Company Limited Partnership ("TMI"), a Canadian satellite
services provider. In consideration for its satellite business assets, Motient
received the following: (i) a $24 million cash payment in June 2000, (ii) a $41
million cash payment paid at closing on November 26, 2001, net of $4 million
retained by MSV to fund the Company's future sublease obligations to MSV for
rent and utilities through August 2003, and (iii) a 5-year $15 million note. In
this transaction, TMI also contributed its satellite communications business
assets to MSV. In addition, Motient purchased a $2.5 million convertible note
issued by MSV, and certain other investors, including a subsidiary of Rare
Medium Group, Inc. ("Rare Medium"), purchased a total of $52.5 million of
convertible notes. As of March 31, 2002, the Company had an ownership
percentage, on an undiluted basis, of approximately 48% of MSV.
Assuming that all of MSV's convertible notes are converted into limited
partnership units of MSV, Motient would have a 33.3% equity interest in MSV as
at March 31, 2002.
Operational Restructuring
In the third quarter of 2001, the Company restructured its business with the
goal of reducing its ongoing operating expenses and operating losses. The
Company recorded a restructuring charge in 2001 of $4.7 million, representing
those costs associated with the restructuring program that the Company announced
and implemented on September 26, 2001. For the three months ended March 31,
2002, the Company recorded operational restructuring costs of $0.6 million
associated with its staff reductions in this period.
2. SIGNIFICANT ACCOUNTING POLICIES
8
Basis of Presentation
The unaudited consolidated financial statements included herein have been
prepared pursuant to the rules and regulations of the SEC. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted as permitted in interim financial statements. While the Company believes
that the disclosures made are adequate to make the information not misleading,
these consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the Company's
filings with the SEC.
The consolidated balance sheet as of March 31, 2002, the consolidated statements
of operations for the three months ended March 31, 2002 and 2001, and cash flows
for the three months ended March 31, 2002 and 2001, have been prepared by the
Company and are unaudited. In the opinion of management, all adjustments
(consisting of normal recurring adjustments unless otherwise indicated)
necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2002, and for all periods presented have been made. As
discussed in the Introductory Note, the results of operations and cash flows
herein give effect to the revised accounting treatment with respect to the MSV
and Aether transactions that was agreed to be appropriate as a result of the
process described in the Introductory Note. The 2001 comparative financial
statements provided herein have been restated and have been reviewed by the
Company's current independent auditors, Ehrenkrantz Sterling & Co. LLC.
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and years ended December 31, 2000 and 2001, the Company
became aware that certain accounting involving the effects of several complex
transactions from prior years, including the formation of and transactions with
a joint venture, MSV, in 2000 and 2001 and the sale of certain of its
transportation assets to Aether Systems, Inc. ("Aether") in 2000, required
revision. These transactions were described in more detail in Motient's Forms
10-K for the periods ended December 31, 2000 and December 31, 2001, Note 13 of
Notes to Consolidated Financial Statements, "Business Acquisitions and
Dispositions". In addition, as a result of the Company's re-audit of the years
ended December 31, 2001 and 2000 performed by the Company's current independent
accounting firm, Ehrenkrantz Sterling & Co. LLC, certain accounting adjustments
were proposed and accepted by the Company. A description of these adjustments is
provided is the "Restatement of Financial Statements" below.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
As noted above, effective January 1, 2001, the Company's investment in XM Radio
was recorded pursuant to the equity method of accounting. For the first quarter
of 2001, XM Radio recorded no revenue, incurred $42.1 million of operating
expenses and had a net loss attributable to common stockholders of $42.7
million.
9
Additionally, the Company's investment in MSV is recorded pursuant to the equity
method of accounting for all periods presented.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less at the time of
acquisition to be cash equivalents.
..
Comprehensive Income
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting of
Comprehensive Income" requires "comprehensive income" and the components of
"other comprehensive income" to be reported in the financial statements and/or
notes thereto. Since the Company does not have any components of "other
comprehensive income," reported net income is the same as "comprehensive income"
for the quarters ended March 31, 2002 and 2001.
Derivatives
In September 1998, the Financial Accounting Standards Board ("FASB") issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires the recognition of all derivatives as either assets
or liabilities measured at fair value, with changes in value reflected as
current period income (loss). The effective date of SFAS No. 133, as amended by
SFAS 138, is for fiscal years beginning after September 15, 2000. The Company
adopted SFAS No. 133 as of January 1, 2001, resulting in no material impact upon
adoption. SFAS No. 133 was not material to the Company's financial position or
results of operations as of or for the period ended March 31, 2002 or 2001.
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information," the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to the
continental United States, Alaska, Hawaii, and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
categories:
Three Months Ended March 31,
---------------------------
Summary of Revenue 2002 2001
---- ----
(in millions)
Wireless Internet $4.1 $2.0
Field services 4.3 5.9
Transportation 3.0 4.1
Telemetry 0.7 0.7
Maritime and other 0.4 4.4
Equipment 4.2 5.5
------------- -------------
Total $16.7 $ 22.6
============== =============
10
The Company does not measure ultimate final profit and loss or track its assets
by these market segments.
Loss Per Share
Basic and diluted loss per common share is computed by dividing income available
to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity. Options and
warrants to purchase shares of common stock were not included in the computation
of loss per share as the effect would be antidilutive. As a result, the basic
and diluted earnings per share amounts are identical. As of March 31, 2002,
there were options outstanding to purchase 2,683,626 shares and 7,759,760 shares
issuable upon exercise of warrants that were not included in this calculation
because of their antidilutive effect for this period.
New Accounting Pronouncements
In January 2002, the Company adopted SFAS No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires that purchased
goodwill and indefinite-lived intangibles no longer be amortized but instead be
reviewed for impairment and written down in the periods in which the carrying
amount is more than fair value. The Company had approximately $5.0 million of
recorded goodwill as of January 1, 2002. However, as part of the Company's
adoption of fresh-start accounting on May 1 2002, the Company's recorded
goodwill was reduced to zero.
The Company accounts for its FCC licenses as finite-lived intangibles and
amortizes them over a 20-year estimated life. The Company is monitoring a
pending FCC rulemaking proposal that may affect its 800 MHz spectrum, and the
Company may change its accounting policy for FCC licenses in the future as new
information is available.
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and to capitalize
the asset retirement cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset and the liability is accreted as an operating expense to
the estimated settlement obligation amount. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or
loss. The Company adopted SFAS No. 143 as of its "fresh-start" accounting date
of May 1, 2002. This adoption had no material impact on the Company's
consolidated financial statements.
11
On January 1, 2002, the Company also adopted SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". The statement requires that all long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured on a net realizable value basis and will
not include amounts for future operating losses. The statement also broadens the
reporting requirements for discontinued operations to include disposal
transactions of all components of an entity (rather than segments of a
business). Components of an entity include operations and cash flows that can be
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The adoption of
SFAS No. 144 had no material impact on the Company's consolidated financial
statements.
In February, 2002, EITF No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", was
issued to provide guidance on whether consideration paid by a vendor to a
reseller should be recorded as expenses or against revenues. The Company records
such consideration as operating expenses. The Company adopted the provisions of
this consensus on January 1, 2002 and it had no material impact on the Company's
consolidated financial statements.
Concentrations of Credit Risk
For the three months ended March 31, 2002, four customers accounted for
approximately 46% of the Company's service revenue, with three of those
customers each accounting for more than 10%.
Related Parties
The Company made no payments to related parties in the three-month period ended
March 31, 2002, as compared to $380,000 in the three-month period ended March
31, 2001, for capital assets and service-related obligations. The Company did
not receive any payments from related parties in either of the first three
months of 2002 or 2001. As of March 31, 2002, the Company had a net due from
related parties in the amount of $439,000. For the three months ended March 31,
2001, the Company recorded revenue from related parties in the amount of $1.8
million related to the MSV satellite capacity agreement.
Restatement of Financial Statements
Subsequent to the issuance of the Company's financial statements for the quarter
ended March 31, 2002 and years ended December 31, 2000 and 2001, the Company
became aware that certain accounting involving the effects of several complex
transactions from these years, including the formation of and transactions with
a joint venture, MSV, in 2000 and 2001 and the sale of certain of our
transportation assets to Aether Systems, Inc. ("Aether") in 2000, required
revision. These transactions were described in more detail in Motient's Forms
10-K for the periods ended December 31, 2000 and December 31, 2001, Footnote
Number 13 - "Business Acquisitions and Dispositions". In addition, as a result
of the Company's re-audit of the years ended December 31, 2000 and 2001
performed by the Company's current independent accounting firm, Ehrenkrantz
12
Sterling & Co. LLC, certain accounting adjustments were proposed and accepted by
the Company. A description of these adjustments is provided below.
Summary of Adjustments to Prior Period Financial Statements with respect to MSV
and Aether Transaction
The following is a brief description of the material differences between the
Company's original accounting treatment with respect to the MSV and Aether
transactions and the revised accounting treatment that Motient has concluded was
appropriate and have been reflected in the accompanying financial statements for
the respective periods.
Allocation of initial proceeds from MSV formation transactions in June 2000. In
the June 2000 transaction with MSV, Motient received $44 million from MSV. This
amount represented payments due under a research and development agreement, a
deposit on the purchase of certain of Motient's assets at a future date, and
payment for a right for certain of the investors in MSV to convert their
ownership in MSV into shares of common stock of Motient. Since the combined fair
value of the three components exceeded $44 million, based on valuations of each
component, Motient initially allocated the $44 million of proceeds first to the
fair value of the research and development agreement and then the remaining
value to the asset deposit and investor conversion option based on their
relative fair values. Upon review, Motient has determined to allocate the $44
million of proceeds first to the investor conversion option based on its fair
value, with the remainder to the research and development agreement and asset
deposit based on their relative fair values. The effect of this reallocation is
to increase shareholders' equity at the time of the initial recording by $12
million, as well as to reduce subsequent service revenue by $1.1 million for the
three months ended March 31, 2001, respectively, as a result of the lower
recorded value allocated to the research and development agreement.
Recording of suspended losses associated with MSV in fourth quarter of 2001. In
November 2001, when the asset sale described above was consummated, Motient and
MSV amended the asset purchase agreement, with Motient agreeing to take a $15
million note as part of the consideration for the sale of the assets to MSV.
Additionally, at the time of this transaction, Motient purchased a $2.5 million
convertible note issued by MSV. As Motient had no prior basis in its investment
in MSV, Motient had not recorded any prior equity method losses associated with
its investment in MSV. When Motient agreed to take the $15 million note as
partial consideration for the assets sold to MSV, Motient recorded its share of
the MSV losses that had not been previously recognized by Motient ($17.5
million), having the effect of completely writing off the notes receivable in
2001.
Upon review, the Company has determined that it should not have recorded any
suspended losses of MSV, since those losses would have been already absorbed by
certain of the senior equity holders in MSV. As a result, Motient has concluded
that it should not have written off its portion ($17.5 million) of the prior MSV
losses against the value of both notes in 2001. This restatement occurred in the
fourth quarter of 2001.
Recording of increase in Motient's investment in MSV in November 2001. Also in
the November 2001 transaction, MSV acquired assets from another company, TMI, in
exchange for cash, a note and equity in MSV. Motient initially considered
13
whether or not a step-up in the value of its investment in MSV was appropriate
for the value allocated to TMI for its equity interest, and determined that a
step-up was not appropriate. Upon review, Motient determined that it should have
recognized a step-up in value of the MSV investment of $12.7 million under Staff
Accounting Bulletin No. 51, "Accounting for Sales of Stock of a Subsidiary", and
an offsetting gain recorded directly to shareholders' equity. This restatement
occurred in the fourth quarter of 2001.
Recognition of gain on sale of assets to MSV in November 2001. Upon the
completion of the November 2001 transactions, Motient determined that 80% of its
gain from the sale of the assets should be deferred, since that was Motient's
equity ownership percentage in MSV at the time the assets were sold to MSV. Upon
review, Motient has determined that it was appropriate to apply Motient's
ownership percentage at the completion of all of the related transactions that
occurred on the same day as the asset sale transaction, since the transactions
were dependent upon one another and effectively closed simultaneously.
Accordingly, Motient should have deferred approximately 48% of the gain
(Motient's equity ownership percentage in MSV following the completion of such
transactions) as opposed to 80%. This change resulted in an increased gain on
the sale of MSV of $7.9 million in 2001. This restatement occurred in the fourth
quarter of 2001.
Allocation of proceeds from the sale of the transportation business to Aether in
November 2000. Motient received approximately $45 million for the sale of its
retail transportation business assets to Aether. This consisted of $30 million
for the assets, of which $10 million was held in an escrow account that was
subsequently released in the fourth quarter of 2001 upon the satisfaction of
certain conditions, and $15 million for a perpetual license to use and modify
any intellectual property owned or licensed by Motient in connection with the
retail transportation business. In the fourth quarter of 2000, Motient
recognized a gain of $8.9 million, which represented the difference between the
net book value of the assets sold and the $20 million cash portion of the
purchase price for the assets received at closing. Motient recognized an
additional $8.3 million gain in the fourth quarter of 2001 when the additional
$10 million of proceeds were released from escrow. The $1.7 million difference
between the proceeds received and the gain recognized is a result of pricing
modifications that were made at the time of the release of the escrow plus
certain compensation paid to former employees of the transportation business as
a result of the certain performance criteria having been met.
Motient deferred the $15 million perpetual license payment, which was then
amortized into revenue over a 5-year period, which was the estimated life of the
customer contracts sold to Aether at the time of the transaction. Upon review,
Motient has determined that the $15 million in deferred revenue should be
recognized over a four year period, which represents the life of a network
airtime agreement that Motient entered into with Aether at the time of the
closing of the asset sale. The decrease in the amortization period resulted in
increased revenue of $188,000 for the three months ended March 31, 2001,
respectively.
Recognition of costs associated with certain options granted to Motient
employees who were subsequently transferred to Aether upon consummation of the
sale of Motient's transportation business to Aether in November 2000. Motient
valued the vested options based on their fair value at the date of the
consummation of the asset sale and recorded that value against the gain on the
sale of the assets to Aether. Upon review, Motient has determined to value these
vested options as a repricing under the intrinsic value method, with any charge
recorded as an operating expense. In addition, for each subsequent quarter for
which the unvested options continued to vest, Motient had valued these options
on a fair value basis and recorded any adjustment in value as an operating
14
expense. Upon review, Motient has determined that any adjustments in value
should have been reflected as an increase or reduction of the gain on the sale
of the assets to Aether. The revised accounting resulted in increases in
expenses of $1.0 million for the three months ended March 31, 2001.
Summary of Adjustments to Prior Period Financial Statements as a result of
re-audit of years ended December 31, 2000 and 2001
The following is a brief description of the differences between Motient's
original accounting treatment and the revised accounting treatment that it has
concluded was appropriate and has been reflected in the accompanying financial
statements for the respective periods.
Recognition of difference between strike price and fair market value at
measurement date for options issued to ARDIS employees. Motient has restated its
consolidated financial statements to recognize compensation expense related to
the issuance of stock options with an exercise price below fair market value.
The revised accounting resulted in a decrease in net income and a corresponding
increase in additional paid in capital of $1.0 million, $0.6 million and $0.01
million for the years ended December 31, 1999, 2000 and 2001, respectively.
Recognition of adoption of SAB 101,"Revenue Recognition in Financial
Statements". Motient has restated its consolidated financial statements as of
January 1, 2000, based on guidance provided in Securities and Exchange
Commission Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements", as amended ("SAB101"). Motient's adoption of SAB101 resulted in a
change of accounting for certain product shipments and activation fees. The
cumulative effect of the change to retained earnings as of January 1, 2000 was
$4.6 million. The cumulative effect was recognized as income in 2001 as the
amounts were amortized into revenue and ultimately recognized as additional gain
on the sale of the Company's satellite, transportation and certain other assets.
Accrual of advertising expense in December 2000. Motient has restated its
consolidated financial statements in 2000 to recognize an additional $1.1
million in advertising expense previously recognized in 2001.
Recognition of costs associated with inventory write-downs. Motient has restated
its consolidated financial statements in 2000 to recognize an additional $1
million in Cost of Goods Sold for inventory write-downs previously recognized in
2001. In addition, Motient has restated its consolidated financial statements
for the three-months ended March 31, 2002 to recognize an additional $0.4
million in Cost of Goods Sold for inventory write-downs not previously recorded.
Summary of Impact of the Restatement
The revised accounting treatment described above required that certain
adjustments be made to the income statements and balance sheets for the three
months ended March 31, 2002 and 2001. The effect of these adjustments is
illustrated in the table below. Certain of the adjustments are based on
assumptions that we have made about the fair value of certain assets.
15
(Unaudited) (Unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
2002 2001
---- ----
(in thousands)
Statement of operations data
- ----------------------------
Net Revenue, as previously reported $16,495 $23,407
Adjustments 188 (842)
As restated $16,683 $22,565
Net Operating Loss, as previously
reported (15,970) (25,217)
Adjustments 208 (443)
As restated (15,762) (25,660)
Net Loss, as previously reported (32,885) (54,006)
Adjustments (2,544) (942)
As restated (35,429) (54,948)
Basic and Fully Diluted Loss Per Share
of Common Stock, as previously reported $(0.56) $(1.09)
Adjustments (0.05) (0.02)
As restated $(0.61) $(1.11)
Balance sheet data
- ------------------
Total Assets, as previously reported 177,628 536,608
Adjustments 27,654 164
As restated 205,282 536,772
Total Liabilities, as previously
reported 485,681 588,579
Adjustments (14,122) (7,739)
As restated 471,559 580,840
Stockholders' Equity, as previously
reported (308,053) (51,971)
Adjustments 41,776 7,903
As restated (266,277) (44,068)
Total Liabilities & Stockholders'
Equity, as previously reported 177,628 536,608
Adjustments 27,654 164
As restated $205,282 $536,772
3. LIQUIDITY AND FINANCING
Liquidity and Financing Requirements
As described below under "Motient's Chapter 11 Filing and Plan of
Reorganization", in January 2002, the Company and three of its four wholly-owned
16
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the Federal Bankruptcy Code. Motient Ventures Holding Inc. did not file for
Chapter 11 and had no activities during the period ending March 31, 2002. The
only asset of this subsidiary is the Company's interest in MSV. The Company's
plan of reorganization was confirmed on April 26, 2002 and became effective on
May 1, 2002. The reorganization significantly deleveraged Motient's balance
sheet and significantly reduced Motient's ongoing interest expense. As of the
effective date of the plan, Motient had approximately $30.7 million of debt
(comprised of capital leases, note payables to Rare Medium and Credit Suisse
First Boston ("CSFB") and the outstanding Motorola credit facility).
The Company's cash flow from operations do not cover its expenses. Even if the
Company begins to generate cash in excess of its operating expenses, it expects
to continue to require additional funds to meet remaining interest obligations,
capital expenditures, and other non-operating cash expenses. In addition, the
Company's financial performance could deteriorate, and there is no assurance
that it will be able to meet its financial projections. If the Company's cash
requirements are more than currently expected, the Company will require
additional financing in amounts that may be material.
The capital resources of Motient may not be sufficient to permit it to fund its
planned launch of new products and services or achieve operating profitability.
Failure to generate or raise sufficient funds may require the Company to delay
or abandon some of its plans, which could harm its business and competitive
position. The Company may meet additional capital needs by issuing debt or
equity securities or borrowing funds from one or more lenders; however, it may
not have timely access to additional financing sources on acceptable terms. If
it does not, it may not be able to expand its operations, network and services
as intended.
Motient's Chapter 11 Filing and Plan of Reorganization
On January 10, 2002, the Company filed for protection under Chapter 11 of the
Bankruptcy Code. The Company's Amended Joint Plan of Reorganization was filed
with the U.S. Bankruptcy Court for the Eastern District of Virginia on February
28, 2002. The cases were jointly administered under the case name "In Re Motient
Corporation, et. al.," Case No. 02-80125. The plan was confirmed on April 26,
2002, and became effective on May 1, 2002.
Under the plan of reorganization, all then-outstanding shares of the Company's
pre-reorganization common stock and all unexercised options and warrants to
purchase the Company's pre-reorganization common stock were cancelled. The
holders of $335 million in senior notes exchanged their notes for approximately
25,000,000 shares of the Company's common stock. Certain of the Company's
creditors also received an aggregate of 97,256 shares of the Company's new
common stock in settlement for amounts owed to them. These shares were issued
upon completion of the bankruptcy claims process. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of new common stock. The warrants may be
exercised to purchase shares of Motient common stock at a price of $.01 per
share, expire May 1, 2004, or two years after the effective date of
reorganization, and are not exercisable unless and until the average closing
price of Motient's common stock for ninety consecutive trading days is equal to
or greater than $15.44 per share. Also, Motient issued to Evercore Partners LP,
financial advisor to the creditors' committee in Motient's reorganization, a
17
warrant to purchase up to 343,450 shares of common stock, at an exercise price
of $3.95 per share. The warrant will have a term of five years. If the average
closing price of Motient's common stock for thirty consecutive trading days is
equal to or greater than $20.00, Motient may require Evercore to exercise the
warrant, provided the common stock is then trading in an established public
market.
Effects of the Chapter 11 Filing
As a result of its Chapter 11 bankruptcy filing, the Company saw a slower
adoption rate for its services in the first quarter of 2002. In a large customer
deployment, the upfront cost of the hardware can be significant. Because the
hardware generally is usable only on Motient's network, certain customers
delayed adoption while the Company was in Chapter 11. In an effort to accelerate
adoption of its services, the Company did, in the first quarter of 2002, in
selected instances, offer certain incentives for adoption of its services that
were outside of its customary contract terms, such as extended payment terms or
temporary hardware rental. None of these offers were accepted; therefore, there
was no impact to the Company's financial statements. Additionally, certain of
the Company's trade creditors required either deposits for future services or
shortened payment terms; however, none of these deposits or changes in payment
terms were material and none of the Company's key suppliers have ceased to do
business with it as a result of our reorganization.
Further details regarding the plan are contained in Motient's Disclosure
Statement with respect to the plan, which was filed as Exhibit 99.2 to the
Company's current report on Form 8-K dated March 4, 2002.
Effective May 1, 2002, the Company adopted "fresh start" accounting, which
requires that the reorganized value of the Company, deemed to be approximately
$221 million, as determined by the court, be allocated to the Company's assets
in accordance with procedures specified by Accounting Principles Bulletin
("APB") Opinion 16. The Company is in the process of allocating the
reorganization value to specific tangible and intangible assets; however, if any
portion of the Company's reorganization value cannot be attributed to specific
tangible or intangible assets, the Company will report as an intangible asset
"reorganization value in excess of amounts allocable to identifiable assets".
It should be noted that the bankruptcy court originally set a reorganization
value for the Company's assets of $234 million. In November of 2003, Motient
engaged CTA to perform a valuation of its equity interests in MSV as of December
31, 2002. Concurrent with CTA's valuation, Motient reduced the book value of its
equity interest in MSV from $54 million (inclusive of the Company's $2.5 million
convertible note with MSV) to $41 million as of May 1, 2002 to reflect certain
preference rights on liquidation of certain classes of equity holders in MSV.
Motient's reorganization value was reduced by $13 million to $221 million as a
result of this valuation revision.
Under the Company's plan of reorganization, the Company issued a note to CSFB,
in satisfaction of certain claims by CSFB against Motient, in the principal
amount of $750,000. The new note was issued by a new subsidiary of Motient that
owns 100% of Motient Ventures Holding, Inc., which owns all of the Company's
interests in MSV. The new note has a term of three years and carries interest at
9%. The note allows the Company to elect to accrue interest and add it to the
18
principal, instead of paying interest in cash. The note requires that it be
prepaid using 25% of the proceeds of any repayment of the $15 million note
receivable from MSV.
As of March 31, 2002, the Company was a party to the following debt facilities:
Rare Medium: In 2001 Motient received a total of $50 million from Rare Medium,
and issued Rare Medium notes payable for such amount at 12.5% annual interest.
These notes were collateralized by five million of the Company's XM Radio
shares. On October 12, 2001, in accordance with the terms of the notes, the
Company repaid $26.2 million of the Rare Medium notes, representing $23.8
million in principal and $2.4 million of accrued interest, in exchange for five
million of its XM Radio shares. The $26.9 million of principal and accrued
interest remaining outstanding at December 31, 2001 was unsecured. At March 31,
2002, the Company had an unsecured note payable to Rare Medium in the amount of
$27.0 million of principal and accrued interest thereon.
As a result of the delivery of the shares of XM Radio common stock described
above, the maturity of the Rare Medium notes was accelerated to November 19,
2001. As of December 31, 2001, the Rare Medium notes were in default; and,
therefore, the Company classified the Rare Medium notes as current liabilities
in the Consolidated Balance Sheet for 2001.
Under the Company's Plan of Reorganization, the Rare Medium notes were cancelled
and replaced by a new note in the principal amount of $19.0 million. The new
note was issued by a new subsidiary of Motient Corporation that owns 100% of
Motient Ventures Holding Inc., which owns all of the Company's interests in MSV.
The new note has a term of three years and carries interest at 9%. The note
allows the Company to elect to accrue interest and add it to the principal,
instead of paying interest in cash. The note requires that it be prepaid using
25% of the proceeds of any repayment of the $15 million note receivable from
MSV.
Vendor Financing: Motorola had entered into an agreement with the Company to
provide up to $15 million of vendor financing, to finance up to 75% of the
purchase price of network base stations. Loans under this facility bear interest
at a rate equal to LIBOR plus 7.0% and are guaranteed by the Company and each
subsidiary of Motient Holdings. The terms of the facility require that amounts
borrowed be secured by the equipment purchased therewith. Advances made during a
quarter constitute a loan, which is then amortized on a quarterly basis over
three years. As of March 31, 2002, $3.3 million was outstanding under this
facility at an interest rate of 9.59%, and no amounts were available for
borrowing. These balances were not impacted by the Company's Plan of
Reorganization.
$335 Million Unit Offering: On March 31, 1998, Motient Holdings Inc. issued $335
million of Units (the "Units") consisting of 12 1/4 % Senior Notes due 2008 (the
"Senior Notes"), and one warrant to purchase 3.75749 shares of Common Stock,
subsequently adjusted to 3.83 shares of Common Stock, of the Company for each
$1,000 principal amount of Senior Notes (the "Warrants") at an exercise price of
$12.51 per share, subsequently adjusted to $12.28 per share. A portion of the
net proceeds of the sale of the Units were used to finance the Motient
Communications acquisition in 1998. In connection with the Senior Notes, Motient
Holdings, Inc. purchased approximately $112.3 million of restricted investments
that were restricted for the payment of the first six interest payments on the
Senior Notes. Interest payments are due semi-annually, in arrears, beginning
October 1, 1998. The Senior Notes were fully guaranteed by Motient Corporation.
The Company failed to make a semi-annual interest payment due October 1, 2001,
which failure constituted an event of default under the Senior Notes. As a
result of the Company's failure to make the required semi-annual interest
payment, the missed interest payment accrued interest at the annual rate of
19
13.25%. As a result of this event of default, the Company classified the Senior
Notes as current liabilities in the Consolidated Balance Sheet as of December
31, 2001. As part of the Company's Plan of Reorganization, the Senior Notes were
exchanged in full, including accrued interest thereon, for new equity of the
reorganized Company. As of March 31, 2002, $367.1 million was outstanding on the
Senior Notes, including accrued interest thereon.
Summary of Liquidity and Financing Sources for the Core Wireless Business
The Company's sources of cash include cash on hand, net cash from operations and
proceeds realized through the sale of inventory relating to eLinkSM and
BlackBerryTM. The Company's projected cash requirements are based, in part, on
assumptions about the Company's business model and projected growth rate. These
growth rates are difficult to predict and there is no assurance that the actual
results that are experienced will meet the assumptions included in the Company's
business model and projections. If the results of operations are less favorable
than currently anticipated, the Company's cash requirements will be more than
projected, and it will require additional financing in amounts that may be
material. The type, timing and terms of financing that the Company selects will
be dependent upon its cash needs, the availability of financing sources and the
prevailing conditions in the financial markets. The Company cannot guarantee
that additional financing sources will be available at any given time or
available on favorable terms.
Additionally, the $15 million note issued to the Company at the November 2001
closing of the MSV transaction, including accrued interest thereon, becomes due
and payable on November 25, 2006. Upon repayment of this note by MSV, $3.75
million of the proceeds are required to be used to repay a portion of the $19
million note payable to Rare Medium and the $750,000 note to CSFB. As part of
the subsequent adjustment for "fresh-start" accounting, Motient has recorded the
$15.0 million note receivable from MSV, plus accrued interest thereon at its
fair market value, estimated to be approximately $13.0 million at the May 1,
2002 "fresh-start" accounting date, after giving effect to discounted future
cash flows at market interest rates.
4. COMMITMENTS AND CONTINGENCIES
As of March 31, 2002 the Company had no contractual commitments; however, during
April the Company contracted to purchase eLinkSM and other subscriber equipment
inventory in the amount of $2.4 million.
Also at March 31, 2002, the Company had certain contingent and/or disputed
obligations under a satellite construction contract entered into by the Company,
which contained flight performance incentives payable by the Company to the
contractor if the satellite performed according to the contract. As a result of
the sale of the satellite assets to MSV, any liabilities under this contract in
respect of the period after November 26, 2001 are the responsibility of MSV;
however, the Company was responsible for any incentive payments deemed to have
been earned prior to such date. All amounts due under this contract had been
recorded in full in the periods in which these incentives were deemed to have
been earned, all of which was prior to March 31, 2002. Upon the implementation
of the plan of reorganization, this contract was terminated, and in satisfaction
20
of all amounts alleged to be owed by the Predecessor Company under this
contract, the contractor received a pro-rata portion of the 97,256 shares issued
to creditors holding allowed unsecured claims.
5. LEGAL AND REGULATORY MATTERS
Legal
Motient filed a voluntary petition for relief under Chapter 11 of the Bankruptcy
Code on January 10, 2002. The Bankruptcy Court confirmed Motient's Plan of
Reorganization on April 26, 2002, and Motient emerged from bankruptcy on May 1,
2002.
Motient is aware of a purported class action lawsuit filed by holders of Rare
Medium common stock challenging the previously proposed merger of Motient and
Rare Medium that was terminated in Rare Medium Group, Inc. Shareholders
Litigation, C.A. No. 18879 NC (cases filed in Delaware Chancery Court between
May 15, 2001 and June 7, 2001, and consolidated by the Court on June 22, 2001).
The complaint names Rare Medium, members of Rare Medium's board of directors,
the holders of Rare Medium preferred stock and certain of their affiliated
entities, and Motient as defendants. The complaint alleges that the defendants
breached duties allegedly owed to the holders of Rare Medium common stock in
connection with the merger agreement, and include allegations that: (1) the
holders of Rare Medium preferred stock engaged in self-dealing in the proposed
merger; (2) the Rare Medium board of directors allegedly breached its fiduciary
duties by agreeing to distribute the merger consideration differently among Rare
Medium's common and preferred shares; and (3) Motient allegedly aided and
abetted the supposed breaches of fiduciary duties. The complaint sought to
enjoin the proposed merger, and also sought compensatory damages in an
unspecified amount. In 2002, the Plaintiffs and the Rare Medium defendants
reached a settlement of the Delaware litigation, and the Court dismissed the
case on December 2, 2002.
A second lawsuit challenging the previously proposed merger, Brickell Partners
v. Rare Medium Group, Inc., et al., N.Y.S. Index No. 01602694 was filed in the
New York Supreme Court on May 30, 2001. Rare Medium and the holders of Rare
Medium preferred stock filed a motion to dismiss or stay the New York lawsuit.
Motient was never served with process in the New York lawsuit, and thus filed no
motion to dismiss. However, Motient has been informed by Rare Medium that an
unopposed motion by Rare Medium to dismiss the New York lawsuit as moot was
granted on February 21, 2002, and a judgment dismissing the case was entered by
the New York Court on April 24, 2002.
Regulatory
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
21
time to time by Congress and the Federal Communications Commission, or FCC, have
in the past materially affected and may in the future materially affect the
telecommunications industry in general, and Motient's wireless business in
particular. In addition, many aspects of regulation at the federal, state and
local level currently are subject to judicial review or are the subject of
administrative or legislative proposals to modify, repeal, or adopt new laws and
administrative regulations and policies. Neither the outcome of these
proceedings nor their impact on Motient's operations can be predicted at this
time.
The ownership and operation of the Company's terrestrial network is subject to
the rules and regulations of the FCC, which acts under authority established by
the Communications Act of 1934 and related federal laws. Among other things, the
FCC allocates portions of the radio frequency spectrum to certain services and
grants licenses to and regulates individual entities using that spectrum.
Motient operates pursuant to various licenses granted by the FCC.
The Company is subject to the Communications Assistance for Law Enforcement Act,
or CALEA. Under CALEA, the Company must ensure that law enforcement agencies can
intercept certain communications transmitted over its networks. The deadline for
complying with the CALEA requirements and any rules subsequently promulgated was
June 30, 2000. The Company has pending with the FCC a petition for an extension
of the deadline with respect to certain of its equipment, facilities, and
services and the Company has been working with law enforcement to arrive at an
agreement on a further extension of this deadline and on an extension of the
deadline for other Motient equipment, facilities, and services. It is possible
that the Company may not be able to comply with all of CALEA's requirements or
do so in a timely manner. Where compliance with any requirement is deemed by the
FCC to be not "reasonably achievable," the Company may be exempted from such
requirement. Should the Company not be exempted from complying, of if federal
funds are not available to the Company to assist in the funding of any required
changes, the requirement to comply with CALEA could have a material adverse
effect on the conduct of the Company's business.
The Company is also subject to the FCC's universal service fund, which supports
the provision of affordable telecommunications to high-cost areas, and the
provision of advanced telecommunications services to schools, libraries, and
rural health care providers. All of the terrestrial network revenue falls within
excluded categories, thereby eliminating the Company's universal service
assessments. There can be no assurances that the FCC will retain the exclusions
or its current policy regarding the scope of a carrier's contribution base. The
Company may also be required to contribute to state universal service programs.
The requirement to make these state universal service payments, the amount of
which in some cases may be subject to change and is not yet determined, may have
a material adverse impact on the conduct of the Company's business and its
financial results.
The Company believes that it has licenses for a sufficient number of channels to
meet its current capacity needs on the terrestrial network. To the extent that
additional capacity is required, the Company may participate in other upcoming
auctions or acquire channels from other licensees.
In November 2001, Nextel proposed, in a "white paper" to the FCC, that certain
of its wireless spectrum in the 700 MHz band, lower 800 MHz band, and 900 MHz
band be exchanged for spectrum in the upper 800 MHz band and in the 2.1 GHz
22
band. Nextel stated that it was making this proposal to address existing
inadvertent interference problems for public safety communications systems
caused by the existing spectrum allocation. Nextel's proposal addresses this
problem by creating blocks of contiguous spectrum to be shared by public safety
agencies. The Nextel proposal, as submitted to the FCC, would require either (i)
that Motient continue to operate using its existing lower 800 MHz band spectrum
on a secondary, non-interfering basis with the public safety agencies who would
be relocated in the same spectrum, or (ii) that Motient relocate, at its own
expense, to other spectrum in the 700 MHz or 900 MHz bands. Motient believes it
is highly unlikely that it could continue to operate in the lower 800 MHz bands
on a secondary, non-interfering basis. If Motient is required to relocate to
spectrum in the 700 MHz or 900 MHz bands, it would incur substantial operational
and financial costs, including costs relating to: manufacturing replacement
infrastructure and user hardware to operate on Motient's network in the 700 MHz
or 900 MHz bands, disruptions to existing customers as a result of the
relocation to other spectrum bands, possible diminished data speed, and coverage
gaps. There are also potential problems with the 700 MHz and 900 MHz bands that
might make it difficult, if not impossible, for Motient to duplicate its
existing operations in the 800 MHz band.
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. The Company does not believe its
operations will be impacted until the Commission adopts final rules in that
proceeding and it cannot predict what actions the FCC will take.
6. SUBSEQUENT EVENTS
As noted above, the Company's plan of reorganization became effective on May 1,
2002. We urge you to read our quarterly reports on Form 10-Q for the quarters
ended June 30, 2002 and September 30, 2002 and our annual report on Form 10-K
for the year ended December 31, 2002, as well as our other reports and filings
with the SEC filed after the date hereof, for more information regarding recent
developments and current matters.
7. FINANCIAL STATEMENTS OF SUBSIDIARIES
In connection with the Company's acquisition of Motient Communications Inc. on
September 30, 1998 (the "Motient Communications Acquisition"), and related
financing discussed above, the Company formed a new wholly-owned subsidiary,
Motient Holdings Inc. ("Motient Holdings"). The Company contributed all of its
inter-company notes receivables and transferred its rights, title and interests
in Motient Services Inc. and certain other subsidiaries that were subsequently
dissolved (together with Motient Communications, the "Subsidiary Guarantors") to
Motient Holdings, and Motient Holdings was the acquirer of Motient
Communications and the issuer of the Senior Notes. Motient Corporation ("Motient
Parent") was a guarantor of the Senior Notes (until cancellation of the Senior
Notes in accordance with the implementation of the Company's plan of
reorganization). The Senior Notes contained covenants that, among other things,
limited the ability of Motient Holdings and its Subsidiaries to incur additional
indebtedness, pay dividends or make other distributions, repurchase any capital
stock or subordinated indebtedness, make certain investments, create certain
liens, enter into certain transactions with affiliates, sell assets, enter into
certain mergers and consolidations, and enter into sale and leaseback
transactions.
23
The Senior Notes were jointly and severally guaranteed on full and unconditional
basis by the Subsidiary Guarantors and Motient Parent. The following unaudited
condensed consolidating information for these entities presents:
o Condensed consolidating balance sheets as of March 31, 2002 and
December 31, 2001, as restated, the condensed consolidating statements
of operations for the three months ended March 31, 2002 and 2001, as
restated, and the condensed consolidating statement of cash flows for
the three months ended March 31, 2002 and 2001, as restated.
o Elimination entries necessary to combine the entities comprising
Motient.
24
Condensed Consolidating Balance Sheet
(Debtor-in-Possession)
As of March 31, 2002
(Unaudited, Restated)
(in thousands)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
---------- -------- ------------ --------- ------ ------------ -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $21,003 $ -- $ -- $ 21,003 $ -- $ -- $ 21,003
Accounts receivable - trade, net 10,972 -- -- 10,972 -- -- 10,972
Inventory 5,291 -- -- 5,291 -- -- 5,291
Investment in/due from subsidiary 439 -- -- 439 -- -- 439
Deferred equipment costs 11,932 -- -- 11,932 -- -- 11,932
Other current assets 12,359 -- -- 12,359 -- -- 12,359
------- -------- -------- --------- ------- -------- ---------
Total current assets 61,996 -- -- 61,996 -- -- 61,996
PROPERTY AND EQUIPMENT-- NET 60,621 -- -- 60,621 -- -- 60,621
GOODWILL AND INTANGIBLES-- NET 50,914 -- -- 50,914 -- -- 50,914
INVESTMENT IN AND NOTES RECEIVABLE
FROM MSV -- -- -- -- 28,096 -- 28,096
DEFERRED CHARGES AND OTHER ASSETS-
NET 3,655 -- -- 3,655 -- -- 3,655
------- -------- -------- --------- ------- --------- ---------
Total assets $177,186 $ -- $ -- $ 177,186 $28,096 $ -- $ 205,282
======== ======== ======== ========= ======= ======== =========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
PRE PETITION LIABILITIES SUBJECT TO
COMPROMISE:
Accrued expenses $ 1,533 $1,750 $ -- $ 3,283 $ 1,550 $ -- $ 4,833
Senior Notes, including accrued -
interest thereon in default -- 367,673 -- 367,673 -- 367,673
Rare Medium Note Payable,
including accrued
interest thereon - in default -- -- -- -- 27,030 -- 27,030
------- -------- -------- --------- ------ ------- ------
Total pre petition liabilities
subject to compromise 1,533 369,423 -- 370,956 28,580 -- 399,536
CURRENT LIABILITIES NOT SUBJECT TO
COMPROMISE:
Accounts payable and accrued expenses 13,755 1,025 -- 14,780 244 -- 15,024
Obligations under capital leases --
due within one year 7,857 -- -- 7,857 -- 7,857
Deferred equipment revenue 11,972 11,972 -- -- 11,972
Deferred revenue and other liabilities 11,900 -- -- 11,900 -- -- 11,900
------- -------- -------- --------- ------- ------- ------
Total current liabilities not
subject to compromise 45,484 1,025 -- 46,509 244 -- 46,753
Total current liabilities 47,017 370,448 -- 417,465 28,824 -- 446,289
DUE TO PARENT/AFFILIATE 838,740 (91,219) (739,172) 8,349 277,049 (285,398) --
LONG-TERM LIABILITIES NOT SUBJECT
TO COMPROMISE:
Note payable to/from Issuer/ Parent -- 11,500 -- 11,500 (11,500) -- --
Vendor Financing Commitment 3,316 -- -- 3,316 -- -- 3,316
Capital lease obligations 163 -- -- 163 -- -- 163
Other long-term liabilities 21,791 -- -- 21,791 -- -- 21,791
------- -------- -------- --------- ------- -------- ------
Total long-term liabilities 25,270 11,500 -- 36,770 (11,500) -- 25,270
Total liabilities 911,027 290,729 (739,172) 462,584 294,373 (285,398) 471,559
STOCKHOLDERS' (DEFICIT) EQUITY (733,841) (290,729) 739,172 (285,398) (266,277) 285,398 (266,277)
-------- --------- -------- ---------- -------- ------- ---------
Total liabilities and
stockholders' (deficit) equity $177,186 $ -- $ -- $ 177,186 $28,096 $ -- $205,282
======== ========= ======== ========= ======= ======= ========
25
Condensed Consolidating Balance Sheet
As of December 31, 2001
(Restated)
(in thousands)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
---------- -------- ------------ -------- ------ ------------ -------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $33,387 $ -- $ -- $ 33,387 $ -- $ -- $33,387
Accounts receivable - trade, net 11,491 -- -- 11,491 -- -- 11,491
Inventory 6,027 -- -- 6,027 -- -- 6,027
Investment in/due from subsidiary 521 -- -- 521 -- -- 521
Deferred equipment costs 13,662 -- -- 13,662 -- -- 13,662
Other current assets 16,113 -- -- 16,113 453 -- 16,566
------- -------- -------- ---------- --------- -------- ------
Total current assets 81,201 -- -- 81,201 453 -- 81,654
PROPERTY AND EQUIPMENT - NET 64,001 -- -- 64,001 -- -- 64,001
GOODWILL AND INTANGIBLES - NET 51,631 -- -- 51,631 -- -- 51,631
INVESTMENT IN AND NOTES RECEIVABLE
FROM MSV -- -- -- 30,126 -- 30,126
DEFERRED CHARGES AND OTHER ASSETS
- --NET 5,650 7,403 -- 13,053 -- -- 13,053
-------- -------- -------- ---------- --------- --------- --------
Total assets $202,483 $7,403 $ -- $ 209,886 $ 30,579 $ -- $240,465
======== ======== ======== ========== ========= ========= ========
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $16,937 $31,473 $ -- $ 48,410 $ 1,864 $ -- $50,274
Senior Notes, net of discount -
in default -- 329,371 -- 329,371 -- -- 329,371
Obligations under capital leases
due within one year 8,691 -- -- 8,691 -- -- 8,691
Rare Medium Notes - in default -- -- -- -- 26,910 -- 26,910
Deferred equipment revenue 13,662 13,662 -- -- 13,662
Deferred revenue and other liabilites 12,054 -- -- 12,054 -- -- 12,054
------- -------- -------- ---------- --------- --------- ---------
Total current liabilities 51,344 360,844 -- 412,188 28,774 -- 440,962
DUE TO PARENT/AFFILIATE 798,110 (150,613) (677,623) (30,126) 244,454 (214,328) --
LONG-TERM LIABILITIES:
Note payable to/from Issuer/Parent -- 11,500 -- 11,500 (11,500) -- --
Vendor Financing Commitment 3,316 -- -- 3,316 -- -- 3,316
Capital lease obligations 257 -- -- 257 -- -- 257
Other long-term liabilities 27,079 -- -- 27,079 -- -- 27,079
------- -------- -------- ---------- --------- --------- ---------
Total long-term liabilities 30,652 11,500 -- 42,152 (11,500) -- 30,652
Total liabilities 880,106 221,731 (677,623) 424,214 261,728 (214,328) 471,614
STOCKHOLDERS' (DEFICIT) EQUITY (677,623) (214,328) 677,623 (214,328) (231,149) 214,328 (231,149)
-------- --------- -------- ----------- --------- --------- ----------
Total liabilities, minority interest
and stockholders' (deficit) equity $202,483 $7,403 $ -- $ 209,886 $ 30,579 $ -- $240,465
========= ======== ======== ========== ========= ========= ==========
26
Condensed Consolidating Statement of Operations
(Debtor-in-Possession)
Three Months ended March 31, 2002
(Unaudited)
(in thousands)
(Restated)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
---------- -------- ------------ -------- ------ ------------ -------
REVENUES
Services $12,467 $-- $-- $12,467 $300 $(300) $12,467
Sales of equipment 4,216 -- -- 4,216 -- -- 4,216
----- -- -- ----- -------- ------- -----
Total Revenues 16,683 -- -- 16,683 300 (300) 16,683
COSTS AND EXPENSES
Cost of service and operations 15,332 -- -- 15,332 -- -- 15,332
Cost of equipment sold 4,534 -- -- 4,534 -- -- 4,534
Sales and advertising 3,285 -- -- 3,285 1 -- 3,286
General and administrative 2,995 300 -- 3,295 527 (300) 3,522
Restructuring charge 584 -- -- 584 -- -- 584
Depreciation and amortization 5,187 -- -- 5,187 -- -- 5,187
----- ----- ------ ----- ------ ------- -----
Operating Loss (15,234) (300) -- (15,534) (228) -- (15,762)
Other income 837 -- -- 837 -- -- 837
Interest expense (4,164) (1,361) 3,801 (1,724) (120) 105 (1,739)
Equity in loss of MSV 717 (2,030) -- (1,313) -- -- (1,313)
Gain (loss) on sale of assets -- -- -- -- -- -- --
Aether employee option vesting (20) -- -- (20) -- -- (20)
---- -- -- ---- -- -- ----
Loss before reorganization items (17,864) (3,691) 3,801 (17,754) (348) 105 (17,997)
Reorganization Items:
Professional fees related to
reorganization -- (4,578) -- (4,578) -- -- (4,578)
Write off of debt financing fees -- (12,975) -- (12,975) -- -- (12,975)
Interest income 121 3,801 (3,801) 121 105 (105) 121
--- ----- ----- -------- -------- -------- --------
Net Loss Attributable Common Shareholders ($17,743) ($17,443) $-- ($35,186) ($243) $-- ($35,429)
========= ========= ====== ========= ====== ====== =========
27
Condensed Consolidating Statement of Operations
Three Months ended March 31, 2001
(Unaudited, Restated)
(in thousands)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
---------- -------- ------------ -------- ------- ------------ ---------
REVENUES
Services $17,165 $-- $-- $17,165 $300 $(300) $17,165
Sales of equipment 5,400 -- -- 5,400 -- -- 5,400
----- -- -- ----- -- -- -----
Total Revenues 22,565 -- -- 22,565 300 (300) 22,565
COSTS AND EXPENSES
Cost of service and operations 18,250 -- -- 18,250 -- -- 18,250
Cost of equipment sold 5,934 -- -- 5,934 -- -- 5,934
Sales and advertising 8,518 -- -- 8,518 -- -- 8,518
General and administrative 6,674 321 -- 6,995 277 (300) 6,972
Depreciation and amortization 9,078 -- -- 9,078 (527) -- 8,551
----- --- -- ----- ------- -- -----
Operating Loss (25,889) (321) -- (26,210) 550 -- (25,660)
Interest and Other Income 608 4,022 (3,277) 1,353 (9) (795) 549
Loss on disposal of assets (407) -- -- (407) -- -- (407)
Aether Option Vesting (499) -- -- (499) -- -- (499)
Income (Loss) on Extinguishment of Debt -- -- -- -- (1,033) -- (1,033)
Equity in Loss of Subsidiaries -- (30,314) 30,314 -- (52,466) 39,994 (12,472)
Interest Expense (5,069) (13,381) 3,277 (15,173) (1,048) 795 (15,426)
------- -------- ----- ------- ------- --- --------
Net Loss Attributable Common Shareholders ($31,256) ($39,994) $30,314 ($40,936) ($54,006) $39,994 ($54,948)
======= ======= ======= ======= ======= ======= =======
28
Condensed Consolidating Statement of Cash flow
(Debtor-in-Possession)
Three Months Ended March 31, 2002
(Unaudited, Restated)
(in thousands)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
---------- -------- ------------ -------- ------ ------------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss before reorganization items ($17,864) ($3,691) $ 3,801 ($17,754) ($348) $ 105 ($17,997)
Adjustments to reconcile net loss to
net cash (used in) provided by operating
activities before reorganization items:
Amortization of Guarantee Warrants
and debt discount and issuance costs -- 56 -- 56 -- -- 56
Depreciation and amortization 5,187 -- -- 5,187 -- -- 5,187
Non cash stock compensation 76 -- -- 76 -- -- 76
Gain on sale of transportation assets 20 -- -- 20 -- -- 20
Equity in Loss of MSV (717) -- -- (717) 2,030 -- 1,313
Changes in assets & liabilities
Inventory 736 -- -- 736 -- -- 736
Trade accounts receivable 519 -- -- 519 -- -- 519
Other current assets 6,329 -- -- 6,329 -- -- 6,329
Accounts payable and accrued expenses (2,318) -- -- (2,318) (70) -- (2,388)
Accrued interest on Senior Note -- 1,200 -- 1,200 -- -- 1,200
Deferred Items--net (5,045) -- -- (5,045) -- -- (5,045)
------ ------ ----- ------ ------ ------- ------
Net cash (used in) provided by
operating activities
before reorganization items (13,077) (2,435) 3,801 (11,711) 1,612 105 (9,994)
CASH USED BY REORGANIZATION ITEMS:
Reorganization items - professional fees -- (4,578) -- (4,578) -- -- (4,578)
Professional fees accrued not paid -- 3,472 -- 3,472 -- -- 3,472
Interest income 121 -- -- 121 105 (105) 121
------- ---- ----- ------ ------- -------- ------
Net cash used by reorganization items 121 (1,106) -- (985) 105 (105) (985)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (494) -- -- (494) -- -- (494)
--- ---- ----- --- ----- ------ -----
Net cash provided by (used in)
investing activities (494) -- -- (494) -- -- (494)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuances -- -- -- -- 17 -- 17
Funding from parent/subsidiary 1,994 3,541 (3,801) 1,734 (1,734) -- --
Principal payments under capital leases (928) -- -- (928) -- -- (928)
------ ------- ------- ----- ------ -------- -----
Net cash provided by (used in)
financing activities 1,066 3,541 (3,801) 806 (1,717) -- (911)
Net increase in cash and cash
equivalents (12,384) -- -- (12,384) -- -- (12,384)
CASH & CASH EQUIVALENTS, beginning
of period 33,387 -- -- 33,387 -- -- 33,387
------- ------ ------ ------ ------ --------- -------
CASH & CASH EQUIVALENTS, end of period $ 21,003 $ -- $ -- $ 21,003 $ -- $ -- $ 21,003
======== ====== ======= ======== ======= ========= ========
29
Condensed Consolidating Statement of Cash flow
Three Months Ended March 31, 2001
(Unaudited, Restated)
(in thousands)
Consolidated
Subsidiary Motient Motient Motient Consolidated
Guarantors Holdings Eliminations Holdings Parent Eliminations Motient
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($ 31,256) ($ 39,994) $ 30,314 ( $ 40,936) ($ 54,006) $ 39,994 ($ 54,948)
Adjustments to reconcile net loss
to net cash (used in) provided by
operating activities:
Amortization of Guarantee Warrants
and debt discount and issuance costs -- 1,584 -- 1,584 1,169 -- 2,753
Depreciation and amortization 9,077 -- -- 9,077 (527) -- 8,550
Non cash stock compensation 1,240 -- -- 1,240 -- -- 1,240
Aether employee option vesting 499 -- -- 499 -- -- 499
Loss on extinguishment of debt -- -- -- -- 1,033 -- 1,033
Equity in loss of XM Radio -- -- -- -- 12,472 -- 12,472
Loss on sale of XM Radio stock -- -- -- -- 407 -- 407
Changes in assets & liabilities
Inventory (2,964) -- -- (2,964) -- -- (2,964)
Trade accounts receivable (7,562) -- -- (7,562) -- -- (7,562)
Other current assets (538) -- -- (538) 109 -- (429)
Accounts payable and accrued expenses 7,300 (94) -- 7,206 121 -- 7,327
Accrued interest on Senior Note -- 10,259 -- 10,259 -- -- 10,259
Deferred trade payables (1,380) -- -- (1,380) -- -- (1,380)
Deferred Items--net 2,884 -- -- 2,884 (710) -- 2,174
----- -- -- ----- ----- -- -----
Net cash (used in) provided by
operating activities (22,700) (28,245) 30,314 (20,631) (39,932) 39,994 (20,569)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property & equipment (3,254) -- -- (3,254) -- -- (3,254)
Proceeds from the sale of XM Radio stock -- -- -- -- 33,539 -- 33,539
Purchase of long-term, restricted
investments 320 (539) -- (219) (126) -- (345)
--- ----- -- ----- ----- ------ -----
Net cash provided by (used in)
investing activities (2,934) (539) -- (3,473) 33,413 -- 29,940
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from stock issuances -- -- -- -- 259 -- 259
Funding from parent/subsidiary 32,764 22,784 (30,314) 25,234 14,760 (39,994) --
Principal payments under capital leases (751) -- -- (751) -- -- (751)
Principal payments under vendor lease (1,066) -- -- (1,066) -- -- (1,066)
Proceeds from bank financing -- 6,000 -- 6,000 -- -- 6,000
Repayment of bank financing -- -- -- -- (8,500) -- (8,500)
------ ------ ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities 30,947 28,784 (30,314) 29,417 6,519 (39,994) (4,058)
Net increase in cash and cash
equivalents 5,313 -- -- 5,313 -- -- 5,313
CASH & CASH EQUIVALENTS, beginning
of period 2,520 -- -- 2,520 -- -- 2,520
----- -- -- ----- -----
CASH & CASH EQUIVALENTS, end of period $7,833 $ -- $-- $7,833 $ -- $ -- $7,833
====== ==== == ====== ==== ==== ======
30
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Restated)
This Quarterly Report on Form 10-Q/A contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project," or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements ("Cautionary
Statements") include, among others, those under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Overview," and elsewhere in this quarterly report, including in conjunction with
the forward-looking statements included in this quarterly report. All of our
subsequent written and oral forward-looking statements (or statements that may
be attributed to us) are expressly qualified by the Cautionary Statements. You
should carefully review the risk factors described in our other filings with the
SEC from time to time and our quarterly reports on Form 10-Q to be filed after
this quarterly report, as well as our other reports and filings with the SEC.
In addition, as discussed in the "Introductory Note," there have been a number
of significant developments regarding Motient's business, operations, financial
condition, liquidity, and outlook subsequent to March 31, 2002. This amendment
to our previously filed report on Form 10-Q for the quarter ended March 31, 2002
generally does not contain information regarding such developments. Instead,
this amendment to our previously filed report on Form 10-Q for such quarter
generally contains the same information included at the time of the original
filing of such report, except for the restated financial statements and
corresponding disclosures regarding such restated figures described above. We
urge you to read our quarterly reports on Form 10-Q for the quarters ended June
30, 2002 and September 30, 2002 and our annual report on Form 10-K for the year
ended December 31, 2002, as well as our other reports and filings with the SEC
filed after the date hereof, for more information regarding recent developments
and current matters.
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.
As discussed in the Introductory Note and Note 2, "Restatement of Financial
Statements", the financial statement herein have been restated to give effect to
the revised accounting treatment with respect to the MSV and Aether transactions
that was agreed to be appropriate, as well as the restatement adjustments that
resulted from the audit of our financial statements for the years ended December
31, 2000, 2001 and 2002 by Ehrenkrantz Sterling & Co. LLC.
Motient's Chapter 11 Filing
31
On January 10, 2002, Motient and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient's plan of reorganization was confirmed on April 26,
2002, and became effective on May 1, 2002. For a more detailed description of
Motient's Chapter 11 filing and its plan of reorganization, please see
"Liquidity and Capital Resources" below.
General - The Current and Former Components of Motient's Business
This section provides information regarding the various current and prior
components of Motient's business which we believe is relevant to an assessment
and understanding of the financial condition and consolidated results of
operations of Motient Corporation. The sale of our satellite assets to Mobile
Satellite Ventures LP, or MSV, in 2001, makes period to period comparison of our
financial results less meaningful, and therefore, you should not rely on them as
an indication of future operating performance. This discussion should be read in
conjunction with the consolidated financial statements and notes thereto.
As of March 19, 2004, Motient has six wholly-owned subsidiaries and an interest
in 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 License was formed on March
16, 2004, as part of Motient's amendment of its $12.5 million term credit
facility, as a special purpose wholly-owned subsidiary of Motient Communications
and holds all of the FCC licenses formerly held by Motient Communications. A
pledge of the stock of Motient License, along with the other assets of Motient
Communications, secures borrowings under the term credit facility, and a pledge
of the stock of Motient License secures, on a second priority basis, borrowings
under our vendor financing facility with Motorola. For further details regarding
the formation of Motient License, please see "Item 1. Business - Recent
Developments -- Credit Facility" of our annual report on Form 10-K for the
period ended December 31, 2002. Our 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 indirect, less-than 50 %
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.
In recent periods, certain factors have placed significant pressures on our
financial condition and liquidity position. A number of factors were preventing
us from accelerating revenue growth at the pace required to enable us to
generate cash in excess of our operating expenses. These factors included
competition from other wireless data suppliers and other wireless communications
providers with greater resources, cash constraints that have limited our ability
to generate greater demand, unanticipated technological and development delays,
and general economic factors. During 2001, in particular, our efforts were also
hindered by the downturn in the economy and poor capital and financing market
conditions. These factors led us to file a voluntary petition for reorganization
under Chapter 11 of the United States Federal Bankruptcy Code in January 2002.
See "--Liquidity and Capital Resources". Having emerged from our reorganization
with a significantly improved balance sheet, we are continuing to focus on
growing our core wireless business.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Our customers use our network for a variety of
32
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and consumers to transfer
electronic information and messages and access corporate databases and the
Internet.
Over the last several years, we have made substantial investments in new
products and services, including our eLinkSM wireless email service, which we
believe will capitalize on the rapid expansion of Internet email usage and
wireless data, particularly in the business-to-business environment.
Our eLinkSM service is a two-way wireless email device and electronic organizer
that uses our terrestrial network. We provide our eLinkSM brand two-way wireless
email service to customers accessing email through corporate servers, Internet
Service Providers, Mail Service Provider accounts, and paging network suppliers.
We also offer a BlackBerry TM by Motient solution specifically designed for
large corporate accounts operating in a Microsoft Exchange and Lotus Notes
environment. BlackBerry TM is a popular wireless email solution developed by
Research In Motion, or RIM, and is being provided on the Motient network under
an agreement with RIM.
XM Radio
As of January 1, 2001, we had an equity interest of approximately 33.1% (or
21.3% on a fully diluted basis) in XM Satellite Radio Holdings Inc., or XM
Radio, a public company that launched its satellite radio service toward the end
of 2001, and accounted for our investment in XM Radio pursuant to the equity
method of accounting. During 2001, we either sold or exchanged all of our
remaining shares of XM Radio and ceased to hold any interest in XM Radio as of
November 19, 2001.
Mobile Satellite Ventures LP
On June 29, 2000, we formed a joint venture subsidiary, MSV, in which we owned
80% of the membership interests. The remaining 20% interests in MSV were owned
by three investors unrelated to Motient; however, the minority investors had
certain participating rights which provided for their participation in certain
business decisions that were made in the normal course of business; therefore,
in accordance with Emerging Issues Task Force Issue No 96-16, "Investor's
Accounting for an Investee When the Investor Has a Majority of the Voting
Interest but the Minority Shareholder or Shareholders Have Certain Approval or
Veto Rights", our investment in MSV has been recorded for all periods presented
pursuant to the equity method of accounting.
Through November 26, 2001, MSV used our satellite network to conduct research
and development activities. On November 26, 2001, we sold the assets comprising
our satellite communications business to MSV, as part of a transaction in which
certain other parties joined MSV, including TMI Communications and Company
Limited Partnership, or TMI, a Canadian satellite services provider. In
consideration for our satellite business assets, we received the following: (i)
a $24 million cash payment in June 2000, (ii) a $41 million cash payment paid at
closing on November 26, 2001, net of $4 million retained by MSV related to our
sublease of real estate from MSV, and (iii) a 5-year $15 million note. In this
transaction, TMI also contributed its satellite communications business assets
to MSV. In addition, we purchased a $2.5 million convertible note issued by MSV,
and certain other investors, including a subsidiary of Rare Medium Group, Inc.,
purchased a total of $52.5 million of convertible notes. As of March 31, 2002,
we had an equity interest, on an undiluted basis, of approximately 48% in MSV.
Assuming that all of MSV's convertible notes issued in such transaction are
converted into limited partnership units of MSV, Motient would have a 33.3%
equity interest in MSV as of March 31, 2002.
33
Overview of Liquidity and Risk Factors
Liquidity and Financing Sources
We have incurred significant operating losses and negative cash flows in each
year since we started operations, due primarily to the costs of developing and
building our networks and the cost of developing, selling and providing our
products and services. Prior to filing for protection under Chapter 11, we were
highly leveraged. These factors and others placed significant pressures on our
financial condition and liquidity position. As a result of our plan of
reorganization, our total debt was substantially reduced; however, we expect to
continue to incur operating losses and negative cash flows. We expect to
continue to make significant capital outlays to fund remaining interest expense,
new product rollouts, capital expenditures, and working capital before we begin
to generate cash in excess of our operating expenses. We are focusing our
efforts on improving our cash flow through growth in our subscriber base, while
maintaining, or even reducing, our operating expenses. We believe that a large
percentage of our costs are fixed; therefore, we are attempting to increase our
revenue without incurring significant cost increases.
For a more detailed discussion of our funding requirements and outlook, see
"Liquidity and Capital Resources - Summary of Liquidity and Financing Sources
for Core Wireless Business."
Effects of the Chapter 11 Filing
As a result of our Chapter 11 bankruptcy filing, we saw a slower adoption rate
for our services in the first quarter of 2002. In a large customer deployment,
the upfront cost of the hardware can be significant. Because the hardware
generally is usable only on Motient's network, certain customers delayed
adoption while we were in Chapter 11. In an effort to accelerate adoption of our
services, we did, in selected instances in the first quarter of 2002, offer
certain incentives for the adoption of our services that were outside of our
customary contract terms, such as extended payment terms or temporary hardware
rental. None of these offers were accepted; therefore, these changes in terms
were not material to our cash flow or operations. Additionally, certain of our
trade creditors required either deposits for future services or shortened
payment terms; however, none of these deposits or changes in payment terms were
material and none of our key suppliers have ceased to do business with us as a
result of our reorganization.
Effective May 1, 2002, we adopted "fresh start" accounting, which requires that
the value of Motient, which was determined by the court to be $221 million, be
allocated to our assets and liabilities in accordance with Accounting Principles
Bulletin Opinion 16, "Business Combinations," for transactions reported on the
basis of the purchase method. We are in the process of allocating this
reorganization value to specific tangible and intangible assets; however, if any
portion of the reorganization value cannot be attributed to specific tangible or
intangible assets, we will be required to report as an intangible asset
"reorganization value in excess of amounts allocable to identifiable assets."
It should be noted that the bankruptcy court originally set a reorganization
value for our assets of $234 million. In November of 2003, Motient engaged CTA
to perform a valuation of its equity interests in MSV as of December 31, 2002.
Concurrent with CTA's valuation, Motient reduced the book value of its equity
interest in MSV from $54 million (inclusive of Motient's $2.5 million
convertible note from MSV)to $41 million as of May 1, 2002 to reflect certain
preference rights on liquidation of certain classes of equity holders in MSV.
Motient's reorganization value was reduced by $13 million to $221 million as a
result of this valuation revision.
34
Summary of Risk Factors
Additionally, our future operating results could be adversely affected by a
number of uncertainties and factors, including:
o our ability to attract and retain customers,
o our ability to secure additional financing necessary to fund
anticipated capital expenditures, operating losses and any remaining
debt service requirements,
o our ability to convert customers who have purchased devices from us
into active users of our airtime service and thereby generate revenue
growth,
o the timely roll-out of certain key customer initiatives and the launch
of new products or the entry into new market segments, which may
require us to continue to incur significant operating losses,
o our ability to fully recover the value of our inventory in a timely
manner,
o our ability to procure new inventory in a timely manner in the
quantities, quality, price and at the times required,
o our ability to gain market acceptance of new products and services,
including eLink and BlackBerryTM by Motient, and our ability to make a
profit thereon,
o our ability to respond and react to changes in our business and the
industry because we have substantial indebtedness,
o our ability to modify our organization, strategy and product mix to
maximize the market opportunities as the market changes,
o our ability to manage growth effectively,
o competition from existing companies that provide services using
existing communications technologies and the possibility of
competition from companies using new technology in the future,
o our ability to maintain, on commercially reasonable terms, or at all,
certain technologies licensed from third parties,
o our dependence on technology we license from Motorola, which may
become available to our competitors,
o the loss of one or more of our key customers,
o our ability to attract and retain key personnel, especially in light
of our recent headcount reductions,
o our ability to keep up with new technological developments and
incorporate them into our existing products and services and our
ability to maintain our proprietary information and intellectual
property rights,
o our dependence on third party distribution relationships to provide
access to potential customers,
o our ability to expand our networks on a timely basis and at a
commercially reasonable cost, or at all, as additional future demand
increases,
o the risk that Motient could incur substantial costs if certain
proposals regarding spectrum reallocation, that are now pending with
the FCC, are adopted, and
o regulation by the FCC.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's annual report on Form 10-K for the period
ended December 31, 2002.
35
Results of Operations
Three Months Ended March 31, 2002 and 2001
Revenue and Subscriber Statistics
Service revenues approximated $12.5 million for the quarter ended March 31,
2002, which was a $4.6 million reduction as compared to the quarter ended March
31, 2001. This $4.6 million reduction represents the loss of approximately $5.2
million of revenue associated with the sale of our satellite assets to MSV in
November 2001, offset by an $0.8 million increase in our core remaining market
sectors. We experienced a 35% growth in subscribers within our Wireless Internet
sector.
The tables below summarize our revenue and subscriber base for the quarters
ended March 31, 2002 and 2001. An explanation of certain changes in revenue and
subscribers is set forth below under the caption "Summary of Year over Year
Revenue."
Quarter Ended March 31,
Summary of Revenue 2002 2001 Change % Change
---- ---- ------ --------
(in millions)
Wireless Internet $4.1 $2.0 $2.1 105%
Field services 4.3 5.9 (1.6) (27)
Transportation 3.0 4.1 (1.1) (27)
Telemetry 0.7 0.7 0.0 0
Maritime and other 0.4 4.4 (4.0) (91)
Equipment 4.2 5.5 (1.3) (24)
------------- ------------- ----------
Total $ 16.7 $ 22.6 $(5.9) (26)%
============= ============= ========== ==========
The make up of our subscriber base was as follows:
As of March 31,
2002 2001 (1) Change % Change
---- -------- ------ --------
Wireless Internet 85,085 63,102 21,983 35%
Field services 36,161 45,070 (8,909) (20)
Transportation 89,750 74,237 15,513 21
Telemetry 28,486 18,059 10,427 58
Maritime and other 544 25,563 (25,019) (98)
------- ------- -------
Total 240,026 226,031 13,995 6%
======= ======= ====== ==
(1) Subscribers as of March 31, 2001, included approximately 37,600 satellite
units that were transferred to MSV as a result of the sale of the satellite
business in November 2001, approximately 25,000 of which were included in the
Maritime and other sector, 10,000 of which were included in the Transportation
sector, and 2,600 of which were included in the Field Services sector. Excluding
the transfer of these subscribers, we had a 27% increase in subscribers as of
March 31, 2002, as compared to March 31, 2001.
Summary of Quarter over Quarter Revenue
36
o Wireless Internet: Revenue grew from $2.0 to $4.1 million, and our
subscriber base grew from 63,102 to 85,085. The revenue growth in the
Wireless Internet sector represents our continued focus on expanding
the adoption of eLink and BlackBerry wireless email offerings to
corporate customers with both direct sales people and reseller channel
partners. Additional content services are provided by software
application partners for corporate customers to access Intranet and
Internet content, as well as document viewing and other desktop
extension applications.
o Field Services: Revenue declined from $5.9 million to $4.3 million,
and our subscriber base declined from 45,070 to 36,161. Approximately
90% of the decrease in revenue from field services was a result of
contractual price reductions put into effect during the latter half of
2001 and first quarter of 2002. The remaining reduction was the result
of internal cutbacks within certain of our customer accounts that have
gone through industry consolidations and downsizings, resulting in
fewer active users on the network, as compared to the revenue
generated from new customers that were acquired in the first quarter
of 2002.
o Transportation: Revenue declined from $4.1 million to $3.0 million,
and our subscriber base grew from 74,237 to 89,750. The reduction in
the revenue from the transportation sector was almost entirely the
result of the sale of our satellite assets to MSV. Excluding this
impact, our reduction in revenue for the first quarter of 2002, as
compared to the first quarter of 2001, was approximately $100,000,
which was the result of a contractual rate reduction in a large
contract, offset by increased usage within that contract.
o Telemetry: Revenue was essentially unchanged from $0.7 million to $0.7
million; however, our subscriber base grew from 18,059 to 28,486.
Growth in revenue by new and existing telemetry customers was offset
by contractual pricing reductions for one of our largest telemetry
customers.
o The reduction in maritime and other revenue was primarily the result
of (i) $0.7 million of revenue earned in the first quarter of 2001
from our contract to provide MSV with satellite capacity as they
pursued their research and development program, as compared to none in
the first quarter of 2002 and (ii) the loss of revenue from the
satellite business associated with the sale of the satellite business
in November 2001.
o The decrease in equipment revenue was primarily a result of the sale
of our satellite business and the loss of equipment sales from that
business in the first quarter of 2001.
Expenses
Quarter Ended March 31,
-----------------------
Summary of Expense 2002 2001 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Cost of Service & Operations $15.3 $18.3 $ (3.0) (16)%
Cost of Equipment Sales 4.5 5.9 (1.4) (24)
Sales & Advertising 3.3 8.5 (5.2) (61)
General & Administration 3.5 7.0 (3.5) (50)
Restructuring Charges 0.6 -- 0.6 --
Depreciation & Amortization 5.2 8.6 (3.4) (40)
---------- ------- --------- ----
Total $32.4 $48.3 $ (15.9) (33)%
========== ===== ========= =======
Cost of service and operations includes costs to support subscribers. The 16%
quarter-over-quarter decrease is made up of the following factors:
1. a $500,000 increase in base station maintenance costs associated with
an approximate 16% increase in the average cost per base station
primarily as a result of new rates that went into effect in the latter
half of 2001 under our maintenance contract, as well as a 3% increase
in the number of base stations,
37
2. a $284,000 increase for site rental costs associated with the 3%
increase in base stations quarter-over-quarter, offset by a 3% average
decrease in the average lease rate, and
3. an increase of approximately $1.2 million in licensing and commission
payments to third parties with whom we have partnered to provide
certain eLink and BlackBerryTM by Motient services.
The increases were offset by:
1. a 19% reduction, or $816,000 decrease, in communication charges
associated with reductions in the cost of usage as a result of the
sale of the satellite assets and the renegotiation of our
telecommunications contract, offset by cost increases associated with
a 3% increase in the number of terrestrial base stations in service as
compared to the first quarter of 2001,
2. a reduction of approximately $1.3 million associated with reduced
headcount levels, primarily as a result of our sale of the satellite
assets, as well as our cost control efforts undertaken in 2001,
3. a $2.3 million decrease in costs associated with the sale of the
satellite assets to MSV, including $1.1 million of in-orbit insurance
costs for the quarter, and
4. a reduction of $100,000 in research and development spending.
The decrease in cost of equipment sold for the quarter ended March 31, 2002, as
compared to 2001, was a result of the sale of the satellite assets to MSV in
November 2001.
Sales and advertising expenses as a percentage of total revenue were
approximately 20% for the first quarter of 2002, compared to 38% for the
comparable period of 2001. The decrease in sales and advertising expenses period
over period was primarily attributable to a reduction in spending on advertising
and trade shows, and a decrease in headcount costs, primarily as a result of the
cost savings initiatives that we undertook in the latter half of 2001 and the
first quarter of 2002.
General and administrative expenses for the core wireless business as a
percentage of total revenue were approximately 21% for the first quarter of 2002
as compared to 31% for 2001. The decrease in 2002 costs over 2001 costs in our
core wireless business general and administrative expenses was primarily
attributable to:
1. a $1.2 million reduction in non cash compensation charges associated
with the vesting of restricted stock, offset by a charge of $0.5
million related to Aether employee options,
2. approximately $1.3 million of savings associated with having fewer
employees throughout the first quarter of 2002 as compared to the
comparable period of 2001, primarily as a result of the cost savings
initiatives that we undertook in the latter half of 2001 and the first
quarter of 2002, and
3. approximately $295,000 of reductions in regulatory expenditures in the
first quarter of 2002 as compared to the same period of 2001.
Operational restructuring costs of $0.6 million are associated with our staff
reductions.
Depreciation and amortization for the core wireless business was approximately
31% of total revenue for the first quarter of 2002, as compared to 38% for the
first quarter of 2001. The $3.4 million decrease in depreciation and
amortization expense in 2002 was primarily attributable to sale of our satellite
assets to MSV in late November 2001 and the associated depreciation on those
assets.
Interest income was $121,000 for the quarter ended March 31, 2002, as compared
to $549,000 for the quarter ended March 31, 2001. The $428,000 decrease in
38
interest earned by the core wireless business reflects the loss of any interest
income earned on our escrow established for the senior notes, which was paid out
in full in April 2001. This decrease was offset by the interest earned on our
cash balances in the first quarter of 2002. Motient also earned other income in
the amount of $837,000 related to cash received from a former satellite customer
to whom we have no further satellite service obligation as a result of our sale
of satellite assets to MSV. In March of 2002, we also recorded a $20,000 charge
related to the vesting of Aether employee options as compared to a charge of
$499,000 for the three months ended March 31, 2001 and a charge of $1.3 million
for equity in losses of MSV and XM as compared to $12.5 million in the first
quarter of 2001.
We incurred $1.7 million of interest expense in the first quarter of 2002,
compared to $15.4 million during the first quarter of 2001. The $13.7 million
decrease was a result of:
1. the cessation of interest expense associated with our senior notes and
Rare Medium notes as a result of our bankruptcy filing in January
2002,
2. reduced debt balances during the first quarter of 2002, as compared to
the first quarter of 2001, as a result of the repayments of our bank
facilities in full during 2001, and
3. the elimination of amortization of warrants and prepaid interest and
debt offering costs due to the debt discount costs that were written
off in 2001 when we extinguished all of our remaining debt under the
bank facilities.
Additionally, in the first quarter of 2002, we recorded reorganization costs in
the amount of $17.6 million associated with our Chapter 11 bankruptcy filing. Of
these costs, approximately $13.0 million represented non-cash charges for the
write off of financing fees and debt discounts associated with the placement of
the senior notes. Also in the first quarter of 2001, we recorded a loss on the
extinguishment of debt in the amount of $1.0 million, representing the pro-rata
write off of fees and unamortized warrants associated with the original
placement of bank financing debt, which was repaid and permanently reduced in
the first quarter of 2001.
Net capital expenditures for the quarter ended March 31, 2002 for property and
equipment were $494,000 compared to $3.3 million for 2001. Expenditures
consisted primarily of assets necessary to continue the build out of our
terrestrial network. Capital expenditures for the first quarter of 2001 included
the purchase of a block of frequencies.
Liquidity and Capital Resources
As described above, in January 2002, we filed a voluntary petition for
reorganization under Chapter 11 of the Federal Bankruptcy Code. The plan was
confirmed on April 26, 2002, and became effective on May 1, 2002. The
reorganization significantly deleveraged Motient's balance sheet and
significantly reduced Motient's ongoing interest expense. As of May 1, 2002, the
effective date of the plan of reorganization, Motient had approximately $30.7
million of debt (comprised of capital leases, notes payable to Rare Medium and
Credit Suisse First Boston, or CSFB, and the outstanding Motorola credit
facility). However, Motient's business plan will require substantial additional
funds to finance the maintenance and growth of its operations, network and
subscriber base and to expand into new markets.
Our cash flow from operations do not cover our expenses. Even if we begin to
generate cash in excess of our operating expenses, we expect to continue to
require additional funds to meet remaining interest obligations, capital
expenditures, and other non-operating cash expenses. In addition, our financial
performance could deteriorate, and there is no assurance that we will be able to
39
meet our financial projections. If our cash requirements are more than we
currently expect, we will require additional financing in amounts that may be
material.
Motient's Chapter 11 Filing
Under the plan of reorganization, all then-outstanding shares of our
pre-reorganization common stock and all unexercised options and warrants to
purchase our pre-reorganization common stock were cancelled. The holders of $335
million in senior notes exchanged their notes for approximately 25,000,000
shares of our common stock. Certain of our creditors also received an aggregate
of 97,256 shares of our new common stock in settlement for amounts owed to them.
These shares were issued upon completion of the bankruptcy claims process.
Holders of our pre-reorganization common stock were entitled to receive warrants
to purchase an aggregate of 1,496,512 shares of new common stock. The warrants
may be exercised to purchase shares of our common stock at a price of $.01 per
share, expire May 1, 2004, or two years after the effective date of
reorganization, and are not exercisable unless and until the average closing
price of our common stock for ninety consecutive trading days is equal to or
greater than $15.44 per share. Also, we issued to Evercore Partners LP,
financial advisor to the creditors' committee in our reorganization, a warrant
to purchase up to 343,450 shares of common stock, at an exercise price of $3.95
per share. The warrant has a term of five years. If the average closing price of
our common stock for thirty consecutive trading days is equal to or greater than
$20.00, we may require Evercore to exercise the warrant, provided the common
stock is then trading in an established public market.
Further details regarding the plan are contained in Motient's Disclosure
Statement with respect to the plan.
Summary of Liquidity and Financing
As of March 31, 2002, Motient had the following sources of financing in place:
o MSV issued a $15 million note to Motient as part of the November 26,
2001 asset sale. The payment of such note by MSV is due the sooner of
ninety days from the date of the approval and issuance of the final
order by the FCC of MSV's pending application, or November 25, 2006.
There can be no assurances that this approval will be received in a
timely manner, if at all. Of the $15 million of proceeds from this
note, $3.75 million would be required to be used to prepay a pro-rata
portion of the $19 million note payable to Rare Medium and a $750,000
note payable to CSFB.
As of March 31, 2002, Motient had the following financing obligations
outstanding:
o Note payable to Rare Medium in the amount of $19.0 million. The note
was issued by a new subsidiary of Motient Corporation, MVH Holdings
Inc., that owns 100% of Motient Ventures Holding Inc., which owns all
of our interests in MSV. The note has a term of 3 years and carries
annual interest at 9%. The note allows us to elect to accrue interest
and add it to the principal or pay interest in cash. The note requires
that it be prepaid using 25% of the proceeds of any repayment of the
$15 million note from MSV.
o Note payable to CSFB in the amount of $750,000. The note was also
issued by MVH Holdings Inc. The note has a term of 3 years and carries
40
annual interest at 9%. The note allows us to elect to accrue interest
and add it to the principal or pay interest in cash. The note requires
that it be prepaid using 25% of the proceeds of any repayment of the
$15 million note from MSV.
o A vendor financing commitment from Motorola to provide up to $15
million of vendor financing to finance up to 75% of the purchase price
of additional terrestrial network base stations. Loans under this
facility bear interest at a rate equal to LIBOR plus 7.0% and are
guaranteed by Motient and each of its wholly-owned subsidiaries. The
terms of the facility require that amounts borrowed be secured by the
equipment purchased therewith. As of March 31, 2002, $3.3 million was
outstanding under this facility at 9.59%. All principal payments under
this arrangement were deferred for twelve months, with the next
scheduled payment due April 1, 2003. No additional amounts may be
drawn under this facility.
o A capital lease for network equipment acquired in July 2000. The lease
has a term of three years and an effective interest rate of 14.718%,
and as of March 31, 2002, had a balance of $8.0 million. As a result
of our default under the senior notes, as of March 31, 2002, we were
deemed to be in default under the terms of this lease agreement;
however, the default was cured upon the effective date of our plan of
reorganization.
Our sources of cash include cash on hand, net cash flow from operations and
proceeds realized through the sale of inventory relating to eLink and
BlackBerryTM. Our projected cash needs are based, in part, on certain
assumptions about our business model and projected growth rate. These growth
rates are difficult to predict and there is no assurance that the actual results
that we experience will meet the assumptions included in our business model and
projections. If our results of operations are less favorable than currently
anticipated, our cash requirements will be more than projected, and we will
require additional financing in amounts that may be material. The type, timing
and terms of financing that we select will be dependent upon our cash needs, the
availability of financing sources and the prevailing conditions in the financial
markets. We cannot guarantee that additional financing sources will be available
at any given time or available on favorable terms. In addition, if the proceeds
from any such source are insufficient to meet our expenditure requirements as
they arise, we will be required to seek additional equity or debt financing,
although it is unlikely under current conditions that such additional financing
will be available to us on reasonable terms, if at all.
Additionally, the $15 million note issued to the Company at the November 2001
closing of the MSV transaction, including accrued interest thereon, becomes due
and payable on November 25, 2006. Upon repayment of this note by MSV, $3.75
million of the proceeds are required to be used to repay a portion of the $19
million note payable to Rare Medium and the $750,000 note to CSFB.
Commitments
As of April 30, 2002, we had outstanding commitments to purchase inventory in
the amount of approximately $2.4 million.
Also at March 31, 2002, we had certain commitments and contingent liabilities
under our satellite construction contract, which contained flight performance
incentives payable by us to the contractor if the satellite performed according
to the contract. As part of implementation of our bankruptcy plan of
reorganization, all amounts that were deemed to be owed by us under this
contract and were converted into shares of new equity of the restructured
company.
41
Summary of Cash Flow for the quarter ended March 31, 2002 and March 31, 2001
Quarter Ended March 31,
-----------------------
2002 2001
---- ----
(in thousands)
Cash Used In Operating activities before Reorganization Items ($9,994) ($20,569)
Cash (Used In) Provided by Investing (494) 29,940
Cash Provided by Financing Activities:
Equity issuances 17 259
Debt payments on capital leases, vendor financing (928) (1,817)
Net proceeds from debt issuances - (2,500)
----- -------
Cash Used in Financing Activities (911) (4,058)
----- -------
Reorganization items (985) -
----- -----
Total Change in Cash $(12,384) $5,313
========= ======
Cash and Cash Equivalents $21,003 $7,833
Working Capital (384,865) 5,205
Restricted Investments included in working capital -- 20,923
Cash used in operating activities decreased quarter over quarter by
approximately $10.6 million. In 2002, we reduced our operating expenses and
working capital requirements; however, we paid approximately $1.0 million of
costs associated with our bankruptcy filing.
The $30.4 million decrease in cash provided by investing activities was
primarily attributable to:
1. the sale in 2001 of 2 million shares of our XM Radio stock for net
proceeds of approximately $33.4 million, offset by
2. a $3.0 million reduction in capital spending.
The $3.1 million decrease in cash used in financing activities was a result of:
1. a net decrease in borrowing of $2.5 million and
2. $890,000 less in the first quarter of 2002, as compared to the first
quarter of 2001, of vendor debt and capital lease repayments,
primarily as a result of our deferral until 2003 of any payments under
our vendor financing agreement.
Other
As of March 31, 2002, all of our wholly owned subsidiaries were subject to
financing agreements that limit the amount of cash dividends and loans that
could have been advanced to Motient Corporation. At March 31, 2002, all of our
subsidiaries' net assets were restricted under these agreements. These
restrictions had an impact on our ability to pay dividends. On May 1, 2002, the
effective date of our plan of reorganization, these financing agreements were
terminated as part of the implementation of our plan of reorganization.
42
Regulation
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state, and local
levels. Various legislative and regulatory proposals under consideration from
time to time by Congress and the FCC, have in the past materially affected and
may in the future materially affect the telecommunications industry in general,
and our wireless business in particular. In addition, many aspects of regulation
at the federal, state and local level currently are subject to judicial review
or are the subject of administrative or legislative proposals to modify, repeal,
or adopt new laws and administrative regulations and policies. Neither the
outcome of these proceedings nor their impact on our operations can be predicted
at this time.
The ownership and operation of our terrestrial network is subject to the rules
and regulations of the FCC, which acts under authority established by the
Communications Act of 1934 and related federal laws. Among other things, the FCC
allocates portions of the radio frequency spectrum to certain services and
grants licenses to and regulates individual entities using that spectrum. We
operate pursuant to various licenses granted by the FCC.
We believe that we have licenses for a sufficient number of channels to meet our
current capacity needs on the terrestrial network. To the extent that additional
capacity is required, we may participate in other upcoming auctions or acquire
channels from other licensees. As part of its new licensing regime, the FCC
permits wide-area geographic licensees, with prior FCC approval, to assign a
portion of their spectrum or a portion of their geographic service area, or a
combination of the two, to another entity. While this authority may increase our
flexibility to acquire additional base stations, the practical utility of these
options is uncertain at this time.
We are subject to the Communications Assistance for Law Enforcement Act, or
CALEA. Under CALEA, we must ensure that law enforcement agencies can intercept
certain communications transmitted over its networks. The deadline for complying
with the CALEA requirements and any rules subsequently promulgated was June 30,
2002. We have pending with the FCC a petition for an extension of the deadline
with respect to certain of its equipment, facilities, and services and we have
been working with law enforcement to arrive at an agreement on a further
extension of this deadline and on an extension of the deadline for other of our
equipment, facilities, and services. It is possible that we may not be able to
comply with all of CALEA's requirements or do so in a timely manner. Where
compliance with any requirement is deemed by the FCC to be not "reasonably
achievable," we may be exempted from such requirement. Should we not be exempted
from complying, of if federal funds are not available to us to assist in the
funding of any required changes, the requirement to comply with CALEA could have
a material adverse effect on the conduct of our business.
Motient is subject to the requirements of the FCC's universal service fund,
which supports the provision of affordable telecommunications to high-cost
areas, and the provision of advanced telecommunications services to schools,
libraries, and rural health care providers. Currently excluded from a carrier's
universal service contribution base are end-user revenues derived from the sale
of information and other non-telecommunications services and wholesale revenues
derived from the sale of telecommunications. All of the terrestrial network
revenue falls within the excluded categories, thereby eliminating Motient's
universal service assessments. Current rules also do not require that Motient
impute to its contribution base retail revenues derived when it uses its own
transmission facilities to provide a service that includes both information
service and telecommunications components. There can be no assurances that the
FCC will retain the exclusions described herein or its current policy regarding
43
the scope of a carrier's contribution base. Motient may also be required to
contribute to state universal service programs. The requirement to make these
state universal service payments, the amount of which in some cases may be
subject to change and is not yet determined, may have a material adverse impact
on the conduct of Motient's business.
In November 2001, Nextel proposed, in a "white paper" to the FCC, that certain
of its wireless spectrum in the 700 MHz band, lower 800 MHz band, and 900 MHz
band be exchanged for spectrum in the upper 800 MHz band and in the 2.1 GHz
band. Nextel stated that it was making this proposal to address existing
inadvertent interference problems for public safety communications systems
caused by the existing spectrum allocation. Nextel's proposal addresses this
problem by creating blocks of contiguous spectrum to be shared by public safety
agencies. The Nextel proposal, as submitted to the FCC, would require either (i)
that we continue to operate using our existing lower 800 MHz band spectrum on a
secondary, non-interfering basis with the public safety agencies who would be
relocated in the same spectrum, or (ii) that we relocate, at our own expense, to
other spectrum in the 700 MHz or 900 MHz bands. We believe it is highly unlikely
that we could continue to operate in the lower 800 MHz bands on a secondary,
non-interfering basis. If we are required to relocate to spectrum in the 700 MHz
or 900 MHz bands, we would incur substantial operational and financial costs,
including costs relating to: manufacturing replacement infrastructure and user
hardware to operate on our network in the 700 MHz or 900 MHz bands, disruptions
to existing customers as a result of the relocation to other spectrum bands,
possible diminished data speed, and coverage gaps. There are also potential
problems with the 700 MHz and 900 MHz bands that might make it difficult, if not
impossible, for us to duplicate our existing operations in the 800 MHz band.
On March 14, 2002, the FCC adopted a notice of proposed rulemaking exploring
options and alternatives for improving the spectrum environment for public
safety operations in the 800 MHz band. Motient does not believe its operations
will be impacted until the FCC adopts final rules in that proceeding and it
cannot predict what actions the FCC will take.
Derivatives
In September 1998, the Financial Accounting Standards Board, or FASB, issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which requires the recognition of all derivatives as either assets
or liabilities measured at fair value, with changes in value reflected as
current period income (loss). The effective date of SFAS No. 133, as amended by
SFAS 138, is for fiscal years beginning after September 15, 2000. We adopted
SFAS No. 133 as of January 1, 2001, resulting in no material impact upon
adoption.
In April and July 2001, the Company sold notes to Rare Medium totaling $50
million. The notes were collateralized by up to 5 million of the Company's XM
Radio shares held at that time, and until maturity, which was extended until
October 12, 2001, Rare Medium had the option to exchange the notes for a number
of XM Radio shares equivalent to the principal of the note plus any accrued
interest thereon. The Company determined the embedded call options in the notes,
which permitted Rare Medium to convert the borrowings into shares of XM Radio,
to be derivatives which were accounted for in accordance with SFAS No. 133 and
accordingly recorded a gain in the amount of $1.5 million in the third quarter
of 2001 related to the Rare Medium note call options. On October 12, 2001, the
embedded call options in the Rare Medium notes expired unexercised. The Rare
Medium note was cancelled and replaced by a new Rare Medium note in the amount
of $19 million as part of the Company's reorganization.
44
Critical Accounting Policies and Significant Estimates
Below are our accounting policies which are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates as they require assumptions that are inherently uncertain.
Inventory
Inventories, which consist primarily of communication devices and accessories,
such as power supplies and documentation kits, are stated at the lower of cost
or market. Cost is determined using the weighted average cost method. We
periodically assess the market value of our inventory, based on sales trends and
forecasts and technological changes and record a charge to current period income
when such factors indicate that a reduction to net realizable value is
appropriate. We consider both inventory on hand and inventory which we have
committed to purchase.
Revenue Recognition
We generate revenue principally through equipment sales and airtime service
agreements, and consulting services. In 2000, we adopted Staff Accounting
Bulletin No. 101, "Revenue Recognition", issued by the SEC. SAB 101 provides
guidance on the recognition, presentation and disclosure of revenue in financial
statements. In certain circumstances, SAB 101 requires us to defer the
recognition of revenue and costs related to equipment sold as part of a service
agreement. Revenue is recognized as follows:
Service revenue: Revenues from our wireless services are recognized when the
services are performed, evidence of an arrangement exits, the fee is fixed and
determinable and collectibility is probable. Service discounts and incentives
are recorded as a reduction of revenue when granted, or ratably over a contract
period.
To date, the majority of our business has been transacted with
telecommunications, field services, natural resources, professional service and
transportation companies located throughout the United States. We grant credit
based on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. We establish a valuation allowance for
doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. We assess the adequacy of these
reserves quarterly, evaluating factors such as the length of time individual
receivables are past due, historical collection experience, the economic
environment, and changes in credit worthiness of our customers. We believe that
our established valuation allowance was adequate as of March 31, 2002 and 2001.
If circumstances related to specific customers change or economic conditions
worsen such that our past collection experience and assessments of the economic
environment are no longer relevant, our estimate of the recoverability of our
trade receivables could be further reduced.
Equipment and service sales: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
45
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 our estimate of customer life of 2 years. Equipment costs are
deferred only to the extent of deferred revenue.
Long-lived assets:
In January 2002, we adopted SFAS No. 141, "Business Combinations" and SFAS No.
142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method of accounting, and broadens the criteria for recording
intangible assets separate from goodwill. SFAS No. 142 requires that purchased
goodwill and indefinite-lived intangibles no longer be amortized but instead be
reviewed for impairment and written down in the periods in which the carrying
amount is more than fair value. We had approximately $5.0 million of recorded
goodwill as of January 1, 2002. However, as part of our adoption of fresh-start
accounting on May 1 2002, our recorded goodwill was reduced to zero.
Motient accounts for its FCC licenses as finite-lived intangibles and amortizes
them over a 20-year estimated life. Motient is monitoring a pending FCC
rulemaking proposal that may affect its 800 MHz spectrum, and Motient may change
its accounting policy for FCC licenses in the future as new information is
available.
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred and to capitalize
the asset retirement cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset and the liability is accreted as an operating expense to
the estimated settlement obligation amount. Upon settlement of the liability, an
entity either settles the obligation for its recorded amount or incurs a gain or
loss. We adopted SFAS No. 143 as of its "fresh-start" accounting date of May 1,
2002. This adoption had no material impact on our consolidated financial
statements.
On January 1, 2002, we also adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
Of". The statement requires that all long-lived assets be measured at the lower
of carrying amount or fair value less cost to sell, whether reported in
continuing operations or in discontinued operations. Therefore, discontinued
operations will no longer be measured on a net realizable value basis and will
not include amounts for future operating losses. The statement also broadens the
reporting requirements for discontinued operations to include disposal
transactions of all components of an entity (rather than segments of a
business). Components of an entity include operations and cash flows that can be
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. The adoption of
SFAS No. 144 had no material impact on the Company's consolidated financial
statements.
Accounting Standards
46
On August 16, 2001 the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. Specifically, this standard
requires entities to record the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The entity is
required to capitalize the cost by increasing the carrying amount of the related
long-lived asset. The capitalized cost is then depreciated over the useful life
of the related asset. Upon settlement of the liability, an entity either settles
the obligation for its recorded amount or incurs a gain or loss. The standard is
effective for fiscal years beginning after June 15, 2002. We do not currently
have any assets held for retirement, and, accordingly, do not believe that the
adoption of SFAS No. 143 will be material to our financial statements.
In February, 2002, EITF No. 01-09, "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)", was
issued to provide guidance on whether consideration paid by a vendor to a
reseller should be recorded as expenses or against revenues. We record such
consideration as operating expenses. We adopted the provisions of this consensus
on January 1, 2002 and it had no material impact on our consolidated financial
statements.
47
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to the impact of interest rate changes related to our credit
facilities. We manage interest rate risk through the use of fixed rate debt.
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
As of January 10, 2002, as a result of our Chapter 11 bankruptcy filing, our
senior notes ceased to be interest bearing. Prior to that, these notes bore
interest at a fixed rate of 12.25%, and we ran the risk that market rates would
decline and the required payments would have exceeded those based on current
market rates.
Effective May 1, 2002, Motient's senior notes were eliminated in exchange for
new common stock of Motient. All of Motient's remaining debt obligations are
fixed rate obligations. We do not believe that we have any material cash flow
exposure due to general interest rate changes on these debt obligations.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15 and
15d-15 under the Securities Exchange Act of 1934, as amended) that are designed
to ensure that information required to be disclosed in our filings and reports
under the Exchange Act is recorded, processed, summarized and reported within
the periods specified in the rules and forms of the SEC. Such information is
accumulated and communicated to our management, including our principal
executive officer (currently our executive vice president, chief financial
officer and treasurer) and chief financial officer (or persons performing such
functions), as appropriate, to allow timely decisions regarding required
disclosure. Our management, including the principal executive officer (currently
our executive vice president, chief financial officer and treasurer) and the
chief financial officer (or persons performing such functions), recognizes that
any set of disclosure controls and procedures, no matter how well designed and
operated, can provide only reasonable assurance of achieving the desired control
objectives.
Within 90 days prior to the filing date of this amendment to the quarterly
report on Form 10-Q/A, we carried out an evaluation, under the supervision and
with the participation of our management, including our principal executive
officer (currently our executive vice president, chief financial officer and
treasurer), chief financial officer and chief accounting officer (or persons
performing such functions), of the effectiveness of our disclosure controls and
procedures. Based on this evaluation, we concluded that our disclosure controls
and procedures required improvement.
As a result of our evaluation, we have taken a number of steps to improve our
disclosure controls and procedures.
o First, we have established a disclosure committee comprised of senior
management and other officers and employees responsible for, or
involved in, various aspects of our financial and non-financial
48
reporting and disclosure functions. Although we had not previously
established a formal disclosure committee, the functions performed by
such committee were formerly carried out by senior management and
other personnel who now comprise the disclosure committee.
o Second, we have instituted regular bi-quarterly meetings to review
each department's significant activities and respective disclosure
controls and procedures.
o Third, department managers have to document their own disclosure
controls and procedures.
o Fourth, department managers have been tasked with tracking relevant
non-financial operating metrics such as network statistics, headcount
and other pertinent operating information. Quarterly reports
summarizing this information will be prepared and presented to the
disclosure committee and the principal executive officer (currently
our executive vice president, chief financial officer and treasurer),
chief financial officer and corporate controller.
o Fifth, department heads prepare weekly activities reviews, which are
shared with the members of the disclosure committee as well as the
principal executive officer (currently our executive vice president,
chief financial officer and treasurer), chief financial officer and
corporate controller. These weekly reviews and the bi-quarterly
disclosure committee meetings and associated reports are intended to
help inform senior management of material developments that affect our
business, thereby facilitating consideration of prompt and accurate
disclosure.
As a result of these improvements, management believes that its disclosure
controls and procedures, though not as mature or as formal as management intends
them ultimately to be, are adequate and effective under the circumstances, and
that there are no material inaccuracies or omissions in this amendment to the
quarterly report on Form 10-Q/A. Any issues that arise out of the disclosure
controls and procedures described would ultimately be reviewed by Motient's
audit committee.
In addition to the initiatives outlined above, we have taken the following steps
to further strengthen our disclosure controls and procedures:
o We conduct and document quarterly reviews of the effectiveness of our
disclosure controls and procedures;
o We circulate drafts of our public filings and reports for review to
key members of the senior management team representing each functional
area;
o In conjunction with the preparation of each quarterly and annual
report to be filed with the SEC, each senior vice president and
department head is required to complete and execute an internal
questionnaire and disclosure certification designed to ensure that all
material disclosures are reported.
Internal Controls
During the course of the fiscal 2002 year-end closing process and subsequent
audit of the financial statements for the eight month period ended December 31,
2002, our management and our then-current independent auditors,
PricewaterhouseCoopers, identified several matters related to internal controls
that needed to be addressed. Several of these matters were classified by the
auditors as "reportable conditions" in accordance with the standards of the
49
American Institute of Certified Public Accountants, or AICPA. Reportable
conditions involve matters coming to management's or our auditor's attention
relating to significant deficiencies in the design or operation of internal
control that, in the judgment management and the auditors, could adversely
affect our ability to record, process, summarize and report financial data in
the financial statements. Our chief technology officer, chief financial officer,
chief accounting officer (or persons performing such functions) and audit
committee are aware of these conditions and of our responses thereto, and
consider them to be significant deficiencies as defined in the applicable
literature embodying generally accepted auditing standards, or GAAS. On March 2,
2004, we dismissed PricewaterhouseCoopers as our independent auditors.
PricewaterhouseCoopers has not reported on Motient's consolidated financial
statements for any fiscal period. On March 2, 2004, we engaged Ehrenkrantz
Sterling & Co. LLC as our independent auditors to replace PricewaterhouseCoopers
and audit our consolidated financial statements for the period May 1, 2002 to
December 31, 2002.
The following factors contributed to the significant deficiencies identified by
PricewaterhouseCoopers:
o Rapid shifts in strategy following our emergence from bankruptcy on
May 1, 2002, particularly with respect to a sharply increased focus on
cost reduction measures;
o Significant reductions in workforce following our emergence from
bankruptcy and over the course of 2002 and 2003, in particular layoffs
of accounting personnel, which significantly reduced the number and
experience level of our accounting staff;
o Turnover at the chief financial officer position during the 2002 audit
period and subsequently in March of 2003; and
o The closure in mid-2003 of our Reston, VA facility, which required a
transition of a large number of general and administrative personnel
to our Lincolnshire, IL facility.
Set forth below are the significant deficiencies identified by management and
PricewaterhouseCoopers, together with a discussion of our corrective actions
with respect to such deficiencies through March 15, 2004.
PricewaterhouseCoopers recommended several adjustments to the financial
statements for the periods ended April 30, June 30, September 30 and December
31, 2002. During the 2002 audit period, PricewaterhouseCoopers noted several
circumstances where our internal controls were not operating effectively.
Although these circumstances continued in 2003, management began to address
these issues formally in March 2003.
Specifically, PricewaterhouseCoopers noted that:
o Timely reconciliation of certain accounts between the general ledger
and subsidiary ledger, in particular accounts receivable and fixed
assets, was not performed;
o Review of accounts and adjustments by supervisory personnel on monthly
cut-off dates, in particular fixed assets clearing accounts, accounts
receivable reserve and inventory reserve calculations, was not
performed;
50
o Cut-off of accounts at balance sheet dates related to accounts
payables, accrued expenses and inventories was not achieved; and
o No formal policy existed to analyze impairment of long-lived assets on
a recurring basis.
PricewaterhouseCoopers recommended that management institute a thorough
close-out process, including a detailed review of the financial statements,
comparing budget to actual and current period to prior period to determine any
unusual items. They also recommended that we prepare an accounting policy and
procedures manual for all significant transactions to include procedures for
revenue recognition, inventory allowances, accounts receivable allowance, and
accruals, among other policies.
In response to these comments, we have taken the following actions:
o In June 2003, we initiated a process of revising, updating and
improving our month-end closing process and created a checklist
containing appropriate closing procedures.
o We have increased our efforts to perform monthly account
reconciliations on all balance sheet accounts in a timely fashion.
o Beginning in July 2003, on a monthly basis the corporate controller
began reviewing balance sheet account reconciliations.
o We have implemented and distributed a written credit and collections
policy, which includes reserve calculations and write-off
requirements.
o All accounts receivable sub-ledgers are reconciled to the general
ledger monthly, and on a monthly basis inventory reports are produced,
sub-ledgers are reconciled to the general ledger and the reserve
account is analyzed.
o Since September 2003, the fixed assets clearing account is no longer
being used, and all asset additions are reviewed by the corporate
controller to determine proper capitalization and balance sheet
classification.
o As of July 2003, all monthly income statement accounts are analyzed by
the corporate controller prior to release of the financial statements.
o We are preparing an accounting policy and procedures manual to include
procedures for all significant policies, business practices, and
routine and non-routine procedures performed by each functional area.
Our goal is to finalize this manual by April 30, 2004.
o Over the course of the third quarter of 2003, we updated our
procedures for the preparation of a monthly financial reporting
package to include management's discussion and analysis of results of
operations, financial statements, cash and investments reporting and
month-to-month variances. Under these procedures, departmental results
of operations are also prepared and provided to appropriate department
managers on a monthly basis.
51
In addition to the above, since April 2003 we have reevaluated our staffing
levels, reorganized the finance and accounting organization and replaced ten
accounting personnel with more experienced accounting personnel, including,
among others, a new chief financial officer, chief accounting officer and
corporate controller, a manager of revenue assurance and a manager of financial
services.
While management has moved expeditiously and committed considerable resources to
address the identified internal control deficiencies, management has not been
able to fully execute all of the salutary procedures and actions it deems
desirable. It will take some additional time to realize all of the benefits of
management's initiatives, and we are committed to undertaking ongoing periodic
reviews of our internal controls to assess the effectiveness of such controls.
We believe the effectiveness of our internal controls is improving and we
further believe that the financial statements included in this amendment to
quarterly report on Form 10-Q/A are fairly stated in all material respects.
However, new deficiencies may be identified in the future. Management expects to
continue its efforts to improve internal controls with each passing quarter.
52
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Motient filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code on January 10, 2002. The Bankruptcy Court confirmed Motient's
plan of reorganization on April 26, 2002, and Motient emerged from bankruptcy on
May 1, 2002. For further details regarding this proceeding, please see
"Motient's Chapter 11 Filing and Plan of Reorganization" under Note 4 (Liquidity
and Financing) of Notes to Consolidated Financial Statements.
Motient is aware of two lawsuits challenging the previously proposed
merger of Motient and Rare Medium Group, Inc. that was terminated. For further
details regarding these lawsuits, please see "Legal" under Note 5 (Legal and
Regulatory Matters) of Notes to Consolidated Condensed Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
The Exhibit Index filed herewith is incorporated herein by reference.
(b) Current Reports on Form 8-K.
On January 10, 2002, the Company filed a Current Report on Form 8-K,
in response to Item 3, reporting that the Company and three of its
subsidiaries had filed voluntary petitions for relief under Chapter 11
of the U.S. Bankruptcy Code in the United States Bankruptcy Court for
the Eastern District of Virginia.
On March 4, 2002, the Company filed a Current Report on Form 8-K, in
response to Item 5, reporting that the Company had filed with the
Bankruptcy Court an Amended Joint Plan of Reorganization and a
Disclosure Statement describing the Plan of Reorganization. The
Company also reported that the Bankruptcy Court approved the
Disclosure Statement on March 1, 2002, and that the Company expected
to begin mailing the documents to parties in interest on or about
March 6, 2002.
On May 2, 2002, the Company filed a Current Report on Form 8-K, in
response to Items 3 and 7, reporting that the Company's Plan of
Reorganization under Chapter 11 of the U.S. Bankruptcy Code had been
confirmed by the Bankruptcy Court.
53
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this amendment to quarterly report to be signed on
its behalf by the undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
March 19, 2004 /s/ Christopher W. Downie
---------------------------------------------------
Christopher W. Downie
Executive Vice President,Chief Financial Officer &
Treasurer
(principal financial and accounting
officer and duly authorized officer to sign
on behalf of the registrant)
54
CERTIFICATION
The undersigned, in his capacity as the Executive Vice President, Chief
Financial Officer and Treasurer of Motient Corporation, and being the principal
executive officer and the principal accounting officer, as the case may be,
provides the following certifications required by 18 U.S.C. Section 1350, as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Executive Vice President, Chief Financial Officer and Treasurer
I, Christopher W. Downie, hereby certify that:
1. I have reviewed this amendment to the quarterly report on Form
10-Q/A of Motient Corporation, a Delaware corporation (the "Company");
2. Based on my knowledge, this amendment to the quarterly report does
not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under
which such statements were made, not misleading with respect to the period
covered by this amendment to the quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this amendment to the quarterly report, fairly present
in all material respects the financial condition, results of operations and cash
flows of the Company as of, and for, the periods presented in this amendment to
the quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
Company, including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the period in
which this amendment to the quarterly report is being prepared;
(b) Evaluated the effectiveness of the Company's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of a date
within 90 days prior to the filing date of this amendment of the
quarterly report; and
(d) Disclosed in this amendment to the quarterly report any change in
the Company's internal control over financial reporting that occurred
during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting; and
5. The Company's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial reporting, to
the Company's auditors and the audit committee of the Company's board of
directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the Company's ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the Company's internal
control over financial reporting.
/s/ Christopher W. Downie
-----------------------------
Christopher W. Downie
Executive Vice President,
Chief Financial Officer and
Treasurer
March 19, 2004
55
EXHIBIT INDEX
Number Description
2.1 - Debtors' Amended Joint Plan of Reorganization Under Chapter 11 of the Bankruptcy Code, dated February 27, 2002
(Incorporated by reference to Exhibit 99.2 to the Registrant's Current Report on Form 8-K dated March 4, 2002).
3.1 - Restated Certificate of Incorporation of the Company (as restated effective May 1, 2002) (Incorporated by
reference to Exhibit 3.1 of the Company's Amendment No. 2 to Registration Statement on Form 8-A, filed May 1,
2002).
3.2 - Amended and Restated Bylaws of the Company (as amended and restated effective May 1, 2002) (Incorporated by
reference to Exhibit 3.2 of the Company's Amendment No. 2 to Registration Statement on Form 8-A, filed May 1,
2002).
4.1 - Specimen of Common Stock Certificate (Incorporated by reference to Exhibit 4.1 of the Company's Amendment No. 2
to Registration Statement on Form 8-A, filed May 1, 2002).
4.2 - Warrant Agreement between the Registrant and Equiserve Trust
Company, N.A., as warrant agent, dated May 1, 2002
(Incorporated by reference to Exhibit 4.1 of the Company's
Registration Statement on Form 8-A, filed May 1, 2002).
4.2a - Specimen of Warrant Certificate of the Company (Incorporated by reference to Exhibit 4.2 of the Company's
Registration Statement on Form 8-A, filed May 1, 2002).
10.1 - Registration Rights Agreement between the Company and Highland Capital Management, L.P., and Morgan Stanley
Investment Management, dated May 1, 2002 (Incorporated by reference to Exhibit 10.1 of the Company's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2002).
10.2* - Form of Change of Control Agreement for Officers of the Company (Incorporated by reference to Exhibit 10.2 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002).
10.3 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of $19.0 million issued to Rare Medium Group, Inc.,
dated May 1, 2002 (Incorporated by reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).
10.4 - Senior Indebtedness Note of MVH Holdings Inc., in the amount of $750,000 issued to Credit Suisse First Boston,
dated May 1, 2002 (Incorporated by reference to Exhibit 10.4 of the Company's Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002).
10.5 - Settlement Agreement by and among the Registrant and Rare
Medium Group, Inc., dated March 28, 2002 (Incorporated by
reference to Exhibit 10.5 of the Company's Quarterly Report on
Form 10-Q for the quarter ended March 31, 2002).
31.1 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive Vice President, Chief Financial Officer and
Treasurer (principal executive officer) (incorporated by reference to the signature page of this amendment to
Quarterly Report on Form 10-Q-A).
31.2 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the
Executive Vice President, Chief Financial Officer and
Treasurer (incorporated by reference to the signature page of
this amendment to Quarterly Report on Form 10-Q-A).
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 of the Executive Vice President, Chief Financial Officer and Treasurer (principal executive
officer) (incorporated by reference to Exhibit 99.1 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 Executive Vice President, Chief Financial Officer and Treasurer (incorporated by reference to
Exhibit 99.1 filed herewith).
91.1 - Written Statement of the Executive Vice President, Chief Financial Officer and Treasurer (principal executive
officer) Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)
99.2 - Written Statement of the Executive Vice President, Chief Financial Officer and Treasurer Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350) (incorporated by reference to Exhibit 99.1 filed
herewith)
- ------------------------------------
*Management contract or compensatory plan or arrangement.
56