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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2005
Commission File No. 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee Identification Number)
Incorporation or organization)
300 Knightsbridge Parkway
Lincolnshire, IL 60069
847-478-4200
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No[ ]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ X ] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X.] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Number of shares of common stock outstanding at August 5, 2005: 62,446,876
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MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED JUNE 30, 2005
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements - (Unaudited)
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2005 and 2004
Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004 4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 28
Item 3. Quantitative and Qualitative Disclosures about Market Risk 48
Item 4. Controls and Procedures 48
PART II
OTHER INFORMATION
Item 1. Legal Proceedings 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 51
Item 4. Submission of Matters to a Vote of Security Holders 51
Item 6. Exhibits 53
2
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
Services and related revenue $ 3,271 $ 10,156 $ 7,801 $ 20,117
Sales of equipment 274 1,283 757 2,822
-------- -------- -------- --------
Total revenues $ 3,545 $ 11,439 $ 8,558 $ 22,939
-------- -------- -------- --------
COSTS AND EXPENSES
Cost of services and operations (including stock-based
compensation of $(185) and $1,454, respectively for the
three months ended June 30, 2005 and June 30, 2004, and
$1,004 and $1,959, respectively for the six months ended
June 30, 2005 and June 30, 2004, exclusive of
depreciation and amortization below) 5,283 10,412 12,823 21,764
Cost of equipment sold (exclusive of depreciation and
amortization below) 277 1,257 738 2,766
Sales and advertising (including stock-based compensation
of $(30) and $529, respectively for the three months ended
June 30, 2005 and June 30, 2004, and $91 and $889,
respectively for the six months ended June 30, 2005 and
June 30, 2004, exclusive of depreciation and
amortization below) 166 860 529 1,892
General and administrative (including stock-based
compensation of $(55) and $453, respectively for the three
months ended June 30, 2005 and June 30, 2004 and $10,204 and
$1,029, respectively for the six months ended June 30, 2005
and June 30, 2004, exclusive of depreciation and
amortization below) 4,693 2,524 19,036 4,876
Research and development 351 -- 351 --
Restructuring and impairment charges 5,580 5,110 5,665 6,264
Depreciation and amortization 5,049 4,112 8,728 8,385
(Gain) on asset disposal -- (2) (6) --
(Gain) on debt and capital lease retirement -- (802) -- (802)
-------- -------- -------- --------
Total costs and expenses 21,399 23,471 47,864 45,145
-------- -------- -------- --------
Operating loss (17,854) (12,032) (39,306) (22,206)
-------- -------- -------- --------
Interest income (expense), net 2,115 (1,273) 2,115 (3,039)
Write-off of deferred financing fees -- (8,052) -- (8,052)
Other income, net -- 191 80 199
Other income from Aether -- 662 -- 1,307
Equity in loss of Mobile Satellite Ventures (2,044) (2,608) (9,212) (4,838)
Minority interests in losses of TerreStar 404 -- 404 --
-------- -------- -------- --------
Net (loss) (17,379) (23,112) (45,919) (36,629)
-------- -------- -------- --------
Less:
Dividends on Series A Cumulative Convertible Preferred
Stock (4,875) -- (4,875) --
Accretion of issuance costs associated with Series A
Cumulative Convertible Preferred Stock (614) -- (614) --
-------- -------- -------- --------
Net (loss) available to Common Stockholders $(22,868) $(23,112) $(51,408) $(36,629)
======== ======== ======== ========
Basic and Diluted (Loss) Per Share of Common Stock: $ (0.36) $ (0.79) $ (0.83) $ (1.34)
Net (Loss), basic and diluted
Weighted-Average Common Shares Outstanding - basic and
diluted 63,762 29,338 61,683 27,285
======== ======== ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
June 30, 2005 December 31, 2004
------------- -----------------
ASSETS (Unaudited) (Audited)
CURRENT ASSETS:
Cash and cash equivalents $ 275,717 $ 16,945
Restricted cash and short-term investments 18,317 --
Restricted cash for Series A Cumulative Convertible
Preferred Stock 21,446 --
Accounts receivable-trade, net of allowance for doubtful
accounts of $153 at June 30, 2005 and $256 at
December 31, 2004 1,286 1,917
Inventory 2 75
Due from Mobile Satellite Ventures, net -- 5
Deferred equipment costs 211 874
Issuance costs associated with Series A Cumulative
Convertible Preferred Stock 3,077 --
Assets held for sale 261 261
Other current assets 1,970 1,348
----------- -----------
Total current assets 322,287 21,425
----------- -----------
RESTRICTED INVESTMENTS 76 76
PROPERTY AND EQUIPMENT, net 15,232 17,261
INTANGIBLE ASSETS, net 139,315 67,649
INVESTMENT IN MSV 503,708 141,635
RESTRICTED CASH FOR SERIES A CUMULATIVE CONVERTIBLE
PREFERRED STOCK 21,446 --
ISSUANCE COSTS ASSOCIATED WITH SERIES A CUMULATIVE
CONVERTIBLE PREFERRED STOCK 13,792 --
DEFERRED CHARGES AND OTHER ASSETS -- 34
----------- -----------
Total assets $ 1,015,856 $ 248,080
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses 8,556 6,327
Deferred equipment revenue 257 933
Deferred revenue and other current liabilities 5,179 5,414
Series A Cumulative Convertible Preferred Stock
dividends 4,875 --
----------- -----------
Total current liabilities 18,867 12,674
----------- -----------
LONG-TERM LIABILITIES
Other long-term liabilities 521 675
----------- -----------
Total long-term liabilities 521 675
----------- -----------
Total liabilities 19,388 13,349
----------- -----------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 77,635 --
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01 par value;
5,000,000 shares authorized at June 30, 2005 and December 31, 2004,
408,500 and 0 shares issued and outstanding at June 30, 2005 and
December 31, 2004,
respectively) 408,500 --
STOCKHOLDERS' EQUITY:
Common Stock; voting, par value $0.01; 200,000,000 and 100,000,000
shares authorized and 65,248,788 and 51,544,596 shares issued and
outstanding at June 30,
2005 and at December 31, 2004, respectively 652 516
Additional paid-in capital 740,866 399,635
Less: 2,900,000 common shares held in treasury stock (56,750) --
Common stock purchase warrants 70,982 28,589
Accumulated deficit (245,417) (194,009)
----------- -----------
STOCKHOLDERS' EQUITY 510,333 234,731
----------- -----------
Total liabilities and stockholders' equity $ 1,015,856 $ 248,080
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
4
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Six Months Six Months
Ended June Ended June
30, 2005 30, 2004
-------- --------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (45,919) $ (36,629)
Adjustments to reconcile net (loss) income to net cash
(used in) provided
by operating activities:
Depreciation and amortization 8,728 8,385
Equity in loss of MSV 9,212 4,838
Minority interests in losses of TerreStar (404) --
Restructuring and impairment charges, asset and
intangible disposals 3,580 2,847
(Gain) on disposal of assets (6) --
(Gain) on debt restructuring -- (802)
Write-off of deferred financing fees -- 8,052
Non cash amortization of deferred financing costs -- 1,571
Non cash stock compensation 11,453 3,877
Changes in assets and liabilities, net of acquisitions
and dispositions:
Inventory 73 48
Accounts receivable -- trade 631 388
Other current assets (582) 6,308
Accounts payable and accrued expenses 627 (1,991)
Accrued interest -- 575
Deferred revenue and other deferred items (402) (5,697)
--------- ---------
Net cash (used in) operating activities (13,009) (8,230)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from MSV note -- 2,000
Proceeds from sale of property and equipment 6 2
Proceeds (purchase) of restricted investments (61,209) 106
Cash acquired in TerreStar asset purchase 6,165 --
Additions to property and equipment, net (36) (653)
--------- ---------
Net cash (used in) provided by investing activities (55,074) 1,455
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments under capital leases -- (2,419)
Principal payments under vendor financing -- (682)
Repayment from term credit facility -- (6,785)
Proceeds from term credit facility -- 1,500
Proceeds from issuance of stock 116 23,188
Proceeds from issuance of employee stock options 1,220 1,003
Proceeds from issuance of Series A Cumulative
Convertible Preferred Stock 408,500 --
Issuance costs associated with Series A Cumulative
Convertible Preferred Stock (17,483) --
Stock issuance costs and other charges (9) (476)
Repayment of notes payable (8,739) --
Purchase of treasury stock (56,750) --
--------- ---------
Net cash provided by financing activities 326,855 15,329
--------- ---------
Net increase in cash and cash equivalents 258,772 8,554
--------- ---------
CASH AND CASH EQUIVALENTS, beginning of period 16,945 3,618
CASH AND CASH EQUIVALENTS, end of period $ 275,717 $ 12,172
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2005
(Unaudited)
1. ORGANIZATION AND BUSINESS
Overview
Motient owns, operates and develops two-way wireless communications businesses.
It is currently developing a satellite communications service via its majority
ownership of TerreStar Networks Inc., a development stage company in the process
of building its first satellite. Motient also owns and operates a two-way
wireless data network (the DataTac network) that it uses to provide its
customers with two-way wireless data communication services. Motient also has
the capabilities to integrate the DataTac network and its back-office and
support systems with convenient and cost-effective access to other wireless data
networks, such as the Sprint and Cingular networks. In addition, Motient also
owns 49% of Mobile Satellite Ventures, LP (MSV), but does not have operating
control of its business.
Motient's Satellite Communications Business - TerreStar Networks Inc.
In February 2002, MSV established TerreStar, as a wholly owned subsidiary of
MSV, to develop business opportunities related to the proposed receipt of
certain licenses to operate a satellite communications system in the 2 GHz band,
also known as the "S-band". On December 20, 2004, MSV issued rights to receive
an aggregate of 23,265,428 shares of common stock of TerreStar (representing all
of the shares of TerreStar common stock owned by MSV), to the limited partners
of MSV, pro rata in accordance with each limited partner's percentage ownership
in MSV.
On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned
subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued
common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase
Agreement by and between MVH and TerreStar. On the same day, TerreStar was
spun-off by MSVto its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 48% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent $200 million stock
purchase increased Motient's ownership to its current 61% of TerreStar's issued
and outstanding common stock.
Motient also entered into the following agreements in connection with the
transaction, all dated May 11, 2005:
o A Conditional Waiver and Consent Agreement pursuant to which, subject
to the satisfaction of certain conditions, Motient has consented in
advance to the acquisition of all the MSV interests held by some or
all of the other limited partners of MSV, such that the ownership of
interests of MSV not held by Motient could be consolidated into a
single entity. The terms of such acquisition have yet to be negotiated
and may never occur. As the limited partners of MSV other than Motient
collectively own 51% of MSV, this transaction could result in a single
limited partner, other than Motient, controlling 51% of MSV, giving
such limited partner effective control of MSV. In such event, Motient
would be entitled to the benefit of a number of minority protection
provisions with respect to MSV.
6
o A Stockholders' Agreement pursuant to which Motient has the right to
designate four of the seven members of the Board of Directors of
TerreStar (one of whom must be independent of TerreStar) and contains
certain minority protection provisions for the other TerreStar
stockholders, including tag-along and preemptive rights, as well as a
drag-along provision.
o An Intellectual Property License Agreement pursuant to which TerreStar
received a perpetual, royalty-free license to utilize MSV's patent
portfolio, including those patents related to "ancillary terrestrial
component", or ATC, technology.
ATC is an FCC granted authority subject to which a Mobile Satellite Service, or
MSS, provider can, subject to certain restrictions, integrate a satellite
communications system with a terrestrial network. Motient anticipates that
TerreStar could use ATC to effectively integrate satellite-based two-way
communications services with land-based two-way communications services. Mobile
devices using ATC could be used for a myriad of communications applications,
including potentially voice, data and video services. 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.
ATC could, for instance, eventually allow a user to utilize a mobile phone that
would communicate with a traditional land-based wireless network when in range
of that network, but communicate with a satellite when not in range of such a
land-based network. Ideally, ATC would allow a user to have a communications
device that would provide ubiquitous service across North America. TerreStar's
ability to effectively use ATC depends on its continued ability to license
certain intellectual property from MSV. TerreStar has a perpetual, royalty free
license to such technology.
During 2002, TerreStar entered into a contract to purchase a satellite system,
including certain ground infrastructure for use with the 2 GHz band. The
satellite represents one component of a communications system that would include
a spare satellite, ground-switching infrastructure, launch costs and insurance.
Total cost of this system could exceed $550 million. In order to finance future
payments, TerreStar will be required to obtain additional debt or equity
financing, or may enter into various joint ventures to share the cost of
development. There can be no assurance that such financing or joint venture
opportunities will be available to TerreStar or available on terms acceptable to
TerreStar.
Motient's Terrestrial Wireless Business - Motient Communications Inc.
Motient is a provider of two-way, wireless mobile data services and wireless
internet services in the top 40 metropolitan statistical areas, or MSA's, in the
United States. Owning and operating a wireless radio data network that provides
wireless mobile data service to customers, Motient primarily generates revenue
from the sale of airtime on its network and from the sale of communications
devices, which are manufactured by other companies. Motient's customers use its
7
network and wireless applications for wireless email messaging and wireless data
communications services. This enables businesses, mobile workers and consumers
to wirelessly transfer electronic information and messages and to wirelessly
access corporate databases and the Internet. Motient's network is designed to
offer a broad array of wireless data services, such as:
o mobile data and mobile management systems used by transportation and
other companies to wirelessly coordinate remote, mobile assets and
personnel;
o two-way mobile Internet services, including Motient's own eLinkSM
wireless email service and the BlackBerry (TM) by Motient wireless
email service, each providing personal consumers and corporate
customers with wireless access to a broad range of email and
information services;
o wireless data systems used by companies involved in data transmission
and processing, used to connect remote equipment, such as wireless
point-of-sale terminals, with a central monitoring facility
In addition to selling wireless data services that use our own network, Motient
is also a reseller of airtime on the Cingular and Sprint wireless networks.
Motient has reseller agreements with these companies that allow it to sell and
promote wireless data applications and solutions to customers using these
networks, which are more modern and have greater capacity than Motient's own
network, while still maintaining a direct relationship with the customer, since
"back office" functions like customer support, application design and
implementation, and billing, among other support services, are handled by
Motient.
These arrangements allow Motient to provide integrated wireless data solutions
to our customers using a variety of networks. In December 2004, Motient launched
a new set of products and services designed to provide these integrated wireless
data solutions to its customers called iMotient Solutions. iMotient allows
Motient's customers to use these multiple networks via a single connection to
Motient's back-office systems, providing a single alternative for application
and software development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT, and Motient's own DataTac
network. Once connected to iMotient, customers will receive our proprietary
applications and services that reduce airtime usage, improve performance and
reduce costs.
A subscriber's wireless device, which may be mobile or stationary, receives and
transmits wireless data messages to and from terrestrial base stations via radio
frequencies. Terrestrial messages are then routed to their destination via data
switches that Motient owns, which connect to the public data network. Motient's
network is a wireless packet-switched network based on technologies developed
prior to newer networks built around CDMA or GSM technologies, and, unlike those
networks, cannot accommodate wireless telephony.
Over the course of 2004, Motient implemented and completed certain initiatives
to rationalize the size of its network, primarily to remove unprofitable base
stations and reduce unneeded coverage. During the first quarter of 2005, Motient
initiated a plan to refocus its DataTac network primarily on the top 40 MSAs.
This plan involved the decommissioning of DataTac network components and
termination of service in previously served MSAs other than the top 40. Given
8
the similar coverage profiles of the Cingular and Sprint networks, the
significantly increased bandwidth capabilities of these networks relative to
DataTac and the concentration of our revenues in the top 40 MSAs, Motient
determined that this plan best allowed it to match its network infrastructure
costs with our revenue base, while continuing to meet the needs of as many of
its customers as possible. This decommissioning was completed in June 2005.
Motient has made every effort to provide any impacted customers with
alternatives to migrate their services and applications either to its new
iMotient Solutions platform, or to other networks using our agreements with RACO
Wireless, Inc. and eAccess Solutions, Inc.
Mobile Satellite Ventures LP
MSV is a provider of mobile satellite-based communications services. MSV
currently uses two satellites to provide service, which allow customers access
to satellite-based wireless data, voice, fax and dispatch radio services almost
anywhere in North and Central America, northern South America, the Caribbean,
Hawaii and in various coastal waters.
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry
Canada, has access to more than 25 MHz of L-band spectrum that is authorized for
use in every market in North America. The L-band spectrum is positioned within
the range of frequencies used by terrestrial wireless providers in North
America.
MSV is also developing a next-generation system; a hybrid satellite/terrestrial
wireless network over North America that MSV expects will utilize new satellites
working with MSV's patented "ATC" technology. MSV expects to be able to deploy
terrestrial two-way wireless 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.
In May 2005, MSV received FCC authorization to launch and operate a next
generation L-Band satellite. This authorization follows the April 2005 Industry
Canada authorization to MSV's Canadian affiliate for an L-band satellite. Use of
the two authorizations together enables MSV to replace its existing satellites
and utilize the full complement of spectrum available to it.
MSV is structured as a limited partnership, of which Motient is one of the
limited partners. Motient holds a proportionate ownership interest in the
corporate general partner. Motient has certain rights to appoint directors to
the sole general partner of the limited partnership, but does not have any
direct or indirect operating control over MSV.
Until November 26, 2001, the entity that would become MSV was a majority owned
subsidiary of Motient. On that date, Motient sold the assets comprising its
satellite communications business as part of a transaction in which certain
other parties joined MSV. At the conclusion of this transaction and several
minor secondary financings, Motient's ownership interest in MSV was 29.5%
(assuming conversion of all outstanding convertible notes). In a subsequent
financing on November 12, 2004, Motient acquired additional interests in MSV in
exchange for cash and the conversion and cancellation of all outstanding notes
issued to Motient by MSV (including all accrued interest thereon), and as a
result increased its ownership to 38.6%. In February 2005, Motient acquired
additional interests from several other MSV equityholders, increasing its direct
and indirect ownership to 49%. Motient cannot increase its ownership of MSV any
further without the consent of a supermajority of the MSV equityholders.
9
For the three and six months ended June 30, 2005, MSV had revenues of $7.5 and
$14.7 million, operating expenses of $14.8 and $34.5 million and a net loss of
$6.7 and $26.7 million, respectively. To the extent that MSV will need future
cash to support its operations, Motient is under no contractual obligation to
provide it, and the value of our investment in MSV could be negatively impacted
if MSV cannot meet any such funding requirements.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company and are unaudited. The results of operations for the three and six
months ended June 30, 2005 are not necessarily indicative of the results to be
expected for any future period or for the full fiscal year. In the opinion of
management, all adjustments (consisting of normal recurring adjustments unless
otherwise indicated) necessary to present fairly the financial position, results
of operations and cash flows at June 30, 2005, and for all periods presented,
have been made. Footnote disclosure has been condensed or omitted as permitted
in interim financial statements.
Consolidation
The consolidated financial statements include the accounts of Motient and its
wholly and majority-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.
Restricted Investments
The Company considers investments segregated for a specific contractual purpose
such as collateral or payment of a future obligation to be restricted cash.
Restricted cash includes interest payable on Series A Cumulative Convertible
Preferred Stock and is presented separately on the Consolidated Balance Sheet.
Investment in MSV
The Company uses the equity method of accounting for its investment in MSV. The
Company considers whether the fair value of its investment has declined below
its carrying value whenever adverse events or circumstances indicate that the
recorded value may not be recoverable. If the Company considers such decline to
be other than temporary, a write down would be recorded to estimate fair value.
10
Business Combinations
The Company accounts for Business Combinations under SFAS No. 141, "Business
Combinations". SFAS No. 141 requires business combinations initiated after June
30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.
Recorded goodwill and intangibles will be evaluated against these new criteria
and may result in certain intangibles being subsumed into goodwill, or
alternatively, amounts initially recorded as goodwill may be separately
identified and recognized apart from goodwill.
Impairment
The Company reviews and accounts for asset impairment under SFAS No. 142,
"Goodwill and Other Intangible Assets" and SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS No. 142 requires the use of a
non-amortization approach to account for purchased goodwill and certain
intangibles. Under a non-amortization approach, goodwill and certain intangibles
will not be amortized into results of operations, but instead will be reviewed
for impairment and written down and charged to results of operations only in the
periods in which the recorded value of goodwill and certain intangibles is more
than its fair value. SFAS No. 144 requires that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadens the presentation of discontinued operations to
include more disposal transactions. The Company reviews its assets for
impairment at a minimum, on an annual basis, and immediately recognizes an
impairment in interim periods.
Deferred Taxes
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured.
Revenue Recognition
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
11
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements". SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not
have a material impact on the Company's revenue recognition policies.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF)
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which
is being applied on a prospective basis. The consensus addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values. The consensus also supersedes
certain guidance set forth in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number
104 (SAB 104).
Revenue is recognized as follows:
Service revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectability is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers and amortizes any revenue and costs
associated with activation of a subscriber over an estimated customer life of
two years.
The Company packages airtime usage that involves a wide variety of volume
packaging, anything from a 35 kilobytes per month plan up to unlimited kilobyte
usage per month, with various gradations in between. Discounts may be applied
when comparing one customer to another, and such service discounts are recorded
as a reduction of revenue when granted.
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
requiring collateral or deposits. The Company establishes a valuation allowance
for doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. The Company assesses the adequacy
of these reserves quarterly, evaluating factors such as the length of time
individual receivables are past due, historical collection experience, the
economic environment and changes in credit worthiness of the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
12
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of June 30, 2005 and 2004, the Company had capitalized a total of $0.3
million and $2.4 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $0.2 million and $2.4 million, respectively.
Property and Equipment
Property and equipment are depreciated over its useful life using the
straight-line method. Assets recorded as capital leases are amortized over the
shorter of their useful lives or the term of the lease. The estimated useful
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.
Intangible Assets
We account for our frequencies and intellectual property and customer contracts
as finite-lived intangibles and amortize them over 15, 15 and 3 year estimated
lives, respectively.
FCC licenses and other intangible assets consist of the following:
June 30,
2005 December 31,
(unaudited) 2004 2003
----------- ---- ----
(in thousands)
-------------------------------------------
FCC 800 MHz licenses $ 76,141 $ 80,594 $ 80,594
FCC 2 GHz licenses 66,864 -- --
Intellectual property 11,707 -- --
Customer contracts 349 349 1,893
--------- --------- ---------
155,061 80,943 82,487
Less accumulated amortization (15,746) (13,294) (8,466)
--------- --------- ---------
FCC licenses and other intangible assets, net $ 139,315 $ 67,649 $ 74,021
========= ========= =========
13
Authorized Shares
On June 15, 2005, the stockholders of Motient Corporation voted to amend the
certificate of incorporation of the Corporation to increase the authorized
number of shares of common stock, $0.01 par value, of the Corporation from
100,000,000 shares to 200,000,000 shares.
Stock Options
On June 15, 2005, the stockholders of Motient Corporation voted to amend the
Company's 2002 Stock Option Plan to increase the number of shares of the
Company's common stock authorized to be issued under the plan by 2,500,000
shares.
Restructuring and Impairment Charges
In February 2004 and March 2005, the Company reduced its workforce by 54 and 11
employees, respectively. In accordance with SFAS No. 112, "Employers' Accounting
for Post-employment Benefits - an amendment of FASB statements No. 5 and 43",
the Company recorded a liability for the severance, employee benefits and
estimated payroll taxes of $1.1 million and $0.1 million respectively related to
the reductions in workforce.
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruct costs of $0.5 million, the loss on the retirement of certain
base station equipment of $2.8 million and termination liabilities of $1.8
million for site leases no longer required for removed base stations. Of these
amounts, as of June 30, 2005, the Company had incurred base station deconstruct
costs of $0.5 million, the loss on the retirement of certain base station
equipment of $2.8 million and termination liabilities of $1.3 million for site
leases no longer required for removed base stations. The Company recorded these
charges in accordance with SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities".
In June 2005, the Company recorded a restructuring charge of $5.6 million
related to additional network rationalization initiatives, consisting of base
station deconstruct costs of $0.1 million, the loss on the cancellation of
frequencies of $3.6 million and termination liabilities of $1.9 million for site
leases no longer required for removed base stations. Of these amounts, as of
June 30, 2005, the Company had incurred base station deconstruct costs of less
than $0.1 million, the loss on the cancellation of frequencies of $3.6 million
and termination liabilities of $0.1 million for site leases no longer required
for removed base stations. The Company recorded these charges in accordance with
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities". In January, 2005 the Company identified the base station equipment
associated with the 2005 rationalization and adjusted their remaining useful
lives for depreciation purposes, resulting inapproximately $1.8 million of
accelerated depreciation expense. The Company recorded these charges in
accordance with SFAS No. 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets".
Research and Development Costs
Research and development costs are expensed as incurred. Such costs include
development efforts on the TerreStar satellite system and expenses associated
with external development agreements. We expect these costs from TerreStar to
increase in the future as development efforts on its satellite system
accelerate.
14
Advertising Costs
Advertising costs (inclusive of airtime commissions) are charged to operations
in the year incurred.
Stock-Based Compensation
The Company accounts for stock options issued to non-employees, under Statement
of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation". The Company's issuance of employee stock options is accounted for
using the intrinsic value method under APB Opinion No. 25, Accounting for Stock
issued to Employees ("APB 25").
Statement of Financial Accounting Standards No. 123 "Accounting for Stock --
based Compensation", ("SFAS No. 123") as amended by Statement of Financial
Accounting Standards No. 148 "Accounting for Stock-Based Compensation --
Transition and Disclosure" requires the Company to provide pro forma information
regarding net earnings and earnings per common share as if compensation cost for
the Company's stock options had been determined in accordance with the fair
value based method prescribed in SFAS No. 123.
We have generally granted stock options to our employees at exercise prices
equal to or greater than the fair value of the shares at the date of grant and
accounted for these stock option grants in accordance with APB 25. Under APB 25,
when stock options are issued with an exercise price equal to the market price
of the underlying stock on the date of grant, no compensation expense is
recognized in the statement of operations. Because we recognized that APB 25 was
in the process of being rescinded, in 2004 we amended our stock option plan to
provide for the grants of restricted stock and other forms of equity
compensation in addition to stock options. In December 2004, APB 25 was replaced
by Statement of Financial Accounting Standards No. 123 (Revised) ("Statement
123(R)"), which will be effective for all accounting periods beginning after
December 15, 2005. The Company will adopt Statement 123(R) on January 1, 2006,
and will be required to recognize an expense for the fair value of its
outstanding stock options. Under Statement 123(R), the Company must determine
the transition method to be used at the date of adoption, the appropriate fair
value model to be used for valuing share-based payments and the amortization
method for compensation cost. The transition methods include prospective and
retroactive adoption methods. Under the retroactive method, prior periods may be
restated either as of the beginning of the year of adoption or for all periods
presented. The prospective option requires that compensation expense be recorded
for all unvested stock options and restricted stock at the beginning of the
first quarter of adoption of Statement 123(R), while the retroactive option
would record compensation expense for all unvested stock options and restricted
stock beginning with the first period restated. Both transition methods would
require management to make accounting estimates. The Company has not yet
concluded which method it will utilize, nor has it determined what the impact
will be on its earnings per share.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
15
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
Net loss available to common stockholders, as
reported $(22,868) $(23,112) $(51,408) $(36,629)
(Deduct)/Add: Stock-based employee compensation
expense included in net loss, net of related tax
effects (270) 2,435 11,299 3,877
(Deduct)/Add: Total stock-based employee
compensation (expense) income determined under
fair value based method for all awards, net of
tax related effects (229) 11 (13,169) (428)
-------- -------- -------- --------
Pro forma net loss (23,367) (20,666) (53,278) (33,180)
Weighted average common shares outstanding 63,762 29,338 61,683 27,285
Loss per share:
Basic and diluted---as reported $ (0.36) $ (0.79) $ (0.83) $ (1.34)
Basic and diluted---pro-forma $ (0.37) $ (0.70) $ (0.86) $ (1.22)
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:
16
Three Months Three Months Ended Six Months Six Months
Ended June 30, June 30, Ended June 30, Ended June 30,
2005 2004 2005 2004
---- ---- ---- ----
Expected life (in years) 9 9 10 10
Risk-free interest rate 2.85% .88%-.93% 2.28%-2.85% .88%-.93%
Volatility 773% 146%-162% 456%-773% 146%-162%
Dividend yield 0% 0% 0% 0%
Segment Disclosures
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", requires companies to report financial and descriptive information
about their reportable operating segments, including segment profit or loss,
certain specific revenue and expense items and segment assets as well as
information about the revenues derived from the company's products and services
and major customers. This statement requires the use of the management approach
to determine the information to be reported. The management approach is based on
the way management organizes the enterprise to assess performance and make
operating decisions regarding the allocation of resources. It is management's
opinion that the Company has two reportable segments, Motient Communications and
TerreStar Networks Inc. The accounting policies of the reportable segments are
the same as those described in the summary of significant accounting policies.
The Company's core customer base can be generally divided into six broad
categories, Wireless Internet, Field Services, Transportation, Telemetry,
iMotient and Other. Wireless Internet primarily consists of customers using the
Company's network and applications to access certain internet functions, like
email. Devices and airtime used by transportation and shipping companies, or by
personnel in the field service industries (such as repair personnel), for
dispatching, routing and other vital communications functions are known as
transportation and field service, respectively. Telemetry typically covers
devices and airtime to connect remote equipment, such as wireless point-of-sale
terminals, with a central monitoring facility. iMotient consists of integrated
wireless data solutions revenues through the resale of airtime on the Cingular
and Sprint wireless networks. Other revenues may consist of sales commissions,
consulting fees or other fees. The following summarizes the Company's core
wireless business revenue by these market categories (in thousands):
Three Months Three Months Six Months Ended Six Months Ended
Ended June 30, Ended June 30, June 30, June 30,
2005 2004 2005 2004
---- ---- ---- ----
Summary of Revenue
Wireless Internet $ 2,033 $ 5,231 $ 4,680 $11,592
Transportation 467 884 1,008 1,799
Field services 135 1,529 891 3,253
Telemetry 443 595 889 1,177
iMotient 75 -- 83 --
All Other 118 1,917 250 2,296
------- ------- ------- -------
Service revenue 3,271 10,156 7,801 20,117
Equipment revenue 274 1,283 757 2,822
------- ------- ------- -------
Total Revenue $ 3,545 $11,439 $ 8,558 $22,939
======= ======= ======= =======
17
The Company does not measure ultimate profit and loss or track its assets by
these market categories. TerreStar does not currently generate any revenues and
we do not anticipate that it will do so until 2008. Additional financial
information concerning the Company's reportable segments is shown in the
following table (in thousands):
Three Months Ended June 30, 2005 Six Months Ended June 30, 2005
Motient TerreStar Total Motient TerreStar Total
------- --------- ----- ------- --------- -----
Operating (loss) $(16,758) $(1,096) $(17,854) $(38,210) $ (1,096) $ (39,306)
Depreciation expense $ 3,020 $ --- $ 3,020 $ 5,403 $ --- $ 5,403
Amortization expense $ 1,296 $ 733 $ 2,029 $ 2,592 $ 733 $ 3,325
Identifiable assets NA NA NA $742,020 $278,710 $1,020,730
Capital expenditures $ 20 $ --- $ 20 $ 36 $ --- $ 36
(Loss) Per Share
Basic and diluted (loss) income per common share is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
As of June 30, 2005 there were 408,500 shares of Series A Cumulative Convertible
Preferred Stock entitled to be converted into a total of 12,255,000 shares of
common stock, shares that were not included in this calculation because of their
antidilutive effect for the three and six months ended June, 2005. 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, 2005 and 2004, there were warrants to
acquire approximately 6,887,551 and 6,664,962, respectively, shares of common
stock and options outstanding for 410,339 and 1,554,867, shares of TerreStar
common stock and options outstanding for 1,341,324 and 0, respectively, that
were not included in this calculation because of their antidilutive effect for
the three months ended June 30, 2005 and 2004.
Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123 (Revised 2004) "Share-Based
Payment" ("SFAS No. 123R") that addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for (a)
equity instruments of the company or (b) liabilities that are based on the fair
value of the company's equity instruments or that may be settled by the issuance
of such equity instruments. SFAS No. 123R addresses all forms of share-based
payment awards, including shares issued under employee stock purchase plans,
stock options, restricted stock and stock appreciation rights. SFAS No. 123R
eliminates the ability to account for share-based compensation transactions
using APB Opinion No. 25, "Accounting for Stock Issued to Employees", that was
provided in Statement 123 as originally issued. Under SFAS No. 123R companies
are required to record compensation expense for all share based payment award
transactions measured at fair value. This statement is effective for quarters
ending after December 15, 2005. We have not yet determined the impact of
applying the various provisions of SFAS No. 123R.
18
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs: an amendment
of ARB No. 43, Chapter 4", to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs and wasted material. SFAS No. 151
is effective for inventory costs incurred during fiscal years beginning after
June 15, 2005. We do not believe the provisions of SFAS No. 151, when applied,
willhave an impact on our financial position or results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets
- -- An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions
(SFAS 153). SFAS 153 eliminates the exception from fair value measurement for
non-monetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, Accounting for Nonmonetary Transactions, and replaces it with an
exception for exchanges that do not have commercial substance. SFAS 153
specifies that a non-monetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS 153 is effective for the fiscal periods beginning after June 15,
2005 and is required to be adopted by the Company in the third quarter of 2005.
The Company does not expect that the adoption of SFAS 153 will have a material
effect on our results of operations as the Company currently does not and does
not expect to exchange any non-monetary assets.
Related Parties
The Company made cash payments of $286,000 and $1,478,000 to related parties for
service-related obligations for the three and six-month periods ended June 30,
2005, as compared to $570,000 and $771,000 for the three and six-month periods
ended June 30, 2004. These payments were primarily made to CTA, a consulting and
private advisory firm specializing in the technology and telecommunications
sectors. CTA has been engaged to act as chief restructuring entity of Motient.
As consideration for this work, Motient has agreed to pay to CTA a monthly fee
of $60,000.
In February 2005, the board approved a success-based consulting fee of
$3,709,796, payable 60% to CTA and certain of its affiliates, and 40% to The
Singer Children's Management Trust, a trust established for the benefit of the
children of Gary Singer, a former lender under the 2003 Term Credit Agreement
and the brother of Steven Singer, Motient's chairman of the board. The fee was
paid in cash and stock, and was related to the closing of Motient's acquisition
of certain interests in MSV. Such fee is equal to 1% of the aggregate
consideration paid by Motient for such MSV interests.
3. COMMITMENTS AND CONTINGENCIES
As of June 30, 2005, the Company had no contractual inventory commitments.
UPS Deposits and Deferred Revenue
- ---------------------------------
In December 2002, Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. As of June 30, 2005, the Company's
remaining airtime service obligation to UPS in respect of the prepayment was
approximately $3.7 million. In April 2005, this agreement was amended to require
that UPS use at least $1.5 million of airtime between January 1, 2005 and March
31, 2006, and in exchange, Motient would repay in April 2006, in cash, an amount
19
equal to the amount of airtime used by UPS during such period. Both UPS' usage
and Motient's repayment will be credited against the remaining airtime
obligation. As a result of this amendment, the maximum prepaid airtime service
obligation will be $0.7 million in May 2006. The parties have not yet reached
agreement regarding the use or repayment of any remaining prepaid airtime
service obligation, but Motient can provide no assurance that it will not be
required to repay such amount to UPS.
Series A Cumualtive Convertible Preferred Stock
- -----------------------------------------------
The Company accounts for Series A Cumulative Convertible Preferred Stock under
Accounting Series Release 268. "Redeemable Preferred Stocks". On April 15, 2005,
Motient sold 408,500 shares of Series A Cumulative Convertible Preferred Stock,
$0.01 par value in a private placement exempt from the registration requirements
of the Securities Act of 1933. Motient received cash proceeds, net of $17.5
million in placement agent commissions and other fees (before escrowing a
portion of the proceeds as required under the terms of the preferred stock,
described below) of approximately $391 million. The purchasers under the
Securities Purchase Agreement included most of the purchasers from Motient's
November 2004 private placement, as well as several new investors.
In connection with the sale of preferred stock, Motient also entered into a
registration rights agreement with the purchasers. Under this agreement, Motient
is obligated to use its reasonable best efforts to cause a registration
statement on Form S-1 (or if available S-3) relating to the resale by the
purchasers of the Motient shares of common stock issuable upon conversion of the
preferred stock or the warrants issued in connection therewith, to cause the
registration statement to become effective as soon as possible, but in no event
later than (i) August 8, 2005 if the registration statement is not reviewed by
the Securities and Exchange Commission (the "SEC") or (ii) September 7, 2005 if
the Registration Statement is reviewed by the SEC.
In connection with the sale of the preferred stock, Motient granted warrants
exercisable for an aggregate of 154,109 shares of Motient common stock to the
purchasers. The warrants have a term of five years and an exercise price equal
to $26.51 per share. Each warrant shall become exercisable if the registration
statement is not filed or declared effective in accordance with the time limits
described above, or if the registration statement is filed and declared
effective but shall thereafter cease to be effective for a period of time that
exceeds 30 days in the aggregate in any twelve-month period. Each warrant will
vest as to 1/365th of the shares of common stock underlying the warrant for (i)
each day after June 24, 2005 on which the registration statement has not yet
been filed, (ii) each day after August 8, 2005 or September 7, 2005, as
applicable, that the registration statement has not been declared effective or
(iii) each day after the registration statement first becomes effective that
Motient is unable to keep it effective in accordance with the time periods and
terms described above. As of June 30, 2005, the Company had not assigned a fair
value to these warrants as none of the warrants have vested and are not expected
to vest.
The sale of these shares of preferred stock was not registered under the
Securities Act and the shares may not be sold in the United States absent
registration or an applicable exemption from registration requirements. The
shares were offered and sold pursuant to the exemption from registration
afforded by Rule 506 under the Securities Act and/or Section 4(2) of the
Securities Act as a sale not involving any public offering, under which offers
and sales were made to Qualified Institutional Buyers as such term is defined
under the rules and regulations under the Securities Act. In connection with
such sale of preferred stock, Motient also issued, for no separate
consideration, warrants to purchase up to 154,109 shares of Motient common
stock.
20
The rights, preferences and privileges of the Series A Preferred are contained
in a Certificate of Designations of the Series A Cumulative Convertible
Preferred Stock. The following is a summary of these rights, preferences and
privileges:
o The Series A Preferred Stock has voting rights limited to those listed
below, or except as required by applicable law. Upon (a) the
accumulation of accrued and unpaid dividends on the outstanding shares
of Series A Preferred for two or more six month periods, whether or not
consecutive; (b) the failure of the Corporation to properly redeem the
Series A Preferred Stock, or (c) the failure of the Corporation to
comply with any of the other covenants or agreements set forth in the
Certificate of Designations for the Series A Preferred Stock, and the
continuance of such failure for 30 consecutive days or more after
receipt of notice of such failure from the holders of at least 25% of
the Series A Preferred then outstanding then the holders of at least a
majority of the then-outstanding shares of Series A Preferred, with the
holders of shares of any parity securities issued after April 15, 2005
upon which like voting rights have been conferred and are exercisable,
voting as a single class, will be entitled to elect two directors to
Motient's Board of Directors for successive one-year terms until such
defect listed above has been cured. In addition, Motient must obtain the
approval of the holders of a majority of the then outstanding shares of
Series A Preferred to modify the rights, preferences or privileges of
the Series A Preferred in a manner adverse to the holders of Series A
Preferred.
o From April 15, 2005 to April 15, 2007, Motient is required to pay
dividends in cash at a rate of 5.25% per annum (the "Cash Rate") on the
shares of Series A Preferred. Motient was required to place the
aggregate amount of these cash dividends, $42,892,500, in an escrow
account. These cash dividends will be paid to the holders of Series A
Preferred from this escrow account in four semi-annual payments, unless
earlier paid pursuant to the terms described below.
o From April 15, 2007 to April 15, 2010, Motient is required to pay
dividends on each share of Series A Preferred either in cash at the Cash
Rate or in shares of Motient common stock at a rate of 6.25% per annum.
o If any shares of Series A Preferred remain outstanding on April 15,
2010, Motient is required to redeem such shares for an amount equal to
the purchase price paid per share plus any accrued but unpaid dividends
on such shares.
o Each holder of shares of Series A Preferred shall be entitled to convert
their shares into shares of Motient common stock at any time. Each share
of Series A Preferred will initially be convertible into 30 shares of
Motient common stock. Upon conversion, any accrued but unpaid dividends
on such shares will also be issued as shares of common stock, in a
number of shares determined by dividing the aggregate value of such
dividend by $33.33. In addition, if the conversion takes place prior to
April 15, 2007 (or if any amounts remain in the escrow account on such
date), the converting holder will be entitled to the portion of the
escrow account per share of Series A Preferred Stock equal to $105.00
minus all dividends that have been paid on such share from the escrow
account (such amount, the "Escrow Portion"). Upon conversion, all
amounts paid to holders of Series A Preferred will be paid in shares of
Motient common stock.
21
o Upon a change in control of Motient, each holder of Series A Preferred
shall be entitled to require Motient to redeem such holder's shares of
Series A Preferred for an amount in cash equal to $1,080 per share plus
all accrued and unpaid dividends on such shares. In addition, if the
change in control takes place prior to April 15, 2007 (or if any amounts
remain in the escrow account on such date), the holder electing to have
such shares redeemed will be entitled to the Escrow Portion remaining as
to such share.
o No dividends may be declared or paid, and no funds shall be set apart
for payment, on shares of Motient common stock, unless (i) written
notice of such dividend is given to each holder of shares of Series A
Preferred not less than 15 days prior to the record date for such
dividend and (ii) a registration statement registering the resale of the
Conversion Shares has been filed with the SEC and is effective on the
date Motient declares such dividend.
o Upon the liquidation, dissolution or winding up of Motient, the holders
of Series A Preferred are entitled to receive, prior and in preference
to any distributions to holders shares of Motient common stock, an
amount equal to $1,000 per share plus all accrued and unpaid dividends
on such shares. In addition if the liquidation, dissolution or winding
up takes place prior to April 15, 2007 (or if any amounts remain in the
escrow account on such date), the holder of each share of Series A
Preferred will be entitled the Escrow Portion remaining as to such
share.
4. LEGAL AND REGULATORY MATTERS
Legal
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.
Regulation
Overview
Motient's wireless communications businesses are regulated to varying degrees at
the federal, state and local levels. Various legislative and regulatory
proposals under consideration from time to time by Congress and the FCC have in
the past materially affected and may in the future materially affect the
telecommunications industry in general, and Motient's wireless businesses in
particular. The following is a summary of significant laws, regulations and
policies affecting the operation of Motient's wireless businesses. In addition,
many aspects of regulation at the federal, state and local level currently are
subject to judicial review or are the subject of administrative or legislative
proposals to modify, repeal, or adopt new laws and administrative regulations
and policies. Neither the outcome of these proceedings nor their impact on
Motient's operations can be predicted at this time.
22
Regulation Of Our DataTac Network
The ownership and operation of Motient's DataTac network is subject to the rules
and regulations of the FCC, which acts under authority established by the
Communications Act of 1934, as amended, and related federal laws. Among other
things, the FCC allocates portions of the radio frequency spectrum to certain
services and grants licenses to and regulates individual entities using that
spectrum. Motient operates pursuant to various licenses granted by the FCC.
Motient's FCC licenses are subject to restrictions in the Communications Act
that (i) some FCC licenses may not be held by a corporation of which more than
20% of its capital stock is directly owned of record or voted by non-U.S.
citizens or entities or their representatives and (ii) no such FCC license may
be held by a corporation controlled by another corporation, referred to as
indirect ownership, if more than 25% of the controlling corporation's capital
stock is owned of record or voted by non-U.S. citizens, entities or their
representatives, if the FCC finds that the public interest is served by the
refusal or revocation of such license. However, with the implementation of the
Basic Telecommunications Agreement, negotiated under the auspices of the World
Trade Organization and to which the United States is a party, the FCC will
presume that indirect ownership interests in our FCC licenses in excess of 25%
by non-U.S. citizens or entities will be permissible to the extent that the
ownership interests are from World Trade Organization-member countries. If the
25% foreign ownership limit is exceeded, the FCC could take a range of potential
actions that could harm Motient's business.
The FCC licenses used for the DataTac network are renewable, site-based, 800 MHz
licenses, granted for a term of 10 years. Renewal is granted in the ordinary
course for 800 MHz licenses like those which Motient holds. As a commercial
mobile radio service provider in the 800 MHz terrestrial business, Motient is
regulated as a common carrier. Motient must therefore offer service at just and
reasonable rates on a first-come, first-served basis, without any unjust or
unreasonable discrimination, and Motient is subject to the FCC's complaint
processes. The FCC has decided not to apply or to withhold its right, at this
time, to apply numerous common carrier provisions of the Communications Act to
commercial mobile radio service providers. In particular, Motient is not subject
to traditional public utility rate-of-return regulation, and is not required to
file tariffs with the FCC.
In order to address certain concerns from wireless users in the public safety
community, such as fire and police departments, on July 8, 2004, the FCC
approved adoption of a reconfiguration plan for the 800 MHz spectrum band. Under
the plan, Nextel Communications Inc. will occupy spectrum in the 1.9 GHz band in
exchange for, among other things, (1) relocating and retuning public safety
licensees in the 800 MHz band, and (2) consolidating its own 800 MHz frequencies
in the so-called "upper 800" MHz band. On April 8, 2004, Motient has filed a
request with the FCC asking that the FCC relocate its 800 MHz band frequencies
into the "Guard Band", which is that portion of the 800 MHz frequency band
immediately adjacent to the upper-800 as part of the 800 MHz reconfiguration
plan. On August 6, 2004, the FCC released the text of its July 8, 2004 order.
The text of the order did not grant Motient's request, but neither did it
explicitly deny it. On December 2, 2004, Motient filed comments with the FCC
seeking to clarify and implement Motient's original request of April 8, 2004. On
December 22, 2004, the FCC clarified that Motient would generally be allowed,
subject to certain conditions, to move its 800 MHz frequencies to the upper-800
MHz band. Motient cannot assure you that its operations will be not affected by
the adoption or implementation of this order or any subsequent addenda.
23
As a result of our ongoing network rationalization efforts, some of our 800 MHz
FCC licenses have been lost and others may be lost in the future in markets to
which we are discontinuing service. We believe that the value of our FCC
licenses in these smaller markets is very small compared to the value of our FCC
licenses in the top 40 MSAs. While we are taking steps to avoid this
possibility, and while we believe that any such losses would not be material to
our business, we can provide no assurance that any such losses would not
negatively impact our business.
Regulation Of TerreStar
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 system. This order was
applicable to both the L-band (MSV) and the S-band (TerreStar). The ATC Order
established a set of preconditions and technical limits for ATC operations, as
well as an application process for ATC approval of the specific system
incorporating the ATCs that the licensee intends to use. On November 18, 2003,
MSV filed an application with the FCC to expand the use of its L-band spectrum
and construct its next-generation hybrid network with ATC. On November 8, 2004,
the FCC issued an order granting MSV the first ATC license ever granted by the
FCC. The FCC also approved several of MSV's waiver requests, allowing MSV to
further enhance its service coverage, but it specifically deferred its ruling on
other MSV waiver requests. The order sets forth various limitations and
conditions necessary to the use of ATC by MSV, but there can be no assurances
that such conditions will be satisfied by MSV, or that such limitations will not
be unnecessarily burdensome to MSV. One of MSV's competitors has asked the FCC
to review the November 8, 2004 decision. We cannot predict the outcome of this
review. On February 25, 2005, the FCC issued a revised set of rules following a
detailed multi-year process for the use of ATC. The rules expanded the technical
and operational flexibility of ATC Services allowing for greater capacity in
both the uplink and downlink directions.
TerreStar has not applied for ATC authority, and there are several regulatory
conditions that must be satisfied prior to any grant of ATC authority by the FCC
to TerreStar. As a result, Motient can provide no assurances that ATC authority
will be granted if and when TerreStar applies for such authority.
TerreStar Licenses
TMI holds the approval issued by Industry Canada for a 2 GHz space station
authorization and related spectrum licenses for the provision of Mobile
Satellite Service, or MSS, in the 2 GHz band, as well as an authorization from
the FCC for the provision of MSS in the 2 GHz band. These authorizations are
subject to various milestones relating to the construction, launch and
operational date of the system. TMI is contractually obligated to transfer the
authorizations to an entity designated by TerreStar that is eligible to hold the
authorizations, subject to obtaining the necessary regulatory approvals.
24
In December 2002, TMI and TerreStar jointly applied to the FCC for authority to
transfer TMI's MSS authorization to TerreStar. However, certain wireless
carriers urged the FCC to cancel TMI's MSS authorization, and to dismiss the
application to transfer TMI's MSS authorization to TerreStar. In February 2003,
the FCC's International Bureau adopted an order canceling TMI's MSS
authorization due to an alleged failure to enter into a non-contingent satellite
construction contract before the specified first milestone date, and dismissing
the application for TMI to transfer its MSS authorization to TerreStar.
In June 2004, upon review of the International Bureau's decision, the FCC agreed
to waive aspects of the first milestone requirement applicable to TMI's MSS
authorization and, therefore reinstated that authorization, along with the
application to transfer TMI's MSS authorization to TerreStar. The FCC also
modified the milestone schedule applicable to TMI's MSS authorization. TMI
recently certified to the FCC its compliance with the second and third
milestones under its MSS authorization. The FCC is currently reviewing that
certification for compliance with the requirements of TMI's MSS authorization.
The application to transfer TMI's MSS authorization to TerreStar is still
pending before the FCC. The remaining milestones relate to satellite launch and
operation, and are in November 2007 and 2008, respectively.
Currently, spectrum in the 2 GHz MSS band is assigned pro rata among the
existing licensees. TMI's current spectrum assignments from the FCC and Industry
Canada reflect the cancellation of licenses of three of the eight entities that
were authorized to provide 2 GHz MSS in 2001: Mobile Communications Holding Inc.
(MCHI), Constellation Communications Holdings, Inc. (Constellation), and
Globalstar LP. Globalstar LLC, the successor-in-interest to Globalstar LP, along
with another interested entity, Globalstar Satellite LP, has collectively
challenged cancellation of its license on reconsideration to the FCC. MCHI and
Constellation have jointly challenged cancellation of their licenses on appeal
to the U.S. Court of Appeals for the D.C. Circuit. If any or all of those
licenses were reinstated, TMI would likely have access to less spectrum than it
would otherwise. The FCC has not yet redistributed spectrum surrendered in March
2005 by three of the then remaining five 2 GHz MSS licensees to the current
remaining two 2 GHz MSS licensees. Although the FCC's rules presume that such
redistribution shall be made in the case of the fourth and fifth license
surrenders, there is no guarantee that the FCC will follow that presumption, or
that Industry Canada would make consequential amendments to the spectrum
assignment contained in TMI's Industry Canada authorization. The FCC has issued
two Public Notices concerning these matters. One public notice deals with the
distribution of the spectrum previously assigned to the fourth and fifth
licenses and the other deals with the spectrum held by the third licensee. We
can provide no assurance regarding the outcome of these matters.
In September 2004, the FCC issued an order allowing PCS operation in the
1995-2000 MHz band, which may be adjacent to the 2 GHz frequencies ultimately
assigned to TMI. TerreStar has commented in the proceedings to establish service
rules for the 1995-2000 MHz band. There can be no assurance that the FCC will
not adopt service rules that will create interference to MSS operators in the 2
GHz band, including TerreStar.
The 2 GHz MSS band and certain adjacent bands are currently occupied by
broadcast auxiliary service licensees, cable television relay service licensees,
local television transmission service licensees, fixed service licensees, and
certain other licensees. Most if not all of those licensees, and especially
those in the 2 GHz MSS uplink at 2000-2020 MHz, will need to relocate their
25
operations to a new band to accommodate 2 GHz MSS and other new entrants. As a 2
GHz MSS entrant, TMI and/or TerreStar may be obligated to compensate those
incumbent licensees for their relocation costs and for the costs of providing
"comparable facilities" to them. Under a separate FCC Order, Nextel
Communications Inc. (Nextel) must relocate incumbent licensees in the 1990-2025
MHz band by September 6, 2007. TMI and TerreStar have filed a Petition for
Reconsideration asking that the FCC clarify the reimbursement obligations of 2
GHz MSS licensees to Nextel, but the FCC has not yet acted on that Petition. It
is thus unclear what the potential reimbursement liability of TerreStar will be
with regard to Nextel's costs in that relocation process. Even if Nextel bears
all costs of relocating incumbent licensees in the 1990-2025 MHz band, TMI
and/or TerreStar will still likely be responsible for relocating certain
incumbent licensees in the 2165-2200 MHz band, although it may have the right to
recoup certain costs from wireless entrants in the 2165-2180 MHz band.
5. TERRESTAR ASSET PURCHASE
On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned
subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued
common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase
Agreement by and between MVH and TerreStar. On the same day, TerreStar was
spun-off by MSV to its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 48% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent $200 million stock
purchase increased Motient's ownership to its current 61% of TerreStar's issued
and outstanding common stock.
Assets acquired and liabilities assumed in the asset purchase were recorded on
the Company's Consolidated Balance Sheet as of the purchase date based upon
their fair values at such date. The results of operations of the net assets
acquired by the Company have been included in the Company's Statements of
Operations since its date of purchase . Approximately $78 million was allocated
to intangible assets that include the rights to receive licenses in the 2 GHz
band and other intangibles. These intangible assets are being amortized over an
average life of 15 years. The allocation is calculated as follows (in
thousands):
26
Purchase price $200,000
Minority interest 39.1455%
--------
Subtotal 78,291
--------
Increase in Motient ownership 13.4%
TerreStar net book value before purchase 643
--------
Add: Motient interest in increased book value 86
--------
Remaining value (a) $ 78,377
========
(a) The remaining value was allocated as follows:
Value allocated to FCC license rights $ 66,699
========
Value allocated to Intellectual Property $ 11,678
========
There was no excess purchase price over the estimated fair values of the
underlying assets acquired and liabilities assumed. In certain circumstances,
the allocation of the purchase price is based upon preliminary estimates and
assumptions. Accordingly, the allocations are subject to revision when the
Company receives final information and other analyses. Revisions to the fair
values, which may be significant, will be recorded by the Company as further
adjustments to the purchase price allocations.
For additional information regarding TerreStar, see Note 1. Organization and
Business as well as Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Pro Forma Financial Data
The following table sets forth our unaudited pro forma results of operations for
the six months ended June 30, 2005 and 2004, reflecting our purchase of the
TerreStar Networks Inc. assets. The pro forma results are based on our
historical financial statements and the historical financial statements of the
operations of TerreStar. The unaudited pro forma statements of operations give
effect to the transaction as if the transaction occurred on January 1, 2005 and
2004, respectively. The pro forma financial results are presented for
informational purposes only and are not intended to be indicative of either
future results of our operations or results that might have been achieved had
the transactions actually occurred since the beginning of the fiscal periods.
Motient Corporation and Subsidiaries
Selected Consolidated Pro-forma
Results of Operations
---------------------
Six Months Ended
----------------
June 30, 2005 June 30, 2004
------------- -------------
Net Sales $ 8,558 $ 22,939
Operating Loss $(43,942) $(25,548)
Operating loss, per share $ (0.71) $ (0.94)
27
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following Management's Discussion and Analysis is intended to help the
reader understand Motient Corporation. It is provided as a supplement to, and
should be read in conjunction with, our financial statements and the
accompanying notes.
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 registration statements on Form S-1, 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
Motient owns, operates and develops two-way wireless communications businesses.
In addition to our own two-way wireless data network (our DataTac network) which
we use to provide our customers with two-way wireless data communication
services, we have the capabilities to provide our customers with convenient
access to other wireless data networks, such as the Sprint and Cingular
networks. We also are in the process of developing a satellite communications
service via our 61% ownership of TerreStar Networks Inc., a development stage
company in the process of building its first satellite. We acquired our
ownership in TerreStar in May 2005. TerreStar was formerly a subsidiary of
another satellite communications company, Mobile Satellite Ventures, LP, or MSV,
as it is commonly known. We own 49% of MSV, but do not have operating control of
its business and do not consolidate its financial statements into Motient.
28
Our Terrestrial Wireless Business
We are a provider of two-way, wireless mobile data services and mobile Internet
services in the top 40 MSAs in the United States. Owning and operating a
wireless radio data network that provides wireless mobile data service to
customers, we generate revenue primarily from the sale of airtime on our network
and from the sale of communications devices to our customers. Our customers use
our network and our wireless applications for wireless email messaging and
wireless data transmission, enabling businesses, mobile workers and consumers to
wirelessly transfer electronic information and messages and to access corporate
databases and the Internet.
In addition to selling wireless data services that use our own network, Motient
is also a reseller of airtime on the Cingular and Sprint wireless networks.
These arrangements allow Motient to provide integrated wireless data solutions
to its customers using a variety of networks. In December 2004, Motient launched
a new set of products and services designed to provide these integrated wireless
data solutions to its customers called iMotient Solutions TM. iMotient allows
Motient's customers to use these multiple networks via a single connection to
Motient's back-office systems, providing a single alternative for application
and software development, device management and billing across multiple
networks, including but not limited to GPRS, 1XRTT and our own DataTac network.
Once connected to iMotient, customers receive proprietary applications and
services that reduce airtime usage, improve performance and reduce costs.
Motient has not yet generated material revenues from iMotient Solutions, but it
anticipates that iMotient revenues will increase over the course of 2005.
Motient cannot anticipate whether these revenues will increase rapidly enough to
offset anticipated revenue declines in other segments of its business.
Of our revenues, for the six months ended June 30, 2005, approximately 53% were
generated in connection with our BlackBerry TM by Motient wireless email service
and our own eLinkSM wireless email service, our "Wireless Internet" market
segment. These wireless email services are utilized by our customers primarily
in conjunction with Research In Motion's RIM 850 and 857 wireless handheld
devices, which are no longer produced by Research in Motion.
We believe that consumers, in general, wish to use and purchase wireless
internet devices that cannot be supported on our DataTac network, such as
wireless internet devices that are data and voice capable. We expect our
revenues from these products will continue to decline, but we will attempt to
capture revenue from the migration of our wireless internet customers to newer
technologies through, among other alternatives, our reseller agreements with
RACO Wireless, Inc. and eAccess Solutions, Inc., which allows us to receive a
one-time commission for signing up customers to use alternative network
providers wireless internet service. Motient is currently exploring ways to
offer Wireless Internet services under our iMotient Solutions TM platform, but
Motient can make no assurances that it will ever be able to effectively offer
such a product.
Over the course of 2004, Motient implemented and completed certain initiatives
to rationalize the size of its network, primarily to remove unprofitable base
stations and reduce unneeded capacity and coverage. During the first quarter of
2005, Motient announced a plan to refocus its DataTac network primarily on the
top 40 Metropolitan Statistical Areas (MSAs), and in the second quarter of 2005,
we deconstructed DataTac network components and terminated service in previously
served MSAs above the top 40. Given the similar coverage profiles of the
Cingular and Sprint networks, the significantly increased bandwidth capabilities
of these networks relative to the DataTac network and the concentration of our
revenues in the top 40 MSAs, we determined that this plan best allowed us to
29
match our network infrastructure costs with our revenue base, while continuing
to meet the needs of as many of our customers as possible. Although these
actions will result in a decline in our revenues, we believe that the initial
revenue decline will be offset by a reduction in our network operating costs.
These network changes may put negative pressure on our revenues in all market
segmentsin 2005 as customers may elect to pursue other alternative network
carriers with alternative coverage. We are making every effort to retain our
customers or migrate them to our iMotient Solutions TM product and services, but
Motient can make no assurances that it will be able to retain these customers.
Our Satellite Communications Business - TerreStar Networks Inc.
On May 11, 2005, we acquired approximately an additional 13.4% ownership in
TerreStar Networks, Inc. for a total 61% ownership interest in, and operating
control over, TerreStar Networks Inc. Prior to that date, TerreStar was a
subsidiary of MSV established to, among other things, develop a satellite
communications system in the 2 GHz frequency band, often known as the "S-band".
We acquired our ownership interest in TerreStar when, in conjunction of a
spin-off of TerreStar to the owners of MSV, we purchased an additional $200
million of newly issued TerreStar common stock. In conjunction with this
transaction, TerreStar also received a perpetual, royalty-free license to
utilize MSV's patent portfolio, including those patents related to "ancillary
terrestrial component", or ATC, which we anticipate will allow us to deploy a
communications network that seamlessly integrates satellite and terrestrial
communications, giving a user ubiquitous wireless coverage across North America.
Approximately $78 million was allocated to intangible assets that include the
rights to receive licenses in the 2 GHz band and other intangibles. The
allocation is calculated as follows (in thousands):
Purchase price $200,000
Minority interest 39.1455%
--------
Subtotal 78,291
------
Increase in Motient ownership 13.4%
TerreStar net book value before purchase 643
---
Add: Motient interest in increased book value 86
--
Remaining value (a) $78,377
=======
(a) The remaining value was allocated as follows:
Value allocated to FCC license rights $66,699
=======
Value allocated to Intellectual Property $11,678
=======
By offering Mobile Satellite Service, or MSS, in the S-band in conjunction with
ATC, TerreStar can effectively deploy a hybrid satellite and terrestrial
wireless communications network. This network could, for instance, eventually
allow a user to utilize a mobile device that would communicate with a
traditional land-based wireless network when in range of that network, but
communicate with a satellite when not in range of such a land-based network.
These mobile devices could be used for a myriad of communications applications,
including potentially voice, data and video services.
TerreStar is currently in the process of building its first satellite pursuant
to a construction contract with Space Systems/Loral, Inc. This satellite is
scheduled to be completed in November 2007, with commercial operations scheduled
to begin in 2008. Once launched, the satellite, with an antenna almost sixty
30
feet across, will be able to communicate with terrestrial base stations and
standard wireless devices. The construction, launch and operation of this
satellite will require significant additional capital, with satellite
construction costs alone expected to exceed $550 million, paid out over the next
several years.
Our ability to offer these services depends on TerreStar's right to receive
certain regulatory authorizations allowing it to provide MSS in the S-band. In
order to use ATC, TerreStar will need to apply for authority with the FCC, which
has not yet done. These authorizations are subject to various regulatory
milestones relating to the construction, launch and operational date of the
satellite system required to provide this service.
Over the course of 2005 through 2008, we expect that TerreStar will continue to
work on building, testing and deploying its satellite communications system,
which will require large capital expenditures, as well as the incurrence of
significant operating expenses. During this period, we do not expect that
TerreStar will generate any revenues. Therefore, we anticipate that TerreStar
will generate operating losses during this period. We anticipate that TerreStar
will not be in a position to generate revenues from business operations until
2008 at the earliest.
TerreStar Intangible Assets
TerreStar's FCC licenses and other intangible assets consist of the following:
June 30,
2005
(unaudited)
FCC 2 GHz licenses 66,864
Intellectual property 11,707
78,571
Less accumulated amortization (732)
-------
FCC licenses and other intangible assets, net $77,839
=======
The Company has utilized numerous assumptions and estimates in applying its
valuation methodologies and in projecting future operating characteristics for
the TerreStar business enterprise. In general, the Company considered
population, market penetration, products and services offered, unit prices,
operating expenses, depreciation, taxes, capital expenditures and working
capital. The Company also considered competition, satellite and wireless
communications industry projections and trends, regulations and general economic
conditions. In the application of its valuation methodologies, the Company
applies certain royalty and discount rates that are based on analyses of public
company information, assessment of risk and other factors and estimates.
The Company's valuation of TerreStar's intellectual property rights was
determined utilizing a form of the income approach referred to as the relief
from royalty valuation method. The Company assumed a 10% to 12% royalty rate
applied to a projected revenue stream generated by a hypothetical licensee
utilizing such intellectual property rights. The projected revenue was based on
a business case for the operations and consisted of the following principal
assumptions and estimates:
31
- - A 20 year forecast period.
- - Specific cash outflows in the first four years of the forecast period to
account for TerreStar's portion of satellite design, construction and
launch expenditures.
- - Annual population growth of 1.6% based on U.S. Census Bureau estimates of
the U.S. population in 2004.
- - Market penetration assumptions of zero to 7% to 12% over the forecast
period, depending on the specific market and when the market is launched.
- - Average monthly revenue per customer of $40.00 when services are launched,
increasing to $44.50 over the forecast period. This increase equates to a
compound annual growth rate of 0.6%. A substantial portion of this revenue
is generated by the terrestrial component of the ATC network.
- - Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period.
- - A 25% discount rate based on a weighted average cost of capital (WACC)
determined by analyzing and weighting the cost of capital for a peer group
of publicly traded satellite service providers, wireless communications
companies and telecommunications companies in general.
The Company's valuation of its spectrum assets is based on a form of the income
approach known as the "Build-Out Method." The method applies a discounted cash
flow framework to the Company's "build-out" business case. This build-out
approach is intended to incorporate all of historical and future development
costs, as well as projected revenues, operating expenses and cash flows
generated from the build-out of a hybrid satellite and terrestrial
communications system utilizing the Company's frequency assets. This "build-out
method" business case and the applied discounted cash flow valuation consisted
of the following principal assumptions and estimates:
- - A 20-year forecast period, comprised of a high growth period for the first
10 years and a declining growth period beginning in year 11 and a terminal
period to perpetuity.
- - Development cash outflows and capital expenditures related to the design
and construction of two satellites in the first 3 years of the forecast
period and the launch of one of these satellites in the fourth year of the
forecast period. Replacement costs for the construction and launch of one
satellite are included in the declining growth period.
- - Satellite only revenues based on market size data for traditional satellite
segments (maritime, fleet management, public safety, telematics and
aeronautical) compiled generally by third party research groups and
penetration estimates of 10% to 40% of the potential customer base,
depending on the specific market segment addressed over the 20 year
forecast period.
- - Terrestrial revenues calculated as eleven percent of the total revenues
generated by a joint or strategic partner with whom TerreStar would intend
to deploy a terrestrial infrastructure and launch terrestrial services.
Total partnership revenues are based on (i) market penetration assumptions
of zero to 7 to 12% over the forecast period depending on the specific city
and when the city is launched, (ii) average monthly revenue per customer of
$40.00 when services are launched, increasing to $44.50 over the forecast
period. This increase equates to a compound annual growth rate of 0.6%.
- - Operating expenses covering the operation of satellite facilities. These
include a network operations center, tracking, telemetry and command
systems, interconnect costs, in-orbit insurance, technical staff, and
general and administrative personnel Under the projected expense structure,
EBITDA margins grow to 60% early in the forecast period and expand to 70%
later in the forecast period.
32
- - All capital expenditures required to design and construct two satellites
and launch one satellite during the first four years of the forecast
period. Additional capital expenditures for constructing ground station
segments and investing in handset development.
- - Tax rate of 40% after the consumption of net operating losses generated in
the early years of the forecast period.
- - A 19 to 21% discount rate based on a weighted average cost of capital
(WACC) determined by analyzing and weighting the cost of capital for a peer
group of publicly traded satellite service providers, wireless
communications companies and telecommunications companies in general, with
more weight given to traditional satellite service providers. A terminal
value calculated using a WACC of 12%and a perpetuity growth rate of 2.5%.
The Company will test for impairment of its intangible assets by reviewing all
of the assumptions and estimates utilized relative to the valuation
methodologies discussed above. To the extent that it determines that these
assumptions and estimates are no longer accurate, either because actual results
have materially differed from the assumptions and estimates, or because changing
circumstances have caused the Company to reevaluate these assumptions and
estimates for future periods, the Company will revalue these intangible assets
based on revised assumptions and estimates.
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 Are Not Cash Flow Positive, And We Will Need Additional Liquidity
To Fund Our Operations And Fully Fund All Of The Necessary TerreStar
Capital Expenditures.
o We Will Continue To Incur Significant Losses.
o We May Not Be Able To Realize Value From Our Investment In TerreStar
Or MSV Due To Risks Associated With Their Next-Generation Business
Plans.
o We May Not Be Able To Effectively Execute TerreStar's Business Plan.
o Funding Requirements For TerreStar May Jeopardize Our Investment In,
And Control Over, TerreStar.
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, Name Recognition And Newer Technologies.
o We Generate A Large Part Of Our Revenues And Cash Flows From A Small
Number Of Customers On Our DataTac Network, And The Loss Of One Or
More Key Customers Could Result In A Significant Reduction In Revenues
And Cash Flows.
o The Value Of Our Intangible Assets In Our Financial Statements Is
Based On Assumptions And Estimates, Which May Not Be Correct.
o We May Not Be Able To Develop, Acquire And Maintain Proprietary
Information And Intellectual Property Rights, Which Could Limit The
Growth Of Our Business And Reduce Our Market Share.
o Government Regulation May Increase Our Cost Of Providing Services,
Slow Our Expansion Into New Markets, Subject Our Services To
Additional Competitive Pressures And Affect The Value Of Our Common
Stock.
33
o Motient's Competitive Position May Be Harmed If The Wireless
Terrestrial Network Technology It Licenses From Motorola Is Made
Available To Competitors.
o We Do Not Expect To Pay Any Dividends On Our Common Stock For The
Foreseeable Future.
o Future Sales Of Our Common Stock Could Adversely Affect Its Price
And/Or Our Ability To Raise Capital.
o Motient May Have To Take Actions That Are Disruptive To Its Business
To Avoid Registration Under The Investment Company Act Of 1940.
o We Face Burdens Relating To The Recent Trend Toward Stricter Corporate
Governance And Financial Reporting Standards.
o Failure To Achieve And Maintain Effective Internal Control Over
Financial Reporting In Accordance With Rules Of The Securities And
Exchange Commission Promulgated Under Section 404 Of The
Sarbanes-Oxley Act Could Harm Our Business And Operating Results
And/Or Result In A Loss Of Investor Confidence In Our Financial
Reports, Which Could In Turn Have A Material Adverse Effect On Our
Business And Stock Price.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's recently filed registration statement on
Form S-1.
Results of Operations
Due to our purchase of ownership interests in TerreStar on May 11, 2005 and our
consequent 61% ownership of TerreStar, the operating results herein include the
operating results of TerreStar from that date through June 30, 2005. We have
identified the impact of TerreStar on our results of operations where material.
Subscriber Statistics
Our customer base can be generally divided into six broad categories, Wireless
Internet, Field Services, Transportation, Telemetry, iMotient 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. iMotient consists of integrated wireless data
solutions revenues through the resale of airtime on the Cingular and Sprint
wireless networks. Other revenues may consist of sales commissions, consulting
fees or other fees. An explanation of certain changes in revenue and subscribers
is set forth below.
The table below summarizes the make up of our registered subscriber base.
Wireless devices may be divided into three categories, registered, billable and
active. Registered devices represent devices that our customers have registered
for use on our network. Certain numbers of these devices may be kept in
inventory by our customers for future use and generally are not revenue
producing. Customers then move such inventory into a production status upon
which it typically becomes billable and generates revenue. However, billable
units may not pass traffic and thus will not be counted as active. We count a
device as active when it is removed from inventory by the customer and transmits
greater than zero kilobytes of data traffic.
34
As of June 30,
2005(1) 2004(1) % Change
------- ------- --------
Registered Billable Active Registered Billable Active Registered Billable Active
---------- -------- ------ ---------- -------- ------ ---------- -------- ------
Wireless Internet 42,172 20,894 9,725 89,471 51,554 33,966 (53)% (59)% (71)%
Field Services 1,702 1,861 235 14,356 13,815 8,070 (88) (87) (97)
Transportation 48,671 39,586 39,840 46,986 38,707 38,505 4 2 3
Telemetry 26,118 19,263 8,546 31,002 25,157 15,576 (16) (23) (45)
iMotient 874 896 245 -- -- -- 100 100 100
All Other 221 140 92 722 645 524 (69) (78) (82)
------- ------ ------- ------- ------- ------ --- --- ---
Total 119,758 82,640 58,683 182,537 129,878 96,641 (34)% (36)% (39)%
======= ====== ====== ======= ======= ====== === === ===
1) Reflects deregistration of units by SkyTel on December 30, 2004 of
approximately 30,000 units and deregistration of 9,000 units in the
first quarter of 2005 by certain other resellers.
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 2005 2004 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $2.0 $5.2 (3.2) (62)%
Field Services 0.1 1.5 (1.4) (93)
Transportation 0.5 0.9 (0.4) (44)
Telemetry 0.4 0.6 (0.2) (33)
iMotient 0.1 0.0 0.1 N/m
All Other 0.1 1.9 (1.8) (95)
--- --- ----- ---
Service Revenue 3.2 10.1 (6.9) (68)
Equipment Revenue 0.3 1.3 (1.0) (77)
--- --- ----- ---
Total $3.5 $11.4 $(7.9) (69)%
==== ===== ====== ===
Six Months Ended June 30,
-------------------------------------
Summary of Revenue 2005 2004 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $4.6 $11.4 (6.8) (60)%
Field Services 0.9 3.3 (2.4) (73)
Transportation 1.1 1.8 (0.7) (39)
Telemetry 0.8 1.2 (0.4) (33)
iMotient 0.2 0.0 0.2 N/m
All Other 0.2 2.4 (2.2) (92)
--- --- ----- ----
Service Revenue 7.8 20.1 (12.3) (61)
Equipment Revenue 0.8 2.8 (2.0) (71)
--- --- ----- ----
Total $8.6 $22.9 $(14.3) (62)%
==== ===== ======= =====
The decrease in service revenue was the result of a decrease in revenue in all
our market segments (except iMotient), primarily as a result of migration by our
customers to newer technologies with capabilities that our network is not
capable of supporting (such as voice enabled handheld devices), or more modern
networks with greater capacity than our own (such as so-called 2G or 3G networks
from providers such as Sprint, Cingular, Verizon or T-Mobile). We believe that
our network reduction efforts, announced to our customers in the first quarter,
may have also caused negative pressure on our revenues as certain customer may
have elected to terminate service with Motient in favor of other alternative
wireless carriers. If we cannot generate additional revenue from other sources
to offset this lost revenue, our overall revenues will decline in the future.
The decrease in total revenue was primarily a result of decreased service and
equipment revenues.
35
During the first quarter of 2005, Motient initiated a plan to refocus its
DataTac network primarily on the top 40 MSAs of the United States. This plan
involves the decommissioning of DataTac network components and termination of
service in previously served MSAs other than the top 40. Given the similar
coverage profiles of the Cingular and Sprint networks, the significantly
increased bandwidth capabilities of these networks relative to DataTac and the
concentration of our revenues in the top 40 MSAs, we determined that this plan
best allowed us to match our network infrastructure costs with our revenue base,
while continuing to meet the needs of as many of our customers as possible. This
decommissioning occurred in June 2005. We are making every effort to provide any
impacted customers with alternatives to migrate their services and applications
to either our new iMotient Solutions(TM) platform or to other networks using our
agreements with RACO Wireless, Inc. and eAccess Solutions, Inc. These network
changes may put negative pressure on our revenues in all market segments in 2005
as customers may elect to pursue other alternative network carriers with
alternative coverage. We are making every effort to retain our customers or
migrate them to our iMotient Solutions(TM) product and services, but Motient can
make no assurances that it will be able to retain these customers.
By revenue segment, we note that:
o Wireless Internet: The revenue decline in the Wireless Internet sector
during this period represented customer losses that we are experiencing in
both our direct and reseller channels as a result of the migration of
Wireless Internet customers to other networks with additional features,
such as voice-capable wireless internet devices. These customer losses have
been exacerbated because Research in Motion, or RIM, no longer manufactures
any devices which will operate on our DataTac network, which has and will
continue to negatively impact the ability of our resellers to add new
devices to our network to replace those that are migrating from their
respective customer bases. These factors, in addition to our network
reduction efforts discussed above, may lead to additional declining
Wireless Internet revenues in 2005. Motient is currently exploring ways to
offer Wireless Internet services under our iMotient Solutions(TM) platform,
but Motient can make no assurances that it will ever be able to effective
offer such a product.
o Field Services: The decrease in field service revenue was primarily the
result of the termination of several customer contracts, including IBM,
Brinks, Bannex, Pitney Bowes and Schindler, as well as the general
reduction of units and/or rates across the remainder of our field service
customer base. Our network changes, discussed above, may put negative
pressure on our revenues in this market segment in 2005. Motient believes
that this market segment will potentially present new opportunities to
generate new revenues with our iMotient Solutions(TM) products and
services.
o Transportation: The decrease in revenue from the transportation sector was
primarily the result of UPS removing units from our network. UPS
represented $0.1 million and $0.3 million of revenue for the three and six
months ended June 30, 2005 as compared to $0.2 million and $0.5 million of
revenue for the three and six months ended June 30, 2004. We did experience
growth during this period in other transportation accounts, most notably
Geologic Solutions, formerly d/b/a Aether Systems. Our network changes,
36
discussed above, may put negative pressure on our revenues in this market
segment in 2005. Motient believes that this market segment will potentially
present new opportunities to generate new revenues with our iMotient
Solutions(TM) products and services.
o Telemetry: While we experienced revenue growth in certain telemetry
customer accounts, this revenue growth was equally offset by customer
losses or negative rate changes in other telemetry accounts. Our network
changes, discussed above, may put negative pressure on our revenues in this
market segment in 2005. Motient believes that this market segment will
potentially present new opportunities to generate new revenues with our
iMotient Solutions(TM) products and services.
o iMotient: We activated our first customer units and generated our initial
revenue from the iMotient platform in February of 2005. As of June 30,
2005, we had 896 billable units utilizing our iMotient platform and
generated $0.2 million in revenues for the six months ended June 30, 2005.
We expect iMotient revenues to increase over the course of 2005.
o All Other: The decrease in other revenue was primarily due to the
termination of our agreements with Verizon and T-Mobile, which allowed us
to sell and promote wireless email and wireless internet applications on
their networks. We do not expect to generate significant revenues in this
product segment in the future.
o Equipment: The decrease in equipment revenues for these periods was the
result of the decline sales of devices attributable to our now-terminated
agency and dealer agreements with Verizon and T-Mobile.
Operating Expenses
The tables below summarize our operating expenses for the three and six months
ended June 30, 2005 and 2004. An explanation of certain changes in operating
expenses is set forth below.
Three Months Ended June 30,
----------------------------
Summary of Expenses 2005 (1) 2004 (2) Change % Change
- ------------------- -------- -------- ------ --------
(in millions)
Cost of Service and Operations $ 5.3 $ 10.4 (5.1) (49)%
Cost of Equipment Sales 0.3 1.3 (1.0) (79)
Sales and Advertising 0.2 0.9 (0.7) (82)
General and Administration 4.7 2.5 2.2 88
Research and Development 0.3 0 0.3 100
Operational Restructuring Costs 5.6 5.1 0.5 9
Depreciation and Amortization 5.0 4.1 0.9 23
(Gain) on Debt & Capital Lease Retirement 0.0 (0.8) 0.8 (100)
------- ------- ------- -------
Total $ 21.4 $ 23.5 $ (2.1) (9)%
======= ======= ======= =======
(1) Includes compensation expense of $(0.3) million related to stock
compensation expense.
(2) Includes compensation expense of $2.4 million related to stock
compensation expense.
37
Six Months Ended June 30,
----------------------------
Summary of Expenses 2005 (1) 2004 (2) Change % Change
- ------------------- -------- -------- ------ --------
(in millions)
Cost of Service and Operations $12.8 $21.7 (8.9) (41)%
Cost of Equipment Sales 0.8 2.8 (2.0) (72)
Sales and Advertising 0.6 1.9 (1.3) (70)
General and Administration 19.0 4.9 14.1 288
Research and Development 0.3 0 0.3 100
Operational Restructuring Costs 5.7 6.3 (0.6) (10)
Depreciation and Amortization 8.7 8.4 0.3 4
(Gain)/Loss on Asset Disposal 0.0 0.0 0.0 0
(Gain) on Debt & Capital Lease Retirement 0.0 (0.8) 0.8 (100)
------- ------- ------- -------
Total $47.9 $45.2 $2.7 6%
======= ======= ======= =======
(1) Includes compensation expense of $11.3 million related to stock
compensation expense.
(2) Includes compensation expense of $3.9 million related to stock
compensation expense.
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 of $0.3 million and $0.8
million for the three and six months ended June 30, 2005 as compared
to the three and six months ended June 30, 2004 due to a workforce
reduction implemented in February 2004 and March 2005. The decrease in
these expenses was also partially the result of lower fees paid to RIM
for licensing Blackberry as a result of the decline of Wireless
Internet units and revenues, which fees we anticipate will continue to
decline in the future as well. The decrease in these expenses was also
impacted by the continued removal of older-generation base stations
from the network and the removal of base stations and other network
equipment under our network rationalization efforts initiated in the
second quarter of 2004 and the resulting decreases in
telecommunications of $1.4 million and $3.3 million for the three and
six months ended June 30, 2005 as compared to the three and six months
ended June 30, 2004 and base station maintenance decreases of $0.2
million and $0.4 million for the three and six months ended June 30,
2005 as compared to the three and six months ended June 30, 2004. As
we continue to remove base stations from the network, in particular as
a result of the additional rationalization efforts completed in June
2005, 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 network
rationalization efforts and negotiation of lower rates on maintenance
service contracts in 2004. The decreases in costs discussed above were
partially offset by compensation expenses associated with stock
options issued to employees of $(0.2) and $1.0 million for the three
and six months ended June 30, 2005. Compensation expenses associated
with stock options issued to employees totaled $1.5 and $2.0 million
for the three and six months ended June 30, 2004. Excluding these
compensation charges, cost of service and operations decreased $3.4
million, or 39%, for the three months ended June 30, 2005, and $7.9
million, or 40%, for the six months ended June 30, 2005 as compared to
the same periods in 2004. Given our ongoing cost-reduction efforts, we
expect these costs to continue to decrease. The extent of the decrease
will depend both upon our ability to successfully manage our
cost-reduction efforts as well as the necessity for these expenditures
in the future if our customer base declines.
38
o Cost of Equipment: The decrease in cost of equipment was the result of
the elimination of sales of devices attributable to agency and dealer
agreements with Verizon Wireless and T-Mobile USA. Our efforts to sell
under our agent relationships with T-Mobile USA and Verizon Wireless
were reduced significantly in the third and fourth quarter of 2004 and
these contracts were terminated in the fourth quarter of 2004 to
accommodate our agreements with Sprint and Cingular. We anticipate
that these costs will be minor in the future given the elimination of
the T-Mobile USA and Verizon Wireless reseller agreements.
o Sales and Advertising: The decrease in sales and advertising expenses
was primarily attributable to lower employee salary of $0.1 million
and $0.5 million for the three and six months ended June 30, 2005 as
compared to the three and six months ended June 30, 2004 and related
costs, including sales commissions, due to lower sales volumes and the
workforce reductions implemented in February 2004 and March 2005.
These decreases included compensation expenses associated with stock
options issued to employees of $0.0 and $0.1 million for the three and
six months ended June 30, 2005 as compared to $0.5 and $0.9 million
for the three and six months ended June 30, 2004. Excluding these
compensation charges, sales and advertising expense decreased $0.2
million, or 51%, for the three months ended June 30, 2005, and $0.5
million, or 50%, for the six months ended June 30, 2005 as compared to
the same periods in 2004. We anticipate that these costs will increase
in the future in conjunction with our increasing efforts to sell and
promote our iMotient Solutions(TM) platform.
o General and Administrative: The increase in general and administrative
expenses was primarily attributable to increases in legal, audit and
regulatory fees, fees paid to advisors and consultants and
compensation expenses associated with stock options issued to
employees and directors. Our audit expenses increased materially due
to our requirements to comply with Sarbanes-Oxley guidelines for 2004
and our corporate finance activity in the first and second quarter of
2005. Legal and regulatory fees increased materially as a result of
our corporate finance activity in the first and second quarter of 2005
and our related reporting and security registration requirements,
costs to support our developments efforts with TerreStar and certain
regulatory fees paid related to our rationalization efforts and our
Motient Communications frequencies. Consulting and advisory fees
increased materially due to certain corporate finance related fees
discussed below, fees paid to consultants to support our regulatory
efforts for both Motient Communications and TerreStar and consulting
support we utilize for our success-based site lease negotiation
efforts. A consulting fee of $3.7 million, consisting of $0.9 million
in cash and 95,000 shares of stock valued at $2.8 million, was paid to
CTA and an affiliated entity of Gary Singer in the first quarter of
2005 for services rendered in conjunction with the acquisition of
further MSV interests from Telcom Ventures, Columbia Capital and
Spectrum Equity in February 2005. These increases were partially
offset by site lease related expense decreases of $0.7 million and
$1.4 million for the three and six months ended June 30, 2005 as
compared to the three and six months ended June 30, 2004, lower
employee salary and related costs of $0.4 million and $0.8 million for
the three and six months ended June 30, 2005 as compared to the three
and six months ended June 30, 2004 due to the workforce reductions
implemented in February 2004 and March 2005 and lower directors and
officers liability insurance costs. General and Administrative
expenses include approximately $0.7 million of general and
administrative costs from TerreStar from the period May 11, 2005 to
June 30, 2005. We expect these costs from TerreStar to increase in the
future as development efforts on its satellite system accelerate.
Compensation expenses associated with stock options issued under the
Company's stock option plan and the stock issued to advisors as a
39
result of the corporate finance activity discussed above totaled
$(0.1) and $10.2 million for the three and six months ended June 30,
2005. Compensation expenses associated with stock options issued to
employees totaled $0.4 and $1.0 million for the three and six months
ended June 30, 2004. Excluding these compensation charges, general and
administrative expenses increased $2.6 million, or 126%, for the three
months ended June 30, 2005, and $4.8 million, or 124%, for the six
months ended June 30, 2005 as compared to the same periods in 2004. We
anticipate that these costs will decline in the future in conjunction
with the completion of our initial Sarbanes-Oxley report, and our
overall cost-cutting efforts. As we expand our efforts on TerreStar,
however, related general and administrative expenses are anticipated
to increase.
o Research and Development: Research and development consists of
approximately $0.3 million of research and development costs from
TerreStar for the period May 11, 2005 to June 30, 2005. We expect
these costs from TerreStar to increase in the future as development
efforts on its satellite system accelerate.
o Operational Restructuring Charges: The 2005 operational restructuring
charges of $5.7 million include $0.1 million in the first quarter of
2005 resulting from the severance and related salary charges as a
result of the reductions in force in March 2005 and $5.6 million in
the second quarter of 2005 resulting from additional network
rationalization initiatives in June 2005. Operational restructuring
charges of $6.3 million in 2004 consist of $1.2 million in the first
quarter of 2004 resulting from the severance and related salary
charges as a result of the reductions in force in February 2004 and
$5.1 million in the second quarter of 2004 related to certain network
rationalization initiatives in June 2004.
o Depreciation and Amortization: Depreciation and amortization expense
increased $0.7 million as a result of the amortization of our
intangible assets of TerreStar and $1.8 million due to our June 2005
network rationalization for which we accelerated the depreciation of
certain base station equipment. Excluding these items, our
depreciation and amortization expense declined $1.6 million or 39% and
$2.2 million or 26% for the three and six months ended June 30, 2005.
Our depreciation expense declined as a result of our decline in asset
value related to network reduction efforts in 2004 and 2005 and our
write-down of related assets and reduced amortization as a result of
our additional impairment of our customer contract intangibles in
December 2004. As a result of continued network restructuring
initiatives planned in 2005, we expect depreciation and amortization
to continue to decrease in 2005.
Other Expenses & Income
Three Months Three Months Six Months Six Months
Ended June 30, Ended June 30, Ended June 30, Ended June 30,
Summary of Expenses 2005 2004 2005 2004
- ------------------- ---- ---- ---- ----
(in thousands)
Interest Expense, net $ 2,115 $(1,273) $ 2,115 $(3,039)
Write -off of deferred financing costs - (8,052) - (8,052)
Other Income, net - 191 80 199
Other Income from Aether - 662 - 1,307
Equity in Losses of Mobile Satellite Ventures (2,044) (2,608) (9,212) (4,838)
Minority Interest in TerreStar 404 - 404 -
40
o Interest expense is presented net of interest income on cash balances
and notes receivable. We generated interest income for the three and
six months ended June 30, 2005 on cash balances generated from
proceeds of our financing transactions. In 2004, we generated interest
income on the interest accrued on our note receivable from MSV,
however, as a result of November 2004 investment transaction into MSV,
the principal and interest outstanding under our note receivable from
MSV was converted into limited partnership units in MSV. Interest
expense decreased for the three and six months ended June 30, 2005 as
compared to the same periods in 2004, due to the April 2004 repayment
of our term credit facility and its subsequent termination on December
31, 2004.
o In April 2004, we expensed $8.1 million of deferred financing costs
related to the repayment of our term credit facility.
o We recorded equity in losses of MSV of $2.0 and $9.2 million for the
three and six months ended June 30, 2005, as compared to $2.6 and $4.8
million for the same periods in 2004. The 2005 MSV losses are
Motient's 38.6% and 48.8% of MSV's losses for the same period, and
losses for 2004 are Motient's 46.5% of MSV's losses for the same
period. For the three and six months ended June 30, 2005, MSV had
revenues of $7.5 and $14.7 million, operating expenses of $14.8 and
$34.5 million and net losses of $6.7 and $26.7 million, respectively.
o For the period ended June 30, 2005, the Company recorded approximately
a $1.0 million net loss for TerreStar Networks. The $0.4 million
minority interest in TerreStar represents the approximately 39% of
TerreStar Networks that is not owned by the Company.
Liquidity and Capital Resources
As of June 30, 2005, we had approximately $276 million of cash and cash
equivalents, which includes approximately $179 million of cash held by
TerreStar. Approximately $43 million of additional cash is held in an escrow
account that will be used to make the first two years of dividend payments on
our Series A Preferred Stock.
The increase of $264 million from June 30, 2004 is mainly attributable to an
increase in cash provided by financing activities, offset by decreases in net
cash used in operating and investing activities, as described below. Our
principal source of funds is currently, and as of June 30, 2005, cash on hand.
Summary of Cash Flow for the six months ended June 30, 2005 and 2004
Six Months Ended Six Months Ended
June 30, 2005 June 30, 2004
(Unaudited) (Unaudited)
Cash Flows from Operating Activities: $ (13,009) $ (8,230)
Cash Flows from Investing Activities: (55,074) 1,455
Cash Flows from Financing Activities:
Proceeds from issuance of employee stock options 1,220 1,003
Proceeds from issuance of stock 116 23,188
Stock issuance costs and other charges (9) (476)
41
Principal payments under capital leases -- (2,419)
Proceeds from issuance of Series A Cumulative
Convertible Preferred Stock 408,500 --
Deferred financing fees on Series A Cumulative
Convertible Preferred Stock (17,483) --
Principal payments under Vendor Financing -- (682)
Repayment under Term Credit Facility -- (6,785)
Proceeds from Term Credit Facility -- 1,500
Repayment of Notes Payable (8,739) --
Purchase of treasury stock (56,750) --
--------- ---------
Net cash provided by (used in) financing activities 326,855 15,329
--------- ---------
Net (decrease) increase in cash and cash equivalents 258,772 8,554
Cash and Cash Equivalents, beginning of period 16,945 3,618
--------- ---------
Cash and Cash Equivalents, end of period $ 275,717 $ 12,172
========= =========
Cash used in operating activities increased primarily as a result of decreases
in funds provided by revenue and increases in certain fees and expenses related
to financial reporting requirements and corporate finance transactions. While we
are attempting to reduce cash used in operating activities as a result of our
cost cutting efforts and through our attempts to increase our revenues by
focusing on our iMotient Solutions(TM) products and services, it is possible
revenue declines will be sufficient to offset or overtake the cash saved by our
cost cutting efforts in the future.
The increase in cash used in investing activities was attributable to increases
in restricted cash consisting of approximately $18 million related to the
satellite construction contract for TerreStar Networks and approximately $43
million related to future interest payments on Series A Cumulative Convertible
Preferred Stock, offset by $6 million in restricted cash acquired in the
TerreStar purchase and lower capital equipment purchases of approximately $0.1
million in the first six months of 2005 as compared to the same period in 2004.
The increase in cash provided by financing activities was the result of the
proceeds from the preferred stock financing completed in April 2005 and the
exercise of certain employee stock options and warrants, offset by the repayment
of the TerreStar note payable to MSV, the purchase of treasury stock and
deferred financing fees related to the Series A Cumulative Convertible Preferred
Stock.
We believe that our funds available at June 30, 2005, together with, our planned
rights offering and the proceeds from the exercise of warrants and options, will
be adequate to satisfy our current and planned operations for at least the next
12 months. We have no definite plans with respect to the acquisition of any
additional debt or equity financing beyond the April 2005 private placement of
our preferred stock. However, to the extent that we require additional liquidity
to fund our operations (including, but not limited to, construction costs of
TerreStar's communications network), we may undertake additional debt or equity
financings.
Outstanding Obligations
As of June 30, 2005, Motient had no outstanding debt obligations other than
obligations with respect to the repayment of its Series A Preferred Stock. If
not converted or repaid, the entire amount of $408.5 million will be due on
April 15, 2010. The first two years' dividend payments for approximately $43
million have been placed in escrow. Future dividend payments will be due
bi-annually, payable in cash (at a 5.25% annual interest rate) or in common
stock (at a 6.25% annual interest rate).
42
Restructuring Costs
In February 2004, the Company recorded a restructuring charge for a workforce
reduction of $1.1 million. In June 2004, the Company recorded a restructuring
charge of $5.1 million related to certain network rationalization initiatives,
consisting of base station deconstruct costs of $0.5 million, the loss on the
retirement of certain base station equipment of $2.8 million and termination
liabilities of $1.8 million for site leases no longer required for removed base
stations. In March 2005, the Company recorded a restructuring charge for a
further workforce reduction of $0.1 million. In June 2005, the Company recorded
a restructuring charge of $5.6 million related to additional network
rationalization initiatives, consisting of base station deconstruct costs of
$0.1 million, the loss on the cancellation of frequencies of $3.6 million and
termination liabilities of $1.9 million for site leases no longer required for
removed base stations. Of these amounts, as of June 30, 2005, the Company had
incurred workforce reduction cost of $0.9 million, base station deconstruct
costs of $0.5 million, the loss on the retirement of certain base station
equipment of $2.8 million, termination liabilities of $1.4 million for site
leases no longer required for removed base stations and $3.6 million for the
cancellation of frequencies.
The following table displays the activity and balances of the restructuring
reserve account from January 1, 2004 to June 30, 2005:
Base Station
Employee FCC License Asset Base Station FCC License Site Lease
Terminations Terminations Write-Offs Deconstruction Terminations Terminations Total
------------ ------------ ---------- -------------- ------------ ------------ -----
Balance January 1, 2004 $--- $--- $--- $--- $--- $---
- ------------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (1,107) --- --- --- --- --- (1,107)
Deductions - Cash 333 --- --- --- --- --- 333
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2004 (774) --- --- --- --- --- (774)
- ------------------------------------------------------------------------------------------------------------------------------------
Restructure Charge --- --- (2,795) (398) (113) (1,854) (5,160)
Deductions - Cash 242 --- --- 75 25 61 403
Deductions - Non-Cash --- --- 2,795 --- --- --- 2,795
- ------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004 (532) --- --- (323) (88) (1,793) (2,736)
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 132 --- --- 252 39 416 839
- ------------------------------------------------------------------------------------------------------------------------------------
Balance September 30, 2004 (400) --- --- (71) (49) (1,377) (1,897)
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 50 --- --- 71 54 435 610
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2004 (350) --- --- --- 5 (942) (1,287)
- ------------------------------------------------------------------------------------------------------------------------------------
Restructure Charge (85) --- --- --- --- --- (85)
Deductions - Cash 39 --- --- --- --- 197 236
- ------------------------------------------------------------------------------------------------------------------------------------
Balance March 31, 2005 (396) --- --- --- 5 (745) (1,136)
- ------------------------------------------------------------------------------------------------------------------------------------
Restructure Charge --- (3,581) --- (147) --- (1,852) (5,580)
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions - Cash 164 --- --- 24 --- 498 686
- ------------------------------------------------------------------------------------------------------------------------------------
Deductions - Non-Cash --- 3,581 --- --- --- (206) (3,375)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2005 $ (232) --- --- $ (123) $ 5 $(2,305) $(2,655)
43
Commitments
As of June 30, 2005, we had no outstanding commitments to purchase inventory.
Series A Cumulative Convertible Preferred Stock
- -----------------------------------------------
The Company accounts for Series A Cumulative Convertible Preferred Stock under
Accounting Series Release 268. "Redeemable Preferred Stocks". On April 15, 2005,
the Company issued 408,500 shares of Series A Preferred Stock, par value of
$0.01; 5,000,000 shares authorized at June 30, 2005 and December 31, 2004;
408,500 shares issued and outstanding at June 30, 2005, no shares issued or
outstanding at December 31, 2004.
UPS Deferred Revenue and Prepayment
- -----------------------------------
In December 2002 Motient entered into an agreement with UPS pursuant to which
UPS prepaid an aggregate of $5 million in respect of network airtime service to
be provided beginning January 1, 2004. As of June 30, 2005, the Company's
remaining airtime service obligation to UPS in respect of the prepayment was
approximately $3.7 million. In April 2005, this agreement was amended to require
that UPS use at least $1.5 million of airtime between January 1, 2005 and March
31, 2006, and in exchange, Motient would repay in April 2006, in cash, an amount
equal to the amount of airtime used by UPS during such period. Both UPS' usage
and Motient's repayment will be credited against the remaining airtime
obligation. As a result of this amendment, the maximum prepaid airtime service
obligation will be $0.9 million in May 2006. The parties have not yet reached
agreement regarding the use or repayment of any remaining prepaid airtime
service obligation, but Motient can provide no assurance that it will not be
required to repay such amount to UPS.
Critical Accounting Policies and Significant Estimates
- ------------------------------------------------------
Below are our accounting policies, which are both important to our financial
condition and operating results, and require management's most difficult,
subjective and complex judgments in determining the underlying estimates and
assumptions. The estimates and assumptions affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates, as they require assumptions that are inherently uncertain.
Concentrations of Credit Risk
- -----------------------------
For the six months ended June 30, 2005, four customers accounted for
approximately 42% of the Company's service revenue, with one customer, SkyTel
Communications, Inc. ("SkyTel"), accounting for more than 23%. As of June 30,
2005, one customer, Geologic Solutions accounted for approximately 17% of our
net accounts receivable. No other single customer accounted for more than 10% of
our net accounts receivable. For the six months ended June 30, 2004,
fivecustomers accounted for approximately 47% of the Company's service revenue,
with one customer, SkyTel, accounting for more than 21%. No single customer
accounted for more than 9% of the Company's net accounts receivable at June 30,
2004.
44
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.
45
Investment in MSV and Note Receivable from MSV
- ----------------------------------------------
The Company uses the equity method of accounting for its investment in MSV. The
Company considers whether the fair value of its investment has declined below
its carrying value whenever adverse events or circumstances indicate that the
recorded value may not be recoverable. If the Company considers such decline to
be other than temporary, a write down would be recorded to estimate fair value.
TerreStar Asset Purchase
- ------------------------
On May 11, 2005, Motient Ventures Holding Inc., or MVH, a wholly owned
subsidiary of Motient Corporation, purchased 8,190,008 shares of newly issued
common stock of TerreStar from TerreStar for $200 million pursuant to a Purchase
Agreement by and between MVH and TerreStar. On the same day, TerreStar was
spun-off by MSV to its limited partners and, in connection with that spin-off,
Motient acquired ownership of approximately 48% of the issued and outstanding
shares of capital stock of TerreStar and the subsequent $200 million stock
purchase increased Motient's ownership to its current 61% of TerreStar's issued
and outstanding common stock.
Assets acquired and liabilities assumed in the asset purchase were recorded on
the Company's Consolidated Balance Sheet as of the purchase date based upon
their fair values at such date. The results of operations of the net assets
acquired by the Company have been included in the Company's Statements of
Operations since its date of purchase . Approximately $78 million was allocated
to intangible assets that include the rights to receive licenses in the 2 GHz
band and other intangibles. These intangible assets are being amortized over an
average life of 15 years. Approximately $78 million represents the 39% minority
interest in TerreStar. There was no excess purchase price over the estimated
fair values of the underlying assets acquired and liabilities assumed. In
certain circumstances, the allocation of the purchase price is based upon
preliminary estimates and assumptions. Accordingly, the allocations are subject
to revision when the Company receives final information and other analyses.
Revisions to the fair values, which may be significant, will be recorded by the
Company as further adjustments to the purchase price allocations.
For additional information regarding TerreStar, see Note 1. Organization and
Business as well as Note 5 TerreStar Asset Purchase .
Deferred Taxes
- --------------
The Company accounts for income taxes under the liability method as required in
SFAS No. 109, "Accounting for Income Taxes". Under the liability method,
deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax laws and rates applicable to
future years to differences between the financial statement carrying amounts and
the tax bases of existing assets and liabilities. Under this method, the effect
on deferred taxes of a change in tax rates is recognized in income in the period
that includes the enactment date. A valuation reserve is established for
deferred tax assets if the realization of such benefits cannot be sufficiently
assured.
46
Revenue Recognition
- -------------------
The Company generates revenue through equipment sales, airtime service
agreements and consulting services. In 2000, the Company adopted SAB No. 101,
which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. In certain circumstances, SAB No. 101 requires
the Company to defer the recognition of revenue and costs related to equipment
sold as part of a service agreement.
In December 2003, the Staff of the SEC issued SAB No. 104, "Revenue
Recognition", which supersedes SAB No. 101, "Revenue Recognition in Financial
Statements". SAB No. 104's primary purpose is to rescind accounting guidance
contained in SAB No. 101 related to multiple-element revenue arrangements and to
rescind the SEC's "Revenue Recognition in Financial Statements Frequently Asked
Questions and Answers" ("FAQ") issued with SAB No. 101. Selected portions of the
FAQ have been incorporated into SAB No. 104. The adoption of SAB No. 104 did not
have a material impact on the Company's revenue recognition policies.
Effective July 1, 2003, the Company adopted Emerging Issues Task Force (EITF)
No. 00-21, Accounting for Revenue Arrangements with Multiple Deliverables, which
is being applied on a prospective basis. The consensus addresses how to account
for arrangements that may involve the delivery or performance of multiple
products, services and/or rights to use assets. Revenue arrangements with
multiple deliverables are required to be divided into separate units of
accounting if the deliverables in the arrangement meet certain criteria.
Arrangement consideration must be allocated among the separate units of
accounting based on their relative fair values. The consensus also supersedes
certain guidance set forth in Securities and Exchange Commission (SEC) Staff
Accounting Bulletin Number 101, Revenue Recognition in Financial Statements (SAB
101). SAB 101 was amended in December 2003 by Staff Accounting Bulletin Number
104 (SAB 104).
Revenue is recognized as follows:
Service revenue: Revenues from the Company's wireless services are recognized
when the services are performed, evidence of an arrangement exists, the fee is
fixed and determinable and collectability is probable. Service discounts and
incentives are recorded as a reduction of revenue when granted, or ratably over
a contract period. The Company defers and amortizes any revenue and costs
associated with activation of a subscriber on the Company's network over an
estimated customer life of two years.
The Company packages airtime usage on its network that involves a wide variety
of volume packaging, anything from a 35 kilobytes per month plan up to unlimited
kilobyte usage per month, with various gradations in between. Discounts may be
applied when comparing one customer to another, and such service discounts are
recorded as a reduction of revenue when granted.
Service discounts and incentives are recorded as a reduction of revenue when
granted, or ratably over a contract period. The Company does not offer
incentives generally as part of its service offerings, however, if offered they
would be recorded as a reduction of revenue ratably over a contract period.
To date, the majority of the Company's business has been transacted with
telecommunications, field services, professional service and transportation
companies located throughout the United States. The Company grants credit based
on an evaluation of the customer's financial condition, generally without
47
requiring collateral or deposits. The Company establishes a valuation allowance
for doubtful accounts receivable for bad debt and other credit adjustments.
Valuation allowances for revenue credits are established through a charge to
revenue, while valuation allowances for bad debts are established through a
charge to general and administrative expenses. The Company assesses the adequacy
of these reserves quarterly, evaluating factors such as the length of time
individual receivables are past due, historical collection experience, the
economic environment and changes in credit worthiness of the Company's
customers. If circumstances related to specific customers change or economic
conditions worsen such that the Company's past collection experience and
assessments of the economic environment are no longer relevant, the Company's
estimate of the recoverability of its trade receivables could be further
reduced.
Equipment and service sales: The Company sells equipment to resellers who market
its terrestrial product and airtime service to the public. The Company also
sells its product directly to end-users. Revenue from the sale of the equipment,
as well as the cost of the equipment, are initially deferred and are recognized
over a period corresponding to the Company's estimate of customer life of two
years. Equipment costs are deferred only to the extent of deferred revenue.
As of June 30, 2005 and 2004, the Company had capitalized a total of $0.3
million and $2.4 million of deferred equipment revenue, respectively, and had
deferred equipment costs of $0.2 million and $2.4 million, respectively.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
- ------------------------------------------------
We have performed an evaluation under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 as of the end of the period covered by this quarterly report on Form 10-Q.
As previously disclosed in the Company's annual Report on Form 10-K for the year
ended December 31, 2004, the Company determined that, as of the end of December
2004, there were material weaknesses affecting aspects of its internal control
over financial reporting and, as a result of those weaknesses, the Company's
disclosure controls and procedures were not effective. As described below, the
Company is in the process of remediating those material weaknesses.
Consequently, based on the evaluation described above, the Company's management,
including its chief executive officer and chief financial officer, have
concluded that, as of the end of the second quarter of 2005, the Company's
disclosure controls and procedures were not effective.
48
Changes in internal control over financial reporting
During the second quarter of 2005, the Company was engaged in an ongoing review
of its internal control over financial reporting as described below. Based on
that review management believes that, during the second quarter of 2005 there
were changes in the company's internal control over financial reporting, as
described below, that have materially affected, or are reasonably likely to
materially affect, those controls.
We believe that the corrective actions described below, taken as a whole, will
remediate the internal control deficiencies identified in this report, but the
Company and the Audit Committee will continue to monitor the effectiveness of
these actions and will make any other changes or take such other actions as
management determines to be appropriate. It is expected that all in process
remediation will be completed by the end of the third quarter, 2005.
The following two material weaknesses have been identified by management,
including our principal executive officer and principal financial officer as
part of our SOX process 404 report completed on April 30, 2005.
1. Management identified a material weakness relating to the lack of
information security and access to initiate, authorize, and record
transactions in all functional areas relating to the financial reporting
software application.
2. Management identified the following significant deficiencies that when
aggregated give rise to a material weakness. Management identified certain
control procedures that were not sufficiently documented relating to a)
information technology back-up and recovery, b) operating systems access,
c) firewall protections, as well as, d) control policies and procedures in
certain transaction cycles.
Management also identified various segregation of duties deficiencies in a)
information security and access to non-financial reporting software
applications, b) program change management in the customer management and
billing systems and c) over the initiation, authorization, review and
transaction recording for certain transaction cycles and non-routine
transaction processing.
Additionally, management identified a lack of sufficient oversight and
review of the processes involved in the financial close and reporting
process, in particular as it relates to several complex and sophisticated
transactions.
These deficiencies in the design and implementation of the Company's internal
control over financial reporting did not result in an actual misstatement to the
financial statements. However, due to (a) the significance of the potential
material misstatement that could have resulted due to the deficient controls and
(b) the absence of other mitigating controls, there is more than a remote
likelihood that a material misstatement of the interim and annual financial
statements would not have been prevented or detected.
49
Actions Taken to Correct Material Weaknesses
- --------------------------------------------
We have taken the following actions to remediate the above-identified material
weaknesses:
With respect to our first material weakness (the lack of information security
and access to initiate, authorize, and record transactions in all functional
areas relating to the financial reporting software application), we have
prevented access to the software applications that certain management level
personnel previously had, which permitted them to change or record transactions
in our financial reporting software application. We conducted a review and
evaluation of the access to our financial reporting software applications by all
personnel, and reassigned the access rights used to control the financial
reporting process.
With respect to our second material weakness, which was an aggregation of
significant deficiencies that, individually, did not rise to the level of a
material weakness, but in aggregate did, we have taken the following steps:
o We have drafted and have implemented remedial control procedures to
address (i) operating systems access and (ii) control policies and
procedures in certain transaction cycles. We are in the process of
implementing remedial control procedures to address: (i) information
technology back-up and recovery and (ii) firewall protections.
o We are in the process of implementing additional monitoring
activities, as well as evaluating job responsibilities, in order to
improve internal controls related to (i) our information security and
access to non-financial reporting software applications, (ii) our
program change management in customer management and billing systems
and (iii) the initiation, authorization, review and transaction
recording for certain transaction cycles and non-routine transaction
processing.
o We have enhanced our corporate accounting function by creating and
filling the new position of Assistant Controller. We believe that the
control deficiencies involving (i) segregation of duties, (ii) lack of
sufficient oversight and review of the processes involved in the
financial close and reporting process, in particular as it relates to
complex and sophisticated transactions, and (iii) lack of control
policy documentation, have been remedied with the addition of this
additional resource.
50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see the discussion regarding Legal Proceedings contained in Note 4
("Legal and Regulatory Matters") of notes to consolidated financial statements,
which is incorporated by reference herein.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
During the fiscal quarter ended June 30, 2005, we repurchased shares of our
common stock on the dates and in the amounts set forth in the table below:
- -----------------------------------------------------------------------------------------------------------------------
Period (a) Total Number of (b) Average Price (c) Total Number of (d) Maximum Number
Shares (or Units) Paid per Share (or Shares (or Units) (or Approximate
Purchased Unit) Purchased as Part of Dollar Value) of
publicly Announced Shares (or Units)
Plans or Programs that May Yet Be
Purchased Under the
Plans or Programs
- -----------------------------------------------------------------------------------------------------------------------
April 1, 2005 - April 0 N/A 0 0
30, 2005
- -----------------------------------------------------------------------------------------------------------------------
May 1, 2005 - May 31, 2.9 million (1) $19.57 0 0
2005
- -----------------------------------------------------------------------------------------------------------------------
June 1, 2005 - June 30, 0 N/A 0 0
2005
- -----------------------------------------------------------------------------------------------------------------------
Total 2.9 million $19.57 0 0
- -----------------------------------------------------------------------------------------------------------------------
(1) All shares were repurchased in privately negotiated transactions.
Item 4. Submission of Matters to a Vote of Security Holders
On June 15, 2005, Motient held its annual meeting of stockholders. Each of our
existing directors stood for re-election and was re-elected at the meeting,
including: Steven Singer, Jonelle St. John, Raymond Steele, Barry Williamson,
James Dondero, Gerald Kittner and C. Gerald Goldsmith. In addition to the
election of directors, the following proposals were acted on and approved at the
meeting: the ratification of Friedman LLP as Motient's independent auditors, an
amendment to Motient's certificate of incorporation to increase the number of
authorized shares of common stock from 100 million to 200 million, and an
amendment to increase by 2.5 million the number of shares authorized to be
issued under Motient's 2002 stock option plan. Voting on these matters was as
follows:
51
Election of Directors
Nominee # of Shares # of Shares
------- ----------- -----------
Steven G. Singer FOR 39,006,957 WITHHELD AUTHORITY 1,132,541
---------- ---------
James D. Dondero FOR 39,730,554 WITHHELD AUTHORITY 408,584
---------- ---------
C. Gerald Goldsmith FOR 40,006,137 WITHHELD AUTHORITY 133,001
---------- ---------
Gerald S. Kittner FOR 39,006,171 WITHHELD AUTHORITY 1,132,541
---------- ---------
Jonelle St. John FOR 40,006,233 WITHHELD AUTHORITY 132,905
---------- ---------
Raymond L. Steele FOR 40,006,137 WITHHELD AUTHORITY 133,001
---------- ---------
Barry A. Williamson FOR 40,015,659 WITHHELD AUTHORITY 123,479
---------- ---------
To ratify the appointment of Friedman LLP as independent auditors of the Company
for the fiscal year ending December 31, 2005.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 40,130,787 ABSTAIN 6,290 AGAINST 2,061
----------- ----------- -----------
To increase the number of shares of common stock authorized by the Company's
certificate of incorporation to 200 million.
# of Shares # of Shares # of Shares
----------- ----------- -----------
FOR 39,647,015 ABSTAIN 3,528 AGAINST 488,595
----------- ----------- -----------
To increase by 2.5 million the number of shares of common stock authorized under
the Company's 2002 Stock Option Plan.
52
# of Shares # of Shares # of Shares # of Shares
----------- ----------- ----------- -----------
FOR 14,361,678 PRESENT, 20,307,981 AGAINST 5,464,776 ABSTAIN 4,703
----------- NOT VOTING ----------- ----------- -----------
Item 6. Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
53
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)
November 2, 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)
54
EXHIBIT INDEX
Number Description
3.1 - Certificate of Designations of the Series A Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.1 to the
Company's Current Report on Form 8-K filed on April 18, 2005)
3.2 - Certificate of Correction to the Series A Cumulative Convertible
Preferred Stock (incorporated by reference to Exhibit 3.2 to the
Company's Current Report on Form 8-K/A filed on August 2, 2005)
10.56 - Consent Agreement, dated January 27, 2005, by and among Columbia
Space (QP), Inc., et al (incorporated by reference to Exhibit 10.56
to the Company's Registration Statement on Form S-1/A filed on
February 14, 2005)
10.57 - Merger Agreement, dated as of February 9, 2005, by and among Motient
Corporation, Telcom Satellite Ventures Inc., et al (incorporated by
reference to Exhibit 10.57 to the Company's Registration Statement on
Form S-1/A filed on February 14, 2005)
10.58 - Form of Stock Purchase Agreement, dated February 9, 2005
(incorporated by reference to Exhibit 10.58 to the Company's
Registration Statement on Form S-1/A filed on February 14, 2005)
10.59 - Registration Rights Agreement, dated February 9, 2005 by and among
Motient Corporation, Telcom Satellite Ventures Inc., et al
(incorporated by reference to Exhibit 10.59 to the Company's
Registration Statement on Form S-1/A filed on February 14, 2005)
10.60 - Form of Warrant to purchase Motient common stock, dated February 9,
2005 (incorporated by reference to Exhibit 10.60 to the Company's
Registration Statement on Form S-1/A filed on February 14, 2005)
10.61 - Form of Stockholder's Agreement, dated February 9, 2005 (incorporated
by reference to Exhibit 10.61 to the Company's Registration Statement
on Form S-1/A filed on February 14, 2005)
10.62 - Securities Purchase Agreement dated April 15, 2005 by and among the
Registrant and the Purchasers listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.1 to the Company's Current
Report on Form 8-K filed on April 18, 2005)
10.63 - Registration Rights Agreement dated April 15, 2005 by and among the
Registrant and the Purchasers listed on Schedule 1 thereto
(incorporated by reference to Exhibit 10.2 to the Company's Current
Report on Form 8-K filed on April 18, 2005)
55
10.64 - Form of Common Stock Purchase Warrant (incorporated by reference to
Exhibit 10.3 to the Company's Current Report on Form 8-K filed on
April 18, 2005)
10.65 - Purchase Agreement dated May 11, 2005 by and between Motient Ventures
Holding Inc. and TerreStar Networks Inc. (incorporated by reference
to Exhibit 10.1 to the Registrant's Current Report on Form 8-K dated
May 11, 2005)
10.66 - Conditional Waiver and Consent Agreement dated May 11, 2005 by and
among the Registrant and each other party listed on the signature
page thereto (incorporated by reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K dated May 11, 2005)
10.67 - Stockholders Agreement dated May 11, 2005 by and among Motient
Ventures Holding Inc. and the other parties thereto (incorporated by
reference to Exhibit 10.3 to the Registrant's Current Report on Form
8-K dated May 11, 2005)
10.68 - Purchase Agreement dated May 13, 2005 by and between Motient
Corporation and George Haywood (incorporated by reference to Exhibit
10.1 to the Registrant's Current Report on Form 8-K dated May 19,
2005)
10.69 - Form of Purchase Agreement dated May 17, 2005 by and between Motient
Corporation and Columbia Capital Investors III, LLC, et al
(incorporated by reference to Exhibit 10.2 to the Registrant's
Current Report on Form 8-K dated May 19, 2005)
10.70 - Amendment to Motient Corporation 2002 Stock Option Plan (incorporated
by reference to Motient's Registration Statement on Form S-1 filed
June 24, 2005)
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)
56