SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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)
---------------
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]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No[X]
Number of shares of common stock outstanding at March 10, 2004: 25,245,777
1
Introductory Note
This quarterly report on Form 10-Q relates to the quarter ended September 30,
2002. We did not file a report on Form 10-Q for this period previously because
we have only recently completed our financial statements for this period.
As previously disclosed in our current reports on Form 8-K dated August 19,
2002, November 14, 2002, March 14, 2003, August 6, 2003, November 4, 2003 and
February 12, 2004, we were not able to complete our financial statements for the
year ended December 31, 2002 and for the quarters ended June 30, 2002 and
September 30, 2002 until we resolved the appropriate accounting treatment with
respect to certain transactions that occurred in 2000 and 2001. We initiated a
review of the appropriate accounting treatment for these transactions following
the appointment of PricewaterhouseCoopers LLP, or PricewaterhouseCoopers, as our
independent auditors in July 2002. The transactions in question involved the
formation of and certain transactions with Mobile Satellite Ventures LP, or MSV,
in 2000 and 2001 and the sale of certain of our transportation assets to Aether
Systems, Inc. in 2000.
In November 2002, we initiated a process to seek the concurrence of the staff of
the Securities and Exchange Commission with respect to our conclusions of the
appropriate accounting for these matters. 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.
On March 2, 2004, we dismissed PricewaterhouseCoopers as our independent
auditors effective immediately. The audit committee of Motient's board of
directors approved the dismissal of PricewaterhouseCoopers. As noted above,
PricewaterhouseCoopers was previously appointed to audit Motient's consolidated
financial statements for the period May 1, 2002 to December 31, 2002, and, by
its terms, such engagement was to terminate upon the completion of services
related to such audit. PricewaterhouseCoopers has not reported on Motient's
consolidated financial statements for such period or for any other fiscal
period. The audit committee appointed Ehrenkrantz Sterling & Co. LLC to replace
PricewaterhouseCoopers to audit Motient's consolidated financial statements for
the period ending May 1, 2002 to December 31, 2002. For further details, please
see the amendment to our current report on Form 8-K/A, filed with the SEC on
March 9, 2004.
We recently completed our financial statements as of and for the three-month and
nine-month periods ended September 30, 2002, which are included in this report.
These financial statements give effect to the accounting treatment with respect
to the MSV and Aether transactions that was agreed to be appropriate as a result
of the above-described process. In addition, as a result of the 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 (See Note 2 of notes to consolidated financial statements). The 2001
comparative financial statements provided herein have been restated and have
been reviewed by Ehrenkrantz Sterling & Co. LLC (see Note 6 of notes to
consolidated financial statements, "Subsequent Events").
2
Concurrently with the filing of this report, we are also filing our quarterly
report on Form 10-Q for the quarter ended June 30, 2002, our annual report on
Form 10-K for the year ended December 31, 2002, and an amendment to our
quarterly report on Form 10-Q/A for the quarter ended March 31, 2002. Such
reports include financial statements that give effect to the accounting
treatment with respect to the MSV, Aether transactions and certain additional
financial statement adjustments that was agreed to be appropriate as a result of
the above-described process. The 2001 comparative financial statements provided
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
September 30, 2002. Information regarding such matters is contained in this
report in Note 6 ("Subsequent Events") of notes to consolidated financial
statements, as well as in our other reports that are being filed concurrently
with this report. We urge you to read our quarterly reports on Form 10-Q for the
quarter ended June 30, 2002, the Form 10-Q/A for the quarter ended March 31,
2002 and our annual report on Form 10-K for the year ended December 31, 2002, as
well as our 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. In
the consolidated financial statements provided herein, all results for periods
prior to May 1, 2002 are referred to as those of the "Predecessor Company" and
all results for periods including and subsequent to May 1, 2002 are referred to
as those of the "Successor Company". Due to the effects of the "fresh start"
accounting, results for the Predecessor Company and the Successor Company are
not comparable (See Note 2, "Significant Accounting Policies," of notes to
consolidated financial statements).
References in this 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
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
PAGE
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Five
Months Ended September 30, 2002 5 (Successor Company), the Four
Months Ended April 30, 2002 (Predecessor Company) and the Three
and Nine Months Ended September 30, 2001 (Predecessor Company) 5
Consolidated Balance Sheets as of September 30, 2002 (Successor Company) and December 31, 6
2001 (Predecessor Company)
Condensed Consolidated Statements of Cash Flows for the Five Months Ended September 30, 7
2002 (Successor Company), the Four Months Ended April 30, 2002 (Predecessor Company), and
the Nine Months Ended September 30, 2001 (Predecessor Company)
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 46
Item 3. Quantitative and Qualitative Disclosures about Market Risk 69
Item 4. Controls and Procedures 69
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 74
Item 2. Changes in Securities and Use of Proceeds 74
Item 3. Defaults Upon Senior Securities 74
Item 6. Exhibits and Reports on Form 8-K 75
4
PART I- FINANCIAL INFORMATION
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
(Restated) (Restated)
Successor Successor Predecessor Predecessor Predecessor
Company Company Company Company Company
Three Months Five Months Four Months Three Months Nine Months
Ended Ended Ended Ended Ended
September 30, September 30, April 30, September 30, September 30,
2002 2002 2002 2001 2001
---- ---- ---- ---- ----
(Unaudited) (Unaudited) (Audited) (Unaudited) (Unaudited)
REVENUES
Services and related revenue $12,953 $21,539 $16,809 $16,760 $52,423
Sales of equipment 344 477 5,564 6,787 16,329
--- --- ----- ----- ------
Total revenues 13,297 22,016 22,373 23,547 68,752
------ ------ ------ ------ ------
COSTS AND EXPENSES
Cost of services and operations (exclusive of 14,233 24,359 21,909 17,957 55,719
depreciation and amortization below)
Cost of equipment sold (exclusive of 438 1,258 5,980 9,079 24,713
depreciation and amortization below)
Sales and advertising 1,754 3,163 4,287 5,526 18,987
General and administrative 3,027 6,360 4,130 4,206 16,018
Restructuring Charge 25 25 584 4,739 4,739
Depreciation and amortization 5,949 10,057 6,913 8,835 26,220
----- ------ ----- ----- ------
Operating loss (12,129) (23,206) (21,430) (26,795) (77,644)
-------- -------- -------- -------- --------
Interest expense, net (575) (983) (1,850) (16,543) (46,971)
Interest and other income, net -- 15 1,270 -- 998
Gain (loss) on disposal of assets (1,193) (1,193) (591) -- (407)
Gain (loss) on sale of transportation assets -- -- 372 (67) (592)
Rare Medium merger costs -- -- -- (4,054) (4,054)
Gain on Rare Medium Note call option -- -- -- 15,312 1,512
Loss on extinguishment of debt -- -- -- (653) (2,578)
Equity in loss of XM Radio and Mobile Satellite
Ventures (2,747) (4,287) (1,909) (16,836) (40,163)
------- ------- ------- -------- --------
(Loss) income before reorganization items (16,644) (29,654) (24,138) (49,636) (169,899)
-------- -------- -------- -------- ---------
Reorganization items:
Costs associated with debt restructuring -- -- (22,324) -- --
Gain on extinguishment of debt -- -- 183,725 -- --
Gain on fair market adjustment of assets -- -- 94,715 -- --
------
(Loss) income before income taxes ($16,644) ($29,654) $231,978 ($49,636) ($169,899)
--------- --------- -------- --------- ----------
Income tax provision -- -- -- -- --
Net (loss) income ($16,644) ($29,654) $231,978 ($49,636) ($169,899)
========= ========= ======== ========= ==========
Basic and Diluted (Loss) Income Per Share of
Common Stock:
Net (Loss) Income, basic and diluted ($0.66) ($1.18) $3.98 ($0.99) ($3.39)
======= ======= ===== ======= =======
Weighted-Average Common Shares Outstanding - basic 25,097 25,097 58,251 50,175 50,175
and diluted ======== ======== ======== ========= ======
The accompanying notes are an integral part of these consolidated financial
statements.
5
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
(Restated)
Successor Predecessor
Company Company
September 30, 2002 December 31, 2001
ASSETS (Unaudited) (audited)
CURRENT ASSETS:
Cash and cash equivalents $3,565 $33,387
Short-term investments 50 --
Accounts receivable-trade, net of allowance for doubtful accounts of
$1,869 at September 30, 2002 and $964 at December 31, 2001 10,884 11,491
Inventory 1,238 6,027
Due from Mobile Satellite Ventures, net 326 521
Deferred equipment costs 1,859 13,662
Other current assets 8,274 16,566
----- ------
Total current assets 26,196 81,654
------ ------
PROPERTY AND EQUIPMENT, net 50,371 64,001
FCC LICENSES AND OTHER INTANGIBLES, net 97,110 46,650
GOODWILL -- 4,981
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 50,527 30,126
DEFERRED CHARGES AND OTHER ASSETS 1,377 13,053
----- ------
Total assets $225,581 $240,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses $14,475 50,274
Deferred revenue and other current liabilities 4,995 25,716
Senior Notes, net of discount -- 329,371
Rare Medium note payable -- 26,910
Vendor financing commitment, current 655 --
Obligations under capital leases, current 4,561 8,691
----- -----
Total current liabilities 24,686 440,962
------ -------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion 1,780 257
Vendor financing commitment , net of current portion 2,661 3,316
Notes payable, including accrued interest thereon 20,495 --
Other long-term liabilities 4,471 27,079
----- ------
Total long-term liabilities 29,407 30,652
------ ------
Total liabilities 54,093 471,614
------ -------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred Stock; par value $0.01; authorized 5,000,000 shares at
September 30, 2002; authorized 200,000 shares at December 31, 2001;
no shares issued or outstanding at September 30, 2002 or
December 31, 2001 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares authorized
and 25,097,256 shares issued and outstanding at September 30,
2002; 150,000,000 shares authorized and 55,027,000 shares issued
and outstanding at December 31, 2001 251 557
Additional paid-in capital 197,814 988,355
Deferred stock compensation -- (433)
Common stock purchase warrants 3,077 93,730
Accumulated deficit (29,654) (1,313,358)
-------- -----------
STOCKHOLDERS' EQUITY (DEFICIT) 171,488 (231,149)
------- ---------
Total liabilities and stockholders' equity (deficit) $225,581 $240,465
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
6
Motient Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Restated)
Predecessor
Successor Predecessor Company
Company Company Nine Months
Five Months Ended Four Months Ended
September 30, Ended April 30, September 30,
2002 2002 2001
---- ---- ----
(Unaudited) (audited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities $(11,874) $(14,546) $(71,901)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term and restricted investments (50) -- 494
Proceeds from sales of assets 616 -- --
Proceeds from sales of transportation assets -- 372 --
Proceeds from the sale of XM Radio stock -- -- 33,539
Receipt of Senior Note interest from escrow -- -- 20,503
Investment in MSV (957) -- --
Additions to property and equipment (299) (494) (7,624)
----- ---- -------
Net cash (used in) provided by investing (690) (122) 46,912
----- ----- ------
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities -- 17 402
Principal payments under capital leases (1,334) (1,273) (5,840)
Principal payments under Vendor Financing -- -- (3,197)
Repayment of Bank Financing -- -- (20,750)
Proceeds from Bank Financing -- -- 6,000
Proceeds from Rare Medium Note -- -- 50,000
Debt issuance costs -- -- (1,062)
------- ------- -------
Net cash (used in) provided by financing activities (1,334) (1,256) 25,553
------- ------- ------
Net (decrease) increase in cash and cash equivalents (13,898) (15,924) 564
CASH AND CASH EQUIVALENTS, beginning of period 17,463 33,387 2,520
------ -------- -----
CASH AND CASH EQUIVALENTS, end of period $3,565 $17,463 $3,084
====== ======= ======
The accompanying notes are an integral part of these consolidated financial statements.
7
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2002
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way mobile communications services principally to business-to-business
customers and enterprises. Motient serves a variety of markets including mobile
professionals, telemetry, transportation and field service. Motient provides its
eLinksm brand two-way wireless email services to customers accessing email
through corporate servers, Internet Service Providers, Mail Service Provider
accounts, and paging network service providers. Motient also offers BlackBerry
TM by Motient, a 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. The Company considers the two-way mobile communications
service described in this paragraph to be its core wireless business.
Motient presently has six wholly-owned subsidiaries. Motient had a 25.5%
interest (on a fully-diluted basis) in MSV as of September 30, 2002. For further
details regarding Motient's interest in MSV, please see Note 6 ("Subsequent
Events -- Developments Relating to MSV"). Motient Communications, Inc. ("Motient
Communications") owns the assets comprising Motient's core wireless business,
except for Motient's Federal Communication Commission ("FCC") licenses, which
are held in a separate subsidiary, Motient License Inc. ("Motient License").
Motient License was formed on March 16, 2004, as part of Motient's amendment of
its 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 the Company's vendor financing facility with
Motorola. For further details regarding the formation of Motient License, please
see "Subsequent Events - $12.5 Million Term Credit Facility". Motient's other
four subsidiaries hold no material operating assets other than the stock of
other subsidiaries and Motient's interests in MSV. On a consolidated basis, we
refer to Motient Corporation and its six wholly-owned subsidiaries as "Motient."
Motient is devoting its efforts to expanding its core wireless business, while
also focusing on cost-cutting efforts. These efforts involve 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.
These factors also restrained Motient's ability 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.
Motient's results in recent periods, including the period covered by this
report, have also been hindered by the downturn in the economy and capital
markets. These factors contributed to the Company's decision in January 2002 to
8
file a voluntary petition for reorganization under Chapter 11 of the United
States Federal Bankruptcy Code. Motient's Plan of Reorganization was confirmed
on April 26, 2002 and became effective on May 1, 2002. See Note 2 ("Significant
Accounting Policies -- Motient's Chapter 11 Filing and Plan of Reorganization
and "Fresh-Start" Accounting") below.
For a discussion of certain significant recent developments and trends in
Motient's business after the end of the period covered by this report, please
see Note 6 ("Subsequent Events"). The 2001 financial results and the 2002
financial results for the period January 1, 2002 to April 30, 2002 are herein
referred to as "Predecessor Company" results and the financial results for the
period May 1, 2002 to September 30, 2002 included herein are referred to as
"Successor Company" results.
XM Radio
Throughout 2001, Motient disposed of its equity interest in XM Satellite Radio
Holdings Inc. ("XM Radio"), a public company, and as of November 19, 2001, did
not hold any interest in XM Radio. 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 nine months ended June 30, 2001, the
Company recorded proceeds of approximately $33.5 million from the sale in 2001
of two million shares of its XM Radio stock. For the three-months and
nine-months ended September 30, 2001, the Company recorded equity in losses of
XM Radio of $16.8 million and $40.2 million, respectively.
Mobile Satellite Ventures LP
On June 29, 2000, the Company formed a joint venture subsidiary, Mobile
Satellite Ventures LP (formerly known as Mobile Satellite Ventures LLC) ("MSV"),
in which it owned, until November 26, 2001, 80% of the membership interests, in
order to conduct research and development activities. In June 2000, the
remaining 20% interests in MSV were purchased by three investors unrelated to
Motient for an aggregate purchase price of $50 million. Of the $50 million
payment received by MSV, $6.0 million was retained by MSV to fund certain
research and development activities, $24 million was paid to Motient Services
Inc. ("Motient Services"), which owned Motient's satellite and related assets,
as a deposit on the purchase of the satellite assets, and $20 million was paid
to Motient Services for the use of the satellite and frequency under a research
and development agreement.
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 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 in the
consolidated financial statements pursuant to the equity method of accounting.
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 five-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. The Company
9
realized a gain of approximately $29.8 million on the sale of its net assets;
however, 48% of the gain, or $14.3 million, was deferred and will be recognized
over five years. Under SAB No. 51, Motient also recorded a write-up in its
investment in MSV of $12.7 million as a result of TMI's contribution of its
satellite business to MSV. Given the early-stage nature of MSV's operations,
this write-up was recorded directly to additional paid-in-capital.
As part of the November 2001 transaction, the Company had no prior basis in its
investment in MSV and had not recorded any prior equity method losses associated
with its investment in MSV. In November 2001, when the asset sale 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. When Motient agreed to take the $15 million note, it recorded
its share of the MSV losses that had not been previously recognized by Motient
($17.5 million), having the affect of completely writing off the notes
receivable in 2001. As part of Motient's restatement (see Note 2, "Significant
Accounting Policies -- Restatement of Financial Statements"), Motient has
determined that it should not have recorded any suspended losses of MSV, since
those losses would have been 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 the notes
in 2001.
MSV has also filed a separate application with the FCC with respect to MSV's
plans for a new generation satellite system utilizing ancillary terrestrial base
stations. For further information on the FCC approval process, see Note 6
("Subsequent Events").
The Company's $15 million note from MSV is subject to prepayment in certain
circumstances where MSV receives cash proceeds from equity, debt or asset sale
transactions. There can be no assurance that any such transactions will occur,
nor can there be any assurance regarding the timing of such events. Any
additional investment in MSV and any related repayment of the $15.0 million note
may not occur before Motient needs the funds from the repayment of such note. In
addition, 25% of the proceeds of any repayment of the $15.0 million note from
MSV must be allocated to prepay pro-rata both the Rare Medium and CSFB notes.
The allocation of the 25.5% of the proceeds will be made in accordance with Rare
Medium's and CSFB's relative outstanding balance at the time of prepayment. If
not repaid earlier, the $15.0 million note from MSV, including accrued interest
thereon, becomes due and payable on November 25, 2006; however, there can be no
assurance that MSV would have the ability, at that time, to pay the amounts due
under the note. 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.
In July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While the Company was not obligated to participate in
the offering, the Company's board determined that it was in the Company's best
interests to participate so that its interest in MSV would not be diluted. On
August 12, 2002, the Company funded an additional $957,000 to MSV pursuant to
this offering, and received a new convertible note in such amount. This rights
offering did not impact the Company's ownership position in MSV.
In November 2003, Motient engaged Communication Technology Advisors LLC ("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
10
preference rights on liquidation of certain classes of equity holders in MSV.
Including its note receivable from MSV ($13 million carrying value at May 1,
2002), the book value of Motient's aggregate interest in MSV as of May 1, 2002
was reduced from $67 million to $53.9 million.
As of September 30, 2002, the Company had an ownership percentage, on an
undiluted basis, of approximately 48% of the common and preferred units of MSV,
and approximately 55% of the common units. Assuming that all of MSV's
outstanding convertible notes are converted into limited partnership units of
MSV, as of September 30, 2002 Motient had a 33.3% partnership interest in MSV on
an "as converted" basis giving effect to the conversion of all outstanding
convertible notes of MSV, and 25.5% on a fully-diluted basis, assuming certain
other investors exercise their right to make additional investment in MSV as a
result of the FCC ATC application process.
For a discussion of certain recent developments regarding MSV, please see Note 6
("Subsequent Events").
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying financial statements have been prepared by the Company and are
unaudited. The results of operations for the three and five months ended
September 30, 2002, and the four months ended April 30, 2002, are not
necessarily indicative of the results to be expected for any future period or
for the full fiscal year. In the opinion of management, all adjustments
(consisting of normal recurring adjustments unless otherwise indicated)
necessary to present fairly the financial position, results of operations and
cash flows at September 30, 2002, and for all periods presented have been made.
Footnote disclosure has been condensed or omitted as permitted in interim
financial statements.
Motient's Chapter 11 Filing and Plan of Reorganization and "Fresh-Start"
Accounting
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 United States 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 Company's Plan of
Reorganization was confirmed on April 26, 2002 and the Company's emergence from
bankruptcy became effective on May 1, 2002 (the "Effective Date"). The Company
adopted "fresh start" accounting as of May 1, 2002 in accordance with procedures
specified by AICPA Statement of Position ("SOP") No. 90-7, "Financial Reporting
by Entities in Reorganization under the Bankruptcy Code." The Company determined
that its selection of May 1, 2002 versus April 26, 2002 for the "fresh start"
date was more convenient for financial reporting purposes and that the results
for the period from April 26, 2002 to May 1, 2002 were immaterial to the
consolidated financial statements. All results for periods prior to the
Effective Date are referred to as those of the "Predecessor Company" and all
results for periods including and subsequent to the Effective Date are referred
to as those of the "Successor Company."
In accordance with SOP No. 90-7, the reorganized value of the Company was
allocated to the Company's assets based on procedures specified by Statement of
Financial Accounting Standards ("SFAS") No. 141, "Business Combinations". Each
liability existing at the plan confirmation date, other than deferred taxes, was
stated at the present value of the amounts to be paid at appropriate market
rates. It was determined that the Company's reorganization value computed
immediately before the Effective Date was $234 million. Subsequent to the
determination of this value, the Company determined that the reorganization
11
value ascribed to MSV did not reflect certain preference rights on liquidation
available to certain equity holders in MSV. Therefore, the reorganization value
of MSV was reduced by $13 million and the Company's reorganization value was
reduced to $221 million. The Company adopted "fresh-start" accounting because
holders of existing voting shares immediately before filing and confirmation of
the plan received less than 50% of the voting shares of the emerging entity and
its reorganization value is less than its postpetition liabilities and allowed
claims, as shown below:
<s>
Postpetition current liabilities $49.9 million
Liabilities deferred pursuant to chapter 11 proceedings 401.1 million
-------------
Total postpetition liabilities and allowed claims 451.0 million
Reorganization value (221.0 million)
---------------
Excess of liabilities over reorganization value $(230.0 million)
================
The reorganization value of Motient was determined by considering several
factors and by reliance on various valuation methods. For the valuation of the
core wireless business, consideration was given to discounted cash flows and
price/earnings and other applicable ratios, a liquidation value analysis,
comparable company trading multiples, and comparable acquisition multiple
analysis. The factors considered by Motient included the following:
o Forecasted operating cash flow results which gave effect to the
estimated impact of limitations on the use of available net operating
loss carryovers and other tax attributes resulting from the Plan of
Reorganization and other events,
o The discounted residual value at the end of the forecast period based
on the capitalized cash flows for the last year of that period,
o Market share and position,
o Competition and general economic considerations,
o Projected sales growth, and
o Working capital requirements.
For the valuation of the Company's investment in MSV, consideration was given to
the valuation of MSV's equity reflected by recent arms-length investments in
MSV, subsequently adjusted as discussed above.
After consideration of the Company's debt capacity, and after extensive
negotiations among parties in interest, it was agreed that Motient's
reorganization capital structure should be as follows:
Notes payable to Rare Medium and CSFB $19.8 million
Stockholders' Equity 201.2 million
-------------
$221.0 million
==============
The Company allocated the $221.0 million reorganization value among its net
assets based upon its current estimates of the fair value of its assets. In the
case of current assets, with the exception of inventory, the Company concluded
that their carrying values approximated fair values. The values of the Company's
frequencies and its investment in and note receivable from MSV were based on
independent analyses presented to the bankruptcy court and subsequently adjusted
as discussed above. The value of the Company's fixed assets was based upon a
recent valuation of the Company's software and estimates of replacement cost for
12
network and other equipment, for which the Company believes that its recent
purchases represent a valid data point. The value of the Company's other
intangible assets was based on third party valuations as of May 1, 2002.
In February 2003, the Company engaged a financial advisory firm to prepare a
valuation of software and customer intangibles. Software and customer
intangibles were not taken into consideration when the original fresh-start
balance sheet was determined at May 1, 2002. The changes for the software and
customer contracts are reflected below and in the financial statements and notes
herein.
The effect of the plan of reorganization and application of "fresh-start"
accounting on the Predecessor Company's balance sheet as of April 30, 2002, is
as follows:
Debt
Discharge Fresh
Preconfirmation and Start Reorganized
Predecessor Exchange Adjustments Successor
(in thousands) Company(j) of Stock (s) Company
---------- -------- ----------- -------
Assets:
Current assets
Cash $17,463 $17,463
Receivables 10,121 10,121
Inventory 8,194 (4,352) 3,842
Deferred equipment costs 11,766 (11,766) (e) --
Other current assets 11,443 11,443
------ ------- ------
Total current assets 58,987 (16,118) 42,869
Property and equipment 58,031 (1,553) (i) 56,478
FCC Licenses and other intangibles 45,610 56,866 (f)(i) 102,476
Goodwill 4,981 (4,981) (i) --
Investment in and notes receivable
from MSV 27,262 26,593 (f) 53,855
Other long-term assets 2,864 (1,141) (e) 1,723
----- ------- -----
Total Assets $197,735 $59,666 $257,401
======== ======= ========
Liabilities & Stockholders' (Deficit) Equity
Liabilities Not Subject to Compromise:
Current liabilities:
Current maturities of
capital leases $4,096 $4,096
Accounts payable - trade 1,625 1,625
Vendor financing 655 655
Accrued expenses 15,727 15,727
(g)
Deferred revenue 23,284 (18,913) (e) 4,371
------ -------- -----
45,387 (18,913) 26,474
Long term liabilities:
Vendor financing 2,661 2,661
Capital lease obligation 3,579 3,579
Deferred revenue 19,931 (16,136) (e)(g) 3,795
Liabilities Subject to Compromise:
Prepetition liabilities 8,785 (8,785) (a) --
Senior note, including
accrued interest thereon 367,673 (367,673) (b) --
Rare Medium Note, including
accrued interest thereon 27,030 (27,030) (c) --
------ ------- ------
403,488 (403,488) --
Rare Medium and CSFB Notes -- 19,750 (a)(c) 19,750
------- ------ ------
13
Total liabilities 475,046 (383,738) (35,049) 56,259
Stockholders' (deficit) equity:
Common stock - old 584 (584) (h) --
Common stock - new 251 (d) 251
Additional paid-in capital 988,531 (988,531) 197,814
197,814 (d)(h)
Common stock purchase
warrants - old 93,730 (93,730) (h)
Common stock purchase
warrants - new 3,077 (d) 3,077
Deferred stock compensation (336) 336 (h) --
Retained (deficit) earnings (1,359,820) 1,359,820 94,715 --
----------- (183,725) ------ -------
(94,715) (d)(h)
183,725 (h)
Stockholders' Equity (Deficit) (277,311) 383,738 94,715 201,142
--------- ------- ------ -------
Total Liabilities & Stockholders' Equity
(Deficit) $197,735 $ -- $59,666 $257,401
======== ========= ======= ========
(a) Represents the cancellation of the following liabilities:
i. Amounts due to Boeing $1,533
ii. Amounts due to CSFB 2,000
iii. Amounts due to JP Morgan Chase 1,550
iv. Amounts due to Evercore Partners LP ("Evercore") 1,948
v. Amounts due to the FCC 1,003
vi. Other amounts 751
--------
$8,785
Liabilities were cancelled in exchange for the following:
a. 97,256 shares of new Motient common stock,
b. a note to CSFB in the amount of $750 and
c. a warrant to Evercore Partners to purchase 343,450
shares of new Motient common stock, and
d. a note to Rare Medium in the amount of $19,000.
(b) Represents the cancellation of the senior notes in the amount of $367,673,
including interest threron, in exchange for 25,000,000 shares of new
Motient common stock. Certain of the Company's other creditors received an
aggregate of 97,256 shares of the Company's common stock in settlement for
amounts owed to them.
(c) Represents the cancellation of $27,030 of notes due to Rare Medium,
including accrued interest thereon, in exchange for a new note in the
amount of $19,000. The Company also issued CSFB a note in the principal
amount of $750 for certain investment banking services.
(d) Represents the issuance of the following:
i. 25,097,256 shares of new Motient common stock.
ii. warrants to the holders of pre-reorganization common stock to
purchase an aggregate of approximately 1,496,512 shares of common
stock, with such warrants being valued at approximately $1,100.
iii. a warrant to purchase up to 343,450 share of common stock to
Evercore, valued at approximately $1,900. The retained
earnings adjustment includes the gain on the discharge of debt of
$183,725.
(e) Represents the write off of deferred equipment costs of $12,907 and
deferred equipment revenue of $12,907 since there is no obligation to
provide future service post-"fresh start".
(f) To reflect the step-up in assets in accordance with the reorganization
value and valuations performed.
(g) Represents the write off of the deferred gain associated with the Company's
sale of its satellite assets to MSV in November 2001 and the write-off of
the unamortized balance of the $15,000 perpetual license sold to Aether
in November 2000, both of which total approximately $22,142, since there is
no obligation to provide future service post-"fresh start".
14
(h) To record the cancellation of the Company's pre-reorganization equity and
to reverse the gain on extinguishment of debt of $183,725 and the gain on
fair market adjustment of $94,715.
(i) To record the valuation and resulting increase of customer intangibles of
approximately $11,501 and frequencies of $45,365. The reduction of $4,981
is due to a write-off of goodwill. The reduction of property and equipment
relates to a subsequent reduction in the carrying value of certain software
from $4,942 to $3,389 and the reduction to inventory from $8,194 to $3,842
to its net realizable value.
(j) The balances do not match the balances in the Company's Plan of
Reorganization due to subsequent audit adjustments.
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 25,000,000
shares of the Company's new common stock. Certain of the Company's other
creditors 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 following
completion of the bankruptcy claims process; however, the value of these shares
has been recorded in the financial statements as if they had been issued on the
effective date of the reorganization. Holders of the Company's
pre-reorganization common stock received warrants to purchase an aggregate of
approximately 1,496,512 shares of common stock. The warrants may be exercised to
purchase shares of Motient common stock at a price of $.01 per share, will
expire May 1, 2004, or two years after the Effective Date, and will not be
exercisable unless and until the average closing price of Motient's common stock
over a period of ninety consecutive trading days is equal to or greater than
$15.44 per share. All warrants issued to the holders of the Company's
pre-reorganization common stock, including those shares held by the Company's
401(k) savings plan, have been recorded in the financial statements as if they
had been issued on the effective date of the reorganization. Also, in July 2002,
Motient issued to Evercore, financial advisor to the creditors' committee in
Motient's reorganization, a warrant to purchase up to 343,450 shares of common
stock, at an exercise price of $3.95 per share. The warrant was dated May 1,
2002, and has 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. The value of this
warrant has been recorded in the financial statements as if it had been issued
on May 1, 2002, given the perfunctory nature of the warrant issuance process
related to bankruptcy emergence.
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.
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, Note 13,
"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
15
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 below.
Summary of Adjustments to Prior Period Financial Statements with respect to MSV
and Aether Transactions
The following is a brief description of the material differences between
Motient's original accounting treatment with respect to the MSV and Aether
transactions and the revised accounting treatment that it has concluded was
appropriate and has 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 Services 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 and $3.3 million for the three and nine months ended September 30,
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, Motient 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.
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
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.
16
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 by 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 five-year period, 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 and $563,000 for the three and nine months ended
September 30, 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 the Company'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
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 no increases in
expenses for the three months ended September 30, 2001 and $1.0 million for the
nine months ended September 30, 2001.
Summary of Adjustments to Prior Period Financial Statements as a result of
re-audit of years ended December 31, 2000 and 2001
17
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 Good 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
and nine months ended September 30, 2002. 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.
18
Three Months Nine Months
Ended Ended
September 30, September30,
2001 2001
---- ----
(in thousands)
Statement of operations data
Net Revenue, as previously reported $24,447 $71,511
Adjustments (900) (2,759)
As restated 23,547 68,752
Net Operating Loss, as previously reported (25,933) (76,374)
Adjustments (862) (1,270)
As restated (26,795) (77,644)
Net Loss, as previously reported (48,707) (168,037)
Adjustments (929) (1,862)
As restated (49,636) (169,899)
Basic and Fully Diluted Loss Per Share of
Common Stock, as previously reported (0.97) (3.36)
Adjustments (0.02) (0.03)
As restated (0.99) (3.39)
Balance sheet data
Total Assets, as previously reported 448,542 448,542
Adjustments 932 932
As restated 449,474 449,474
Total Liabilities, as previously reported 610,106 610,106
Adjustments (6,051) (6,051)
As restated 604,055 604,055
Stockholders' Equity, as previously
reported (161,564) (161,564)
Adjustments 6,910 6,910
As restated (154,654) (154,654)
Total Liabilities & Stockholders' Equity,
as previously reported 448,542 448,542
Adjustments 932 932
As restated $449,474 $449,474
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less at the time of
acquisition to be cash equivalents
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
19
Inventory
Inventory, which consists primarily of communication devices and accessories,
such as power supplies and documentation kits, is stated at the lower of cost or
market. Cost is determined using the weighted average cost method. The Company
periodically assesses the market value of its inventory, based on sales trends
and forecasts and technological changes and records a charge to current period
income when such factors indicate that a reduction to net realizable value is
appropriate. The Company considers both inventory on hand and inventory which it
has committed to purchase, if any.
In April 2002, after assessing its ability to recover the full value of certain
components of its inventory associated with a product launched in March 2002 for
which the Company had not seen very substantial adoption rates, as well as the
Company's adoption of reduced pricing policies for older generation wireless
internet products in the second quarter of 2002 in order to incentivize certain
customers, the Company recorded inventory write-downs to cost of equipment sold
to reduce inventory amounts to its net realizable value, in the amount of $4.4
million (pre-May 1, 2002). The Company has no further plans or commitments to
purchase any additional older generation inventory. Additionally, the Company
recorded a charge in the five-month period ended September 30, 2002, of
approximately $0.7 million associated with prepaid license fees of this new
product.
Periodically, the Company will offer temporary discounts on equipment sales to
customers. The value of this discount is recorded as a cost of sale in the
period in which the sale occurs.
The Predecessor Company recorded a charge in the amount of $5.8 million in the
nine month period ended September 30, 2001, associated with the write down of
its inventory to estimated fair value.
Concentrations of Credit Risk
For the three months ended September 30, 2002, four customers accounted for
approximately 44% of the Company's service revenue, with two customers, United
Parcel Service of America, Inc. ("UPS") and SkyTel Communications, Inc.
("SkyTel"), each accounting for more than 10%, and one of those customers,
SkyTel, a subsidiary of MCI WorldCom, Inc., accounting for approximately 15% of
the Company's service revenue for the three month period. As of September 30,
2002, Skytel represented 24% of the Company's net accounts receivable, of which
42% was greater than 30 days past due.
For the five months ended September 30, 2002, four customers accounted for
approximately 44% of the Company's service revenue, with two of those customers,
UPS and SkyTel, each accounting for more than 10%, with SkyTel accounting for
approximately 14% of the Company's service revenue, excluding the amounts
reserved for below, all of which the Company believed was fully collectible.
The revenue attributable to such customers varies with the level of network
airtime usage consumed by such customers, and none of the service contracts with
such customers requires that the customers use any specified quantity of network
airtime, nor do such contracts specify any minimum level of revenue. There can
be no assurance that the revenue generated from these customers will continue in
future periods.
Due to the bankruptcy of WorldCom, as of September 30, 2002 the Company reserved
100% of all amounts then due from Skytel, until such time as the Company
determined that the amounts became fully collectible without any right of
recourse. In October of 2002, the Company received payment from SkyTel of a
significant portion of the amount of the Company's pre-petition claim amount.
Since the date of WorldCom's Chapter 11 filing, SkyTel has remained current on
its obligations under the Company's contract with SkyTel.
20
Software Development Costs
During 1998, the Company adopted SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." Net capitalized
internal use software costs are included in property and equipment in the
accompanying consolidated balance sheets and are amortized over three years.
Investment in MSV and Note Receivable from MSV
As disclosed in the Company's current report on Form 8-K dated March 14, 2003,
the Company has determined that certain adjustments to our historical financial
information for 2000, 2001 and 2002 are required to reflect the effects of
several complex transactions, including the formation of, and transactions with,
MSV. Please see the Company's Form 8-K dated March 14, 2003 for a complete
discussion of such adjustments.
The Predecessor Company had no basis in either its $15 million note receivable
from MSV or its $2.5 million convertible note receivable from MSV, as the
Company had fully written these off in 2001 through the recording of its equity
share of losses in MSV. It was determined that Motient should not have recorded
any suspended losses of MSV. As a result, it was concluded that Motient should
not have written off any prior MSV losses against the value of these notes.
As a result of the application of "fresh-start" accounting and the subsequent
modifications described below, the notes and investment in MSV were valued at
fair value and the Company recorded an asset in the amount of approximately
$53.9 million representing the estimated fair value of our investment in and
note receivable from MSV. Included in this investment is the historical cost
basis of the Company's common equity ownership of approximately 48% as of May 1,
2002, or approximately $19.3 million. In accordance with the equity method of
accounting, the Company recorded its approximate 48% share of MSV losses against
this basis.
Approximately $21.6 million of the $40.9 million value attributed to MSV is the
excess of fair value over cost basis and is amortized over the estimated lives
of the underlying MSV assets that gave rise to the basis difference. The Company
is amortizing this excess basis in accordance with the pro-rata allocation of
various components of MSV's intangible assets as determined by MSV through
recent independent valuations. Such assets consist of FCC licenses, intellectual
property and customer contracts, which are being amortized over a
weighted-average life of approximately 12 years.
Additionally, the Company 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, after giving effect to discounted future cash flows
at market interest rates. This note matures in November 2006, but may be fully
or partially repaid prior to maturity, subject to certain conditions and
priorities with respect to payment of other indebtedness, in certain
circumstances involving the consummation of additional investments in MSV.
In November 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. Including its notes receivable from MSV ($13
million at May 1, 2002), the book value of Motient's aggregate interest in MSV
as of May 1, 2002 was reduced from $67 million to $53.9 million.
21
The valuation of Motient's investment in MSV and its note receivable from MSV
are ongoing assessments that are, by their nature, judgmental given that MSV is
not traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in Motient's
investment in MSV and that the MSV note is collectible, there is the inherent
risk that this assessment will change in the future and Motient will have to
write down the value of this investment and note. For information regarding
recent developments involving MSV, please see Note 6 ("Subsequent Events").
For the five-month period ended September 30, 2002 and four-month period ended
April 30, 2002, MSV had revenues of $12.2 million and $9.0 million,
respectively, operating expenses of $10.6 million and $9.2 million,
respectively, and a net loss of $10.4 million and $9.3 million, respectively. As
discussed earlier, on November 26, 2001, Motient sold the assets comprising its
satellite communications business to MSV.
Deferred Taxes
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured. The Company has paid no income taxes since inception.
The Company has generated significant net operating losses for tax purposes
through September 30, 2002; however, it has had its ability to utilize these
losses limited on two occasions as a result of transactions that caused a change
of control in accordance with the Internal Revenue Service Code Section 382.
Additionally, since the Company has not yet generated taxable income, it
believes that its ability to use any remaining net operating losses has been
greatly reduced; therefore, the Company has established a valuation allowance
for any benefit that would have been available as a result of the Company's net
operating losses.
Revenue Recognition
The Company generates revenue principally through equipment sales and airtime
service agreements, and consulting services. In 2000, the Company adopted Staff
Accounting Bulletin ("SAB") 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 the
deferral of 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 wireless services are recognized when the
services are performed, evidence of an arrangement exists, 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. The Company defers any revenue and costs associated with activation of a
subscriber on its network over an estimated customer life of two years.
22
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public, and it also sells its
product directly to end-users. Revenue from the sale of the equipment, as well
as the cost of the equipment, are initially deferred and are recognized over a
period corresponding to the Company's estimated customer life of two years.
Equipment costs are deferred only to the extent of deferred revenue.
Property and Equipment
Property and equipment are recorded at cost and depreciated over its useful life
using the straight-line method. Assets recorded as capital leases are amortized
over the shorter of their useful lives or the term of the lease. The estimated
useful lives of office furniture and equipment vary from two to ten years, and
the network equipment is depreciated over seven years. The Company has also
capitalized certain costs to develop and implement its computerized billing
system. These costs are included in property and equipment and are depreciated
over three years. Repairs and maintenance do not significantly increase the
utility or useful life of an asset and are expensed as incurred.
Research and Development Costs
Research and development costs are expensed as incurred. Such costs include
internal research and development activities and expenses associated with
external product development agreements.
Advertising Costs
Advertising costs are charged to operations in the year incurred.
Stock-Based Compensation
The Company accounts for employee stock options using the method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees." Generally, no expense is recognized related to
the Company's stock options because the option's exercise price is set at the
stock's fair market value on the date the option is granted. In cases where the
Company issues shares of restricted stock, the Company will record an expense
based on the value of the restricted stock on the measurement date.
In May 2002, the Company's board approved a new employee stock option plan with
2,993,024 authorized shares of common stock, of which options to purchase
1,621,975 shares of the Company's common stock were outstanding at September 30,
2002. See Note 6 ("Subsequent Events"). Options to purchase 5,485,088 shares of
the Predecessor Company's stock were outstanding at June 30, 2001. These options
were cancelled as part of the Company's reorganization.
A portion of the options granted under the 2002 stock option plan have a Company
performance-based component. These options are accounted for in accordance with
23
variable plan accounting, which requires that the value of these options be
measured at their intrinsic value and any change in that value be charged to the
income statement upon the determination that the fulfillment of the Company
performance criteria is probable. The other options are accounted for as a fixed
plan and in accordance with intrinsic value accounting, which requires that the
excess of the market price of stock over the exercise price of the options, if
any, at the time that both the exercise price and the number of options are
known be recorded as deferred compensation and amortized over the option vesting
period. As of the date of grant, the option price per share was in excess of the
market price; therefore, these options are not deemed to have any value and no
expense has been recorded to date.
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. Since
the Company does not have any components of "other comprehensive income,"
reported net income is the same as "comprehensive income" for all periods
presented.
Derivatives
In September 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
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 Company 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.
24
Segment Disclosures
In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", the Company had one operating segment: its core
wireless business. The Company provides its core wireless business to the
continental United States, Alaska, Hawaii, and Puerto Rico. The following
summarizes the Company's core wireless business revenue by major market
segments:
Successor Company Predecessor Company
(Restated) (Restated)
Three Months Five Months Three Months Nine Months
Ended Ended Four Months Ended Ended Ended
September 30, September 30, April 30, September 30, September 30,
2002 2002 2002 2001 2001
---- ---- ---- ---- -----
Summary of Revenue
(in millions)
Wireless Internet $5.5 $8.9 $5.6 $3.2 $7.6
Field services 4.0 6.9 5.6 4.4 15.4
Transportation 2.8 4.5 4.1 3.6 11.8
Telemetry 0.6 1.0 0.8 0.7 2.1
Maritime and other 0.1 0.2 0.7 4.8 15.5
--- --- --- --- ----
Service revenue 13.0 21.5 16.8 16.7 52.4
Equipment revenue 0.3 0.5 5.6 6.8 16.3
--- --- --- --- ----
Total $13.3 $22.0 $22.4 $23.5 $68.7
===== ===== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market segments.
(Loss) Income Per Share
Basic and diluted (loss) income per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
Options and warrants to purchase shares of common stock were not included in the
computation of loss per share as the effect would be antidilutive for all
periods. As a result, the basic and diluted earnings per share amounts for all
periods presented are the same. As of September 30, 2002, there were warrants to
acquire approximately 1,839,962 shares of common stock and options outstanding
for 1,621,975 shares that were not included in this calculation because of their
antidilutive effect for the three and five months ended September 30, 2002. For
the four month period ended April 30, 2002, all options and warrants had
exercise prices in excess of the fair market value of the Company's common
stock, and thus options and warrants were not factored into the per share
calculation. Options to purchase 5,485,088 shares of the Predecessor Company's
stock were outstanding at June 30, 2001. These options were cancelled as part of
the Company's reorganization.
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
25
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, 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. As described in Note 6
("Subsequent Events"), 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.
The table below reflects the Company's financial results for the specified
periods as if it had adopted SFAS No. 142 effective January 1, 2001 and
accordingly not amortized its goodwill during 2001.
(Restated)
Predecessor Company
-------------------
Three Months Nine Months
Ended Ended
September 30, September 30,
2001 2001
---- ----
(in thousands)
Net loss, as restated $(49,636) $(169,899)
Amortization of goodwill 77 230
-- ---
Pro forma net loss, as restated $(49,559) $(169,669)
========= ==========
Loss per share of common stock, as restated $(0.99) $(3.39)
Amortization of goodwill -- --
-- --
Pro forma loss per share of common stock, as restated $(0.99) $(3.39)
======= =======
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.
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
26
clearly distinguished from the rest of the entity that will be eliminated from
the ongoing operations of the entity in a disposal transaction. In February
2003, the Company engaged an outside valuation expert to value certain of its
assets as of December 31, 2002 to test for potential impairment of certain of
our long-lived assets under SFAS No. 144. This testing included valuations of
software and customer-related intangibles. Based on these tests, no recording of
impairment charges was required. 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.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
No. 145 rescinded three previously issued statements and amended SFAS No. 13,
"Accounting for Leases". The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The Company adopted SFAS No. 145 as of its "fresh-start" accounting date of May
1, 2002. In accordance with SFAS No. 145, the Company has reclassified all prior
period extraordinary losses on extinguishment of debt as ordinary non-operating
losses on extinguishment of debt.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. Previous accounting
guidance was provided by EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. The Company adopted SFAS No. 146 as of
January 1, 2003.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". This consensus requires that
revenue arrangements with multiple deliverables be divided into separate units
of accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
sale of the Company's equipment with related services constitutes a revenue
arrangement with multiple deliverables. The Company will be required to adopt
the provisions of this consensus for revenue arrangements entered into after
June 30, 2003, and the Company has decided to apply it on a prospective basis.
Motient does not have any revenue arrangements that would have a material impact
on its financial statements with respect to EITF No. 00-21.
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002. The disclosure requirements of FIN No. 45 are
effective for financial statements with annual periods ending after December 15,
2002. Motient does not have any guarantees that would require disclosure under
FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
27
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. The Company will adopt the disclosure requirements of SFAS
No. 148 as of January 1, 2003 and plans to continue to follow the provisions of
APB Opinion No. 25 for accounting for stock based compensation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51," which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. The Company has reviewed the implications that adoption of FIN No. 46
would have on our financial position and results of operations and does not
expect it to have a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. The Company has determined that it does not have any financial instruments
that are impacted by SFAS No. 150.
Related Parties
The Company made no payments to related parties for capital assets and
service-related-obligations for the four-month period ended April 30, 2002 and
$408,000 for the five-month period ended September 30, 2002, as compared to
$762,000 in the nine-month period ended September 30, 2001. From related parties
28
the Company did not receive any payments for the five-months ended September 30,
2002 as compared to $1.2 million in the first nine months of 2001. As of
September 30, 2002, the Company had a net due from related parties in the amount
of $0.3 million.
For the three and nine months ended September 30, 2001, the Company recorded
revenue from related parties in the amount of $0.7 million and $2.1 million,
respectively, related to the MSV satellite capacity agreement. There were no
revenues from related parties for the four months ended April 30, 2002 and the
five months ended September 30, 2002.
In May 2002, the Company entered into a consulting agreement with CTA under
which CTA provided consulting services to the Company. CTA's chairman, Jared E.
Abbruzzese, was a director of the Company until June 20, 2003. CTA is a
consulting and private advisory firm specializing in the technology and
telecommunications sectors. The Company's agreement with CTA had an initial term
of three months ending August 15, 2002, and was extended by mutual agreement for
several additional terms of two or three months each. For the first three months
of the agreement, CTA was paid a flat fee of $60,000 per month, and for the
period August to September 2002, the monthly fee was $55,000. The Company has
also agreed to reimburse CTA for CTA's out-of-pocket expenses incurred in
connection with rendering services during the term of the agreement. This
agreement was modified on January 30, 2004.
CTA had previously acted as the spectrum and technology advisor to the official
committee of unsecured creditors in connection with the Company's Chapter 11
case. CTA received a total of $475,000 in fees for such advice and was
reimbursed a total of $4,896 for expenses in connection with the rendering of
such advice.
In July 2002, the Company's board of directors approved the offer and sale to
CTA (or affiliates thereof) of a warrant (or warrants) for 500,000 shares of the
Company's common stock, for an aggregate purchase price of $25,000. The warrant
has an exercise price of $3.00 per share and a term of five years. These
warrants were valued at $1.5 million and were recorded as a consultant
compensation expense in of December of 2002. Certain affiliates of CTA purchased
the warrants in December 2002.
Mr. Abbruzzese did not participate in the deliberations or vote of the Board of
Directors with respect to the foregoing matters.
Except for the warrant offered to CTA described above, neither CTA, nor any of
its principals or affiliates is a stockholder of Motient, nor does it hold any
debt of Motient (other than indebtedness as a result of consulting fees and
expense reimbursement owed to CTA in the ordinary course under the Company's
existing agreement with CTA). CTA has informed us that in connection with the
conduct of its business in the ordinary course, (i) it routinely advises clients
in and appears in restructuring cases involving telecommunications companies
throughout the country, and (ii) some of the Company's stockholders and
bondholders and/or certain of their respective affiliates or principals, may be
considered to be (A) current clients of CTA in matters unrelated to Motient; (B)
former clients of CTA in matters unrelated to Motient; and (C) separate
affiliates of clients who are (or were) represented by CTA in matters unrelated
to Motient.
See Note 6 ("Subsequent Events") for further discussion of other subsequent
related party transactions.
3. LIQUIDITY AND FINANCING
29
Liquidity and Financing Requirements
In January 2002, the Company and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient Ventures Holding Inc. did not file for Chapter 11 and
had no activities during the periods presented. 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. After confirmation of the plan, Motient had
approximately $30.7 million of debt, comprised of capital leases, notes payable
to Rare Medium and CSFB and a vendor financing facility with Motorola, Inc.
("Motorola").
Since emerging from bankruptcy protection in May 2002, the Company has
undertaken a number of actions to reduce its operating expenses and cash burn
rate. For a description of the Company's significant cost reduction initiatives
after the end of the period covered by this report, please see Note 6
("Subsequent Events").
The Company's liquidity constraints have been exacerbated by weak revenue growth
since emerging from bankruptcy protection, due to a number of factors including
the weak economy generally and the weak telecommunications and wireless sector
specifically, the financial difficulty of several of the Company's key
resellers, on whom the Company relies for a majority of its new revenue growth,
and the Company's continued limited liquidity which has hindered efforts at
demand generation.
In addition to cash generated from operations, the Company holds a $15 million
promissory note issued by MSV in November 2001. This note matures in November
2006, but may be fully or partially repaid prior to maturity, subject to certain
conditions and priorities with respect to payment of other indebtedness, in
certain circumstances involving the consummation of additional investments in
MSV. Under the terms of the Company's $19.75 million of notes issued to Rare
Medium and CSFB in connection with its Plan of Reorganization, in certain
circumstances the Company must use 25% of any proceeds from the repayment of the
$15 million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata
basis. For a discussion of certain recent developments regarding MSV, please see
Note 6 ("Subsequent Events"). There can be no assurance that the MSV note will
be repaid prior to maturity, or at all.
Subsequent to the end of the period covered by this report, the Company entered
into a $12.5 million term credit facility. Please see Note 6 ("Subsequent
Events") for a discussion of this facility and related defaults and waivers and
the borrowing availability period.
The Company's future financial performance will depend on its ability to
continue to reduce and manage operating expenses, as well as its ability to grow
revenue. The Company's future financial performance could be negatively affected
by unforeseen factors and unplanned expenses.
The Company continues to pursue all potential funding alternatives. Among the
alternatives for raising additional funds are the issuance of debt or equity
securities, other borrowings under secured or unsecured loan arrangements, and
sales of assets. There can be no assurance that additional funds will be
available to the Company on acceptable terms or in a timely manner. The
Company's new credit facility also has certain terms and conditions, subject to
limits and waivers, that restrict the Company's ability to issue additional debt
30
securities and use the proceeds from the sale of assets. There can be no
assurance that these restrictions will be waived or reduced to allow the Company
to access additional funding.
The Company's projected cash requirements are based on certain assumptions about
its business model and projected growth rate, including, specifically, assumed
rates of growth in subscriber activations and assumed rates of growth of service
revenue. While the Company believes these assumptions are reasonable, these
growth rates continue to be 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 future results of
operations are significantly less favorable than currently anticipated, the
Company's cash requirements will be more than projected, and it may require
additional financing in amounts that will be material. The type, timing and
terms of financing that the Company obtains 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.
The Company's consolidated financial statements have been prepared on a going
concern basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The successful implementation of
the Company's business plan requires substantial funds to finance the
maintenance and growth of its operations, network and subscriber base and to
expand into new markets. The Company has an accumulated deficit and has
historically incurred losses from operations which are expected to continue for
additional periods in the future. There can be no assurance that its operations
will become profitable. These factors, along with the Company's negative
operating cash flows have placed significant pressures on the Company's
financial condition and liquidity position.
Debt Facilities & Capital Leases
The following table outlines the Company debt facilities and capital leases as
of September 30, 2002 and December 31, 2001.
Successor Company Predecessor Company
(Restated)
September 30, 2002 December 31, 2001
------------------ -----------------
(in thousands)
Senior Notes, net of discount $-- $329,371
Rare Medium note payable, including 19,717 26,910
accrued interest thereon
CSFB note payable, including accrued 778 --
interest thereon
Vendor financing 3,316 $3,316
Capital leases 6,341 8,948
----- -----
$30,152 $368,545
Less current maturities 5,216 364,972
----- -------
Long-term debt $24,936 $3,573
------- ------
$335 Million Unit Offering: On March 31, 1998, Motient Holdings Inc., a
wholly-owned subsidiary of Motient, issued $335 million of Units (the "Units")
consisting of 12.25% Senior Notes due 2008 (the "Senior Notes"), and one warrant
to purchase 3.75749 shares of common stock, subsequently adjusted to 3.83 shares
31
of Common Stock, of the Company for each $1,000 principal amount of Senior Notes
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 jointly and
severally guaranteed on a full and unconditional basis by Motient Corporation
and all of its subsidiaries. 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 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, including accrued interest thereon, were exchanged in full for
new equity of the reorganized Company.
Rare Medium Notes: In 2001 Motient issued two notes to Rare Medium in the
aggregate principal amount of $50 million, 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.
As a result of the delivery of the shares of XM Radio common stock described
above, the maturity of the Rare Medium notes were 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 matures on May 1, 2005 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.
As of September 30, 2002, the principal balance on the note payable to Rare
Medium was $19.0 million.
CSFB $750,000 Note: 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 Corporation that owns 100% of Motient Ventures Holdings
Inc., which owns all of the Company's interests in MSV. The new note matures on
May 1, 2005 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 Company must use 25% of the proceeds of any repayment of the $15 million
note receivable from MSV to prepay the CSFB note.
As of September 30, 2002, the principal balance of the note payable to CSFB was
$750,000.
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
32
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 December 31, 2001, $3.3 million was outstanding under this
facility. These balances were not impacted by the Company's Plan of
Reorganization. As of September 30, 2002, $3.3 million was outstanding under a
vendor financing facility with Motorola at an interest rate of 9.0%, and no
additional amounts were available for borrowing.
Capital Leases: As of September 30, 2002, the Company was also a party to
certain capital leases.
As of September 30, 2002, $6.0 million was outstanding under a capital lease for
network equipment with Hewlett-Packard Financial Services Company
("Hewlett-Packard"). The lease has an effective interest rate of 12.2%. As of
September 30, 2002, $0.3 million was outstanding under a capital lease for
corporate telecommunications equipment with Avaya Financial Services.
Subsequent to the end of the period covered by this report, the Company entered
into a $12.5 million term credit facility, and restructured certain of its
existing debt and capital lease obligations. Please see Note 6 ("Subsequent
Events").
4. COMMITMENTS AND CONTINGENCIES
As of September 30, 2002, the Company had no contractual inventory commitments.
In May 2002, the FCC filed a proof of claim with the United States Bankruptcy
Court, asserting a pre-petition claim in the approximate amount of $1.0 million
for fees incurred as a result of the Company withdrawing from certain auctions.
Under the Company's court-approved Plan of Reorganization, the FCC's claim was
classified as an "other unsecured" claim and the FCC received a pro rata portion
of the 97,256 shares of common stock issued to creditors with allowed claims in
such class. The Company recorded an expense in the amount of $1.0 million for
this claim in April 2002.
At April 30, 2002, the Company had certain contingent and/or disputed
obligations under a satellite construction contract entered into by the
Predecessor Company, which contained flight performance incentives payable by
the Predecessor 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 Predecessor 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 April 30, 2002. Upon the implementation of the Plan of Reorganization, this
contract was terminated, and in satisfaction 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.
For a discussion of certain commitments and contingencies entered into by the
Company after the end of the period covered by this report, please see Note 6
("Subsequent Events").
5. LEGAL AND REGULATORY MATTERS
Legal
33
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 and "Fresh Start" Accounting" under
Note 2.
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.
For a discussion of legal matters after the end of the period covered by this
report, please see Note 6 ("Subsequent Events").
Regulatory
The terrestrial two-way wireless data network used in Motient's wireless
business is regulated to varying degrees at the federal, state and local levels.
Various legislative and regulatory proposals under consideration from time to
time by Congress and the 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
34
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 network. The deadline for
complying with the CALEA requirements and any rules subsequently promulgated was
June 30, 2002. Based on discussions with Federal law enforcement agencies
regarding the applicability of CALEA's provisions to the Company, the Company
does not believe that its network, which uses packet data technology, is subject
to the requirements of CALEA. At the suggestion of Federal law enforcement
agencies, the Company has developed an alternative methodology for intercepting
certain communications over its network for the purposes of law enforcement
surveillance. The Company believes this alternative methodology has
substantially the same functionality as the standards provided in CALEA. It is
possible that the Company's alternative methodology may ultimately be found not
to comply with CALEA's requirements, or the Company's interpretation that CALEA
does not apply to its network may ultimately be found to be incorrect. Should
these events occur, the requirement to comply with CALEA could have a material
adverse effect on the conduct of the Company's business and financial
operations.
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 effect on the conduct of the Company's business.
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 to the extent funding is
available for such purposes.
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. For further discussion of this
proceeding, please see Note 6 ("Subsequent Events").
6. SUBSEQUENT EVENTS
Cost Reduction Actions
Since emerging from bankruptcy in May 2002, several factors have restrained the
Company's ability to grow revenue at the rate it previously anticipated. These
factors include the weak economy generally and the weak telecommunications and
wireless sector specifically, the financial difficulty of several of the
35
Company's key resellers, on whom it relies for a majority of its new revenue
growth, and the Company's continued limited liquidity.
The Company has taken a number of steps after the end of the period covered by
this report to reduce operating and capital expenditures in order to lower its
cash burn rate.
Reductions in Workforce. The Company undertook reductions in its workforce in
July 2002, September 2002, March 2003 and February 2004. These actions
eliminated approximately 29% (95 employees), 13% (26 employees), 10% (19
employees) and 32.5% (54 employees), respectively, of its then-remaining
workforce. The Company recorded restructuring charges of $282,000, $228,000,
$161,000 and $873,000 related entirely to employee severance obligations for
each action in July 2002, September 2002, March 2003 and February 2004,
respectively. Approximately $62,000 of the September 2002 severance liability
was unpaid as of December 31, 2002. In the aggregate, the Company has reduced
its work force by approximately 68% since July 2002 and reduced employee and
related expenditures by approximately $1.5 million per month.
Network Rationalization. The Company is in the process of restructuring its
wireless data network in a coordinated effort to reduce network operating costs.
One aspect of this rationalization encompasses reducing unneeded capacity across
the network by deconstructing un-profitable base stations. In certain instances,
the geographic area that the network serves may be reduced by this process. The
full extent of the changes to network coverage have yet to be determined.
Closure of Reston, VA Facility. On July 15, 2003, the Company substantially
completed the transfer of its headquarters from Reston, VA to Lincolnshire, IL,
where the Company already had a facility. This action will reduce the Company's
monthly operating expenses by an amount of approximately $65,000 per month or
$780,000 per year.
Refinancing of Vendor Obligations. During the fourth quarter of 2002 and the
first quarter of 2003, the Company renegotiated several of its key vendor and
customer arrangements in order to reduce recurring expenses and improve its
liquidity position. In some cases, the Company was able to negotiate a flat rate
reduction for continuing services provided to it by its vendors or a deferral of
payable amounts, and in other cases the Company renegotiated the scope of
services provided in exchange for reduced rates or received pre-payments for
future services. The Company continues to aggressively pursue further vendor
cost reductions where opportunities arise.
In the case of operating expenses, the Company negotiated, among other things,
reductions of recurring monthly expense of approximately $380,000 per month, or
$4.6 million in annual costs.
In January 2003, the Company negotiated a deferral of approximately $2.6 million
that was owed to Motorola for maintenance services provided pursuant to the
Company's service agreement with Motorola. The Company issued a promissory note
to Motorola for such amount, with the note to be paid off over a two-year period
beginning in January 2004. Also in January 2003, the Company restructured
certain of its vendor obligations to Motorola. The remaining principal
obligation of approximately $3.3 million under this facility was restructured
such that the outstanding amount will be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In March 2004, the
amortization for both of these obligations was reduced to $100,000 in aggregate,
effectively extending the amortization period for both obligations.
The Company also restructured certain of its capital lease obligations with
Hewlett-Packard to significantly reduce the monthly amortization requirements of
these facilities on an on-going basis. As part of such negotiations, the Company
agreed to fund a letter of credit in twelve monthly installments during 2003, in
36
the aggregate amount of $1.125 million, to secure certain payment obligations.
This letter of credit will be released to the Company in fifteen monthly
installments beginning in July 2004, assuming no defaults have occurred and are
occurring. As part of these negotiations, the total amount of the Company's
remaining principal obligations under these financing arrangements were not
reduced.
On December 1, 2002, Motient entered into a letter agreement with UPS under
which UPS agreed to make a series of eight prepayments to Motient totaling $5
million for future services Motient is obligated to provide after January 1,
2004. In addition to any other rights it has under its network services
agreement with Motient, the letter agreement provides that UPS may terminate the
network services agreement, in whole or in part, by providing 30 days notice to
Motient at which point any remaining prepayment would be required to be repaid.
As of July 31, 2003, all eight prepayments had been made. The $5 million
prepayment will be credited against airtime services provided to UPS beginning
January 1, 2004, until the prepayment is fully credited. Based on UPS' current
level of network airtime usage, Motient does not expect that UPS will be
required to make any cash payments to Motient in 2004 for service provided
during 2004.
Despite these initiatives, we continue to be cash flow negative, and there can
be no assurances that we will ever be cash flow positive.
$12.5 Million Term Credit Facility
On January 27, 2003, the Company's wholly-owned subsidiary, Motient
Communications, closed a $12.5 million term credit agreement with a group of
lenders, including several of the Company's existing stockholders. The lenders
include the following entities or their affiliates: M&E Advisors, L.L.C., Bay
Harbour Partners, York Capital and Lampe Conway & Co. York Capital is affiliated
with James G. Dinan. Bay Harbour Management and James G. Dinan each hold 5% or
more of Motient's common stock. The lenders also include Gary Singer, directly
or through one or more entities. Gary Singer is the brother of Steven G. Singer,
one of our directors.
The table below shows, as of March 10, 2004 the number of shares of Motient
common stock beneficially owned by the following parties to the term credit
agreement, based solely on filings made by such parties with the SEC:
Name of Beneficial Owner Number of Shares
------------------------ ----------------
Bay Harbour Management, L.C. 3,217,396
James G. Dinan 2,593,045
Under the credit agreement, the lenders have made commitments to lend Motient
Communications up to $12.5 million. The commitments are not revolving in nature
and amounts repaid or prepaid may not be reborrowed. Borrowing availability
under Motient's $12.5 million term credit facility terminated on December 31,
2003. On March 16, 2004, Motient entered into an amendment to the credit
facility which extended the borrowing availability period until December 31,
2004. As part of this amendment, Motient provided the lenders with a pledge of
all of the stock of a newly-formed special purpose subsidiary of Motient
Communications, Motient License which holds all of Motient's FCC licenses
formerly held by Motient Communications. On March 16, 2004, in connection with
the execution of the amendment to our credit agreement, we issued warrants to
the lenders to purchase, in the aggregate, 2,000,000 shares of our common stock.
The number of warrants will be reduced to an aggregate of 1,000,000 shares of
common stock if, within 60 days after March 16, 2004, we obtain at least $7.5
million of additional debt or equity financing. The exercise price of the
37
warrants is $4.88 per share. The warrants were immediately exercisable upon
issuance and have a term of five years. The warrants will be valued using a
Black-Scholes pricing model and will be recorded as a debt discount and will be
amortized as additional interest expense over three years, the term of the
related debt. The warrants are also subject to a registration right agreement.
Under such agreement, we agreed to register the shares underlying the warrants
upon the request of a majority of the warrant holders, or in conjunction with
the registration of other common stock of the Company. We will bear all the
expenses of such registration. We are also required to pay a commitment fees to
the lenders of $320,000, which accrued to the principal balance of the credit
facility at closing. These fees will be recorded on our balance sheet and will
be amortized as additional interest expense over three years, the term of the
related debt.
Under this facility, the lenders have agreed to make loans to Motient
Communications through December 31, 2004 upon Motient Communications' request no
more often than once per month, in aggregate principal amounts not to exceed
$1.5 million for any single loan, and subject to satisfaction of other
conditions to borrowing, including certain financial and operating covenants,
contained in the credit agreement. As of February 29, 2004, the Company had
borrowed $4.5 million under this facility.
Each loan borrowed under the credit agreement has a term of three years. Loans
carry interest at 12% per annum. Interest accrues, compounding annually, from
the first day of each loan term, and all accrued interest is payable at each
respective loan maturity, or, in the case of mandatory or voluntary prepayment,
at the point at which the respective loan principal is repaid. Loans may be
prepaid at any time without penalty.
The obligations of Motient Communications under the credit agreement are secured
by a pledge of all the assets owned by Motient Communications that can be
pledged as security and are not already pledged under certain other existing
credit arrangements, including under Motient Communications' credit facility
with Motorola and Motient Communications' equipment leasing agreement with
Hewlett-Packard. Motient Communications owns, directly or indirectly, all of the
Company's assets relating to its terrestrial wireless communications business.
In addition, Motient and its wholly-owned subsidiary, Motient Holdings Inc.,
have guaranteed Motient Communications' obligations under the credit agreement,
and the Company has delivered a pledge of the stock of Motient Holdings Inc.,
Motient Communications, Motient Services and Motient License to the lenders. In
addition, upon the repayment in full of the outstanding $19,750,000 in senior
notes due 2005 issued by MVH Holdings Inc. to Rare Medium and CSFB in connection
with the Company's approved Plan of Reorganization, the Company will pledge the
stock of MVH Holdings Inc. to the lenders.
On January 27, 2003, in connection with the signing of the credit agreement, we
issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of our common stock. The exercise price for these warrants is
$1.06 per share. The warrants were immediately exercisable upon issuance and
have a term of five years. The warrants were valued at $10 million using a
Black-Scholes pricing model and have been recorded as a debt discount and are
being amortized as additional interest expense over three years, the term of the
related debt. Upon closing of the credit agreement, the Company paid closing and
commitment fees to the lenders of $500,000. These fees have been recorded on the
Company's balance sheet and are being amortized as additional interest expense
over three years, the term of the related debt. Under the credit agreement, the
Company must pay an annual commitment fee of 1.25% of the daily average of
undrawn amounts of the aggregate commitments from the period from the closing
38
date to December 31, 2003. In December 2003, the Company paid the lenders a
commitment fee of approximately $113,000.
In each of April, June and August 2003, the Company made draws under the credit
agreement in the amount of $1.5 million for an aggregate amount of $4.5 million.
The Company used such funds to fund general working capital requirements of
operations.
For the monthly periods ended April 2003 through December 2003, the Company
reported events of default under the terms of the credit facility to the
lenders. These events of default related to non-compliance with covenants
requiring minimum monthly revenue, earnings before interest, taxes and
depreciation and amortization and free cash flow performance. In each period,
the lenders waived these events of default. There can be no assurance that
Motient will not have to report additional events of default or that the lenders
will continue to provide waivers in such event. Ultimately, there can be no
assurances that the liquidity provided by the credit facility will be sufficient
to fund our ongoing operations.
Stock Option Plan
In May 2002, the Company's board approved a new employee stock option plan with
2,993,024 authorized shares of common stock, of which options to purchase
1,670,375 shares of the Company's common stock were outstanding at September 30,
2002. The plan was approved by the Company's stockholders on July 11, 2002.
A portion of the options granted under the plan have a Company performance-based
component. These options are accounted for in accordance with variable plan
accounting, which requires that the value of these options be measured at their
intrinsic value and any change in that value be charged to the income statement
upon the determination that the fulfillment of the Company performance criteria
is probable. The other options are accounted for as a fixed plan and in
accordance with intrinsic value accounting, which requires that the excess of
the market price of stock over the exercise price of the options, if any, at the
time that both the exercise price and the number of options are known be
recorded as deferred compensation and amortized over the option vesting period.
As of the date of grant, the option price per share was in excess of the market
price; therefore, these options are not deemed to have any value and no expense
has been recorded.
In March 2003, the Company's board of directors approved the reduction in the
exercise price of all of the outstanding stock options from $5.00 per share to
$3.00 per share. The repricing will require that all options be accounted for in
accordance with variable plan accounting, which requires that the value of these
options are measured at their intrinsic value and any change in that value be
charged to the income statement each quarter based on the difference (if any)
between the intrinsic value and the then-current market value of the common
stock.
In July 2003, the compensation and stock option committee of the Company's board
of directors, acting pursuant to the Company's 2002 stock option plan, granted
26 employees and officers options to purchase an aggregate of 495,000 shares of
the Company's common stock at a price of $5.15 per share. One-half of each
option grant vests with the passage of time and the continued employment of the
recipient, in three equal increments, on the first, second and third anniversary
of the date of grant. The other half of each grant will either vest or be
rescinded based on the performance of the Company in 2003. The compensation and
stock option committee of the Company's board of directors has not yet made a
determination regarding whether the 2003 performance criteria were satisfied. If
39
vested and not exercised, the options will expire on the 10th anniversary of the
date of grant.
Developments Relating to MSV
In January 2003, MSV's application with the FCC with respect to MSV's plans for
a new generation satellite system utilizing ATC was approved by the FCC. The
order granting such approval (the "ATC Order") requires that licensees,
including MSV, submit a further application with the FCC to seek approval of the
specific system incorporating ATC that the licensee intends to use. MSV has
filed an application for ATC authority, pending the FCC's final rules and
regulations. MSV has also filed a petition for reconsideration with respect to
certain aspects of the ATC Order. In January 2004, certain terrestrial wireless
providers filed petitioned the U.S. Court of Appeals for the District of
Columbia to review the FCC's decision to grant ATC to satellite service
providers. Oral arguments in this case are scheduled for May 2004.
On August 21, 2003, two investors in MSV (excluding Motient) invested an
additional $3.7 million in MSV in exchange for Class A preferred units of
limited partnership interests in MSV. MSV used the proceeds from this investment
to repay other indebtedness that is senior in its right of repayment to
Motient's promissory note. Under the terms of the amended and restated
investment agreement, these investors had the option of investing an additional
$17.6 million in MSV by December 31, 2003; however, if, prior to this time, the
FCC had not issued a decision addressing MSV's petition for reconsideration with
respect to the ATC Order, the option will be automatically extended to March 31,
2004. As of the closing of the initial investment on August 21, 2003, Motient's
percentage ownership of MSV was approximately 46.5% on an undiluted basis, 32.6%
on an "as converted" basis giving effect to the conversion of all outstanding
convertible notes of MSV and 29.5% on a fully diluted basis, assuming certain
other investors fully exercise their option to make the $17.6 million additional
investment in MSV as a result of the FCC ATC approval process.
The proceeds from the additional $17.6 million investment described above, if
consummated, will be used to repay certain outstanding indebtedness of MSV, and,
subject to certain conditions and priorities with respect to payment of other
indebtedness, a portion of such proceeds will be used to partially repay the
$15.0 million note issued by MSV to Motient.
In November 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 in MSV) to $41 million as
of May 1, 2002 to reflect certain preference rights on liquidation of certain
classes of equity holders in MSV. Including its note receivable from MSV ($13
million at May 1, 2002), the book value of Motient's aggregate interest in MSV
as of May 1, 2002 was reduced from $67 million to $53.9 million. Also, as a
result of CTA's valuation of MSV, Motient determined that the value of its
equity interest in MSV was impaired as of December 31, 2002. This impairment was
deemed to have occurred in the fourth quarter of 2002. Motient reduced the value
of its equity interest in MSV by $15.4 million as of December 31, 2002.
Including its notes receivable from MSV ($19 million at December 31, 2002), the
book value of Motient's aggregate interest in MSV was $32 million as of December
31, 2002.
Agreements with Communication Technology Advisors LLC
40
Since September 2002, the Company has extended it consulting agreement with CTA
on either three month or month-to-month terms. For the period September 2002 to
May 2003, the monthly fee was $55,000. Beginning in May 2003, the monthly fee
was reduced to $39,000. This agreement was amended, and the engagement and
related payment was modified on January 30, 2004.
In July 2002, the Company's board of directors approved the offer and sale to
CTA (or affiliates thereof) of a warrant (or warrants) for 500,000 shares of the
Company's common stock, for an aggregate purchase price of $25,000. The warrant
has an exercise price of $3.00 per share and a term of five years. These
warrants were valued at $1.5 million and were recorded as a consultant
compensation expense in December of 2002. Certain affiliates of CTA purchased
the warrants in December 2002.
As mentioned below, on June 20, 2003, Jared Abbruzzese resigned his position as
Chairman of the Board and Peter D. Aquino, a senior managing director of CTA,
was elected to the Company's Board on June 20, 2003.
In November 2003, the Company engaged CTA to provide a valuation of its equity
interest in MSV as of December 31, 2002. CTA was paid $150,000 for this
valuation.
On January 30, 2004, the Company engaged CTA to act as chief restructuring
entity. The term of CTA's engagement is currently scheduled to end on August 1,
2004. As consideration for this work, Motient agreed to pay to CTA a monthly fee
of $60,000, one-half of which will be paid monthly in cash and one-half of which
will be deferred. The new agreement replaces the Company's existing consulting
arrangement with CTA.
Management and Board Changes
On July 16, 2002, W. Bartlett Snell resigned as Director, senior vice president
and chief financial officer.
On July 16, 2002, the board of directors elected Patricia Tikkala to the
position of vice president, chief financial officer and treasurer. On March 20,
2003, Patricia Tikkala resigned as vice president and chief financial officer.
On January 17, 2003, David Engvall resigned as senior vice president, general
counsel and secretary.
On March 18, 2003, Brandon Stranzl resigned from the board of directors.
On April 17, 2003, the board of directors elected Christopher W. Downie to the
position of vice president, chief financial officer and treasurer. Mr. Downie
had previously been a consultant with CTA, working on Motient matters, since May
2002.
On June 20, 2003, Jared Abbruzzese resigned his position as chairman of the
board. Steven Singer was elected chairman of the board and a new director, Peter
Aquino, was elected to the board. Mr. Aquino is a senior managing director for
CTA.
On February 10, 2004, the Company and Walter V. Purnell, Jr. mutually agreed to
end his employment as president and chief executive officer of Motient and all
of its wholly owned subsidiaries. Concurrently, Mr. Purnell resigned as a
director of such entities and of MSV and all of its subsidiaries.
41
On February 18, 2004, Daniel Croft, senior vice president, marketing and
business development, and Michael Fabbri, senior vice president, sales, were
relieved of their duties as part of a reduction in force.
On March 18, 2004 the board of directors elected Christopher W. Downie to the
position of executive vice president, chief financial officer and treasurer, and
designated Mr. Downie as the Company's principal executive officer.
Change in Accountants
On April 17, 2003, the Company dismissed PricewaterhouseCoopers as its
independent auditors, effective upon the completion of services related to the
audit of the Company's consolidated financial statements for the period May 1,
2002 to December 31, 2002.
Also on April 25, 2003, the Company's board of directors approved the engagement
of Ehrenkrantz Sterling & Co. LLC as its independent auditors to (i) re-audit
the Company's consolidated financial statements for the fiscal year ended
December 31, 2000 and the fiscal year ended December 31, 2001, and (ii) audit
the Company's consolidated financial statements for the interim period from
January 1, 2002 to April 30, 2002, and the fiscal year that will end on December
31, 2003.
On March 2, 2004, Motient dismissed PricewaterhouseCoopers as its independent
auditors effective immediately. The audit committee of the Company's board of
directors approved the dismissal of PricewaterhouseCoopers.
PricewaterhouseCoopers was previously appointed to audit Motient's consolidated
financial statements for the period May 1, 2002 to December 31, 2002, and, by
its terms, such engagement was to terminate upon the completion of services
related to such audit. PricewaterhouseCoopers has not reported on Motient's
consolidated financial statements for such period or for any other fiscal
period. On March 2, 2004, the audit committee engaged Ehrenkrantz Sterling & Co.
LLC as Motient's independent auditors to replace PricewaterhouseCoopers to audit
Motient's consolidated financial statements for the period May 1, 2002 to
December 31, 2002.
For further details regarding the change in accountants, please see the
Company's current report on Form 8-K/A filed with the SEC in April 23, 2003 and
the Company's amendment to current report on Form 8-K filed with the SEC on
March 9, 2004.
Research In Motion Matters
Our rights to use and sell the BlackBerryTM software and Research In Motion's
handheld devices may be limited or made prohibitively expensive as a result of a
patent infringement lawsuit brought against Research In Motion ("RIM") by NTP
Inc. (NTP v. Research In Motion, Civ. Action No. 3:01CV767 (E.D. Va.)). In that
action, a jury concluded that certain of RIM's BlackBerryTM products infringe
patents held by NTP covering the use of wireless radio frequency information in
email communications. On August 5, 2003, the judge in the case ruled against
RIM, awarding NTP $53.7 million in damages and enjoining RIM from making, using,
or selling the products, but stayed the injunction pending appeal by RIM. This
appeal has not yet been resolved. As a purchaser of those products, the Company
could be adversely affected by the outcome of that litigation.
On June 26, 2003, RIM provided the Company with a written End of Life
Notification for the RIM 857 wireless handheld device. This means that RIM will
no longer produce this model of handheld device. The last date for accepting
42
orders was September 30, 2003, and the last date for shipment of devices was
January 2, 2004. Motient has implemented a RIM 857 "equivalent to new" program
and expects that there will be sufficient returned RIM 857s to satisfy demand
for the foreseeable future. During the year ended December 31, 2002, a majority
of Motient's equipment revenues were attributable to sales of the RIM 857
device, and Motient estimates that approximately 35% of its monthly recurring
service revenues were derived from wireless messaging that use RIM 857 devices.
New Network Offerings
On March 1, 2003 Motient entered into a National Premier Dealer Agreement with
T-Mobile USA, and on May 21, 2003 Motient entered into an Authorized Agency
Agreement with Verizon Wireless. These agreements allow Motient to sell each of
T-Mobile's third generation GSM/GPRS network subscriptions and Verizon's third
generation CDMA/1XRTT network subscriptions nationwide. Motient is paid for each
subscriber put on to either network. Each agreement allows Motient to continue
to actively sell and promote wireless email and wireless Internet applications
to enterprise accounts on networks with greater capacity and speed, and that are
voice capable.
Regulatory Matters
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. This notice of proposed rulemaking was
issued by the FCC after a "white paper" proposal was submitted to the FCC by
Nextel Communications Inc. in November 2001 addressing largely the same issues.
In its white paper, Nextel proposed 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's proposal addressed the
problem of interference to public safety agencies by creating blocks of
contiguous spectrum to be shared by public safety agencies. Since the notice of
proposed rulemaking was issued, Motient has been actively participating with
other affected licensees, including Nextel, to reach agreement on a voluntary
plan to re-allocate spectrum to alleviate interference to public safety
agencies. On December 24, 2002, a group of affected licensees, including
Motient, Nextel, and several other licensees, submitted a detailed proposal to
the FCC for accomplishing the re-allocation of spectrum over a period of several
years. These parties have also been negotiating a mechanism by which Nextel
would agree to reimburse, up to $850 million, costs incurred by affected
licensees in relocating to different parts of the spectrum band pursuant to the
rebanding plan.
On February 10, 2003, approximately 60 entities filed comments to the proposal
submitted to the FCC on December 24, 2002. Several of the comments addressed the
issue of comparable 800 MHz spectrum for Economic Area ("EA") and the need to
avoid recreating the 800 MHz interference situation when Nextel integrates its
900 MHz spectrum into its integrated dispatch enhanced network, or iDEN. Reply
comments, which were due February 25, 2003, included comments urging the FCC to
conduct its own analysis of the adequacy of the interference protection proposed
in the plan. In mid-April 2003, the FCC's Office of Engineering and Technology
("OET") sent a letter to several manufacturers requesting additional practical,
technical and procedural solutions or information that may have yet to be
considered. Responses were due May 8, 2003. Upon reviewing the filed comments,
OET has indicated that other technical solutions were possible and were being
reviewed by the FCC. To date, no action has been taken by the FCC. The Company
cannot assure you that its operations will not be affected by this proceeding.
Legal Matters
43
A former employee who was discharged as part of a reduction in force in July
2002 has asserted a claim for a year's pay and attorney's fees under a Change of
Control Agreement this employee had with the Company. This claim is subject to
binding arbitration. Although the Company believed that it had substantial
defenses on the merits, on July 11, 2003, the Company was informed that the
arbitrator ruled in the employee's favor. In August 2003, the Company made a
$200,000 payment to this employee for the disputed pay and related benefits
costs and legal fee reimbursement.
UPS Revenue
UPS, the Company's largest customer as of September 30, 2002 and December 31,
2002, has substantially completed its migration to next generation network
technology, and its monthly airtime usage of the Company's network has declined
significantly. There are no minimum purchase requirements under the Company's
contract with UPS and the contract may be terminated by UPS on 30 days' notice
at which point any remaining prepayment would be required to be repaid. While
the Company expects that UPS will remain a customer for the foreseeable future,
over time the Company expects that the bulk of UPS' units will migrate to
another network. As of January 31, 2004, UPS had approximately 4,300 active
units on Motient's network.
Until June of 2003, UPS had voluntarily maintained its historical level of
payments to mitigate the near-term revenue and cash flow impact of its recent
and anticipated continued reduced network usage. However, beginning in July of
2003, the revenues and cash flow from UPS declined significantly. Also, due to a
separate arrangement entered into in 2002 under which UPS prepaid for network
airtime to be used by it in 2004, the Company does not expect that UPS will be
required to make any cash payments to the Company in 2004 for service to be
provided in 2004. If UPS does not make any cash payments to the Company in 2004,
the Company's cash flows from operations in 2004 will decline, and its liquidity
and capital resources could be materially and negatively affected. The Company
is planning a number of initiatives to offset the loss of revenue and cash flow
from UPS, including the following:
o further reductions in the Company's employee and network
infrastructure costs;
o growth in new revenue from the Company's recently-announced carrier
relationships with Verizon Wireless and T-Mobile, under which the
Company will be selling voice and data services on such carrier's next
generation wireless networks as a master agent;
o increased revenue growth from the Company's various telemetry
applications and initiatives; and
o enhancements to the Company's liquidity which are expected to involve
the sale of unneeded frequency assets, such as the recently announced
sales of certain Specialized Mobile Radio ("SMR") licenses to Nextel.
Further Lane
On July 29, 2003, Motient entered into a letter agreement with Further Lane
Asset Management Corp. under which Further Lane is providing investment advisory
services to Motient. In connection with the execution of this letter agreement,
Motient issued Further Lane a warrant to purchase 200,000 shares of its common
stock. The exercise price of the warrant is $5.10 per share. The warrant is
immediately exercisable upon issuance and has a term of five years. The fair
value of the warrant was estimated at $927,000 using a Black-Scholes model. In
September 2003, the Company recorded a non-cash consultant compensation charge
of $927,000 based on this valuation.
44
Sale of SMR Licenses to Nextel Communications, Inc.
On July 29, 2003, our wholly-owned subsidiary, Motient Communications, entered
into an asset purchase agreement with Nextel, under which Motient Communications
sold to Nextel certain of its SMR licenses issued by the FCC for $3.4 million.
The closing of this transaction occurred on November 7, 2003. On December 9,
2003, Motient Communications entered into a second asset purchase agreement,
under which Motient Communications will sell additional licenses to Nextel for
$2.75 million. In February, 2004, the Company closed the sale of licenses
covering approximately $2.2 million of the purchase price, and the Company
expects to close the sale of approximately one-half of the remaining licenses by
April 2004. The transfer of the other half of the remaining licenses has been
challenged at the FCC by a third-party. While the Company believes, based on the
advice of counsel, that the FCC will ultimately rule in its favor, the Company
cannot assure you that it will prevail, and, in any event, the timing of any
final resolution is uncertain. None of these licenses are necessary for
Motient's future network requirements. Motient has and expects to continue to
use the proceeds of the sales to fund its working capital requirements and for
general corporate purposes. The lenders under Motient Communications' term
credit agreement have consented to the sale of these licenses.
45
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy, and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may," "will," "anticipate," "estimate," "expect," "project" or "intend."
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, those under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview - Overview of Liquidity
and Risk Factors," and elsewhere in this quarterly report. All of our subsequent
written and oral forward-looking statements (or statements that may be
attributed to us) are expressly qualified in their entirety by the cautionary
statements referred to above and contained elsewhere in this quarterly report on
Form 10-Q. You should carefully review the risk factors described in our other
filings with the Securities and Exchange Commission from time to time, including
the risk factors contained in our Form 10-K for the period ended December 31,
2002, and our quarterly reports on Form 10-Q to be filed after this quarterly
report, as well as our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed in these statements.
Overview
Motient's Chapter 11 Filing
On January 10, 2002, Motient and three of its wholly-owned subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the Federal
Bankruptcy Code. Motient's Plan of Reorganization was confirmed on April 26,
2002, and became effective on May 1, 2002. For a more detailed description of
Motient's Chapter 11 filing and its Plan of Reorganization, please see
"Liquidity and Capital Resources" below.
General - The Current and Former Components of Motient's Business
This section provides information regarding the various current and prior
components of Motient's business, which we believe are relevant to an assessment
and understanding of the financial condition and consolidated results of
operations of Motient. 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. Additionally, on April 26, 2002, our
Plan of Reorganization was confirmed by the United States Federal Bankruptcy
Court, and we emerged from bankruptcy on May 1, 2002. As a result of the
reorganization and the recording of the restructuring transaction and
46
implementation of fresh start reporting, our results of operations after April
30, 2002, are not comparable to results reported in prior periods. See Notes 2
and 3 of notes to consolidated financial statements for information on
consummation of our Plan of Reorganization and implementation of "fresh-start"
reporting. The discussion of our Plan of Reorganization should be read in
conjunction with the consolidated financial statements and notes thereto.
Motient presently has six wholly-owned subsidiaries and a 25.5% interest (on a
fully-diluted basis) in MSV as of September 30, 2002. For further details
regarding Motient's interest in MSV, please see Note 6 ("Subsequent Events --
Developments Relating to 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 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 Note 6 ("Subsequent Events - $12.5
Million Term Credit Facility") of notes to consolidated financial statements.
Motient's other four subsidiaries hold no material operating assets other than
the stock of other subsidiaries and Motient's interests in MSV. On a
consolidated basis, we refer to Motient Corporation and its six wholly-owned
subsidiaries as "Motient." Our indirect, less-than 50% voting interest in MSV is
not consolidated with Motient for financial statement purposes. Rather, we
account for our interest in MSV under the equity method of accounting.
Core Wireless Business
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Our customers use our network for a variety of
wireless data communications services, including email messaging and other
services that enable businesses, mobile workers and consumers to transfer
electronic information and messages and access corporate databases and the
Internet.
Over the last several years, we have made substantial investments in new
products and services, including our eLinksm wireless email service. Our eLink
service is a wireless email application, wirelessly enabling POP and IMAP
compliant email services on the Motient network. We provide our eLink brand
two-way wireless email service to customers accessing email through corporate
servers, internet service providers, mail service provider, or MSP, accounts,
and paging network suppliers. We also offer a BlackBerry TM by Motient solution
specifically designed for large corporate accounts operating in a Microsoft
Exchange and Lotus Notes environment. BlackBerry TM is a popular wireless email
solution developed by Research In Motion, or RIM, and is being provided on the
Motient network under an agreement with RIM. See Note 6 ("Subsequent Events") of
notes to consolidated financial statements for discussion related to on-going
RIM litigation.
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 disposed of all of our remaining shares of
XM Radio and ceased to hold any interest in XM Radio as of November 19, 2001.
For the nine months ended September 30, 2001, we recorded proceeds of
47
approximately $33.5 million from the sale in 2001 of two million shares of our
XM Radio stock. For the three-months and nine-months ended September 30, 2001,
we recorded equity in losses of XM Radio of $16.8 million and $40.2 million,
respectively.
Mobile Satellite Ventures LP
On June 29, 2000, we formed a joint venture subsidiary, MSV, with certain other
parties, in which we owned 80% of the membership interests. Through November
2001, MSV used our satellite network 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 the right to
participate in certain business decisions that were made in the normal course of
MSV's 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 in the consolidated financial statements included in
this annual report pursuant to the equity method of accounting.
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, or 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 our
future sublease obligations to MSV for rent and utilities through August 2003
and (iii) a five-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., purchased a
total of $52.5 million of convertible notes. As part of this transaction,
certain investors, excluding Motient, were also provided the option to invest
another $50 million, subject to certain timing and approval by the Federal
Communications Commission, or FCC, of MSV's plans for a new generation satellite
system utilizing ancillary terrestrial components, or ATCs. As of September 30,
2002, we had an ownership percentage, on an undiluted basis, of approximately
48% of the common and preferred units of MSV, and approximately 55% of the
common units. Assuming that all of MSV's outstanding convertible notes are
converted into limited partnership units of MSV, as of September 30, 2002
Motient had a 33.3% partnership interest in MSV on an "as converted" basis
giving effect to the conversion of all outstanding convertible notes of MSV, and
25.5% on a fully-diluted basis, assuming certain other investors exercise their
right to make additional investment in MSV as a result of the FCC ATC
application process.
Our $15 million note from MSV is subject to prepayment in certain circumstances
where MSV receives cash proceeds from equity, debt or asset sale transactions.
There can be no assurance that any such transactions will occur, nor can there
be any assurance regarding the timing of such events. Any additional investment
in MSV and any related repayment of the $15.0 million note may not occur before
Motient needs the funds from the repayment of such note. In addition, 25% of the
proceeds of any repayment of the $15.0 million note from MSV must be allocated
to prepay pro-rata both the Rare Medium and Credit Suisse First Boston
Corporation, or CSFB, notes. The allocation of the 25% of the proceeds will be
made in accordance with Rare Medium's and CSFB's relative outstanding balance at
the time of prepayment. If not repaid earlier, the $15.0 million note from MSV,
including accrued interest thereon, becomes due and payable on November 25,
2006; however, there can be no assurance that MSV would have the ability, at
48
that time, to pay the amounts due under the note. 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.
In July 2002, MSV commenced a rights offering seeking total funding in the
amount of $3.0 million. While we were not obligated to participate in the
offering, our board determined that it was in our best interests to participate
so that its interest in MSV would not be diluted. On August 12, 2002, we funded
an additional $957,000 to MSV pursuant to this offering, and received a new
convertible note in such amount. The rights offering did not impact our
ownership position in MSV.
In January 2003, MSV's application with the Federal Communications Commission,
or FCC, with respect to MSV's plans for a new generation satellite system
utilizing ancillary terrestrial components, or ATCs, was approved by the FCC.
The order granting such approval, which we refer to as the ATC Order, requires
that licensees, including MSV, submit a further application with the FCC to seek
approval of the specific system incorporating the ATCs that the licensee intends
to use. MSV has filed an application for ATC authority, pending the FCC's final
rules and regulations. MSV has also filed a petition for reconsideration with
respect to certain aspects of the ATC Order. In January 2004, certain
terrestrial wireless providers petitioned the U.S. Court of Appeals for the
District of Columbia to review the FCC's decision to grant ATC to satellite
service providers. Oral arguments in this case are scheduled for May 2004.
In November 2003, we engaged Communication Technology Advisors LLC, or CTA, to
perform a valuation of our 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.
Including its notes receivable from MSV ($13 million at May 1, 2002), the book
value of Motient's aggregate interest in MSV as of May 1, 2002 was reduced from
$67 million to $53.9 million.
For a discussion of certain recent developments regarding MSV, please see Note 6
("Subsequent Events") of notes to consolidated financial statements.
Overview of Liquidity and Risk Factors
As described below under "Liquidity and Capital Resources - Motient's Chapter 11
Filing and Plan of Reorganization", in January 2002 we and three of our
wholly-owned subsidiaries filed voluntary petitions for reorganization under
Chapter 11 of the Federal Bankruptcy Code. Motient Ventures Holding, Inc. did
not file for Chapter 11 and had no activities during this period. The only asset
of this subsidiary is its interest in MSV.
Our 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, notes payable to Rare Medium and CSFB, and the
outstanding Motorola, Inc. credit facility).
For further discussion of our funding requirements and outlook, and recent
developments with respect thereto, please see Note 6 ("Subsequent Events") of
notes to consolidated financial statements.
49
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 periods following emergence from bankruptcy. In a large
customer deployment, the upfront cost of the hardware can be significant.
Because the hardware generally is usable only on Motient's network, certain
customers delayed adoption while we were in Chapter 11. In an effort to
accelerate adoption of our services, we did, in selected instances in the first
quarter of 2002, offer certain incentives for adoption of our services that are
outside of our customary contract terms, such as extended payment terms or
temporary hardware rental. None of these offers were accepted; therefore, these
changes in terms did not effect 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, the Company adopted "fresh-start" accounting, which
required that the $221 million of reorganization value of the Company's net
assets be allocated in accordance with procedures specified by Statement of
Financial Accounting Standards No. 141, "Business Combinations" (See Note 2,
"Significant Accounting Policies").
Summary of Risk Factors
In addition to the challenge of growing revenue as described above, our future
operating results could be adversely affected by a number of uncertainties and
factors, including:
o our ability, and our resellers' ability, some of whom are in
bankruptcy, to attract and retain customers,
o our ability to further reduce operating expenses and thereby reduce
our cash burn rate,
o our ability to secure additional financing necessary to fund
anticipated capital expenditures, operating losses and any 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 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 limited liquidity,
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,
50
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, including, but not
limited to, our rights to sell and distribute handheld devices
manufactured by RIM and the wireless email service known as
BlackBerryTM by Motient, which rights may be challenged or jeopardized
as a result of a recent jury verdict finding that certain of RIM's
technology for such products and services infringed certain
intellectual property owned by NTP, Inc.,
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 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 fiscal
year ended December 31, 2002.
Results of Operations
Due to the consummation of our bankruptcy and the application of "fresh-start"
accounting, results of operations for the periods after April 30, 2002 are not
fully comparable to the results for previous periods.
The table below outlines operating results for the Successor and Predecessor
Companies
Successor Predecessor
Company Company
(Restated)
Three Months Three Months
Ended Ended September
September 30, 30,
2002 2001
---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless internet $5.5 $3.2
Field services 4.0 4.4
Transportation 2.8 3.6
Telemetry 0.6 0.7
Maritime and other 0.1 4.8
--- ---
Service revenue 13.0 16.7
Equipment revenue 0.3 6.8
--- ---
Total $13.3 $23.5
===== =====
51
Successor
Company Predecessor Company
(Restated)
Five Months Nine Months
Ended Four Months Ended
September 30, Ended April 30, September 30,
2002 2002 2001
---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless internet $8.9 $5.6 $7.6
Field services 6.9 5.6 15.4
Transportation 4.5 4.1 11.8
Telemetry 1.0 0.8 2.1
Maritime and other 0.2 0.7 15.5
--- --- ----
Service revenue 21.5 16.8 52.4
Equipment revenue 0.5 5.6 16.3
--- --- ----
Total $22.0 $22.4 $68.7
===== ===== =====
Successor Company Predecessor Company
(Restated)
Three Months Ended Three Months Ended % of
September 30, % of Service September 30, Service
2002 Revenue 2001 Revenue
---- ------- ---- -------
Summary of Expense
- ------------------
(in millions)
Cost of service and operations $14.2 109% $18.0 108%
Cost of equipment sold 0.4 3 9.1 54
Sales and advertising 1.8 14 5.5 33
General and administration 3.0 23 4.2 25
Restructuring charges -- -- 4.7 28
Depreciation and amortization 5.9 45 8.8 53
--- -- --- --
Total $25.3 195% $50.3 301%
===== ===== ===== =====
Successor Company Predecessor Company
Four (Restated)
Five Months Months Nine Months
Ended % of Ended % of Ended % of
September 30, Service April 30, Service September 30, Service
2002 Revenue 2002 Revenue 2001 Revenue
---- ------- ---- ------- ---- -------
Summary of Expense
- ------------------
(in millions)
Cost of service and operations $24.4 113% $21.9 130% $55.7 106%
Cost of equipment sold 1.3 6 6.0 35 24.7 47
Sales and advertising 3.2 15 4.3 26 19.0 36
General and administration 6.4 30 4.1 24 16.0 31
Restructuring charges -- -- 0.6 4 4.7 9
Depreciation and amortization 10.1 47 6.9 41 26.2 50
---- -- --- -- ---- --
Total $45.4 211% $43.8 260% $146.3 279%
===== ==== ===== ==== ====== ====
52
Three and Nine Months Ended September 30, 2002 and 2001
Operations of our core wireless business have continued post-bankruptcy, and
accordingly, management believes that the combined operating results of the
Successor Company since May 1, 2002, and those of the Predecessor Company prior
to that date provide a reasonable means for the discussion of our core
operations. Accordingly, the following describes period-over-period activity
assuming the combination of results from both the Successor and Predecessor
Companies.
Revenue and Subscriber Statistics
Service revenues approximated $38.3 million for the nine months ended September
30, 2002, which was a $14.1 million reduction as compared to the nine months
ended September 30, 2001. This reduction is a result of the loss of revenue
associated with the sale of our satellite assets to MSV in November 2001 and
from the loss of royalty revenue as a result of the application of "fresh-start"
accounting, offset by an increase in revenue in our wireless internet market
sector.
The tables below summarize our revenue and subscriber base for the three and
nine months ended September 30, 2002 (combining Predecessor and Successor
Companies for the nine months ended September 30, 2002) and 2001. An explanation
of certain changes in revenue and subscribers is set forth below.
Three Months Ended September 30,
-------------------------------------
Summary of Revenue 2002 2001 Change % Change
- ------------------ ---- ---- ------ --------
(in millions) (Restated)
Wireless internet $5.5 $3.2 $2.3 72%
Field services 4.0 4.4 (0.4) (9)
Transportation 2.8 3.6 (0.8) (22)
Telemetry 0.6 0.7 (0.1) (14)
Maritime and other 0.1 4.8 (4.7) (98)
--- --- ----- ----
Service revenue 13.0 16.7 (3.7) (22)
Equipment revenue 0.3 6.8 (6.5) (96)
--- --- ----- ----
Total $13.3 $23.5 $(10.2) (43)%
===== ===== ======= =====
Nine Months Ended September 30,
-------------------------------------
Summary of Revenue 2002 Combined 2001 Change % Change
------------------ ------------- ---- ------ --------
(in millions) (Restated) (Restated)
Wireless internet $14.5 $7.6 $6.9 91%
Field services 12.5 15.4 (2.9) (19)
Transportation 8.6 11.8 (3.2) (27)
Telemetry 1.8 2.1 (0.3) (14)
Maritime and other 0.9 15.5 (14.6) (94)
--- ---- ------ ----
Service revenue 38.3 52.4 (14.1) (27)
Equipment revenue 6.1 16.3 (10.2) (63)
--- ---- ------ ----
Total $44.4 $68.7 $(24.3) (35)%
===== ===== ======= =====
The make up of our subscriber base was as follows:
53
As of September 30,
-------------------------------------------------------------------------
Subscribers
2001 transferred to 2001
2002 As Reported MVS As Adjsuted Change % Change
---- ----------- ------ ----------- ------ --------
Wireless internet 101,637 101,923 -- 101,923 (286) (0)%
Field services 32,244 40,163 (2,613) 37,550 (5,306) (14)
Transportation 94,347 80,970 (9,619) 71,351 22,996 32
Telemetry 29,267 21,386 -- 21,386 7,881 37
Maritime and other 657 26,376 (25,102) 1,274 (617) (48)
--- ------ ------- ----- ---- ----
Total 258,152 270,818 (37,334) 233,484 24,668 11%
======= ======= ======== ======= ====== ===
o Wireless Internet: Revenue grew from $7.6 million to $14.5 million for
the nine month period ended September 30, 2002, as compared to the
nine month period ended September 30, 2001, and our subscriber base
declined from 101,923 to 101,637; however, the active,
revenue-producing units grew from approximately 24,000 units as of
September 30, 2001, to approximately 52,000 as of September 30, 2002,
or a 117% increase period over period. Revenue grew from $3.2 million
to $5.5 million for the three month period ended September 30, 2002,
as compared to the three month period ended September 30, 2001. The
revenue growth in the Wireless Internet sector for both the three and
nine month periods ended September 30, 2002, as compared to the
comparable periods in 2001, represents our continued focus on
expanding the adoption of eLink and BlackBerry TM 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 $15.4 million to $12.5 million
for the nine month period ended September 30, 2002, as compared to the
nine month period ended September 30, 2001, and our subscriber base
declined from 37,550 to 32,244. Revenue declined from $4.4 million to
$4.0 million for the three month period ended September 30, 2002, as
compared to the three month period ended September 30, 2001. 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 sale of our satellite assets to MSV, and
internal cutbacks within certain customer accounts that have gone
through industry consolidations and downsizings, resulting in fewer
active users on the network.
o Transportation: Revenue for the nine month period ended September 30,
2002, as compared to the nine months ended September 30, 2001,
declined from $11.8 million to $8.6 million; however, our subscriber
base grew from 71,351 to 94,347. Revenue declined from $3.6 million to
$2.8 million for the three month period ended September 30, 2002, as
compared to the three month period ended September 30, 2001. The
decrease in revenue from the transportation sector was primarily the
result of the sale of our satellite assets to MSV.
o Telemetry: Revenue for the nine month period ended September 30, 2002,
as compared to the nine months ended September 30, 2001, declined from
$2.1 million to $1.8 million; however, our subscriber base grew from
21,386 to 29,267. Revenue declined from $0.7 million to $0.6 million
for the three month period ended September 30, 2002, as compared to
the three month period September 30, 2001. Growth in revenue by new
and existing telemetry customers was offset by contractual pricing
reductions for one of our largest telemetry customers.
o Maritime and other: Revenue for the nine month period ended September
30, 2002, as compared to the nine months ended September 30, 2001,
declined from $15.5 million to $0.9 million. The reduction in maritime
and other revenue was primarily the result of the loss of revenue
earned in the first nine months of 2001, as compared to the first nine
months of 2002 from (i) our contract to provide MSV with satellite
54
capacity as it pursued its research and development program, and (ii)
the loss of revenue from the satellite business associated with the
sale of the satellite business in November 2001. Revenue declined from
$4.8 million to $0.1 million for the three month period ended
September 30, 2002, as compared to the three month period ended
September 30, 2001.
o Equipment: Revenue for the nine month period ended September 30, 2002,
as compared to the nine months ended September 30, 2001, declined from
$16.3 million to $6.1 million. Revenue declined from $6.8 million to
$0.3 million for the three month period ended September 30, 2002, as
compared to the three month period ended September 30, 2001. The
decrease in equipment revenue was primarily a result of the sale of
our satellite business in November 2001 and the loss of equipment
sales from that business in the first nine months of 2002, as well as
a write-off of deferred equipment revenue of $12.7 million as a result
of "fresh-start" accounting.
The tables below summarize our operating expenses for the three and nine months
ended September 30, 2002 (combining Predecessor and Successor Companies) and
2001. An explanation of certain changes in operating expenses is set forth
below.
Three Months Ended September 30,
-------------------------------------
Summary of Expenses 2002 2001 Change % Change
---- ---- ------ --------
(in millions) (Restated)
Cost of service and operations $14.2 $18.0 ($3.8) (21)%
Cost of equipment sales 0.4 9.1 (8.7) (96)
Sales and advertising 1.8 5.5 (3.7) (68)
General and administration 3.0 4.2 (1.2) (29)
Restructuring charges -- 4.7 (4.7) --
Depreciation and amortization 5.9 8.8 (2.9) (33)
--- --- ----- ----
Total $25.3 $50.3 $(25.0) (50%)
===== ===== ======= =====
Nine Months Ended September 30,
-------------------------------------
Summary of Expenses 2002 Combined 2001 Change % Change
------------- ---- ------ --------
(in millions) (Restated) (Restated)
Cost of service and operations $46.3 $55.7 $(9.4) (17)%
Cost of equipment sales 7.2 24.7 (17.5) (71)
Sales and advertising 7.5 19.0 (11.5) (61)
General and administration 10.5 16.0 (5.5) (34)
Restructuring charges 0.6 4.7 (4.1) (87)
Depreciation and amortization 17.0 26.2 (9.2) (36)
---- ---- ----- ----
Total $89.1 $146.3 $(57.2) (39)%
====== ====== ======= =====
Cost of service and operations includes costs to support subscribers, such as
network telecommunications charges and site rent for network facilities, among
other things. Cost of service and operations decreased from $55.7 million for
the nine months ended September 30, 2001 to $46.3 million for the nine months
ended September 30, 2002, or approximately 17%. Costs of service and operations
decreased from $18.0 million to $14.2 million for the three months ended
September 30, 2002 as compared to the three months ended September 30, 2001.
These decreases were the result of decreases 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, reductions of
headcount levels primarily as a result of our sale of the satellite assets as
well as our cost control efforts undertaken in the second half of 2001,
decreases in other costs associated with the sale of the satellite assets to
MSV, and reductions in research and development spending. These decreases were
55
partially offset by fees incurred as a result of Motient's withdrawal from
certain frequency auctions, increases in base station maintenance costs
associated with new rates that went into effect in the latter half of 2001 under
our maintenance contract, increases in the number of base stations, increases
for site rental costs associated with the increase in base stations and
increases in the average lease rate, and increases in licensing and commission
payments to third parties with whom we have partnered to provide certain eLink
and BlackBerry TM by Motient services.
The decrease in cost of equipment sold to $0.4 million and $7.2 million for the
three and nine months ended September 30, 2002, as compared to $9.1 million and
$24.7 million for the three and nine months ended 2001, was a result of reduced
terrestrial hardware sales prices and no hardware sales in 2002 associated with
the satellite voice business that was sold to MSV in November 2001. These
decreases were offset by a $4.4 million write down in April 2002. These
write-downs compared to a charge of $4.5 million write-down in the first nine
months of 2001. This reduction was also a result of write-offs of deferred
equipment costs of $12.7 million.
Sales and advertising expenses decreased to $1.8 million and $7.5 million for
the three and nine months ended September 30, 2002, as compared to $5.5 million
and $19.0 million for the three and nine months ended September 30, 2001. Sales
and advertising expenses as a percentage of service revenue were approximately
20% for the first nine months of 2002, compared to 36% for the comparable period
of 2001. The decrease in sales and advertising expenses for the three and nine
months ended September 30, 2002 was primarily attributable to less spending on
advertising and trade shows, and decreases 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 decreased to
$3.0 million and $10.5 million for the three and nine months ended September 30,
2002, as compared to $4.2 million and $16.0 million for the three and nine
months ended September 30, 2001. General and administrative expenses as a
percentage of service revenue were approximately 27% for the first nine months
of 2002 as compared to 31% for 2001. The decrease in costs for the three and
nine months ended September 30, 2002 in our core wireless business general and
administrative expenses was primarily attributable to savings associated with
having fewer employees throughout the first three and nine months 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 reductions in regulatory expenditures.
Depreciation and amortization for the core wireless business decreased to $5.9
million and $17.0 million for the three and nine months ended September 30,
2002, as compared to $8.8 million and $26.2 million for the three and nine
months ended September 30, 2001. Depreciation and amortization was approximately
44% of service revenue for the first nine months of 2002, as compared to 50% for
the first nine months of 2001. The decrease in depreciation and amortization
expense for the three and nine months ended September 30, 2002 was primarily
attributable to the sale of our satellite assets to MSV in late November 2001
and the associated depreciation on those assets. This was partially offset by a
write-up in FCC frequency license assets at the "fresh-start" date, which caused
an increase in amortization.
As a result of our emergence from bankruptcy, certain of our non-operating
expenses, such as interest expense, will be materially different that those
expenses recorded in prior periods. We believe the results for the five months
ended September 30, 2002, are the most reflective of our future results.
56
Successor Predecessor Predecessor Predecessor
Company Company Company Company
Five Months Four Months Nine Months Three Months
Ended Ended Ended Ended
September 30, April 30, September 30, September 30,
2002 2002 2001 2001
---- ---- ---- ----
(in thousands) (Restated) (Restated)
Interest expense, net (983) (1,850) (46,971) (16,543)
Interest and other income, net 15 1,270 998 --
Gain (loss) on disposal of assets (1,193) (591) (407) --
Gain (loss) on sale of transportation assets -- 372 (592) (67)
Rare Medium merger costs -- -- (4,054) (4,054)
Loss on Rare Medium note call option -- -- 1,512 15,312
Equity in loss of XM Radio & Mobile Satellite
Ventures $(4,287) (1,909) (40,163) (16,836)
Loss on extinguishment of debt -- -- $(2,578) $(653)
Interest expense from May 1, 2002, is associated with our various debt
obligations, including the $19.8 million notes payable to Rare Medium and CSFB,
our capital lease obligations and our vendor financing commitment. Interest
expense has decreased significantly for the three and nine months ended
September 30, 2002, as compared to the three and nine months ended September 30,
2001, as we eliminated the majority of our debt obligations as part of our Plan
of Reorganization and "fresh-start" accounting in May 2002. In comparing the
three and nine months ended September 30, 2002 to September 30, 2001, there have
been material changes in our financial position as part of our Plan of
Reorganization and "fresh-start" accounting in May 2002. As part of this Plan of
Reorganization, we cancelled approximately $380 million of notes and other
liabilities, which materially altered the balance of our liabilities on its
balance sheet and related interest expense requirements.
Certain other transaction in 2002 and 2001 caused variations for the three and
nine months ended September 30, 2002, as compared to the three and nine months
ended September 30, 2001. For the three and nine months ended September 30,
2001, we recorded gains on the Rare Medium note call option of $15.3 million and
$1.5 million, respectively. There were no similar losses for the three and nine
months ended September 30, 2002.
Effective May 1, 2002, we are required to reflect our equity share of the losses
of MSV, up to our cost basis of approximately $19.3 million. For the five months
ended September 30, 2002, MSV had revenues of $12.2 million, operating expenses
of $10.6 million and a net loss of $10.4 million and we recorded our share of
losses of $4.5 million.
Liquidity and Capital Resources
As of September 30, 2002, we had approximately $3.6 million of cash on hand and
short-term investments.
Since emerging from bankruptcy protection in May 2002, we have undertaken a
number of actions to reduce our operating expenses and cash burn rate. Our
liquidity constraints have been exacerbated by weak revenue growth since
emerging from bankruptcy protection, due to a number of factors including the
weak economy generally and the weak telecommunications and wireless sector
specifically, the financial difficulty of several of our key resellers, on whom
we rely for a majority of our new revenue growth, and our continued limited
liquidity which has hindered efforts at demand generation.
57
For a description of our significant cost reduction initiatives since emerging
from bankruptcy, please see Note 6 ("Subsequent Events") of notes to
consolidated financial statements.
In addition to cash generated from operations, we own a $15.0 million promissory
note issued by MSV in November 2001. This note matures in November 2006, but may
be fully or partially repaid prior to maturity involving the consummation of
additional investments in MSV in the form of equity, debt or asset sale
transactions, subject to certain to certain conditions and priorities with
respect to payment of other indebtedness. There can be no assurance that any
such transactions will occur, nor can there be any assurance regarding the
timing of such events. Under the terms of our $19.75 million of notes issued to
Rare Medium and CSFB in connection with our plan of reorganization, in certain
circumstances we must use 25% of any proceeds from the repayment of the $15.0
million note from MSV to repay the Rare Medium and CSFB notes, on a pro-rata
basis. Motient also owns an aggregate of $3.5 million of convertible notes
issued MSV. The convertible notes mature on November 26, 2006, bear interest at
10% per annum, compounded semiannually, and are payable at maturity. The
convertible notes are convertible, at any time, at our discretion, and
automatically in certain circumstances, into class A preferred units of limited
partnership of MSV. For a discussion of certain recent developments regarding
MSV, please see Note 6 ("Subsequent Events") of notes to consolidated financial
statements.
Subsequent to the end of the period covered by this report, we entered into a
$12.5 million term credit facility. Please see Note 6 ("Subsequent Events") of
notes to consolidated financial statements.
Our future financial performance will depend on our ability to continue to
reduce and manage operating expenses, as well as our ability to grow revenue. We
may lose certain revenues from major customers due to churn and migration to
alternative technologies. Our future financial performance also could be
negatively affected by unforeseen factors and unplanned expenses.
As described in Note 6 ("Subsequent Events") of notes to consolidated financial
statements, in December 2002 we entered into an agreement with UPS pursuant to
which the customer prepaid an aggregate of $5 million in respect of network
airtime service to be provided beginning January 1, 2004. The $5 million
prepayment will be credited against airtime services provided to UPS beginning
January 1, 2004, until the prepayment is fully credited. Based on UPS' current
level of network airtime usage, we do not expect that UPS will be required to
make any cash payments to us in 2004 for service provided during 2004. If UPS
does not make any cash payments to us in 2004, our cash flows from operations in
2004 will decline, and our liquidity and capital resources could be materially
and negatively affected.
As described above in Note 6 ("Subsequent Events") of notes to consolidated
financial statements, UPS has substantially completed its migration to next
generation network technology, and its monthly airtime usage of our network has
declined significantly. There are no minimum purchase requirements under our
contract with UPS, and the contract may be terminated by UPS on 30 days' notice.
While we expect that UPS will remain a customer for the foreseeable future, over
time we expect that the bulk of UPS' units will migrate to another network.
Until June of 2003, UPS had maintained its historical level of payments to
mitigate the near-term revenue and cash flow impact of its recent and
anticipated continued reduced network usage. However, beginning in July of 2003,
the revenues and cash flow from UPS declined significantly. We are planning a
number of initiatives to offset the loss of revenue and cash flow from UPS,
including the following:
58
o further reductions in our employee and network infrastructure costs;
o growth in new revenue from our recently-announced carrier
relationships with Verizon Wireless and T-Mobile, under which we will
be selling voice and data services on such carrier's next generation
wireless networks as a master agent;
o increased revenue growth from our various telemetry applications and
initiatives; and
o enhancements to our liquidity which are expected to involve the sale
of certain frequency assets, such as the recently announced sales of
certain specialized mobile radio, or SMR, licenses to Nextel
Communications Inc.
We continue to pursue all potential funding alternatives. Among the alternatives
for raising additional funds are the issuances of debt or equity securities,
other borrowings under secured or unsecured loan arrangements, and sales of
assets. There can be no assurance that additional funds will be available to us
on acceptable terms or in a timely manner.
We expect to continue to require significant additional funds before we begin to
generate cash in excess of our operating expenses, and do not expect to begin to
generate cash from operations in excess of our cash operating costs until the
first quarter of 2005, at the earliest. Also, even if we begin to generate cash
in excess of our operating expenses, we expect to continue to require
significant additional funds to meet remaining interest obligations, capital
expenditures and other non-operating cash expenses.
We are in the process of evaluating our future strategic direction. We have been
forced to take drastic actions to reduce operating costs and preserve our
remaining cash. For example, in February 2004 we effected a reduction in force
that reduced our workforce from approximately 166 to 112 employees. The
substantial elimination of sales and other personnel may have a negative effect
on our future revenues and growth prospects and our ability to support new
product initiatives and generate customer demand. Cash generated from operations
may not be sufficient to pay all of our obligations and liabilities, and if we
are not able to obtain other sources of funding or obtain relief from our
creditors, we may not be able to continue as a going concern.
Our projected cash requirements are based on certain assumptions about our
business model, including, specifically, assumed rates of growth in subscriber
activations and assumed rates of growth of service revenue. While we believe
these assumptions are reasonable, these growth rates continue to be difficult to
predict, and there is no assurance that the actual results that are experienced
will meet the assumptions included in our business model and projections. If the
future results of operations are significantly less favorable than currently
anticipated, our cash requirements will be more than projected, and we may
require additional financing in amounts that will 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.
Our consolidated financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The successful implementation of
our business plan requires substantial funds to finance the maintenance and
growth of our operations, network and subscriber base and to expand into new
markets. We have an accumulated deficit and have historically incurred losses
from operations, which are expected to continue for additional periods in the
future. There can be no assurance that our operations will become profitable.
59
These factors, along with our negative operating cash flows have placed
significant pressures on our financial condition and liquidity position.
Motient's Chapter 11 Filing and Plan of Reorganization
Under our 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
$335.0 million in senior notes exchanged their notes plus accrued interest for
25,000,000 shares of our new common stock. Some of our other creditors 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; however, the value of these shares has been recorded in the financial
statements as if they had been issued on the effective date of the
reorganization. Holders of our pre-reorganization common stock received
warrants to purchase an aggregate of approximately 1,496,512 shares of common
stock. The warrants may be exercised to purchase shares of Motient common stock
at a price of $.01 per share, will expire May 1, 2004, or two years after the
effective date of reorganization, and will not be exercisable unless and until
the average closing price of Motient's common stock over a period of ninety
consecutive trading days is equal to or greater than $15.44 per share. All
warrants issued to the holders of our pre-reorganization common stock, including
those shares held by our 401(k) savings plan, have been recorded in the
financial statements as if they had been issued on the effective date of the
reorganization. Also, in July 2002, Motient issued to Evercore
Partners LP, financial advisor to the creditors' committee in Motient's
reorganization, a warrant to purchase up to 343,450 shares of common stock, at
an exercise price of $3.95 per share. The warrant was dated May 1, 2002, and has
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. The value of this warrant has been
recorded in the financial statements as if it had been issued on May 1, 2002
Further details regarding our Plan of Reorganization are contained in Motient's
disclosure statement with respect to the Plan of Reorganization, which was filed
as Exhibit 99.2 to our current report on Form 8-K dated March 4, 2002.
Summary of Liquidity and Financing
As of September 30, 2002, Motient had the following sources of financing in
place:
o MSV issued a $15.0 million note to Motient as part of the November 26,
2001 asset sale. The note matures in November 2006, but is payable
sooner in certain circumstances involving the consummation of
additional investments in MSV, subject to certain priorities with
respect to payment of other indebtedness. There can be no assurances
that this note will be repaid prior to its stated maturity date or
that MSV will have the resources to repay such note when due. Of the
$15.0 million of proceeds from this note, $3.75 million would be
required to be used to prepay a pro-rata portion of the $19.0 million
note payable to Rare Medium and the $750,000 note payable to CSFB.
Motient also owns an aggregate of $3.5 million of convertible notes
issued MSV. The convertible notes mature on November 26, 2006, bear
interest at 10% per annum, compounded semiannually, and are payable at
maturity. The convertible notes are convertible, at any time at our
60
discretion, and automatically in certain circumstances, into class A
preferred units of limited partnership of MSV. For a discussion of
certain recent developments relating to MSV, please see Note 6
("Subsequent Events") of notes to consolidated financial statements.
As of September 30, 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 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 matures on May 1, 2005 and carries annual
interest at 9%. The note allows us to elect to add interest 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 $15.0
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 matures on May 1, 2005 and
carries annual interest at 9%. The note allows us to elect to add
interest 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
$15.0 million note from MSV.
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 12.2%, and
as of September 30, 2002, had a balance of $6.0 million.
o A capital lease for telecommunications equipment acquired in September
2000. The lease term has a term of three years and an effective
interest rate of 13.3%, and as of September 30, 2002, had a balance of
$0.3 million.
o A vendor financing commitment from Motorola to provide up to $15.0
million of vendor financing to finance up to 75% of the purchase price
of additional terrestrial network base stations. Loans under this
facility, which are held by Motient Communications Inc., bear interest
at a rate equal to LIBOR plus 7.0% and are guaranteed by Motient
Corporation and Motient Holdings Inc. The terms of the facility
require that amounts borrowed be secured by the equipment purchased
therewith. As of September 30, 2002, $3.3 million was outstanding
under this facility at 9.0%. In December 2001, 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.
Subsequent to the end of the period covered by this report, we entered into a
new $12.5 million term credit facility, and restructured our existing debt
obligations with Motorola and Hewlett-Packard Financial Services Company. Please
see Note 6 ("Subsequent Events") of notes to consolidated financial statements.
Commitments
As of September 30, 2002, we had no outstanding commitments to purchase
inventory.
In May 2002, the FCC filed a proof of claim with the United States Bankruptcy
Court, asserting a pre-petition claim in the approximate amount of $1.0 million
fees incurred as a result of our withdrawal from certain auctions. Under our
court-approved Plan of Reorganization, the FCC's claim was classified as an
"other unsecured" claim and the FCC was issued a pro rata portion of 97,256
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shares of common stock issued to creditors with allowed claims in such class. We
recorded a $1.0 million expense in April 2002 for this claim.
At April 30 2002, we had certain contingent and/or disputed obligations under
our satellite construction contract entered into in 1995, which contained flight
performance incentives payable by us to the contractor if the satellite
performed according to the contract. Upon the implementation of the Plan of
Reorganization, this contract was terminated, and in satisfaction of all amounts
alleged to be owed by us under this contract, the contractor received a pro-rata
portion of the 97,256 shares issued to creditors holding allowed unsecured
claims. The shares were issued upon closure of the bankruptcy claims process.
Please see Note 6 ("Subsequent Events") of notes to consolidated financial
statements.
Summary of Cash Flow for the five months ended September 30, 2002 (Successor
Company), the four months ended April 30, 2002 and the nine months ended
September 30, 2001 (Predecessor Company)
Successor Company Predecessor Company
----------------- -------------------
(Restated)
Five Months Ended Four Months Ended Nine Months Ended
September 30, April 30, September 30,
2002 2002 2001
---- ---- ----
Cash used in operating activities $(11,874) $(14,546) $(71,901)
Cash (used in) provided by investing activities (690) (122) 46,912
Cash (used in) provided by financing activities:
Equity issuances -- 17 402
Debt payments on capital leases, vendor
financing (1,334) (1,273) (9,037)
Net proceeds from debt issuances -- -- 35,250
Other -- -- (1,062)
-- -- -------
Cash (used in) provided by financing activities (1,334) (1,256) 25,553
------- ------- ------
Total change in cash (13,898) (15,924) 564
-------- -------- ---
Cash and cash Equivalents, end of period $3,565 $17,463 $3,084
====== ======= ======
Cash used in operating activities decreased for the nine months ended September
30, 2002 as compared to the nine months ended September 30, 2001, as a result of
decreases in operating losses, due substantially to the sale of MSV in November
2001, decreases in funds provided by working capital, and decreases in our cash
interest expense as a result of our reorganization.
We continue to work on reducing our operating expenses and working capital
requirements. We expect that cash used in operating activities will be reduced
going forward as a result of the cost saving measures that we have put into
place.
The decrease in cash provided by investing activities for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001 was
primarily attributable to the sale in 2001 of two million shares of our XM Radio
stock for net proceeds of approximately $33.5 million, the funding of the $20.5
million second quarter 2001 high yield interest payment out of the escrow
account, offset by an increase of $148,000 in capital spending.
The decrease in cash provided by financing activities for the nine months ended
September 30, 2002 as compared to the nine months ended September 30, 2001 was a
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result of a net decrease in borrowings and related issuance costs, and lower
vendor debt and capital lease repayments, primarily as a result of our deferral
until 2003 of any payments due under our vendor financing agreement.
Other
On May 1, 2002, the effective date of our Plan of Reorganization, the financing
agreements that included restrictions on our ability to pay dividends were
terminated as part of the implementation of our Plan of Reorganization; however,
we have never paid dividends and do not expect to do so in the near future.
Regulation
For a discussion of material regulatory matters affecting our business, please
see Note 5 ("Legal and Regulatory Matters") and Note 6 ("Subsequent Events") of
notes to consolidated financial statements.
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.
"Fresh-Start" Accounting
In accordance with Statement of Position No. 90-7, effective May 1, 2002, we
adopted "fresh start" accounting and allocated the reorganization value of $221
million to our assets in accordance with Statement of Financial Accounting
Standards No. 141, "Business Combinations".
We have allocated the $221 million reorganization value among our assets based
upon our estimates of the fair value of our assets and liabilities. In the case
of current assets, we concluded that their carrying values approximated fair
values. The values of our frequencies and our investment in and notes receivable
from MSV were based on independent analyses presented to the bankruptcy court.
The value of our investment in MSV was subsequently modified as it had not been
appropriately calculated as of May 1, 2002 due to certain preference rights for
certain classes of shareholders in MSV. The value of our fixed assets was based
upon an estimate of replacement cost, for which we believe that our recent
purchases represent a valid data point. Software and customer related
intangibles values were determined based on third party valuations as of May 1,
2002.
For a complete description of the application of "Fresh-Start" Accounting,
please refer to Note 2 ("Significant Accounting Policies, Motient's Chapter 11
Filing and Plan of Reorganization and "Fresh-Start" Accounting") of notes to
consolidated financial statements.
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Inventory
Inventory, which consists 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, if any. Periodically, we will offer temporary discounts
on equipment purchases. The value of this discount is recorded as a cost of sale
in the period in which the sale occurs.
Investment in MSV and Note Receivable from MSV
As a result of the application of "fresh-start" accounting and subsequently
modified (see below), the notes and investment in MSV were valued at fair value
and we recorded an asset in the amount of approximately $53.9 million
representing the estimated fair value of our investment in and note receivable
from MSV. Included in this investment is the historical cost basis of the
Company's common equity ownership of approximately 48% as of May 1, 2002, or
approximately $19.3 million. In accordance with the equity method of accounting,
we recorded our approximate 48% share of MSV losses against this basis.
Approximately $21.6 million of the $40.9 million value attributed to MSV is the
excess of fair value over cost basis and is amortized over the estimated lives
of the underlying MSV assets that gave rise to the basis difference. We are
amortizing this excess basis in accordance with the pro-rata allocation of
various components of MSV's intangible assets as determined by MSV through
recent independent valuations. Such assets consist of FCC licenses, intellectual
property and customer contracts, which are being amortized over a
weighted-average life of approximately 12 years.
Additionally, we have recorded the $15.0 million note receivable from MSV, plus
accrued interest thereon at its fair value, estimated to be approximately $13.0
million, after giving affect to discounted future cash flows at market interest
rates. This note matures in November 2006, but may be fully or partially repaid
prior to maturity in certain circumstances involving the consummation of
additional investments in MSV, subject to certain to certain conditions and
priorities with respect to payment of other indebtedness.
In November 2003, we engaged CTA to perform a valuation of our 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 notes 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. Including its notes receivable from MSV ($13 million at
May 1, 2002), the book value of Motient's aggregate interest in MSV as of May 1,
2002 was reduced from $67 million to $53.9 million.
The valuation of our investment in MSV and our note receivable from MSV are
ongoing assessments that are, by their nature, judgmental given that MSV is not
traded on a public market and is in the process of developing certain next
generation technologies, which depend on approval by the FCC. While the
financial statements currently assume that there is value in our investment in
MSV and that the MSV note is collectible, there is the inherent risk that this
assessment will change in the future and we will have to write down the value of
this investment and note.
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Deferred Taxes
We have generated significant net operating losses for tax purposes through
September 30, 2002. We have had our ability to utilize these losses limited on
two occasions as a result of transactions that caused a change of control in
accordance with the Internal Revenue Service Code Section 382. Additionally,
since we have not yet generated taxable income, we believe that our ability to
use any remaining net operating losses has been greatly reduced; therefore, we
have fully reserved for any benefit that would have been available as a result
of our net operating losses.
Revenue Recognition
We generate revenue principally through equipment sales and airtime service
agreements, and consulting services. In 2000, we adopted SAB 101 which 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 exists, 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. We defer any revenue and costs associated with activation of a
subscriber on our network over an estimated customer life of two years.
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. As of September
30, 2002, we had a valuation allowance of approximately 15% of our accounts
receivable. We believe that our established valuation allowance was adequate as
of September 30, 2002 and 2001. If circumstances related to specific customers
change or economic conditions worsen such that our past collection experience
and assessments of the economic environment are no longer relevant, our estimate
of the recoverability of our trade receivables could be further reduced.
Equipment and service sales: We sell equipment to resellers who market our
terrestrial product and airtime service to the public. We also sell our product
directly to end-users. Revenue from the sale of the equipment as well as the
cost of the equipment, are initially deferred and are recognized over a period
corresponding to our estimate of customer life of two years. Equipment costs are
deferred only to the extent of deferred revenue.
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Long-lived Assets:
On January 1, 2002, we adopted the provisions of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No.
141 requires business combinations initiated after June 30, 2001 to be accounted
for using the purchase method of accounting, and broadens the criteria for
recording intangible assets separate from goodwill. Recorded goodwill and
intangibles will be evaluated against this new criteria and may result in
certain intangibles being subsumed into goodwill, or alternatively, amounts
initially recorded as goodwill may be separately identified and recognized apart
from goodwill. SFAS No. 142 requires the use of a nonamortization approach to
account for purchased goodwill and certain intangibles. Under a nonamortization
approach, goodwill and certain intangibles will not be amortized into results of
operations, but instead will be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. As of January
1, 2002, we had approximately $5.0 million of recorded goodwill. However, as
part of our adoption of fresh-start accounting, our recorded goodwill was
reduced to zero.
We account for our frequencies as finite-lived intangibles and amortize them
over a 20-year estimated life. As described in Note 6 of notes to consolidated
financial statements, we are monitoring a pending FCC rulemaking proposal that
may affect our 800 MHz spectrum, and we may change our accounting policy for FCC
frequencies in the future as new information is available.
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. Subsequent to
the period covered by this report, we engaged an outside valuation expert to
value certain of our assets as of December 31, 2002 to test for potential
impairment of certain of our long-lived assets under SFAS No. 144. This testing
included valuations of software and customer-related intangibles. Based on these
tests, no impairment charges were required. The adoption of SFAS No. 144 had no
material impact to our consolidated financial statements.
Recent Accounting Standards
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 have reviewed
EITF No. 01-09 and believe that all such consideration is properly recorded by
us 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.
In May 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4,
44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS
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No. 145 rescinded three previously issued statements and amended SFAS No. 13,
"Accounting for Leases". The statement provides reporting standards for debt
extinguishments and provides accounting standards for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
We adopted SFAS No. 145 as of our "fresh-start" accounting date of May 1, 2002.
In accordance with SFAS No. 145, we have reclassified all prior period
extraordinary losses on extinguishment of debt as ordinary non-operating losses
on extinguishment of debt.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. Previous accounting
guidance was provided by EITF No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity (including
Certain Costs Incurred in a Restructuring)". SFAS No. 146 replaces EITF No.
94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities
initiated after December 31, 2002. We adopted SFAS No. 146 as of January 1, 2003
and this adoption had no material impact on our consolidated financial
statements.
In November 2002, the EITF reached consensus on EITF No. 00-21, "Accounting for
Revenue Arrangements with Multiple Deliverables". This consensus requires that
revenue arrangements with multiple deliverables be divided into separate units
of accounting if the deliverables in the arrangement meet specific criteria. In
addition, arrangement consideration must be allocated among the separate units
of accounting based on their relative fair values, with certain limitations. The
sale of our equipment with related services constitutes a revenue arrangement
with multiple deliverables. We will be required to adopt the provisions of this
consensus for revenue arrangements entered into after June 30, 2003, and we have
decided to apply it on a prospective basis. Motient does not have any revenue
arrangements that would have a material impact on our financial statements with
respect to EITF No. 00-21.
In November 2002, the FASB issued FASB Interpretation, or FIN No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN No. 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. However, a liability does not have to be recognized for a
parent's guarantee of its subsidiary's debt to a third party or a subsidiary's
guarantee of the debt owed to a third party by either its parent or another
subsidiary of that parent. The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002 irrespective of the guarantor's fiscal year
end. The disclosure requirements of FIN No. 45 are effective for financial
statements with annual periods ending after December 15, 2002. Motient does not
have any guarantees that would require disclosure under FIN No. 45.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-based
Compensation - Transition and Disclosure - an Amendment to SFAS No. 123". SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value-based method of accounting for stock-based employee compensation. In
addition, this statement amends the disclosure requirements of SFAS No. 123 for
public companies. This statement is effective for fiscal years beginning after
December 15, 2002. We will adopt the disclosure requirements of SFAS No. 148 as
of January 1, 2003 and plan to continue to follow the provisions of APB Opinion
No. 25 for accounting for stock based compensation.
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In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities -- An Interpretation of ARB No. 51", which clarifies the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to
certain entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. FIN No. 46 provides guidance related to identifying
variable interest entities (previously known generally as special purpose
entities, or SPEs) and determining whether such entities should be consolidated.
FIN No. 46 must be applied immediately to variable interest entities created or
interests in variable interest entities obtained, after January 31, 2003. For
those variable interest entities created or interests in variable interest
entities obtained on or before January 31, 2003, the guidance in FIN No. 46 must
be applied in the first fiscal year or interim period beginning after June 15,
2003. We have reviewed the implications that adoption of FIN No. 46 would have
on our financial position and results of operations and do not expect it to have
a material impact.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position certain financial instruments with characteristics of both
liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances) because that financial instrument embodies the characteristics of
an obligation of the issuer. This standard is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. We have determined that we do not have any financial instruments that are
impacted by SFAS No. 150.
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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.
Effective May 1, 2002, Motient's senior notes were eliminated in exchange for
new common stock of the company. All of Motient's remaining debt obligations are
fixed rate obligations. We do not believe that we have any material cash flow
exposure due to general interest rate changes on these debt obligations.
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 quarterly report on Form 10-Q,
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
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.
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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 quarterly report on
Form 10-Q. 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
American Institute of Certified Public Accountants, or AICPA. Reportable
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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;
o Cut-off of accounts at balance sheet dates related to accounts
payables, accrued expenses and inventories was not achieved; and
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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.
In addition to the above, since April 2003 we have reevaluated our staffing
levels, reorganized the finance and accounting organization and replaced ten
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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 quarterly report
on Form 10-Q 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.
Our current auditors, Ehrenkrantz Sterling &Co. LLC, agree with the reportable
conditions identified by our management and PricewaterhouseCoopers and have
communicated this to our audit committee.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see the discussion regarding Legal Proceedings contained in Note 5
("Legal and Regulatory Matters") of notes to consolidated financial statements,
which is incorporated by reference herein.
Item 2. Changes in Securities and Use of Proceeds
(a) In July 2002, Motient issued to Evercore Partners LP, financial advisor
to the creditors' committee in Motient's reorganization, a warrant to purchase
up to 343,450 shares of common stock, at an exercise price of $3.95 per share.
The warrant has 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. The warrant was
issued in reliance upon the exemption contained in Section 1145(a) of the
Bankruptcy Code, which exempts the offer and sale of securities under a Plan of
Reorganization from registration under the Securities Act.
In December 2002, Motient issued to three affiliates of CTA, a consultant
to the Company, warrants to purchase an aggregate of 500,000 shares of common
stock, for an aggregate purchase price of $25,000. The warrants have an exercise
price of $3.00 per share and a term of five years. The warrants were issued in
reliance upon the exemption provided by Rule 506 under the Securities Act of
1933, as amended, and/or in reliance on the exemption afforded by Section 4(2)
of the Securities Act.
Item 3. Defaults Upon Senior Securities
After having filed for protection under Chapter 11 of the Bankruptcy Code on
January 10, 2002, Motient emerged from bankruptcy protection on May 1, 2002, the
effective date of Motient's Plan of Reorganization. Accordingly, during the
period April 1, 2002 through May 1, 2002, i.e., prior to the effective date of
its reorganization plan, Motient was in default of its obligations on the
following senior debt securities outstanding during such period: (i)
approximately $367 million aggregate principal amount (and accrued interest)
owing with respect to the 12.25% senior notes due 2008 issued by Motient
Holdings Inc. in 1998, and (ii) approximately $27.0 million aggregate principal
amount and accrued interest owed to Rare Medium under certain promissory notes
issued in 2001. Pursuant to Motient's Plan of Reorganization, the foregoing debt
securities were extinguished, effective May 1, 2002, and the holders of such
securities received new debt and equity securities issued by Motient in
accordance with the terms of its Plan of Reorganization. See "Motient's Chapter
11 Filing and Plan of Reorganization and "Fresh Start" Accounting" under Note 2
of notes to consolidated financial statements included in this report.
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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 July 10, 2002, the Company filed a Current Report on Form
8-K, in response to Item 4, reporting that the Company had
engaged PricewaterhouseCoopers LLP as its independent
auditors.
On July 30, 2002, the Company filed a Current Report on Form
8-K, in response to Item 5, reporting that the Company had
effected a reduction in its workforce and that the Executive
Vice President and Chief Financial Officer had resigned.
On August 19, 2002, the Company filed a Current Report on Form
8-K, in response to Item 5, reporting that the Company did not
file its second quarter report on Form 10-Q by the filing
deadline.
On November 14, 2002, the Company filed a Current Report on
Form 8-K, in response to Item 5, reporting that the Company
would not be filing its third quarter report on Form 10-Q by
the filing deadline.
On January 28, 2003, the Company filed a Current Report on
Form 8-K, in response to Item 5, reporting that the Company
had entered into a new $12.5 million term credit facility.
On March 14, 2003, the Company filed a Current Report on Form
8-K, in response to Item 5, to provide an update on the status
of certain unresolved accounting matters.
On April 23, 2003, the Company filed a Current Report on Form
8-K, in response to Item 4, reporting that the Company had
dismissed its independent auditors, PricewaterhouseCoopers
LLP, and engaged Ehrenkrantz Sterling & Co. LLC as its
independent auditors.
On July 29, 2003, the Company filed a Current Report on Form
8-K, in response to Item 5, reporting certain changes to its
board of directors.
On August 6, 2003, the Company filed a Current Report on Form
8-K, in response to Item 5, to report a recent transaction
with Nextel and to provide an update on the status of its
periodic SEC reports.
On November 4, 2003, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report an update of recent
transaction with Nextel, to report the loss of its largest
customer UPS, and to provide an update on the status of its
periodic SEC reports.
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On December 11, 2003, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report a recent
transaction with Nextel.
On February 12, 2004, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report the termination of
employment of Walter V. Purnell, Jr. as the Company's
president and chief executive officer, and to provide an
update on the status of its periodic SEC reports.
On February 20, 2004, the Company filed a Current Report on
Form 8-K, in response to Item 5, to report a reduction in
personnel.
On March 9, 2004, the Company filed an amendment to Current
Report on Form 8-K/A, in response to Item 4, to report the
dismissal of PricewaterhouseCoopers as its independent
auditors for the period May 1, 2002 to December 31, 2002 and
the engagement of Ehrenkrantz Sterling & Co. LLC as the
Company's independent auditors for the period May 1, 2002 to
December 31, 2002.
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CERTIFICATION
The undersigned, in his capacity as the Executive Vice President, Chief
Financial Officer and Treasurer of Motient Corporation, being the principal
executive officer and principal financial 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 quarterly report on Form 10-Q of Motient
Corporation, a Delaware corporation (the "Company");
2. Based on my knowledge, this 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
quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 a date 90 days prior to the filing date of
this quarterly report; and
(d) Disclosed in this 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):
77
(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
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
March 19, 2004 /s/Christopher W. Downie
----------------------------
Christopher W. Downie
Executive Vice President,
Chief Financial Officer and
Treasurer
(principal financial and accounting
officer and duly authorized officer
to sign on behalf of the registrant)
79
EXHIBIT INDEX
Number Description
10.23* - Executive Retention Agreement, dated as of July 16, 2002, by and between Walter V. Purnell, Jr. and the Company
(filed herewith).
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 Quarterly Report
on Form 10-Q).
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 Quarterly Report on Form 10-Q).
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).
99.1 - 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.
80