SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q/A
AMENDED QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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 [X] No[_]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X]
Number of shares of common stock outstanding at August 10, 2004: 33,329,359
1
Explanatory Note
This Amended Quarterly Report on Form 10-Q/A (this "Amendment") has been filed
to amend certain disclosures in response to comments received from the
Securities and Exchange Commission on our Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004, that we originally filed on August 16, 2004, (the
"10-Q"). In order to preserve the nature and character of the disclosures set
forth in the 10-Q as originally filed, unless otherwise indicated, this
Amendment does not speak to, or reflect, events occurring after the original
filing of our 10-Q on August 16, 2004. For ease of review of the reader, we have
filed a restated 10-Q, as amended by this Amendment, in its entirety.
All information contained in this Amendment shall be deemed updated or
superseded, as applicable, by the reports (including any amendments to such
reports) we have filed and will file, with the SEC subsequent to the original
filing of our 10-Q. You should read this Amendment together with these
subsequent reports for updated disclosures on certain matters discussed in this
Amendment.
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.
2
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2004
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2003 and 2004 4
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003 5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2003 and 2004 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 27
Item 3. Quantitative and Qualitative Disclosures about Market Risk 46
Item 4. Controls and Procedures 46
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 47
Item 2. Changes in Securities and Use of Proceeds 47
Item 3. Defaults Upon Senior Securities 48
Item 6. Exhibits and Reports on Form 8-K 49
3
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Services and related revenue $ 10,156 $ 13,984 $ 20,117 $ 27,547
Sales of equipment 1,283 1,008 2,822 1,815
-------- -------- -------- --------
Total revenues $ 11,439 $ 14,992 $ 22,939 $ 29,362
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of services and operations (including stock-based
compensation of $1,454 and $1,959, respectively for the
three and six months ended June 30, 2004; exclusive of
depreciation and amortization below) 10,412 13,884 21,764 27,538
Cost of equipment sold (exclusive of depreciation and
amortization below) 1,257 1,125 2,766 2,122
Sales and advertising (including stock-based compensation
of $529 and $889, respectively, for the three and six
months ended June 30, 2004; exclusive of depreciation
and amortization below) 860 1,475 1,892 2,717
General and administrative (including stock-based
compensation of $453 and $1,029, respectively, for the
three and six months ended June 30, 2004; exclusive of
depreciation and amortization below) 2,524 3,287 4,876 6,547
Restructuring and Impairment Charges 5,110 -- 6,264 --
Depreciation and amortization 4,112 5,587 8,385 10,858
(Gain) on asset disposal (2) -- -- --
(Gain) on debt and capital lease retirement (802) -- (802) --
-------- -------- -------- --------
Total Costs and Expenses 23,471 25,358 45,145 49,782
-------- -------- -------- --------
Operating loss (12,032) (10,366) (22,206) (20,420)
-------- -------- -------- --------
Interest expense, net (1,273) (1,642) (3,039) (2,954)
Write-off of deferred financing fees (8,052) -- (8,052) --
Other income, net 191 -- 199 807
Other income from Aether 662 1,286 1,307 1,776
Equity in loss of Mobile Satellite Ventures (2,608) (2,288) (4,838) (4,613)
-------- -------- -------- --------
Net (loss) $(23,112) $(13,010) $(36,629) $(25,404)
======== ======== ======== ========
Basic and Diluted (Loss) Per Share of Common Stock:: $ (0.79) $ (0.52) $ (1.34) $ (1.01)
Net (Loss), basic and diluted
Weighted-Average Common Shares Outstanding - basic and diluted 29,338 25,116 27,285 25,107
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
4
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30, 2004 December 31, 2003
------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 12,172 $ 3,618
Restricted cash and short-term investments 1,438 504
Accounts receivable-trade, net of allowance for doubtful
accounts of $704 at June 30, 2004 and $759 at December 31, 2003 3,416 3,804
Inventory 192 240
Due from Mobile Satellite Ventures, net 95 93
Deferred equipment costs 2,212 3,765
Assets held for sale 271 2,734
Other current assets 1,686 5,091
--------- ---------
Total current assets 21,482 19,849
--------- ---------
RESTRICTED INVESTMENTS 51 1,091
PROPERTY AND EQUIPMENT, net 23,608 31,381
FCC LICENSES AND OTHER INTANGIBLES, net 71,213 74,021
INVESTMENT IN AND NOTES RECEIVABLE FROM MSV 15,772 22,610
DEFERRED CHARGES AND OTHER ASSETS 5,066 8,076
--------- ---------
Total assets $ 137,192 $ 157,028
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 12,159 12,365
Deferred equipment revenue 2,223 3,795
Deferred revenue and other current liabilities 6,387 11,005
Notes payable, including accrued interest thereon 23,405 --
Vendor financing commitment, current -- 2,413
Obligations under capital leases, current -- 1,454
--------- ---------
Total current liabilities 44,174 31,032
--------- ---------
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion -- 1,642
Vendor financing commitment, net of current portion -- 2,401
Notes payable, including accrued interest thereon -- 22,885
Term credit facility, including accrued interest thereon -- 4,914
Other long-term liabilities 290 1,347
--------- ---------
Total long-term liabilities 290 33,189
--------- ---------
Total liabilities 44,464 64,221
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY:
Preferred Stock; par value $0.01; authorized 5,000,000 shares at June
30, 2004 and December 31, 2003, no shares issued or outstanding at
June 30, 2004 or December 31, 2003 -- --
Common Stock; voting, par value $0.01; 100,000,000 shares
authorized and 29,773,089 and 25,196,840 shares issued and
outstanding at June 30, 2004 and at December 31, 2003, respectively 298 252
Additional paid-in capital 220,168 198,743
Common stock purchase warrants 30,571 15,492
Accumulated deficit (158,309) (121,680)
--------- ---------
STOCKHOLDERS' EQUITY 92,728 92,807
--------- ---------
Total liabilities and stockholders' equity $ 137,192 $ 157,028
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and the Six Months Ended June 30, 2003
(in thousands)
Six Months Six Months
Ended June 30, Ended June 30,
2004 2003
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $(36,629) $(25,404)
Adjustments to reconcile net (loss) income to net cash
(used in) provided by operating activities:
Depreciation and amortization 8,385 10,814
Equity in loss of MSV 4,838 4,613
Restructuring and impairment charges, fixed asset
disposals 2,847 --
(Gain) loss on disposal of assets -- 580
Gain on debt restructuring (802) (405)
Write-off of deferred financing fees 8,052 --
Non cash amortization of deferred financing costs 1,571 --
Non cash stock compensation 3,877 1,244
Changes in assets and liabilities, net of acquisitions
and dispositions:
Inventory 48 239
Accounts receivable -- trade 388 927
Other current assets 6,306 1,222
Accounts payable and accrued expenses (1,991) 1,469
Accrued interest 575 998
Deferred revenue and other deferred items (5,697) 164
-------- --------
Net cash (used in) operating activities (8,230) (3,539)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from MSV note 2,000 --
Proceeds from sale of property and equipment 2 --
Proceeds (purchase) of restricted investments 106 83
Additions to property and equipment, net (653) --
-------- --------
Net cash (used in) provided by investing activities 1,455 83
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases (2,419) (1,357)
Principal payments under vendor financing (682) (438)
Repayment from term loan (6,785) --
Proceeds from term credit facility 1,500 3,000
Proceeds from issuance of stock 23,188 --
Proceeds from issuance of employee stock options 1,003 --
Stock issuance costs and other charges (476) --
Debt issuance costs and other charges -- (537)
-------- --------
Net cash provided by (used in) financing activities 15,329 (668)
-------- --------
Net increase (decrease) in cash and cash equivalents 8,554 (2,788)
-------- --------
CASH AND CASH EQUIVALENTS, beginning of period 3,618 5,840
CASH AND CASH EQUIVALENTS, end of period $ 12,172 $ 3,052
======== ========
The accompanying notes are an integral part of these
consolidated condensed financial statements.
6
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2004
(Unaudited)
1. ORGANIZATION AND BUSINESS
Motient Corporation (with its subsidiaries, "Motient" or the "Company") provides
two-way wireless mobile communications services principally to
business-to-business customers. Motient generates revenue primarily from the
sale of airtime on its network and from the sale of communications devices to
its customers. Motient serves a variety of markets including mobile
professionals (such as attorneys and accountants), data processing customers
(such as wireless point of sale processing companies), and the transportation
and shipping markets. Motient provides several products to its customers
including its eLinksm brand two-way wireless email services, which allows
customers to access email in a variety of ways, including through their
corporate servers or their Internet service provider. It allows users to
remotely and wirelessly access their email, and allows users to synchronize the
calendar and organizer functions of their desktop computer with a handheld
device such as a RIM 850 or 857 Wireless Handheld, a small, data-only wireless
handheld device. Although Research In Motion, Ltd., or RIM, has discontinued
making these models, Motient continues to purchase limited quantities of RIM 857
devices, and Motient has implemented an "equivalent to new" program pursuant to
which it purchases and refurbishes used RIM 857 devices and expects that there
will be sufficient returned RIM 857s and 850s to satisfy demand for the
foreseeable future. Even if there is a sufficient supply of these devices,
however, our rights to use and sell the devices, as well as the BlackBerryTM
software, may be limited or made prohibitively expensive as a result of a
pending patent infringement lawsuit brought against Research In Motion. Please
see Item 5, "Legal and Regulatory Matters" for further details.
However, aside from our ability to obtain this hardware, the End of Life
Notification by Research In Motion may be considered indicative of the desire of
RIM and consumers in general to evolve to newer technologies with capabilities
that cannot be supported on Motient's network, including wireless handheld
devices that are both data and voice-capable. Motient cannot use these newer
devices on our network, including RIM devices newer than the RIM 857.
Motient also offers BlackBerry TM by Motient, another wireless email solution
developed by Research In Motion Ltd. ("RIM") and licensed to operate on
Motient's network on RIM 850 or 857 Devices. BlackBerry TM by Motient is
designed for large corporate accounts using Microsoft Exchange(R) or Lotus
Notes(R).
In addition to eLink and Blackberry by Motient, Motient sells airtime and
communications devices to other customers for non-email applications. Motient
currently has 21 different types of hardware devices from 17 manufacturers on
its network. The devices allow for field service organizations within companies,
or transportation companies, to connect remote personnel or assets wirelessly to
critical data. The devices also allow for machine-to-machine communications for
various telemetry applications.
In addition to selling messaging services that use Motient's own network,
Motient is also able to sell a variety of devices distributed by Verizon
7
Wireless and T-Mobile USA for use on their wireless networks. These contracts,
which were signed in the first quarter of 2003, allow Motient to sell and
promote wireless email and wireless Internet applications on networks with
greater capacity and speed than Motient's own, and that are voice capable.
Motient generates revenue in the form of one-time commissions from the sale of
subscriptions on their networks. This revenue represented less than 10% of
Motient's revenues for the three months ended June 30, 2004. The Company
considers the two-way mobile communications service described above to be its
core wireless business.
Motient has six wholly-owned subsidiaries and a 29.5% interest (assuming
conversion of all outstanding convertible notes) in Mobile Satellite Ventures LP
("MSV") as of August 10, 2004. MSV is a provider of wireless, satellite-based,
communications services. As Motient owns less than 50% of MSV, Motient has no
operating control of MSV. For further details regarding Motient's interest in
MSV, please see "- Mobile Satellite Ventures LP" below and Note 6 ("Subsequent
Events -- Developments Relating to MSV"). Our subsidiary, Motient Communications
Inc. ("Motient Communications") owns the assets comprising Motient's core
wireless business, except for Motient's Federal Communications Commission
("FCC") licenses, which are held in a separate subsidiary, Motient License Inc.
("Motient License"). Motient License is a special purpose wholly-owned
subsidiary of Motient Communications that holds no assets other than Motient's
FCC licenses. 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 maintaining its core wireless business and
expanding sales under its agent agreements with Verizon and T-Mobile, 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 restrained Motient's ability
to generate 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 newer
networks and greater resources, the loss of UPS as a primary customer, 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.
For a discussion of certain significant recent developments and trends in
Motient's business after the end of the period covered by this report through
the initial filing of this report on August 16, 2004, please see Note 6
("Subsequent Events").
8
Mobile Satellite Ventures LP
Business
- --------
Mobile Satellite Ventures LP is a provider of mobile satellite-based
communications services. MSV currently has two satellites, which allow customers
access to satellite-based wireless data, voice, fax and dispatch radio services
almost anywhere in North and Central America, northern South America, the
Caribbean, Hawaii and in various coastal waters.
MSV is also developing a next-generation system, a hybrid satellite/terrestrial
wireless network over North America that will utilize new satellites working
with MSV's patented "ancillary terrestrial component", or ATC, technology. MSV
will be able to deploy terrestrial two-way radio network technology in thousands
of locations across the United States, allowing subscribers to integrate
satellite-based communications services with more traditional land-based
wireless communications services. MSV is headquartered in Reston, VA, with an
office in Ottawa, ON, Canada.
MSV is structured as a limited partnership, of which Motient is one of the
limited partners, and holds a proportionate ownership interest in the corporate
general partner. Motient has certain rights to appoint directors to the sole
general partner of the limited partnership, but does not have any direct or
indirect operating control over MSV. As of August 10, 2004, Motient had a 29.5%
ownership interest in MSV (assuming conversion of all outstanding convertible
notes).
History
- -------
On November 26, 2001, Motient sold the assets comprising its satellite
communications business to MSV, as part of a transaction in which certain other
parties joined MSV, including TMI Communications and Company, Limited
Partnership ("TMI"), a Canadian satellite services provider. In this
transaction, TMI also contributed its satellite communications business assets
to MSV. As part of this transaction, Motient received, among other proceeds, a
$15 million promissory note issued by MSV and purchased a $2.5 million
convertible note issued by MSV. On August 12, 2002, the Company funded an
additional $957,000 to MSV pursuant to a rights offering, and received a new
convertible note in such amount. This rights offering did not impact the
Company's ownership position in MSV. 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 the Company's promissory note.
On April 2, 2004, a $17.6 million investment into MSV was consummated by
investors other than Motient. In connection with this investment, MSV's amended
and restated investment agreement was amended to provide that of the total $17.6
million in proceeds, $5.0 million was used to repay certain outstanding
indebtedness of MSV, including $2.0 million of accrued interest under the $15.0
million promissory note issued to Motient by MSV. Motient was required to use
25% of the $2 million it received in this transaction, or $500,000, to and did
make prepayments under its existing notes owed to Rare Medium Group, Inc. and
Credit Suisse First Boston. The remainder of the proceeds from this investment
were used by MSV for general corporate purposes. As of the closing of the
additional investment on April 2, 2004, and at June 30, 2004, Motient's
percentage ownership of MSV remained approximately 29.5%, assuming the
conversion of all outstanding convertible notes.
9
To the extent that MSV will need future cash to support its operations, we are
under no contractual obligation to provide it, and the value of our investment
in MSV could be negatively impacted if MSV cannot meet any such funding
requirements.
ATC
- ---
In February 2003, the FCC adopted an order governing ancillary terrestrial
component, or ATC, technology, giving mobile satellite operators broad authority
to use their assigned spectrum to operate an ATC. ATC technology allows a
wireless provider to use satellite communications technology in conjunction with
more traditional land-based wireless communications technologies, allowing a
user to utilize a signal from both satellite and terrestrial locations,
depending on a variety of technical and cost concerns. ATC can enhance satellite
availability, efficiency and economic viability by terrestrially reusing at
least some of the frequencies that are allocated to the satellite systems.
Without ATC, it may be challenging for mobile satellite systems to reliably
serve densely populated areas, because the satellite's signal may be blocked by
high rise structures and may not penetrate into buildings. As a result, the
satellite spectrum may be underutilized or unused in such areas. The use of ATC
retransmission can reduce or eliminate this problem.
Both proponents and opponents of ATC (including MSV) have filed for
reconsideration of the ATC Order, and the opponents of ATC have filed an appeal
with the U.S. Court of Appeals for the District of Columbia Circuit. Oppositions
to the petitions for reconsideration were filed August 20, 2003; replies were
filed September 2, 2003. The Court of Appeals has held the appeal in abeyance
pending resolution of the reconsideration requests. 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. A decision by the court has not yet been reached.
On May 17, 2004, MSV was awarded its first patent on a next generation satellite
system technology containing an ATC innovation. MSV believes that this patent
will support its ability to deploy ATC in a way that minimizes interference to
other satellite systems, and addresses ways to mitigate residual interference
levels using interference-cancellation techniques.
Cost Reduction Actions
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 loss of
UPS as a primary customer, the financial difficulty of several of the Company's
key resellers, on whom it relies for a majority of its new revenue growth, and
the Company's continued limited liquidity.
10
The Company has taken a number of steps recently to reduce operating and capital
expenditures in order to lower its cash burn rate and improve its liquidity
position.
Reductions in Workforce. The Company undertook a reduction in its workforce in
February 2004. This action eliminated approximately 32.5% (54 employees) of its
workforce and reduced employee and related expenditures by approximately $0.4
million per month.
Credit Facility Repayment: On April13, 2004, Motient repaid all amounts then
owing under its term credit facility, including all principal and accrued
interest thereon, in an amount of $6.8 million. The remaining availability under
the credit facility of $5.7 million will be available for borrowing by the
Company until December 31, 2004, subject to the lending conditions in the credit
agreement.
Termination Of Motorola And Hewlett-Packard Agreements: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facilities with Motorola and its capital lease with Hewlett-Packard.
The full amount due and owing under these agreements was a combined $6.8
million. The Company paid a combined $3.9 million in cash to Motorola and
Hewlett-Packard and issued a warrant to Motorola to purchase 200,000 shares of
the Company's common stock at a price of $8.68, in full satisfaction of the
outstanding balances. At June 30, 2004 approximately $1.9 million of the
Company's accounts payable related to the Motorola settlement. In the case of
Hewlett-Packard, the Company took title to all of the leased equipment and
software and the letter of credit securing this lease was cancelled; in the case
of Motorola, there was no equipment or service that Motorola was obligated to
provide. The Company recorded a gain on the extinguishment of debt in the amount
of $0.7 million on the Hewlett Packard settlement. The Company recorded a gain
of $0.1 million on the Motorola settlement.
Please see Note 3 ("Liquidity and Financing") and Note 6 ("Subsequent Events")
for further discussion of this and other financing obligations.
Network Rationalization. In the second quarter of 2004, we finalized plans to
implement certain base station rationalization initiatives. These initiatives
are anticipated to be completed by December 2004. These initiatives involve the
de-commissioning of approximately 409 base stations from our network. We had
1,549 base stations in our network as of March 31, 2004. We are taking these
actions in a coordinated effort to reduce network operating costs while also
focusing on minimizing the potential impact to our customers communications and
coverage requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. As of July 31, 2004, we were approximately 85%
complete with these network rationalization initiatives.
11
Please see Item 2 ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") for further discussion of this network
rationalization.
Communication Technology Advisors LLC. Effective January 30, 2004, Motient hired
Communications Technology Advisors LLC, or CTA, to serve as "Chief Restructuring
Entity" and advise the Company on various ways to reduce cash operating
requirements. The term of CTA's engagement was recently extended through
December 2004. See Note 2 ("Related Parties") for further discussion of
Motient's relationship with CTA.
Despite these initiatives, the Company continues to generate losses from
operations, and there can be no assurances that it will ever generate income
from operations.
Changes in Management
On May 24, 2004 the board of directors designated Myrna J. Newman, the Company's
controller and chief accounting officer, as the Company's principal financial
officer. Simultaneously, the board of directors elected Christopher W. Downie to
the position of executive vice president, chief operating officer and treasurer.
Mr. Downie will remain as the Company's principal executive officer.
On May 6, 2004 the board of directors elected Raymond L. Steele to the Company's
board of directors. The board of directors now consists of six members. Mr.
Steele was also elected to the Company's audit committee.
Also on May 6, 2004 the board of directors elected Robert L. Macklin as the
Company's general counsel and secretary.
Change in Accountants
On March 2, 2004, Motient dismissed PricewaterhouseCoopers LLP 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 did not report 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. Ehrenkrantz Sterling & Co. LLC was also engaged to audit
Motient's consolidated financial statements for the period ended December 31,
2003.
On June 1, 2004, Ehrenkrantz Sterling & Co. LLC merged with the firm of Friedman
Alpren & Green LLP. The new entity, Friedman LLP has been retained by Motient
and the Audit Committee of Motient's Board of Directors approved this decision
on June 4, 2004.
For further details regarding the change in accountants, please see the
Company's current report on Form 8-K filed with the SEC in April 23, 2003, the
Company's amendment to current report on Form 8-K/A filed with the SEC on March
9, 2004 and the Company's quarterly report on Form 10-Q for the quarter ended
September 30, 2003, filed with the SEC on June 7, 2004.
12
Sale of SMR Licenses to Nextel Communications, Inc.
On December 9, 2003, Motient Communications entered into an asset purchase
agreement, under which Motient Communications will sell surplus 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 in April
2004, the Company closed the sale of approximately one-half of the remaining
licenses. 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 consented to the sale of these licenses.
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 six months ended June 30,
2004 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 June 30, 2004, and for all periods presented have
been made. Footnote disclosure has been condensed or omitted as permitted in
interim financial statements.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly-owned subsidiaries. All significant inter-company transactions and
accounts have been eliminated.
Cash Equivalents
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of three months or less to be cash
equivalents.
Short-term Investments
The Company considers highly liquid investments with original or remaining
maturities at the time of purchase of between three months and one year to be
short-term investments.
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.
13
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.
Concentrations of Credit Risk
For the six months ended June 30, 2004, five customers accounted for
approximately 47% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 21%. No one customer
accounted for more than 9% of the Company's net accounts receivable at June 30,
2004. For the six months ended June 30, 2003, five customers accounted for
approximately 50% of the Company's service revenue, with two customers, United
Parcel Service of America, Inc. ("UPS") and SkyTel, each accounting for more
than 15%. SkyTel accounted for approximately 10% of the Company's accounts
receivable at June 30, 2003. UPS migrated a majority of its units off of the
Company's network in the second half of 2003 and is no longer a material
customer of the Company.
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.
Investment in MSV and Notes Receivable from MSV
The Company determined that certain adjustments to its historical financial
information for 2000, 2001 and 2002 were required to reflect the effects of
several complex transactions, including the formation of, and transactions with,
MSV. Please see the Company's current report on Form 8-K dated March 14, 2003
and its annual report on Form 10-K for the year ended December 31, 2002 for a
complete discussion of such adjustments.
Prior to our adoption of "fresh-start" accounting after we emerged from Chapter
11 bankruptcy proceedings on May 1, 2002, the 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 its 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.
14
Approximately $6.2 million of the 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 at "fresh start", 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 April 2004, MSV repaid $2.0 million of accrued interest under this note.
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 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. There
was no further impairment required as of December 31, 2003 or June 30, 2004.
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 the three and six month period ended June 30, 2004, MSV had revenues of $7.6
million and $15.7 million, respectively, operating expenses of $7.7 million and
$15.0 million, respectively, and a net loss of $7.5 million and $14.2 million,
respectively.
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
15
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 June 30, 2004; 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 No. 101 provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the deferral of the recognition of revenue and costs related to equipment sold
as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No.104, "Revenue Recognition",
which supersedes SAB No. 101, "Revenue Recognition in Financial Statements." SAB
No. 104's primary purpose is to rescind accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements and to rescind the SEC's
"Revenue Recognition in Financial Statements Frequently Asked Questions and
Answers" ("FAQ") issued with SAB No. 104. Selected portions of the FAQ have been
incorporated into SAB No. 104. The adoption of SAB No. 104 did not have a
material impact on the Company's revenue recognition policies.
Revenue is recognized as follows:
Service revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and 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 the Company's network over an estimated customer
life of two years.
The Company packages airtime usage on our network that involves a wide variety
of volume packaging, anything from a 35 kilobytes per month plan up to unlimited
kilobyte usage per month, with various gradations in between. Discounts may be
applied when comparing one customer to another, and such service discounts are
recorded as a reduction of revenue when granted. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
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 the Company's network over
an estimated customer life of two years.
16
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 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 that do not significantly increase the
utility or useful life of an asset 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.
Restructuring and Impairment Charges
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of September 30, 2004, the Company had incurred base station
deconstruct costs of $0.4 million, the loss on the retirement of certain base
station equipment of $2.8 million and termination liabilities of $0.5 million
for site leases no longer required for removed base stations. In February, 2004,
the Company reduced its workforce by 54 employees. In accordance with SFAS No.
112, "Employers' Accounting for Postemployment Benefits - an amendment FASB
statements No. 5 and 43" the Company recorded a liability for the severance,
employee benefits and estimated payroll taxes related to the reduction in
workforce.
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.
17
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on (loss) attributable to common
stockholders and (loss) per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Net loss, as reported $(23,112) $(13,010) $(36,629) $(25,404)
Add: Stock-based employee compensation expense
included in net loss, net of related tax effects 2,435 1,141 3,877 1,141
(Deduct)/Add: Total stock-based employee
compensation (expense) income determined under
fair value based method for all awards, net of
tax related effects 11 (567) (428) (2,198)
-------- -------- -------- --------
Pro forma net loss (20,666) (12,436) (33,180) (26,461)
Weighted average common shares outstanding 29,338 25,116 27,285 25,107
Loss per share:
Basic and diluted---as reported $ (0.79) $ (0.52) $ (1.34) $ (1.01)
Basic and diluted---pro-forma $ (0.70) $ (0.49) $ (1.22) $ (1.05)
Under SFAS No. 123 the fair value of each option grant is estimated on the date
of grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions:
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Expected life (in years) 9 10 10 10
Risk-free interest rate .88%-.93% 1.71% .88%-.93% 1.71%
Volatility 146%-162% 173% 146%-162% 173%
Dividend yield 0% 0% 0% 0%
18
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 Company's core
customer base can be generally divided into five broad categories, Wireless
Internet, Field Services, Transportation, Telemetry and Other. Wireless Internet
primarily consists of customers using he Company's network and applications to
access certain internet functions, like email. Devices and airtime used by
transportation and shipping companies, or by personnel in the field service
industries (such as repair personnel), for dispatching, routing and other vital
communications functions are known as transportation and field service,
respectively. Telemetry typically covers devices and airtime to connect remote
equipment, such as wireless point-of-sale terminals, with a central monitoring
facility. Other revenue consists of sales commissions, consulting fees, or other
fees. The following summarizes the Company's core wireless business revenue by
these market categories:
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $5.2 $7.3 $11.4 $14.4
Field Services 1.5 2.8 3.3 6.0
Transportation 0.9 3.2 1.8 5.8
Telemetry 0.6 0.6 1.2 1.2
All Other 1.9 0.1 2.4 0.2
--- --- --- ---
Service revenue 10.1 14.0 20.1 27.6
Equipment revenue 1.3 1.0 2.8 1.8
--- --- --- ---
Total Revenue $11.4 $15.0 $22.9 $29.4
===== ===== ===== =====
The Company does not measure ultimate profit and loss or track its assets by
these market categories.
(Loss) Per Share
Basic and diluted (loss) income per common share is computed by dividing income
(loss) available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
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 June 30, 2004 and 2003, there were
warrants to acquire approximately 8,864,962 and 5,464,962, respectively, shares
of common stock. As of June 30, 2004 and June 30, 2003 there were options
outstanding for 799,108 and 1,273,649 shares, respectively.
19
Holders of our pre-bankruptcy common stock received warrants to purchase an
aggregate of approximately 1,496,512 shares of common stock. The warrants were
exercisable to purchase shares of our common stock at a price of $.01 per share,
if and only at such time, the average closing price of our common stock for
ninety consecutive trading days was equal to or greater than $15.44 per share
during the two years following our May 1, 2002 reorganization. The terms of
these warrants were not met and therefore, they expired May 1, 2004.
Related Parties
The Company made payments of $570,000 and $771,000 to related parties for
service-related obligations for the three and six-month period ended June 30,
2004, as compared to $38,000 and $208,000 for the three and six month period
ended June 30, 2003. There were no amounts due to related parties as of June 30,
2004. CTA is a consulting and private advisory firm specializing in the
technology and telecommunications sectors. It had previously acted as the
spectrum and technology advisor to the official committee of unsecured creditors
in connection with the Company's bankruptcy proceedings, and subsequently as a
consultant to the Company since May 2002. On January 30, 2004, the Company
engaged CTA to act as chief restructuring entity. As consideration for this
work, Motient agreed to pay to CTA a monthly fee of $60,000. In addition, since
the initial engagement of CTA, the payment of certain monthly fees to CTA had
been deferred. In April 2004, Motient paid CTA $440,000 for all past deferred
fees. The term of CTA's engagement was recently extended through December 2004.
3. LIQUIDITY AND FINANCING
The Company has taken a number of steps recently to reduce operating and capital
expenditures in order to lower its cash burn rate and improve its liquidity
position. Most recently, the Company undertook a reduction in its workforce in
February 2004. This action eliminated approximately 32.5% (54 employees) of its
workforce. The Company has no definite plans to undertake any future debt or
equity financing.
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 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. In April 2004, MSV
repaid $2.0 million of accrued interest under this note and the Company paid
$0.5 million to Rare Medium and CSFB, pro-rata, for accrued interest under those
notes. There can be no assurance that the remainder of the MSV note will be
repaid prior to maturity, or at all.
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.
For additional information with regard to recent funding events and debt
reduction, please see Note 6 ("Subsequent Events").
20
Debt Obligations & Capital Leases
The following table outlines the Company debt obligations and capital leases as
of June 30, 2004.
(Unaudited)
June 30, 2004
-------------
(in thousands)
Rare Medium note payable due 2005, including
accrued interest thereon $ 22,516
CSFB note payable due 2005, including
accrued interest thereon 889
Vendor financing and Promissory Note ---
--------
Less current maturities 23,405
--------
Long-term debt $ ---
========
Rare Medium Note: 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 substantially all of the
Company's interests in MSV. The new note matures on May 1, 2005 and carries
interest at 9% per annum. 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. In April 2004, the Company paid
accrued interest of $0.5 million under this note as a result of the $2.0 million
repayment of the MSV note. On July 15, 2004, the Company paid all principal and
interest due and owing on this note, in the amount of $23.6 million. Please see
Note 6 ("Subsequent Events - Repayment of Rare Medium and CSFB Debt
Obligations") for further information with regard to certain payments made on
this note subsequent to the period covered by this report.
CSFB 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 subsidiary of Motient
Corporation that owns 100% of Motient Ventures Holdings Inc., which owns
substantially all of the Company's interest in MSV. The note matures on May 1,
2005 and carries interest at 9% per annum. 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. In April 2004, the
Company paid accrued interest of $0.02 million under this note as a result of
the $2.0 million repayment of the MSV note. On July 15, 2004, the Company paid
all principal and interest due and owing on this note, in the amount of $0.9
million. Please see Note 6 ("Subsequent Events - Repayment of Rare Medium and
CSFB Debt Obligations") for further information with regard to certain payments
made on this note subsequent to the period covered by this report.
21
Vendor Financing and Promissory Note & Capital Leases: In June 2004, the Company
negotiated settlements of the entire amounts outstanding under the financing
facilities with Motorola and the capital lease with Hewlett-Packard. The full
amount due and owing under these agreements was a combined $6.8 million. The
Company paid a combined $3.9 million in cash to Motorola and Hewlett-Packard and
issued a warrant to Motorola to purchase 200,000 shares of the Company's common
stock at a price of $8.68, in full satisfaction of the outstanding balances. In
the case of Hewlett-Packard, the Company took title to all of the leased
equipment and software and the letter of credit securing this lease was
cancelled, and in the case of Motorola, there was no equipment or service that
Motorola was obligated to provide. The Company recorded a gain on the
extinguishment of debt in the amount of $0.7 million on the Hewlett Packard
settlement. The Company recorded a gain of $0.1 million on the Motorola
settlement.
Sources of Funding
Sales of Common Stock
On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a per
share price of $5.50 for an aggregate purchase price of $23.2 million to
multiple investors, and also issued warrants to purchase an aggregate of
1,053,978 shares of its common stock, at an exercise price of $5.50 per share.
These warrants will vest if and only if Motient does not meet certain deadlines
between June and November 2004, with respect to certain requirements under the
registration rights agreement.
On July 1, 2004, Motient sold 3,500,000 shares of our common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to
multiple investors, and also issued warrants to purchase an aggregate of 525,000
shares of common stock, at an exercise price of $8.57 per share. These warrants
will vest if and only if we do not meet certain registration deadlines beginning
in November, 2004, with respect to certain requirements under the registration
rights agreement. For further information, please see "Item 2. Changes in
Securities and Use of Proceeds".
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, Highland Capital
Management and Lampe Conway & Co. York Capital is affiliated with JGD Management
Corp. and James G. Dinan. JGD Management Corp, James G. Dinan, Highland Capital
Management and James D. Dondero 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 August 1, 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
------------------------ ----------------
James G. Dinan* 2,276,445
JGD Management Corp.* 2,276,445
Highland Capital Management** 4,642,469
James Dondero** 4,642,469
22
*JGD Management Corp and James G. Dinan share beneficial ownership
with respect to the 2,276,445 shares of our common stock. Mr. Dinan is
the president and sole stockholder of JGD Management Corp, which
manages the other funds and accounts that hold our common stock over
which Mr. Dinan has discretionary investment authority.
** James D. Dondero, a member of Motient's board of directors, is the
President of Highland Capital Management, L.P., which, pursuant to an
arrangement with M&E Advisors, L.L.C., has indirectly made a
commitment under the credit facility.
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 term credit facility terminated on December 31, 2003. On March
16, 2004, Motient Communications entered into an amendment to the credit
facility which extended the borrowing availability period until December 31,
2004. As part of this amendment, Motient Communications 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.
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. On April 13, 2004, Motient repaid all
principal amounts then owing under the credit facility, including accrued
interest thereon, in an amount of $6.8 million, which amount may not be
reborrowed. In conjunction with the April 13, 2004 repayment, Motient
immediately expensed $6.4 million and $1.7 million in financing fees related to
the January 2003 and March 2004 credit facilities.
The remaining availability under the credit facility of $5.7 million will be
available for borrowing to the Company until December 31, 2004, subject to the
lending conditions in the credit agreement.
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 (including, but not limited to Motient Communication's
shares in Motient License). 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
lenders could ask the Company to pledge the stock of MVH Holdings Inc. to the
lenders.
23
On January 27, 2003, in connection with the signing of the credit agreement,
Motient issued warrants at closing to the lenders to purchase, in the aggregate,
3,125,000 shares of its 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
date to December 31, 2003. In December 2003, the Company paid the lenders a
commitment fee of approximately $113,000.
On March 16, 2004, in connection with the execution of the amendment to the
credit agreement, Motient issued warrants to the lenders to purchase, in the
aggregate, 1,000,000 shares of Motient's common stock. The exercise price of the
warrants is $4.88 per share. The warrants were immediately exercisable upon
issuance and have a term of five years. The warrants were valued using a
Black-Scholes pricing model at $6.7 million 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
rights agreement. Under such agreement, Motient agreed to file a registration
statement to register the shares underlying the warrants upon the request of a
majority of the warrant holders, or in conjunction with the filing of a
registration statement in respect of shares of common stock of the Company held
by other holders. Motient will bear all the expenses of such registration. In
connection with the amendment, Motient was also required to pay commitment fees
to the lenders of $320,000, which were added to the principal balance of the
credit facility at closing. These fees were recorded on the Company's balance
sheet and will be amortized as additional interest expense over three years, the
term of the related debt.
In each of April, June and August 2003 and March of 2004, the Company made draws
under the credit agreement in the amount of $1.5 million for an aggregate amount
of $6.0 million, each of which would have been due three years from the date of
the draw, if not earlier repaid. 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 Motient's ongoing operations.
For further details regarding the term credit facility, please see our annual
report on Form 10-K for the year ended December 31, 2002, filed with the SEC on
March 22, 2004, and the exhibits attached thereto.
24
Litigation Proceeds
On April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing under the "take-or-pay" agreement between Motient and
Wireless Matrix. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix in which Wireless Matrix paid Motient $1.1
million. The $1.1 million was recorded as service revenue in June 2004.
4. COMMITMENTS AND CONTINGENCIES
As of June 30, 2004, the Company had no contractual inventory commitments.
In December 2002 Motient 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, Motient does not expect that UPS will be required to make any
cash payments in 2004 for service provided during 2004. There are no minimum
purchase requirements under the contract with UPS, and the contract may be
terminated by UPS on 30 days' notice. If UPS terminates the contract, we will be
required to refund any unused portion of the prepayment to UPS. The Company's
remaining airtime service obligation to UPS at June 30, 2004 in respect of the
prepayment was approximately $4.3 million.
5. LEGAL AND REGULATORY MATTERS
Legal
Our rights to use and sell the BlackBerryTM software and RIM's handheld devices
may be limited or made prohibitively expensive as a result of a patent
infringement lawsuit brought against 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 April 15, 2004, Motient filed a claim under the rules of the American
Arbitration Association in Fairfax County, VA, against Wireless Matrix
Corporation, a reseller of Motient's services, for the non-payment of certain
amounts due and owing to Motient under the "take-or-pay" agreement between
Motient and Wireless Matrix. Under this agreement, Wireless Matrix agreed to
purchase certain minimum amounts of air-time on the Motient network. In June
2004, Motient reached an out of court settlement with Wireless Matrix, in which
Wireless Matrix paid Motient $1.1 million.
From time to time, Motient is involved in legal proceedings in the ordinary
course of its business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which Motient is a party, Motient
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings not otherwise
disclosed would have a material adverse impact on its business, financial
condition, results of operations or cash flows.
25
Regulatory
Seeking to resolve interference to public safety users, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel is allowed to occupy spectrum in the 1.9 GHz band in exchange
for, among other things, relocating and retuning public safety licensees in the
800 MHz band. However, there are reports that a court challenge will be filed
challenging the legality of the FCC's decision, and the U.S. Comptroller General
is investigating whether the plan would impermissibly diverge funds from the
U.S. Treasury. Motient has spectrum in both the lower-800 MHz band and upper-800
MHz band, and on April 8, 2004, filed a request with the FCC asking that the FCC
relocate its lower-800 MHz band frequencies into the upper -800 MHz band as part
of the 800 MHz reconfiguration plan. On August 6, 2004, the FCC released the
text of its July 8, 2004 order. The text of the order did not grant Motient's
request, but neither did it explicitly deny it. Motient cannot assure that its
operations will be not affected by the adoption or implementation of this order
or any subsequent addenda.
6. SUBSEQUENT EVENTS
Sale of Common Stock
On July 1, 2004, Motient sold 3,500,000 shares of our common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to
multiple investors, and also issued warrants to purchase an aggregate of 525,000
shares of common stock, at an exercise price of $8.57 per share. These warrants
will vest if and only if we do not meet certain registration deadlines beginning
in November, 2004, with respect to certain requirements under the registration
rights agreement. For further information, please see "Item 2. Changes in
Securities and Use of Proceeds".
Repayment of Rare Medium and CSFB Debt Obligations
On July 15, 2004, Motient repaid all principal amounts then owing under its
notes payable to Rare Medium and CSFB, including accrued interest thereon, in an
amount of $23.6 million and $0.9 million, respectively.
Termination of Motorola Agreements
In June 2004, the Company negotiated a settlement of its entire amount
outstanding under its financing facilities with Motorola. The full amount due
and owing under these agreements was a combined $4.2 million. On July 12, 2004,
the Company paid $1.9 million in cash and issued a warrant to Motorola to
purchase 200,000 shares of the Company's common stock at a price of $8.68, in
full satisfaction of the outstanding balances. The Company recorded a gain of
$0.1 million on this Motorola settlement.
26
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,
2003, and our reports on Form 10-K and 10-Q to be filed after this quarterly
report, as well as our other reports and filings with the SEC.
Our forward-looking statements are based on information available to us today,
and we will not update these statements. Our actual results may differ
significantly from the results discussed in these statements.
Overview
General
This section provides information regarding the various components of Motient's
business, which we believe are relevant to an assessment and understanding of
the financial condition and consolidated results of operations of Motient.
We are a nationwide provider of two-way, wireless mobile data services and
mobile Internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we generate revenue primarily from the sale of airtime on our network
and from the sale of communications devices to our customers. Our customers use
our network and our wireless applications for wireless email messaging and
wireless data transmission, enabling businesses, mobile workers and consumers to
wirelessly transfer electronic information and messages and to access corporate
databases and the Internet.
Motient has six wholly-owned subsidiaries and a 29.5% interest (assuming
conversion of all outstanding convertible notes) in Mobile Satellite Ventures
LP, a provider of wireless, satellite-based, communications services, as of June
30, 2004. As Motient owns less than 50% of MSV, Motient has no operating control
27
of MSV. Motient Communications Inc. owns the assets comprising Motient's core
wireless business, except for Motient's FCC licenses, which are held in a
separate subsidiary, Motient License Inc. Motient's other four subsidiaries hold
no material operating assets other than the stock of other subsidiaries and
Motient's interests in MSV. On a consolidated basis, we refer to Motient
Corporation and its six wholly-owned subsidiaries as "Motient." Our 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.
Summary of Risk Factors
In addition to the challenge of growing revenue as described above, our future
operating results could be adversely affected by a number of uncertainties and
factors, including:
o We have undergone significant organizational restructuring and we face
substantial operational challenges.
o We are not cash flow positive, and our prospects will depend on our
ability to control our costs while maintaining and improving our
service levels.
o We will need additional liquidity to fund our operations.
o We may not be able to meet our debt obligations, operating expenses,
working capital and other capital expenditures.
o We will continue to incur significant losses.
o We generate a large part of our revenues and cash flows from a small
number of customers, and the loss of one or more key customers could
result in a significant reduction in revenues and cash flows; UPS has
recently deregistered a majority of its units on our network.
o Our growth has been curtailed by funding constraints.
o Our in internal controls may not be sufficient to ensure timely and
reliable financial information.
o We may not be able to realize value from our investment in MSV due to
risks associated with MSV's next-generation business plan.
o Motient may have to take actions which are disruptive to its business
to avoid registration under the Investment Company Act of 1940.
o We could lose market share and revenues as a result of increasing
competition from companies in the wireless communications industry
that have greater resources and name recognition.
o Failure to keep pace with rapidly changing markets for wireless
communications would significantly harm our business.
o The success of our wireless communications business depends on our
ability to enter into and maintain third party distribution
relationships.
o We expect to maintain a limited inventory of devices to be used in
connection with our eLink service, and any interruption in the supply
of such devices could significantly harm our business.
o We cannot guarantee that our suppliers will be able to supply us with
components and devices in the quantities and at the times we require,
or at all.
28
o If prices charged by suppliers for wireless devices do not decline as
we anticipate, our business may not experience the growth we expect.
o We may not be able to develop, acquire and maintain proprietary
information and intellectual property rights, which could limit the
growth of our business and reduce our market share.
o Patent infringement litigation against Research In Motion, Ltd., or
RIM, may impede our ability to use and sell certain software and
handheld devices.
o Government regulation may increase our cost of providing services,
slow our expansion into new markets, subject our services to
additional competitive pressures and affect the value of our common
stock.
o We face burdens relating to the recent trend toward stricter corporate
governance and financial reporting standards.
o Motient's competitive position may be harmed if the wireless
terrestrial network technology it licenses from Motorola is made
available to competitors.
o Motient could incur substantial costs if it is required to relocate
its spectrum licenses under a pending proposal being considered by the
FCC.
o Our adoption of "fresh-start" accounting may make evaluation our
financial position and results of operations for 2002 and 2003, as
compared to prior periods, more difficult.
o Certain tax implications of our bankruptcy and reorganization may
increase our tax liability.
o There is a very limited public trading market for our common stock,
and our equity securities may continue to be illiquid or experience
significant price volatility.
o We do not expect to pay any dividends on our common stock for the
foreseeable future.
o Future sales of our common stock could adversely affect its price
and/or our ability to raise capital.
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, 2003.
29
Results of Operations
The tables below outline operating results for Motient for the periods
indicated:
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
Summary of Revenue
- ------------------
(in millions)
Wireless Internet $5.2 $7.3 $11.4 $14.4
Field Services 1.5 2.8 3.3 6.0
Transportation 0.9 3.2 1.8 5.8
Telemetry 0.6 0.6 1.2 1.2
All Other 1.9 0.1 2.4 0.2
--- --- --- ---
Service Revenue 10.1 14.0 20.1 27.6
Equipment Revenue 1.3 1.0 2.8 1.8
--- --- --- ---
Total $11.4 $15.0 $22.9 $29.4
===== ===== ===== =====
Three Months Ended Three Months Ended
June 30, % of Service June 30, % of Service
2004(1) Revenue 2003(2) Revenue
------- ------- ------- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $10.4 103% $13.9 99%
Cost of Equipment Sold 1.3 13 1.1 8
Sales and Advertising 0.9 9 1.5 11
General and Administration 2.5 25 3.3 24
Operational Restructuring Costs 5.1 50 -- --
Depreciation and Amortization 4.1 41 5.6 40
(Gain) loss on asset disposal 0.0 0 0.0 0
(Gain) on debt and capital lease retirement (0.8) (8) 0.0 0
----- --- ----- ---
Total Operating $23.5 233% $25.4 182%
===== === ===== ===
(1) Includes compensation expense of $2.4 million related to the market
value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the market
value of employee stock options.
Six Months Ended Six Months Ended
June 30, % of Service June 30, % of Service
2004(1) Revenue 2003(2) Revenue
------- ------- ------- -------
Summary of Expense
- ------------------
(in millions)
Cost of Service and Operations $21.7 108% $27.5 100%
Cost of Equipment Sold 2.8 14 2.1 8
Sales and Advertising 1.9 10 2.7 10
General and Administration 4.9 24 6.6 24
Operational Restructuring Costs 6.3 31 -- --
Depreciation and Amortization 8.4 42 10.9 39
(Gain) loss on asset disposal 0.0 0 0.0 0
(Gain) on debt and capital lease retirement (0.8) (4) 0.0 0
----- --- ----- ---
Total Operating $45.2 225% $49.8 180%
===== === ===== ====
(1) Includes compensation expense of $3.9 million related to the market
value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the market
value of employee stock options.
30
Subscriber Statistics
Our customer base can be generally divided into five broad categories, Wireless
Internet, Field Services, Transportation, Telemetry and Other. Wireless Internet
primarily consists of customers using our network and applications to access
certain Internet functions, like email. Devices and airtime used by
transportation and shipping companies, or by personnel in the field service
industries (such as repair personnel), for dispatching, routing and other vital
communications functions are known as Transportation and Field Service,
respectively. Telemetry typically covers devices and airtime used to connect
remote equipment, such as wireless point-of-sale terminals, with a central
monitoring facility.
The table below summarizes the make up of our subscriber base. Registered
devices represent devices that our customers have registered for use on our
network. Certain numbers of these devices may be kept in inventory by our
customers for future use and generally are not revenue producing. However,
tracking changes of registered devices period-over-period is nonetheless a
useful indicator of changes in our customer base.
As of June 30,
--------------------
2004 2003 Change % Change
---- ---- ------ --------
Wireless Internet 89,471 110,452 (20,981) (19)%
Field Services 14,356 20,770 (6,414) (31)
Transportation (1) 46,986 100,793 (53,807) (53)
Telemetry 31,002 29,787 1,215 (4)
All Other 722 941 (219) (23)
------- ------- -------- -----
Total 182,537 262,743 (80,206) (31)%
======= ======= ======== =====
(1) Includes 9,692 registered UPS devices as of June 30, 2004, of which
3,066 were actively passing data traffic, as compared to 69,954
registered UPS devices as of June 30, 2003, of which 33,890 were
actively passing data traffic.
Revenues
The tables below set forth, for the periods indicated, a year-over-year
comparison of the key components of revenue..
Three Months Ended June 30,
---------------------------
Summary of Revenue 2004 2003 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $5.2 $7.3 $(2.1) (29)%
Field Services 1.5 2.8 (1.3) (46)
Transportation 0.9 3.2 (2.3) (72)
Telemetry 0.6 0.6 0.0 0
All Other 1.9 0.1 1.8 1,800
--- --- --- -----
Service Revenue 10.1 14.0 (3.9) (28)
Equipment Revenue 1.3 1.0 0.3 30
--- --- --- --
Total $11.4 $15.0 $(3.6) (24)%
===== ===== ====== =====
31
Six Months Ended June 30,
Summary of Revenue 2004 2003 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $11.4 $14.4 $(3.0) (21)%
Field Services 3.3 6.0 (2.7) (45)
Transportation 1.8 5.8 (4.0) (69)
Telemetry 1.2 1.2 0.0 0
All Other 2.4 0.2 2.2 1,100
--- --- --- -----
Service Revenue 20.1 27.6 (7.5) (27)
Equipment Revenue 2.8 1.8 1.0 56
--- --- --- --
Total $22.9 $29.4 $(6.5) (22)%
===== ===== ====== =====
Our decrease in service revenues was generally due to a decrease in revenue in
our Wireless Internet, field services and transportation market segments,
primarily as a result of migration by our customers to newer technologies with
capabilities that our network is not capable of supporting (such as voice
enabled handheld devices), or more modern networks with greater capacity than
our own (such as so-called 2G or 3G networks from providers such as AT&T or
T-Mobile). If we cannot generate additional revenue from other sources to offset
this lost revenue, our overall revenues will decline in the future. The decrease
in total revenues was primarily a result of the decreased service revenues,
partially offset by an increase in equipment revenue. By segment, we note that:
o Wireless Internet: The revenue decline in the wireless Internet sector
represented customer losses that we are experiencing in both our
direct and reseller channels as a result of the migration of wireless
Internet customers to other networks. These customer losses have been
exacerbated by the `end-of-life' announcement by RIM for the 857
device, which has negatively impacted the ability of our resellers to
add new devices to our network to replace those that are migrating
from their respective customer bases. This decline is also the result
of Motient's coordinated effort to actively sell and promote wireless
email and wireless Internet applications to enterprise accounts under
our agent relationships with T-Mobile USA and Verizon Wireless. During
the fourth quarter of 2003, we sold several of our existing customers
devices on these networks that resulted in their termination of
devices on our network in the first six months of 2004. We received
commissions from these carriers for these sales. The termination of
the manufacture of 850 and 857 devices by Research in Motion, as well
as the increased competition from other wireless carriers offering
converged voice and data devices that utilize newer networks, will
hamper our ability to grow wireless Internet revenues in 2004.
o Field Services: The decrease in field service revenue was primarily
the result of the termination of several customer contracts, including
Sears and Lanier, as well as the general reduction of units and/or
rates across the remainder of our field service customer base,
primarily IBM and Pitney Bowes. This revenue segment was also
negatively impacted by approximately $350,000 due to the
reclassification of one of our customers, Lucent, to the wireless
Internet segment. We believe that the technology requirements of this
market segment are more compatible with our network than the Wireless
Internet market segment, our most significant market segment, and we
are making efforts to grow this segment.
o Transportation: The decrease in revenue from the transportation sector
was primarily the result of UPS, beginning in July 2003, having
removed a significant number of their units from our network and no
longer maintaining their historical level of payments. UPS represented
$0.2 million and $0.5 million of revenue for the three and six months
ended June 30, 2004, as compared to $2.7 million and $4.8 million of
revenue for the three and six months ended June 30, 2003. We did,
however, also continue to experience growth during this period in
other transportation accounts, most notably Aether and Roadnet. We
believe that the technology requirements of this market segment are
more compatible with our network than the wireless Internet market
segment, our most significant market segment, and we are making
efforts to grow this segment.
32
o Telemetry: While we experienced growth in certain telemetry customer
accounts, including US Wireless Data and USA Technologies, this
revenue growth was equally offset by customer losses or negative rate
changes in other telemetry accounts, resulting in no net change in
this sector. We believe that the technology requirements of this
market segment are more compatible with our network than the wireless
Internet market segment, our most significant market segment, and we
are making efforts to grow this segment.
o Other: The increase in other revenue was attributable to the
settlement of a take-or-pay contract with Wireless Matrix resulting in
the recognition of $1.1 million and approximately $0.6 million of
commissions earned via the agency and dealer agreements with Verizon
Wireless and T-Mobile USA. Revenue growth in this market segment will
depend on our ability to generate new customers for Verizon and
T-Mobile as well as migrating customers from our own network to these
newer technologies.
o Equipment: The increase in equipment revenue was primarily the result
of the sales of devices attributable to agency and dealer agreements
with Verizon Wireless and T-Mobile USA.
Operating Expenses
The table below sets forth, for the periods indicated, a year-over-year
comparison of the key components of our operating expenses. An explanation of
certain changes in operating expenses is set forth below.
Three Months Ended June 30,
---------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
- ------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $10.4 $13.9 $(3.5) (25)%
Cost of Equipment Sales 1.3 1.1 0.2 18
Sales and Advertising 0.9 1.5 (0.6) (40)
General and Administration 2.5 3.3 (0.8) (24)
Operational Restructuring and
Impairment Charges 5.1 -- 5.1 --
Depreciation and Amortization 4.1 5.6 (1.5) (27)
(Gain) loss on asset disposal 0.0 0.0 0.0 --
(Gain) on debt and capital lease retirement (0.8) 0.0 (0.8) --
----- ----- ----- ----
Total Operating $23.5 $25.4 $(1.9) (7)%
===== ===== ===== ====
(1) Includes compensation expense of $2.4 million related to the market
value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the market
value of employee stock options.
Six Months Ended June 30,
-------------------------
Summary of Expenses 2004(1) 2003(2) Change % Change
- ------------------- ------- ------- ------ --------
(in millions)
Cost of Service and Operations $21.7 $27.5 $(5.8) (21)%
Cost of Equipment Sales 2.8 2.1 0.7 33
Sales and Advertising 1.9 2.7 (0.8) (30)
General and Administration 4.9 6.6 (1.7) (26)
Operational Restructuring and 6.3 -- 6.3 --
Impairment Charges
Depreciation and Amortization 8.4 10.9 (2.5) (23)
(Gain) loss on asset disposal 0.0 0.0 0.0 0
(Gain) on debt and capital lease retirement (0.8) 0.0 (0.8) 0
----- ----- ----- ----
Total Operating $45.2 $49.8 $(4.6) 9%
===== ===== ===== ====
(1) Includes compensation expense of $3.9 million related to the market
value of employee stock options.
(2) Includes compensation expense of $1.2 million related to the market
value of employee stock options.
33
o Cost of Service and Operations: Our largest single cost center is the
cost of service and operations, which includes costs to support
subscribers, such as network telecommunications charges and site rent
for network facilities, network operations employee salary and related
costs, network and hardware and software maintenance charges, among
other things. The decrease in these expenses was partially the result
of lower employee salary and related costs due to the workforce
reductions implemented in March of 2003 and February of 2004. The
reduction in force in February of 2004 also resulted in the reversal
in the first quarter of 2004 of certain accrued employee bonuses from
prior periods. This decrease was also impacted by the termination of
our national maintenance contract with Motorola at December 31, 2003,
as well as the continued removal of older-generation base stations
from the network. We currently perform our maintenance on our base
stations by contracting directly with service shops in respective
regions, which has materially lowered our cost relative to our prior
national maintenance contract. Site lease and telecommunications costs
for base station locations also decreased during this period as a
result of the removal of base stations as part of our efforts to
remove older-generation equipment from our network. As we continue to
remove these base stations, we anticipate that these costs will
continue to decrease. The decrease in costs of service and operations
was also partially the result of reductions in hardware and software
maintenance costs as a result of the negotiation of lower rates on
maintenance service contracts in 2003, the reduction of software
licenses as a result of having fewer employees and a decrease in
software development costs as a result of a change in capitalization
policy. These decreases were partially offset by compensation expenses
associated with stock options issued to employees in 2003 of $1.5
million and $2.0 million for the three and six months ended June 30,
2004, respectively. Compensation expenses associated with stock
options issued to employees totaled $0.4 million for the three and six
months ended June 30, 2003. Excluding these compensation charges, cost
of service and operations decreased $4.6 million and $7.4 million, or
34% and 27% for the three and six months ended June 30, 2004,
respectively, as compared to the comparable periods in 2003. Given our
ongoing cost-reduction efforts, we expect these costs to continue to
decrease. The extent of the decrease will depend both upon our ability
to successfully manage our cost-reduction efforts as well as the
necessity for these expenditures in the future if our customer base
declines.
o Cost of Equipment: The increase in the cost of equipment sold was
primarily the result of the cost of the sales of devices attributable
to the agency and dealer agreements with Verizon Wireless and T-Mobile
USA. These newer devices used on the Verizon and T-Mobile networks
have increased functionality and, correspondingly, increased cost,
over previous generation devices. To the extent we are unable to add
new customers at previous rates, these costs will likely decline in
the future.
34
o Sales and Advertising: The decrease in sales and advertising expenses
was primarily attributable to lower employee salary and related costs,
including sales commissions, due to lower sales volumes and the
workforce reductions implemented in March 2003 and February 2004, the
reversal of certain prior period accrued compensation as discussed
above and the significant reduction in or elimination of sales and
marketing programs after our reorganization in May 2002. These
decreases were partially offset by compensation expenses associated
with stock options issued to employees in 2003 of $0.5 million and
$0.9 million for the three and six months ended June 30, 2004,
respectively. Compensation expenses associated with stock options
issued to employees totaled $0.3 million for the three and six months
ended June 30, 2003. Excluding these compensation charges, sales and
advertising decreased $0.8 million and $1.4 million, or 67% and 58%
for the three and six months ended June 30, 2004, respectively, as
compared to the comparable periods in 2003. We anticipate that these
costs will continue to decline in the future in conjunction with our
overall cost-cutting efforts.
o General and Administrative: The decrease in general and administrative
expenses was primarily attributable to lower - employee salary and
related costs due to the workforce reductions implemented in March of
2003 and February of 2004, the reversal of certain prior period
accrued compensation as discussed above, the closure of our Reston
facility in July 2003, lower directors and officers liability
insurance costs subsequent to reorganization and a reduction in bad
debt charges primarily due to lower accounts receivables balances as a
result of improvements in our collection capabilities. These decreases
were partially offset by increases in audit and legal fees as a result
of our continuing efforts to be compliant with our financial reporting
and by compensation expenses associated with stock options issued to
employees in 2003 of $0.4 million and $1.0 million for the three and
six months ended June 30, 2004, respectively. Compensation expenses
associated with stock options issued to employees totaled $0.5 million
for the three and six months ended June 30, 2003. Excluding these
compensation charges, general and administrative decreased $0.7
million and $2.2 million, or 25% and 36% for the three and six months
ended June 30, 2004, respectively, as compared to the comparable
periods in 2003. We anticipate that these costs will continue to
decline in the future in conjunction with our overall cost-cutting
efforts.
o Restructuring and Impairment Charges: The operational restructuring
and impairment charges in the first quarter of 2004 resulted from the
severance and related salary charges as a result of the reduction in
force in February 2004 and certain costs as a result of base station
deconstruction activities as part of our on-going network
rationalization efforts. For the second quarter ended June 30, 2004,
the network rationalization costs aggregateed $5.1 million, consisting
of base station deconstruct costs of $0.5 million, the loss on the
retirement of certain base station equipment of $2.8 million and
termination liabilities of $1.8 million for site leases no longer
required for removed base stations.
In the second quarter of 2004, we finalized plans to implement certain
base station rationalization initiatives. These initiatives are
anticipated to be completed by December 2004. These initiatives
involve the de-commissioning of approximately 409 base stations from
our network. We had 1,549 base stations in our network as of March 31,
2004. We are taking these actions in a coordinated effort
35
to reduce network operating costs while also focusing on minimizing
the potential impact to our customers communications and coverage
requirements. This rationalization encompasses, among other things,
the reduction of unneeded capacity across the network by
de-commissioning under-utilized and un-profitable base stations as
well as de-commissioning base stations that pass an immaterial amount
of customer data traffic. In some cases, these base stations were
originally constructed specifically to serve customers with nationwide
requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced
by this process and customer communications may be impacted. We have
discussed these changes to our network with many of our customers to
assist them in evaluating the potential impact, if any, to their
respective communications requirements. The full extent and effect of
the changes to our network have yet to be determined, but based on
internal analyses, we believe the de-commissioning of these base
stations from our network will only impact approximately 1.5% of our
network's current data traffic. As of July 31, 2004, we were
approximately 85% complete with these network rationalization
initiatives. We expect that the costs associated with this
de-commissioning of approximately 409 will decrease over the next year
as this rationalization program is completed. However, any future
programs of de-commissioning could result in increased expenditures in
this area. No such additional programs are planned at this time.
o Depreciation and Amortization: Depreciation and amortization expense
reduced as a result of our decline in asset value related to our
frequency sale transactions in 2003 and our write-down as of September
2003 of our customer contract related intangibles. In May 2004, the
Company engaged a financial advisory firm to prepare a valuation of
customer intangibles as of September 2003. Due to the loss of UPS as a
core customer in 2003 as well as the migration and customer churn
occurring in the Company's mobile internet base that is impacting the
average life of a customer in this base, among other things, the
Company determined an impairment of the value of these customer
contracts was probable. As a result of this valuation, the value of
customer intangibles was determined to be impaired as of September
2003 and was reduced by $5.5 million.
Other Expenses & Income
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2004 2003 2004 2003
---- ---- ---- ----
(in thousands)
Interest Expense, net $(1,273) $(1,642) $(3,039) $(2,954)
Write -off of deferred financing costs (8,052) --- (8,052) ---
Other Income, net 191 348 199 807
Other Income from Aether 662 938 1,307 1,776
Equity in Losses of Mobile Satellite Ventures (2,608) (2,288) (4,838) (4,613)
36
Interest expense decreased for the three months ended June 30, 2004, as compared
to the three months ended June 30, 2003, due primarily to the April, 2004
repayment of our term credit facility, which resulted in the requirement to
immediately expense $6.4 and $1.7 million in financing fees related to the
January 2003 and March 2004 credit facilities. Interest expense increased for
the six months ended June 30, 2004, as compared to the six months ended June 30,
2003, due to the amortization of fees and the value ascribed to warrants
provided to the term credit facility lenders on our closing of our credit
facility in January of 2003 and the subsequent amendment in March 2004. Given
our recent private placements of common stock and our repayment of the term
credit facility, we expect interest expense to decline in the future as we will
have less debt financing in place. We have no current plans to seek any
additional debt financing.
In June 2004, we negotiated settlements of our vendor financing and notes
payable with Motorola and our capital lease with Hewlett-Packard. These
settlements resulted in a gain on debt and capital lease retirements of $0.8
million.
Effective May 1, 2002, we were required to reflect our equity share of the
losses of MSV. We recorded equity in losses of MSV of $2.6 million and $4.8
million for the three and six months ended June 30, 2004, as compared to $2.3
million and $4.6 million for the three and six months ended June 30, 2003. The
MSV losses for the three and six months ended June 30, 2004 are Motient's 46.5%
of MSV's losses for the same periods, and losses for the three and six months
ended June 30, 2003 consist of Motient's 48% share of the MSV losses to date
reduced by the loans in priority. For the three and six months ended June 30,
2004, respectively, MSV had revenues of $7.6 million and $15.7 million,
operating expenses of $7.7 million and $15.0 million and a net loss of $7.5
million and $14.2 million.
Liquidity and Capital Resources
As of June 30, 2004, we had approximately $13.6 million of cash on hand and
short-term investments. In addition to cash generated from operations, our
principal source of funds was, as of June 30, 2004, a term credit facility that
we entered into on January 27, 2003. On April 7, 2004, we received proceeds of
$23.2 million from the sale of our common stock to several institutional
investors in a private placement. On April 13, 2004, we repaid all of its then
owing principal and interest under its term credit facility. We currently have
$5.7 million of availability remaining under this facility, until December 31,
2004, subject to the lending conditions of the credit agreement. On July 2,
2004, we received aggregate proceeds of $30.0 million from the sale of our
common stock to several institutional investors, of which approximately $24.5
million was used to repay certain debt owing to Rare Medium and CSFB, with the
remainder used for general working capital purposes.
37
Summary of Cash Flow for the Six months ended June 30, 2004 and 2003
Six Months Six Months
Ended Ended
June 30, June 30,
2004 2003
---- ----
(Unaudited) (Unaudited)
Net cash (used in) Operating Activities: $ (8,230) $ (3,539)
Net cash provided by Investing Activities: 1,455 83
Cash Flows from financing activities:
Principal payments under capital leases (2,419) (1,357)
Principal payments under vendor financing (682) (438)
Repayment from term loan (6,785) --
Proceeds from term credit facility 1,500 3,000
Proceeds from issuance of stock 23,188 --
Proceeds from issuance of employee stock options 1,003 --
Stock issuance costs and other charges (476) --
Debt issuance costs and other charges -- (537)
-------- --------
Net cash provided by financing activities 15,329 (668)
-------- --------
Net (decrease) increase in cash and cash equivalents 8,554 (2,788)
Cash and Cash Equivalents, beginning of period 3,618 5,840
-------- --------
Cash and Cash Equivalents, end of period $ 12,172 $ 3,052
======== ========
Cash used in operating activities increased as a result of decreases in funds
provided by revenue. While we are attempting to reduce cash used in operating
activities as a result of our cost cutting efforts and through our attempts to
increase our revenues by focusing on more network-appropriate market segments,
it is possible revenue declines will be sufficient to offset or overtake the
cash saved by our cost cutting efforts in the future.
The increase in cash provided by investing activities was primarily attributable
to the receipt of $2 million from MSV as a result of the April 2, 2004
investment in MSV. Cash flows from investing activities also includes the
conversion of our $1.1 million letter of credit that secured our capital lease
with Hewlett-Packard to unrestricted cash, as part of our negotiated settlement
of these obligations with Hewlett-Packard in June 2004.
The increase in cash provided by financing activities was the result of the
proceeds from the exercise of certain employee stock options, borrowings under
the term credit facility (prior to retirement discussed hereafter) and our
private placement of common stock completed in April 2004. These proceeds were
partially utilized in our negotiated settlement of our vendor debt and capital
lease obligations and the repayment of all amounts outstanding under our term
credit facility in April 2004. We have no definite plans for any future debt or
equity financing beyond the term credit facility or the April or July 2004
private placements of common stock.
We believe that our available funds, together with our credit facility, will be
adequate to satisfy our current and planned operations for at least the next 12
months. To the extent that MSV will need future cash to support its operations,
we are under no contractual obligation to provide it, and the value of our
investment in MSV could be negatively impacted if MSV cannot meet any such
funding requirements.
38
Cost Reduction Actions
We have taken a number of steps to reduce operating and capital expenditures in
order to lower our cash burn rate and improve our liquidity position.
Reductions in Workforce. We undertook a reduction in our workforce in February
2004. This action eliminated approximately 32.5% (54 employees), of our
workforce. This action reduced employee and related expenditures by
approximately $0.4 million per month.
Credit Facility Repayment: On April 13, 2004, Motient repaid the all principal
amounts then owing under its term credit facility, including accrued interest
thereon, in an amount of $6.8 million. The remaining availability under the
credit facility of $5.7 million will be available for borrowing by the Company
until December 31, 2004, subject to the lending conditions in the credit
agreement.
Termination of Motorola and Hewlett-Packard Agreements: In June 2004, the
Company negotiated settlements of the entire amounts outstanding under its
financing facility with Motorola and its capital lease with Hewlett-Packard. The
full amount due and owing under these agreements was a combined $6.8 million.
The Company paid a combined $3.9 million in cash to Motorola and Hewlett-Packard
and issued a warrant to Motorola to purchase 200,000 shares of the Company's
common stock at a price of $8.68, in full satisfaction of the outstanding
balances.
Network Rationalization. In the second quarter of 2004, we finalized plans to
implement certain base station rationalization initiatives. These initiatives
are anticipated to be completed by December 2004. These initiatives involve the
de-commissioning of approximately 409 base stations from our network. We had
1,549 base stations in our network as of March 31, 2004. We are taking these
actions in a coordinated effort to reduce network operating costs while also
focusing on minimizing the potential impact to our customers communications and
coverage requirements. This rationalization encompasses, among other things, the
reduction of unneeded capacity across the network by de-commissioning
under-utilized and un-profitable base stations as well as de-commissioning base
stations that pass an immaterial amount of customer data traffic. In some cases,
these base stations were originally constructed specifically to serve customers
with nationwide requirements that are no longer customers of Motient. In certain
instances, the geographic area that our network serves may be reduced by this
process and customer communications may be impacted. We have discussed these
changes to our network with many of our customers to assist them in evaluating
the potential impact, if any, to their respective communications requirements.
The full extent and effect of the changes to our network have yet to be
determined, but based on internal analyses, we believe the de-commissioning of
these base stations from our network will only impact approximately 1.5% of our
network's current data traffic. As of July 31, 2004, we were approximately 85%
complete with these network rationalization initiatives.
Please see Item 2 ("Management's Discussion and Analysis of Financial Condition
and Results of Operations") for further discussion of this network
rationalization.
Despite these initiatives, we continue to generate losses from operations, and
there can be no assurances that we will ever generate income from operations.
In December 2002 we entered into an agreement with UPS pursuant to which UPS
prepaid an aggregate of $5 million in respect of network airtime service to be
provided beginning January 1, 2004. 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. UPS has substantially completed its
39
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. If UPS terminates the contract, we will be required to
refund any unused portion of the prepayment to UPS. While we expect that UPS
will remain a customer for the foreseeable future, the bulk of UPS' units have
migrated to another network. Until June 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 2003, the revenues and cash flow from UPS declined significantly. As of
June 30, 2004, UPS had approximately 3,100 active units on Motient's network.
The value of our remaining airtime service obligations to UPS at June 30, 2004
in respect of the prepayment was approximately $4.3 million.
Sources of Financing
Sales of Common Stock: On April 7, 2004, Motient sold 4,215,910 shares of common
stock at a per share price of $5.50 for an aggregate purchase price of $23.2
million to multiple investors, and also issued warrants to purchase an aggregate
of 1,053,978 shares of its common stock, at an exercise price of $5.50 per
share. These warrants will vest if and only if Motient does not meet certain
deadlines between June and November 2004, with respect to certain requirements
under the registration rights agreement.
On July 1, 2004, Motient sold 3,500,000 shares of common stock at a per share
price of $8.57 for an aggregate purchase price of $30.0 million to multiple
investors, and also issued warrants to purchase an aggregate of 525,000 shares
of common stock, at an exercise price of $8.57 per share. These warrants will
vest if and only if we do not meet certain registration deadlines beginning in
November, 2004, with respect to certain requirements under the registration
rights agreement. For further information, please see "Item 2. Changes in
Securities and Use of Proceeds".
Term Credit Facility: On January 27, 2003, our wholly-owned subsidiary, Motient
Communications, closed a term credit agreement with a group of lenders,
including several of our existing stockholders.
The lenders have agreed to make up to $12.5 million of 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.
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 commitments are not revolving in nature
and amounts repaid or prepaid may not be reborrowed.
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, 1,000,000 shares of our common stock. The exercise price of the
warrants is $4.88 per share. The warrants were immediately exercisable upon
40
issuance and have a term of five years. The warrants were valued using a
Black-Scholes pricing model at $6.7 million and were be recorded as a debt
discount and are being amortized as additional interest expense over three
years, the term of the related debt. In connection with the amendment, we were
also required to pay commitment fees to the lenders of $320,000, which were
added to the principal balance of the credit facility at closing. These fees
were recorded on our balance sheet and are being amortized as additional
interest expense over three years, the term of the related debt.
In each of April, June and August 2003 and March of 2004, we made draws under
the credit agreement in the amount of $1.5 million for an aggregate amount of
$6.0 million, each of which would have been due three years after the date of
the draw, if not repaid earlier. We used such funds to fund general working
capital requirements of operations. On April 13, 2004, Motient repaid all
principal amounts due under its Credit Facility, including accrued interest
thereon, in an amount of $6.8 million. The remaining availability under the
Credit Facility of $5.7 million will remain available for borrowing to Motient
until December 31, 2004, subject to the lending conditions in the agreement.
For the monthly periods ended April 2003 through December 2003, we 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.
MSV Note: 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 conditions
and priorities with respect to payment of other indebtedness. Motient also owns
an aggregate of $3.5 million of convertible notes issued by 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.
In connection with an April 2004 investment into MSV by other MSV equity
holders, $5.0 million of such investment proceeds were used to repay certain
outstanding indebtedness of MSV, including $2.0 million of accrued interest
under the $15.0 million promissory note issued to us by MSV. We were required to
use 25% of the $2 million we received in this transaction, or $500,000, to make
prepayments under our existing notes owed to Rare Medium Group, Inc. and Credit
Suisse First Boston, which are described below.
Litigation Proceeds: On April 15, 2004, Motient filed a claim under the rules of
the American Arbitration Association in Fairfax County, VA, against Wireless
Matrix Corporation, a reseller of Motient's services, for the non-payment of
certain amounts due and owing under the "take-or-pay" agreement between Motient
and Wireless Matrix. In June 2004, Motient reached a favorable out of court
settlement with Wireless Matrix in which Wireless Matrix paid Motient $1.1
million.
41
Outstanding Obligations
As of June 30, 2004, Motient had the following debt obligations, in addition to
the above mentioned term credit facility, in place:
Rare Medium Notes: Under our Plan of Reorganization, the then outstanding 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
substantially all of our interests in MSV. The new note matures on May 1, 2005
and carries interest at 9% per annum. The note allows us to elect to accrue
interest and add it to the principal, instead of paying interest in cash. The
note requires that it be prepaid using 25% of the proceeds of any repayment of
the $15 million note receivable from MSV. As described above, we partially
repaid outstanding interest on this note in April 2004. On July 15, 2004, we
paid $22.6 million, representing all outstanding principal and interest due and
owing on this note.
CSFB Note: Under our Plan of Reorganization, we 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 our
interests in MSV. The new note matures on May 1, 2005 and carries interest at
9%. The note allows us to elect to accrue interest and add it to the principal,
instead of paying interest in cash. We must use 25% of the proceeds of any
repayment of the $15 million note receivable from MSV to prepay the CSFB note.
As described above, we partially repaid outstanding interest on this note in
April 2004. On July 15, 2004, we paid $0.9 million, representing all outstanding
principal and interst due and owing on this note.
Vendor Financing and Promissory Notes: Motorola had entered into an agreement
with us to provide up to $15 million of vendor financing, to finance up to 75%
of the purchase price of network base stations. Loans under this facility bear
interest at a rate equal to LIBOR plus 4.0% and are guaranteed by us 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. These balances were not impacted by our Plan of Reorganization. In
January 2003, we restructured the then-outstanding principal under this facility
of $3.5 million, with such amount to be paid off in equal monthly installments
over a three-year period from January 2003 to December 2005. In January 2003, we
also negotiated a deferral of approximately $2.6 million that was owed for
maintenance services provided pursuant to a separate service agreement with
Motorola, and we issued a promissory note for such amount, with the note to be
paid off over a two-year period beginning in January 2004. The interest rate on
this promissory note is LIBOR plus 4%. In March 2004, we further restructured
both the vendor financing facility and the promissory note, primarily to extend
the amortization periods for both the vendor financing facility and the
promissory note. We amortized the combined balances in the amount of $100,000
per month beginning in March 2004. We also agreed that interest would accrue on
the vendor financing facility at LIBOR plus 4%. As part of this restructuring,
we agreed to grant Motorola a second lien (junior to the lien held by the
lenders under our term credit facility) on the stock of Motient License. This
pledge secured our obligations under both the vendor financing facility and the
promissory note.
42
As of March 31, 2004, $4.3 million was outstanding under these notes with
Motorola. In June 2004, we reached an agreement to prepay these obligations in a
negotiated settlement with Motorola, which we consummated in July 2004. Please
see Note 1, ("Organization and Business") and Note 6, ("Subsequent Events").
Our projected cash requirements are based on certain assumptions about our
business model and projected growth rate, including, specifically, assumed rates
of growth in subscriber activations and assumed rates of growth of service
revenue. While we believe these assumptions are reasonable, these growth rates
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. 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.
We believe that our available funds, together with our credit facility, will be
adequate to satisfy our current and planned operations for at least the next 12
months. We have no definite plans to undertake any future debt or equity
financing.
Commitments
As of June 30, 2004, we had no outstanding commitments to purchase inventory.
In December 2002 we entered into an agreement with UPS pursuant to which UPS
prepaid an aggregate of $5 million in respect of network airtime service to be
provided beginning January 1, 2004. 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. There are no minimum purchase
requirements under our contract with UPS, and the contract may be terminated by
UPS on 30 days' notice. If UPS terminates the contract, we will be required to
refund any unused portion of the prepayment to UPS. The value of our remaining
airtime service obligations to UPS at June 30, 2004 in respect of the prepayment
was approximately $4.3 million.
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.
43
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 our 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 $6.2 million of the 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 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, at "fresh start" 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 or upon the occurrence of certain
other events such as issuance of other indebtedness or the sale of assets by
MSV, subject to certain to certain conditions and priorities with respect to
payment of other indebtedness. In April 2004, MSV repaid $2.0 of accrued
interest on this note, of which $500,000 was used by Motient to repay accrued
interest owing to Rare Medium and CSFB.
In November of 2003, we engaged CTA to perform a valuation of our equity
interests in MSV as of December 31, 2002. As part of this valuation process, we
determined that our equity interest in MSV was not appropriately calculated as
of May 1, 2002 due to certain preference rights for certain classes of
shareholders in MSV. We reduced our 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. As a result of the valuation of MSV, it was determined that
the value of our equity interest in MSV was impaired as of December 31, 2002
from the value on our balance sheet. This impairment was deemed to have occurred
in the fourth quarter of 2002. We reduced the value of its equity interest in
MSV by $15.4 million as of December 31, 2002. It was determined there was no
further impairment required as of December 31, 2003 and June 30, 2004.
44
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.
Deferred Taxes
- --------------
We have generated significant net operating losses for tax purposes through June
30, 2004. 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 No. 101 which
provides guidance on the recognition, presentation and disclosure of revenue in
financial statements. In certain circumstances, SAB No. 101 requires us to defer
the recognition of revenue and costs related to equipment sold as part of a
service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB 101, "Revenue Recognition in Financial
Statements." SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers", or FAQ, issued with SAB No. 101. Selected portions of
the FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did
not have a material impact on our revenue recognition policies.
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 the Company's network over an estimated customer life of two
years.
We package airtime usage on our network that involves a wide variety of volume
packaging, anything from a 35 kilobytes per month plan up to unlimited kilobyte
usage per month, with various gradations in between. Discounts may be applied
when comparing one customer to another, and such service discounts are recorded
as a reduction of revenue when granted. We do not offer incentives generally as
part of its service offerings, however, if offered they would be recorded as a
reduction of revenue ratably over a contract period.
45
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. 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.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
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
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our principal executive officer, principal financial officer and chief
accounting officer, of the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our management, principal executive
officer and principal financial officer concluded that our disclosure controls
and procedures were effective as of the end of the period covered by this
report.
46
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
Sale of Common Stock
On April 7, 2004, Motient sold 4,215,910 shares of its common stock at a per
share price of $5.50 for an aggregate purchase price of $23.2 million to The
Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar
Rock Fund L.P., Tudor Proprietary Trading, L.L.C., Highland Crusader Offshore
Partners, L.P., York Distressed Opportunities Fund, L.P., York Select, L.P.,
York Select Unit Trust, M&E Advisors L.L.C., Catalyst Credit Opportunity Fund,
Catalyst Credit Opportunity Fund Offshore, DCM, Ltd., Greywolf Capital II LP and
Greywolf Capital Overseas Fund and LC Capital Master Fund. The sale of these
shares was not registered under the Securities Act of 1933, as amended (the
"Securities Act") and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act. In connection with this sale, the Company signed a registration
rights agreement with the holders of these shares. Among other things, this
registration rights agreement requires the Company to file and cause to make
effective a registration statement permitting the resale of the shares by the
holders thereof. Motient also issued warrants to purchase an aggregate of
1,053,978 shares of its common stock to the investors listed above, at an
exercise price of $5.50 per share. Motient's registration statement registering
the shares issued in this transaction became effective on July 13, 2004, prior
to the deadline imposed by the registration rights agreement. Therefore, the
warrants issued in this transaction will never vest.
In connection with this sale, Motient issued to Tejas Securities Group, Inc.,
Motient's placement agent for the sale, and certain members of CTA, warrants to
purchase 600,000 and 400,000 shares, respectively, of its common stock. CTA
assisted Tejas Securities on certain due diligence matters for this transaction.
The exercise price of these warrants is $5.50 per share. The warrants are
immediately exercisable upon issuance and have a term of five years. Motient
also paid Tejas Securities Group, Inc. a placement fee of $350,000 at closing.
The warrants were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act.
Additional Sale of Common Stock
On July 1, 2004, Motient sold 3,500,000 shares of its common stock at a per
share price of $8.57 for an aggregate purchase price of $30.0 million to The
Raptor Global Portfolio Ltd., The Tudor BVI Global Portfolio, Ltd., The Altar
Rock Fund L.P., Tudor Proprietary Trading, L.L.C., York Distressed Opportunities
Fund, L.P., York Select, L.P., York Select Unit Trust, York Global Value
Partner, L.P., Catalyst Credit Opportunity Fund, Catalyst Credit Opportunity
Fund Offshore, DCM, Ltd., Rockbay Capital Fund, LLC, Rockbay Capital Investment
47
Fund, LLC, Rockbay Capital Offshore Fund, Ltd., Glenview Capital Partner, L.P.,
Glenview Institutional Partners, L.P., Glenview Capital Master Fund, Ltd., GCM
Little Arbor Master Fund, Ltd., OZ Master Fund, Ltd., OZ Mac 13 Ltd., Fleet
Maritime, Inc., John Waterfall, Edwin Morgens, Greywolf Capital II, L.P.,
Greywolf Capital Overseas Fund, Highland Equity Focus Fund, L.P., Highland
Equity Fund, L.P., Singer Children's Management Trust, and Strome Hedgecap
Limited. The sale of these shares was not registered under the Securities Act
and the shares may not be sold in the United States absent registration or an
applicable exemption from registration requirements. The shares were offered and
sold pursuant to the exemption from registration afforded by Rule 506 under the
Securities Act and/or Section 4(2) of the Securities Act. In connection with
this sale, Motient signed a registration rights agreement with the holders of
these shares. Among other things, this registration rights agreement requires
Motient to file and cause to make effective a registration statement permitting
the resale of the shares by the holders thereof. Motient also issued warrants to
purchase an aggregate of 525,000 shares of its common stock to the investors
listed above, at an exercise price of $8.57 per share. Motient's registration
statement registering the shares issued in this transaction became effective on
July 13, 2004, prior to the deadline imposed by the registration rights
agreement. Therefore, the warrants issued in this transaction will never vest.
In connection with this sale, Motient issued to certain CTA affiliates and
certain affiliates of Tejas Securities Group, Inc., our placement agent for the
private placement, warrants to purchase 340,000 and 510,000 shares,
respectively, of our common stock. CTA assisted Tejas Securities on certain due
diligence matters for this transaction. The exercise price of these warrants is
$8.57 per share. The warrants are immediately exercisable upon issuance and have
a term of five years. Motient also paid Tejas Securities Group, Inc. a placement
fee of $850,000 at closing. The shares were offered and sold pursuant to the
exemption from registration afforded by Rule 506 under the Securities Act and/or
Section 4(2) of the Securities Act.
In April 2004, former employees Walter Purnell, Michael Fabbri and Daniel Croft
were issued an aggregate of 291,684 unregistered shares upon the exercise of
options they held under the Company's 2002 Employee Stock Option Plan. CTA
assisted Tejas Securities on certain due diligence matters for this transaction.
The company received proceeds from this issuance of $875,052. The shares were
issued pursuant to an exemption from registration afforded by Sections 4(1)
and/or 4(2) of the Securities Act. The Company did not pay any underwriter a
placement fee in connection with this issuance.
The Company filed registration statements on Forms S-1 and S-8 with the SEC on
July 2, 2004. The Company will not receive any proceeds from the sale of the
shares registered thereby. Motient's Registration Statement became effective on
July 13, 2004.
Item 3. Defaults Upon Senior Securities
Please see the discussion regarding the defaults under our term credit agreement
contained in Note 3 ("Liquidity and Financing") of notes to consolidated
financial statements, which is incorporated by reference herein.
48
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 April 8, 2004, the Company filed a Current Report on Form 8-K, in
response to Items 5 and 7, to report the sale of 4,215,910 shares of
its common stock at a per share price of $5.50 per share.
On July 8, 2004, the Company filed a Current Report on Form 8-K, in
response to Items 7, to report the issuance of a press release
regarding an investor's call.
On July 9, 2004, the Company filed a Current Report on Form 8-K, in
response to Items 7, to report the issuance of a press release
regarding the rescheduling of an investor's call.
On July 15, 2004, the Company filed a Current Report on Form 8-K, in
response to Items 7 and 9, to report the transcript of an investor's
call.
49
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
May 23, 2005 /s/ Christopher W. Downie
------------------------------------------
Christopher W. Downie
Executive Vice President, Chief Operating Officer
and Treasurer (principal executive officer and
duly authorized officer to sign
on behalf of the registrant)
50
EXHIBIT INDEX
Number Description
10.42 Warrant Issued to Motorola, Inc. (incorporated by reference to Exhibit
10.41 to the Company's quarterly report on Form 10-Q filed on July 2,
2004).
31.1 Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Executive
Vice President, Chief Operating Officer and Treasurer (principal
executive officer) (filed herewith).
31.2 Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the Controller
and Chief Accounting Officer (principal financial officer) (filed
herewith)
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Executive Vice
President, Chief Operating Officer and Treasurer (principal executive
officer) (filed herewith).
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002, of the Controller and
Chief Accounting Officer (principal financial officer) (filed herewith)
51