UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2006
[_] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission File Number: 0-23044
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MOTIENT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 93-0976127
(State or other jurisdiction of (I.R.S. Employee
Incorporation or organization) Identification Number)
300 Knightsbridge Parkway, Lincolnshire, IL 60069
(Address of principal executive offices and zip code)
847-478-4200
(Registrant's telephone number, including area code)
--------------
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 is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [X] Non-accelerated filer [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [X] No [_]
Number of shares of common stock outstanding at May 1, 2006: 63,249,573
MOTIENT CORPORATION
FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2006
TABLE OF CONTENTS
PAGE
----
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months Ended
March 31, 2006 and 2005 ................................................3
Consolidated Balance Sheets as of March 31, 2006 and December 31,
2005 ...................................................................4
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2006 and 2005 ................................................5
Notes to Consolidated Financial Statements .............................6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................27
Item 3. Quantitative and Qualitative Disclosures about Market Risk .........44
Item 4. Controls and Procedures ............................................44
PART II
OTHER INFORMATION
Item 1. Legal Proceedings ..................................................46
Item 1A. Risk Factors ......................................................46
Item 6. Exhibits ...........................................................49
2
PART I- FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
Motient Corporation and Subsidiaries
Consolidated Statements of Operations
(in thousands, except per share data)
Three Months Three Months
Ended March 31, Ended March 31,
2006 2005
---- ----
(Unaudited) (Unaudited)
REVENUES
Services and related revenue $ 2,003 $ 4,530
Sales of equipment 40 483
-------- --------
Total revenues 2,043 5,013
-------- --------
COSTS AND EXPENSES
Cost of services and operations 4,690 7,540
Cost of equipment sold (exclusive of depreciation and
amortization below) 21 461
Sales and advertising 333 363
General and administrative (including expense to MSV,
a related party, of $166 and $0 for the three months
ended March 31, 2006 and 2005, respectively) 10,404 14,343
Restructuring charges -- 85
Research and development (including expense to MSV,
a related party, of $452 and $0 for the three months
ended March 31, 2006 and March 31, 2005) 452 --
Depreciation and amortization (excluded from above captions) 2,934 3,679
(Gain)/Loss on asset disposals 62 (6)
-------- --------
Total Costs and expenses 18,896 26,465
-------- --------
Operating loss (16,853) (21,452)
Interest and other income 2,663 80
Equity in loss of Mobile Satellite Ventures (8,193) (9,767)
Minority interests in losses of TerreStar 2,328 --
-------- --------
Net loss (20,055) (31,139)
Less:
Dividends on Series A and Series B Cumulative
Convertible Preferred Stock (5,808) --
Accretion of issuance costs associated with Series A
and Series B Cumulative Convertible Preferred Stock (976) --
-------- --------
Net loss available to Common Stockholders $(26,839) $(31,139)
======== ========
Basic and Diluted Loss Per Share of Common Stock: $ (0.42) $ (0.52)
Weighted-Average Common Shares Outstanding - basic and diluted 63,161 59,580
======== ========
Non-cash stock-based compensation included above is as follows:
Cost of services and operations $ 550 $ 1,189
Sales and advertising 81 121
General and administrative 3,091 10,259
-------- --------
Total non-cash sock-based compensation $ 3,722 $ 11,569
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
Motient Corporation and Subsidiaries
Consolidated Balance Sheets
(in thousands, except share and per share data)
March 31, 2006 December 31, 2005
-------------- -----------------
(Unaudited) (Audited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 149,051 $ 180,774
Cash committed for satellite construction costs due by
December 31, 2006 22,368 77,946
Restricted cash for Series A and Series B Cumulative
Convertible Preferred Stock dividends 30,883 24,905
Accounts receivable-trade, net of allowance for doubtful
accounts of $55 at March 31, 2006 and $55 at December 31, 2005 721 857
Deferred Issuance costs associated with Series A and Series B
Cumulative Convertible Preferred Stock 4,083 4,029
Assets held for sale 261 261
Deferred equipment costs 77 93
Other current assets 2,624 2,738
--------- ---------
Total current assets 210,068 291,603
RESTRICTED INVESTMENTS 77 76
PROPERTY AND EQUIPMENT, net 93,950 75,989
INTANGIBLE ASSETS, net 79,583 81,068
INVESTMENT IN MSV 488,015 496,208
RESTRICTED CASH FOR SERIES A AND SERIES B CUMULATIVE
CONVERTIBLE PREFERRED STOCK DIVIDENDS 1,287 7,264
DEFERRED ISSUANCE COSTS ASSOCIATED WITH SERIES A AND
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK 13,917 14,947
DEFERRED CHARGES AND OTHER ASSETS 33 36
--------- ---------
Total assets $ 886,930 $ 967,191
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses (including amounts due
to MSV, a related party, of $241 at March 31, 2006 and $699
December 31, 2005) $ 7,620 $ 8,154
Accounts payable to Loral for satellite construction contract -- 59,771
Deferred equipment revenue 100 120
Deferred revenue and other current liabilities 472 928
Series A and Series B Cumulative Convertible Preferred Stock
Dividends 11,802 5,994
--------- ---------
Total current liabilities 19,994 74,967
--------- ---------
LONG-TERM LIABILITIES:
Other long-term liabilities 337 343
--------- ---------
Total long-term liabilities 337 343
--------- ---------
Total liabilities 20,331 75,310
--------- ---------
COMMITMENTS AND CONTINGENCIES -- --
MINORITY INTEREST 74,397 74,840
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01 par value,
450,000 shares authorized and 90,000 shares issued and outstanding
at March 31, 2006 and December 31, 2005) 90,000 90,000
SERIES B CUMULATIVE CONVERTIBLE PREFERRED STOCK ($0.01
par value, 500,000 shares authorized and 318,500 shares issued and
outstanding at March 31, 2006 and December 31, 2005) 318,500 318,500
STOCKHOLDERS' EQUITY:
Common Stock; voting (par value $0.01; 200,000,000 shares authorized
at March 31, 2006 and December 31, 2005, 66,669,145 and 66,606,504
shares issued at March 31, 2006 and December 31, 2005 and 63,181,943
and 63,119,302 shares outstanding at March 31, 2006 and December 31,
2005, respectively) 667 666
Additional paid-in capital 755,686 752,777
Common stock purchase warrants 73,692 74,600
Less: 3,487,202 common shares held in treasury stock (67,088) (67,086)
Accumulated deficit (379,255) (352,416)
--------- ---------
Total stockholders' equity 383,702 408,541
--------- ---------
Total liabilities, and stockholders' equity $ 886,930 $ 967,191
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
4
Motient Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands)
Three Months Three Months
Ended March 31, Ended March 31,
2006 2005
---- ----
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (20,055) $ (31,139)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,934 3,679
Equity in losses of MSV 8,193 9,767
Minority interest in losses of TerreStar (2,328) --
(Gain)/loss on asset disposals 62 (6)
Non cash 401(k) match 54 48
Stock based compensation expense 3,722 11,569
Changes in assets and liabilities, net of acquisitions and
dispositions:
Accounts receivable - trade 136 343
Inventory -- 36
Other current assets 131 5
Accounts payable and accrued expenses (including payments to
MSV, a related party, of $1,076 and $0 for the three months
ended March 31, 2006 and 2005, respectively) (834) 14
Deferred revenue and other current liabilities (482) (240)
--------- ---------
Net cash used in operating activities (8,467) (5,924)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property & equipment -- 6
Net cash released from restrictions 55,576 --
Accounts payable to Loral for satellite construction contract (59,771) --
Other additions to property and equipment (19,172) (16)
--------- ---------
Net cash used in investing activities (23,367) (10)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of equity securities 90 34
Stock issuance costs and other charges -- (9)
Proceeds from the exercise of employee stock options 21 1,064
--------- ---------
Net cash provided by financing activities 111 1,089
--------- ---------
Net decrease in cash and cash equivalents (31,723) (4,845)
CASH AND CASH EQUIVALENTS, beginning of period 180,774 16,945
--------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 149,051 $ 12,100
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
5
MOTIENT CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2006
(Unaudited)
1. ORGANIZATION AND BUSINESS
Our Business Segments
Motient Corporation (with its subsidiaries, "Motient" or the "Company") owns,
operates and develops two-way wireless communications businesses. We are
currently developing a satellite communications service via our majority
ownership of TerreStar Networks Inc. ("TerreStar"), a development stage company
in the process of building its first satellite. TerreStar was formerly a
subsidiary of another satellite communications company, called Mobile Satellite
Ventures LP ("MSV"). We own 49% of MSV, but do not have operating control of its
business. Motient's investments in TerreStar and MSV are governed by stockholder
agreements with the other equity holders in those entities. We also own a
majority interest of TerreStar Networks Bermuda, Ltd., a recently formed entity
to explore the development of satellite communication service in various
international markets. TerreStar Bermuda currently has no material operations.
We also provide our customers with two-way wireless data communication services
via convenient and cost-effective access to wireless data networks, such as the
Sprint and Cingular networks, and our own DataTac network.
Our Satellite Communications Business - TerreStar Networks Inc.
In February 2002, MSV established TerreStar Networks Inc. 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". The Federal Communications Commission,
or FCC, increased TerreStar's allocation to its present 20 MHz of S-band
spectrum from its previous allocation of 8 MHz of such spectrum in the fourth
quarter of 2005.
On May 11, 2005, TerreStar was spun-off by MSV to its limited partners,
including Motient, which resulted in Motient receiving ownership of
approximately 49% of the issued and outstanding shares of capital stock of
TerreStar. On the same day, 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 the
subsidiary and TerreStar. The purchase price was funded from proceeds received
in a 2005 issuance of Motient's Series A preferred stock. The TerreStar common
stock purchase increased Motient's ownership to its current 61% of TerreStar's
issued and outstanding common stock and resulted in Motient starting to
consolidate TerreStar's financial statements into its own. Motient's ownership
is subject to the terms of a stockholders' agreement with the minority
stockholders of TerreStar.
Upon the initial consolidation of TerreStar on May 11, 2005, the assets and
liabilities of TerreStar were recorded on the Company's Consolidated Balance
Sheet based upon their fair values at such date. TerreStar's results of
operations have been included in the Company's Consolidated Statements of
Operations since that date.
6
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. There
was no excess purchase price over the estimated fair values of the underlying
assets and liabilities consolidated into Motient. 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.
We anticipate that TerreStar will allow us to provide Mobile Satellite Service,
or MSS, in the S-band in conjunction with ancillary terrestrial component, or
ATC, which would allow us to integrate satellite based two-way communications
services with land-based two-way communications services. The mobile devices
utilizing this service 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 which
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 for a user to have a communications
device that would provide ubiquitous service across the United States and
Canada. TerreStar's ability to effectively use ATC depends on its continued
ability to license certain intellectual property from MSV, including patents
covering ATC operations. TerreStar has a perpetual, royalty free license to such
technology pursuant to its agreement with MSV.
During 2002, TerreStar entered into a contract with Space Systems/Loral, Inc. to
purchase a satellite system, including certain ground infrastructure for use
with the 2 GHz band. Principal construction of this satellite began in mid-2005.
Terms of the contract include restricting certain cash balances in escrow
accounts in favor of Loral. In January 2006, approximately $59 million of the
escrowed balance as of December 31, 2005 was released which represented all
invoiced amounts due and payable to Loral through January 31, 2006. At the end
of 2005, TerreStar entered into a letter of intent to execute, and in January
2006, TerreStar executed a contract with Hughes Networks Systems, LLC. for
additional ground-based components of the system. The contract calls for regular
payments over time of up to $38 million, excluding any optional services or
components TerreStar elects to purchase. The communications system being
developed by TerreStar will ultimately include a main satellite, a spare
satellite, ground-switching infrastructure, launch costs and insurance, among
other things. The cost of the satellite system alone 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, and Motient is under no obligation to provide such
financing. The value of our investment in TerreStar could be negatively impacted
if TerreStar cannot meet any such funding requirements.
7
Our Terrestrial Wireless Business - Motient Communications Inc.
We are a nationwide provider of two-way, wireless mobile data services and
wireless internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we primarily generate revenue from the sale of airtime on our network
and from the sale of communications devices, which are manufactured by other
companies. Our customers use our network and our 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. Our network is designed to offer a broad array of wireless data
services, such as two-way mobile Internet services, including email services,
and wireless data transmission and processing (e.g.; wireless point-of-sale
systems).
Our subscriber's wireless devices, which may be mobile or stationary, receive
and transmit 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.
In December 2004, we launched a new set of products and services designed to
provide these integrated wireless data solutions to our customers over
alternative, higher bandwidth-capable communications networks called iMotient
Solutions. iMotient allows Motient's customers to use multiple networks,
including our own DataTac network, plus the networks of Cingular (GPRS) and
Sprint (1XRTT), via a single connection to Motient's back-office systems,
providing a single alternative for application and software development, device
management and billing across these multiple networks. Once connected to
iMotient, customers receive our proprietary applications and services that
reduce airtime usage, improve performance and reduce costs.
As of March 31, 2006 and 2005, there were approximately 72,583 and 97,248 user
devices billable and 51,925 and 70,124 user devices with active usage on
Motient's networks, respectively. Of these devices, there were approximately
8,801 and 345 user devices billable and 7,707 and 0 user devices active
utilizing our iMotient Solutions platform at March 31, 2006 and 2005. None of
the devices on our iMotient platform utilize our DataTac network.
Mobile Satellite Ventures LP
MSV's Business
MSV is a provider of mobile satellite-based communications services. MSV
currently uses two satellites to provide service, which allow customers access
to satellite-based wireless data, voice, fax and dispatch radio services almost
anywhere in North and Central America and in various coastal waters.
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry
Canada, is licensed to operate in the L-Band spectrum which it has coordinated
for use. MSV currently has coordinated approximately 30 MHz of L-band spectrum
for use throughout the United States and Canada. The L-band spectrum is
positioned within the range of frequencies used by terrestrial wireless
providers in the United States and Canada. Like TerreStar, MSV is also
developing an ATC- based next-generation integrated wireless network. MSV is
headquartered in Reston, VA, with an office in Ottawa, ON, Canada.
8
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. Motient cannot increase its
ownership of MSV any further without the consent of a supermajority of the MSV
equity holders.
In 2006, MSV entered into a contract with Boeing Satellite Systems Inc. (Boeing)
to construct a space-based network that consists of a space segment and ground
segment. Under the terms of the contract, MSV will purchase up to three
satellites with options for two additional satellites. Payments by MSV to Boeing
under the contract could exceed $1 billion if the contract is not cancelled
prior to completion by MSV.
On March 30, 2006, MSV completed the sale of $750 million aggregate principal
amount at maturity of its 14% senior secured discount notes due 2013 for gross
proceeds of approximately $436 million. MSV has stated that it intends to use
the net proceeds from the sale of the notes for working capital and general
corporate purposes including the construction of its next generation integrated
network.
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.
Board of Directors
In February 2006, Director James Dondero left the Board of Directors and David
Meltzer and David Grain joined the Board.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared by the
Company and are unaudited. The consolidated financial statements include the
accounts of Motient and its wholly and majority-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated. The
results of MSV have been accounted for pursuant to the equity method of
accounting. The results of TerreStar have been consolidated with Motient since
TerreStar's spin off from MSV and Motient's concurrent additional investment in
TerreStar on May 11, 2005. Certain amounts from prior years have been
reclassified to conform to the current year presentation. The results of
operations for the three months ended March 31, 2006 are not necessarily
indicative of the results to be expected for any future period or for the full
fiscal year. In the opinion of management, all adjustments (consisting of normal
recurring adjustments unless otherwise indicated) necessary to present fairly
the financial position, results of operations and cash flows at March 31, 2006,
and for all periods presented, have been made. Footnote disclosure has been
condensed or omitted as permitted in interim financial statements.
9
Use of Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The Company's most significant estimates
relate to the valuation of its investment in MSV, the allowance for doubtful
accounts receivable, the valuation of deferred income tax assets and the ability
to realize long-lived assets. Actual results could differ from those estimates.
Cash and 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. The carrying amount of cash and cash equivalents approximates fair
value because of the short maturity of those instruments.
Restricted Cash and Investments
The Company had approximately $55 million of restricted cash at March 31, 2006
held in money market escrow accounts. At March 31, 2005, the Company had
approximately $0.1 million of restricted investments. The restricted investments
included securities that were classified as held-to-maturity under the provision
of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The Company classified restricted investment amounts that would
mature within one year as current assets in the accompanying consolidated
balance sheet. The Company accounted for these investments at their amortized
cost.
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 are evaluated against these 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.
Valuation of Long-Lived Assets
The Company evaluates whether long-lived assets, excluding goodwill, have been
impaired when circumstances indicate the carrying value of those assets may not
be recoverable. For such long-lived assets, an impairment exists when its
carrying value exceeds the sum of estimates of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. When
alternative courses of action to recover the carrying amount of a long-lived
asset are under consideration, a probability-weighted approach is used for
developing estimates of future undiscounted cash flows. If the carrying value of
the long-lived asset is not recoverable based on these estimated future
undiscounted cash flows, the impairment loss is measured as the excess of the
asset's carrying value over its fair value, such that the asset's carrying value
is adjusted to its estimated fair value.
10
The Company reviews and accounts for impairment of long-lived assets 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.
Income 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 tax credit carry forwards and the
income 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 income tax bases of existing assets
and liabilities. Under this method, the effect on deferred income taxes of a
change in income tax rates is recognized in operations in the period that
includes the enactment date. A valuation reserve is established for deferred
income tax assets if the realization of such benefits cannot be determined to be
more likely than not.
Fair Value of Financial Instruments
The fair value of certain of the Company's financial instruments, including cash
and cash equivalents, and other accrued liabilities approximate cost because of
their short maturities. The fair value of investments is determined using quoted
market prices for those securities or similar financial instruments.
Revenue Recognition
The Company generates revenue almost exclusively through airtime service
agreements and in minor amounts, consulting services and equipment sales and
services. Revenue is recognized as follows:
Airtime Service Agreements: 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. 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. 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.
11
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.
Property and Equipment
Property and equipment are recorded at cost and adjusted for impairment and are
depreciated over the shorter of their estimated useful lives or the term of the
lease using the straight-line method. Leasehold improvements are amortized over
the shorter of their estimated 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, while
expenditures for refurbishments and improvements that significantly add to the
productive capacity or extend the useful life of an asset are capitalized.
Satellite Under Construction
Satellite under construction, a component of property and equipment, is stated
at cost and aggregated $71 million and $90 million at March 31, 2006 and
December 31, 2005, respectively. These costs consist primarily of the cost of
satellite construction and will include the costs of the launch, including
premiums for launch insurance and insurance during the period of in-orbit
testing, the net present value of any performance incentives expected to be
payable to the satellite manufacturers, costs directly associated with the
monitoring and support of satellite construction and interest costs incurred
during the period of satellite construction. Satellite construction and launch
services have generally been or will be procured under long-term contracts that
provide for payments by us over the contract periods.
Restructuring and Impairment Charges
In March 2005, the Company reduced its workforce by 11 employees and recorded a
liability for the severance, employee benefits and estimated payroll taxes of
$0.1 million.
In June 2004, the Company recorded a restructuring charge of $5.1 million
related to certain network rationalization initiatives, consisting of base
station deconstruction costs of $0.5 million, the loss on the retirement of
certain base station equipment of $2.8 million and termination liabilities of
12
$1.8 million for site leases no longer required for removed base stations. Of
these amounts, the only remaining accrual as of March 31, 2006 was $0.3 million
for site leases no longer required for removed base stations.
In June 2005, the Company recorded a restructuring charge of $5.6 million
related to additional network rationalization initiatives for Motient ,
consisting of base station deconstruction 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, the only remaining accrual as of March 31, 2006, was $0.7 million for
site leases no longer required for removed base stations. In January 2005, the
Company identified certain base station equipment associated with the 2005
rationalization and adjusted their remaining useful lives for depreciation
purposes, resulting in approximately $1.8 million of accelerated depreciation
expense.
In aggregate, the Company's restructuring reserve decreased from $1.2 million at
December 31, 2005 to $1.0 million at March 31, 2006 due to cash payments for
abandoned site leases.
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.
Advertising Costs
Advertising costs (inclusive of airtime commissions) are charged to operations
in the year incurred.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123 (revised), "Share-Based Payment, an amendment of FASB
Statements Nos. 123 and 95" ("SFAS 123R"), applying the modified prospective
method. Prior to the adoption of SFAS 123R, the Company applied the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") in accounting for its stock-based awards, and accordingly,
recognized no compensation costs for its stock option plans other than for
instances where APB 25 required variable plan accounting related to
performance-based stock options, stock option modifications and restricted stock
awards. Under the modified prospective method, SFAS 123R applies to new awards
and to awards that were outstanding as of December 31, 2005 that are
subsequently vested, modified, repurchased or cancelled. Compensation expense
recognized during the first quarter of 2006 includes the portion vesting during
the period for (1) all share-based payments granted prior to, but not yet
vested, as of December 31, 2005, based on the grant date fair value estimated in
accordance with the original provisions of SFAS 123 and (2) all share-based
payments granted subsequent to December 31, 2005, based on the grant date fair
value estimated using the Black-Scholes option pricing model. Since our adoption
of SFAS 123R, there have been no changes to our equity plans or modifications to
outstanding stock-based awards. As a result of the Company's decision to adopt
using the modified prospective method, prior period results have not been
restated. Compensation expense recorded in the first quarter of 2006 under SFAS
123R is as follows (in thousands):
13
Related to stock options granted prior to December 31, 2005 $2,202
Related to stock options granted during the first quarter of 2006 495
Restricted stock awarded granted prior to December 31, 2005 --
Restricted stock awarded during the first quarter of 2006 1,025
-----
Total stock-based compensation $3,722
======
Before adoption of SFAS 123R, pro forma disclosures were used to reflect the
potential impact of accounting under the fair value techniques of SFAS 123R
rather than under the intrinsic value techniques under APB 25. The following
tables provide information regarding the fair value of stock options granted
during the three months ended March 31, 2006 and 2005 and relevant pro forma
information regarding stock-based compensation for the 2005 quarter. The value
of restricted stock awards is computed as the value of the shares awarded on the
date of the award under both SFAS 123R and APB 25.
In November 2005, the Company granted an aggregate of 155,000 shares of
restricted stock to three officers, which will vest upon the completion of
strategic events involving a change of control which had not occurred as of
December 31, 2005. At December 31, 2005 the Company did not record any
compensation charge associated with the grants, as they were assigned a zero
probability of vesting. On March 9, 2006 the Company amended its November 21,
2005 employment agreements with Mr. Downie, Ms. Newman and Mr. Macklin to change
the vesting provision of each employment agreement. Based upon a 30% probability
that the restricted stock would vest, the Company recorded a compensation charge
associated with the restricted stock in the amount of $1.0 million.
2006 2005
---- ----
Weighted fair value of stock options granted:
To acquire Motient common stock --- $19.50
To acquire TerreStar common stock $16.01 N/A
Weighted average assumptions:
Motient stock options:
Risk-free interest rate --- 2.58
Dividend yield --- ---
Expected volatility --- 616.5%
Expected option life in years --- 10
TerreStar stock options:
Risk-free interest rate 4.42% N/A
Dividend yield --- N/A
Expected volatility 66.0% N/A
Expected option life in years 6.5 N/A
2005
----
Net loss as reported $(31,139)
Add back recorded stock-based compensation expense:
Motient compensation expense 11,569
Deduct stock-based compensation expense as if recorded
under the fair value method:
Motient compensation expense (12,940)
--------
Pro forma net loss $(32,510)
========
Basic and Diluted loss per share:
As reported $ (0.52)
Pro forma $ (0.55)
14
The aggregate intrinsic value (defined as the spread between the market value of
the Company's common stock as of the end of the period and the exercise price of
the stock options) for Motient stock options outstanding and exercisable as of
March 31, 2006 were $1,188,079 and $757,150, respectively. Similarly, for
TerreStar options (as computed based on TerreStar's estimated market value), the
aggregate intrinsic value of its stock options outstanding and exercisable were
$1,472,466 and $0, respectively, as of such date.
SFAS 123R also requires the benefits of tax deductions in excess of recognized
compensation cost to be reported as cash flow from financing activities rather
than as cash flow from operations as required under Emerging Issues Task Force
("EITF") issue No. 0015, "Classification in the Statement of Cash Flow of the
Income Tax Benefit Received by a Company upon Exercise of a Nonqualified
Employee Stock Option".
The following is a summary of nonvested stock awards activity:
Stock options Restricted Stock
------------- ----------------
Weighted Weighted
Average Average
Grant Grant
Number Date Fair Number Date Fair
of Shares Value of Shares Value
--------- ----- --------- -----
Motient:
Nonvested as of
December 31, 2005 319,134 $ 21.03 -- --
Granted -- -- 155,000 $ 22.05
Vested -- -- -- --
Cancelled (20,499) $ 16.96 -- --
--------- -------
Nonvested as of
March 31, 2006 298,635 $ 21.31 155,000 $ 22.05
========= =======
TerreStar:
Nonvested as of
December 31, 2005 713,593 $ 17.39 -- --
Granted 670,000 $ 16.01 -- --
Vested -- -- -- --
Cancelled -- -- -- --
--------- -------
Nonvested as of
March 31,2006 1,383,593 $ 16.72 -- --
========= =======
At March 31, 2006, there was $7.9 million of total pre-tax unrecognized
stock-based compensation costs related to Motient's options and restricted stock
which will be recognized over periods through December 2007 (considering
estimated forfeitures and restricted stock awards which will never vest).
Similarly, for TerreStar, there was $21.4 million of total pre-tax unrecognized
stock-based compensation costs which will be recognized, along with related
minority interest income, over periods through March 2009.
Loss Per Share
Basic and diluted loss per common share is computed by dividing net loss
available to common stockholders by the weighted-average number of common shares
outstanding for the period. The loss available to common stockholders includes
the reported net loss plus the additional loss attributable to preferred stock
15
dividends and accretion. Diluted loss per share would additionally reflect 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;
however, due to the reported losses, all such assumed exercises, conversions and
issuances would be antidilutive for all periods presented and are therefore not
considered in the diluted loss per share computations.
As of March 31, 2006, there were 90,000 shares of Series A Cumulative
Convertible Preferred Stock and 318,500 shares of Series B Cumulative
Convertible Preferred Stock outstanding which were entitled to be converted into
a total of 12,255,000 shares of Motient common stock. No such shares were
outstanding as of March 31, 2005. As of March 31, 2006 and 2005, there were
outstanding warrants to acquire approximately 5,800,320 and 6,887,551 shares,
respectively, of Motient common stock and outstanding options to purchase
701,410 and 410,339 shares, respectively, of Motient common stock.
3. SEGMENT DISCLOSURES
Beginning in May 2005, when TerreStar was spun off by MSV to its limited
partners, including Motient, and Motient concurrently acquired a majority
ownership in TerreStar and started consolidating TerreStar's operations, the
Company has two reportable segments, Motient Communications Inc. and TerreStar
Networks Inc. The accounting policies of the reportable segments are the same as
those described in the summary of significant accounting policies as more fully
described in Motient's 2005 Annual Report on Form 10-K.
The Company's core customer base can be generally divided into six broad
categories, Wireless Internet, Field Services, Transportation, Telemetry,
iMotient and Other. The services provided in all categories, except iMotient and
iMotient related revenues in the Other category, are provided over our DataTac
network. 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 millions):
16
Three Months Three Months
Ended March 31, Ended March 31,
2006 2005
---- ----
Summary of Revenue
------------------
Wireless internet $ 0.8 $ 2.6
Field services 0.1 0.8
Transportation 0.4 0.6
Telemetry 0.3 0.4
iMotient 0.3 --
All Other 0.1 0.1
---- ----
Service revenue 2.0 4.5
Equipment revenue 0.0 0.5
---- ----
Total Revenue $ 2.0 $ 5.0
==== ====
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
March 31, 2006 (unaudited)
Motient TerreStar Total
------- --------- -----
Operating (loss) $(9,689) $(7,164) $(16,853)
Depreciation expense $1,448 $1 $1,449
Amortization expense $175 $1,310 $1,485
Identifiable assets $618,204 $268,726 $886,930
Capital expenditures $20 $78,923 $78,943
4. RELATED PARTY TRANSACTIONS
The Company made cash payments of $1.4 million to related parties for
service-related obligations during the three months ended March 31, 2006. Of
that amount, $1.1 million was paid to MSV for consulting services related to
TerreStar and $0.3 million was paid to CTA, a consulting and private advisory
firm specializing in the technology and telecommunications sectors. For the
three months ended March 31, 2005, $1.2 million was paid to CTA for consulting
services.
5. COMMON AND PREFERRED STOCK
Common stock
- ------------
From April to November 2004, Motient issued an aggregate of 23,069,519 shares of
its common stock in various private placements at an average price of $8.00 per
share, raising aggregate proceeds, net of placement agent and other issuance
costs of $178 million. Several issuances and related fees included warrants to
acquire an additional 7,267,379 shares of common stock at an average exercise
price of $7.70 per share over various periods. Certain warrants were exercisable
only if certain conditions were met and, accordingly, only 4,728,801 warrants
are exercisable as a result of the private placement transactions.
In May 2005, the Company repurchased 2,900,000 shares of its common stock for an
aggregate $57 million from various investors. Pursuant to a resolution of the
Board of Directors, from September through December 2005, Motient repurchased an
additional 587,102 shares of its common stock for approximately $10 million. The
repurchased shares are included in treasury stock and are available for general
corporate purposes.
17
Series A and Series B Cumulative Convertible Preferred Stock
- ------------------------------------------------------------
The Company accounts for Series A and Series B 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 $17.6 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. On October 26,
2005, Motient exchanged $318.5 million face amount of its Series A Preferred
Stock for Series B Preferred stock, with substantially identical economic terms.
If any shares of Series A or Series B 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. In addition, 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. Motient
believes that all of these warrants will vest by September 8, 2006.
6. COMMITMENTS AND CONTINGENCIES
As of March 31, 2006, we had the following outstanding cash contractual
operating commitments in addition to the preferred stock commitments described
above:
More than 5
Total <1 Year 1-3 Years 3-5 Years Years
----- ------- --------- --------- -----
(in thousands)
TerreStar Satellite (1) $147,602 $122,532 $ 25,070 $ -- $ --
Operating leases (2) 13,461 5,229 6,020 2,212 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $161,063 $127,761 $ 31,090 $ 2,212 $ --
-------- -------- -------- -------- --------
(1) These commitments include time payments related to the satellite
construction contract with Space Systems/Loral, Inc. and the ground-based
satellite beam access subsystem contract with Hughes Network Systems, LLC.
This satellite is scheduled to be completed in November 2007.
(2) These commitments generally contain provisions that provide for an
acceleration of rent upon a default by us, except that certain long-term
real estate leases, categorized as Operating Leases, may not contain such
provisions.
The table below outlines the Company's amortization requirements for the
five-year period from March 31, 2006.
March 31,
---------
2006 2007 2008 2009 2010 Thereafter
---- ---- ---- ---- ---- ----------
800 MHz Licenses $ 375 $ 499 $ 499 $ 499 $ 499 $ 3,204
2 GHz Licenses 3,339 4,452 4,452 4,452 4,452 41,675
Intellectual Property 589 786 786 786 786 7,353
Customer Contracts 100 -- -- -- -- --
------- ------- ------- ------- ------- -------
Total Amortization $ 4,403 $ 5,737 $ 5,737 $ 5,737 $ 5,737 $52,232
======= ======= ======= ======= ======= =======
18
Change of Control Agreements
On November 21, 2005, Motient entered into employment agreements with three
executives. On March 9, 2006, the company amended these agreements.
7. LEGAL AND REGULATORY MATTERS
Legal
On February 14, 2006, entities controlled by James D. Dondero announced that
they would seek to replace Motient current board of directors with another slate
proposed by such entities. Also on February 14, 2006, Mr. Dondero resigned from
Motient's board of directors.
Please also see our description of certain regulatory matters given below, which
involve certain legal matters.
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.
Additional information may be found in Note 10, "Subsequent Events".
Regulation
Overview
Motient's wireless communications business is regulated to varying degrees at
the federal, state and local levels. Various legislative and regulatory
proposals under consideration from time to time by Congress and the FCC have in
the past materially affected and may in the future materially affect the
telecommunications industry in general, and Motient's wireless business in
particular. The following is a summary of significant laws, regulations and
policies affecting the operation of Motient's wireless business. In addition,
many aspects of regulation at the federal, state and local level currently are
subject to judicial review or are the subject of administrative or legislative
proposals to modify, repeal or adopt new laws and administrative regulations and
policies. Neither the outcome of these proceedings nor their impact on Motient's
operations can be predicted at this time.
The ownership and operation of 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
19
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 or 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.
Regulation Of Our DataTac Network
The FCC licenses used in Motient's terrestrial wireless business 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 upper portion of the 800 MHz band. On December 22, 2004, the FCC
clarified that Motient would generally be allowed, subject to certain
conditions, to move its 800 MHz frequencies to a portion of the upper-800 MHz
band. Motient will move some, but not all of its 800 MHz frequencies in this
manner. Motient cannot assure you that its operations will not be affected by
the adoption or implementation of this order or any subsequent addenda.
As a result of our ongoing network rationalization efforts, our 800 MHz FCC
licenses may be lost 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
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 & MSV
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 network. 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 approval of specific ATC systems.
20
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 enhance its service coverage further, but it specifically
deferred its ruling on other MSV waiver requests at that time. On February 25,
2005, the FCC issued a revised set of rules for ATC. The decision clarified the
outstanding technical issues left open by the February 2003 and November 2004
decisions. In particular, these revised rules allow MSV to (i) increase
significantly reuse of its frequencies for ATC, resulting in enhanced ATC
capacity and coverage and (ii) increase base station power, permitting MSV to
deploy base stations in a more cost-effective manner and to offer innovative
services. MSV has filed an application for approval from the FCC to modify its
ATC license to conform to the revised rules. In the interim, MSV can operate an
ATC network pursuant to the November 2004 decision.
The February 2003, November 2004 and February 2005 orders set forth various
limitations and conditions necessary to the use of ATC by MSV. There can be no
assurances that such conditions will be satisfied by MSV, or that such
limitations will not be unnecessarily burdensome. One of MSV's competitors has
asked the FCC to review the November 2004 and February 2005 decisions. We cannot
predict the outcome of this review.
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 a next generation L-band
satellite. Use of the two authorizations together gives MSV the authority it
needs to replace its existing satellites and utilize the full complement of
spectrum available to it.
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 Communications, a shareholder of TerreStar, holds an 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 in Canada, as well as an authorization from the FCC for the provision of
MSS in the 2 GHz band in the United States. 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.
In December 2002, TMI and TerreStar jointly applied to the FCC for authority to
transfer TMI's U.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.
21
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 and will need to be modified to reflect certain changes
in ownership of TerreStar and the eventual transfer of the Canadian MSS
authorization to TerreStar Canada. Furthermore, TMI's LOI will have to be
modified to reflect technical changes to the satellite and a change in the
orbital location specified in the Canadian MSS authorization. The remaining
milestones relate to satellite launch and operation, and are in November 2007
and 2008, respectively.
On July 26, 2005, Industry Canada modified TMI's S-band authorization to provide
for a 2 x 10 MHz reservation (20 MHz in total). Specifically, this reservation
consists of 7 MHz in each direction, with an additional 3 MHz in each direction
available on the condition that it does not constrain the entry of another MSS
operator into the Canadian market.
In December 2005, the FCC provided TMI a reservation of 2 x 10 MHz (20 MHz in
total) of spectrum within the 2 GHz MSS band. TMI does not yet have a specific
spectrum assignment within that band, because current FCC rules do not allow it
to request a specific assignment until such time as its satellite reaches its
intended orbit. TMI's current spectrum reservation from the FCC reflects the
December 2005 order dividing all of the then available S-band MSS spectrum
between the two 2 GHz MSS licensees, TMI and ICO Satellite Services. TMI and ICO
were the only remaining S-band authorization holders whose authorizations had
not been surrendered or cancelled by the FCC, and in the December 2005 order the
FCC rejected proposals to make recaptured 2 GHz spectrum available to new MSS
applicants or to non-MSS services. Several parties have challenged the December
2005 ruling and the revocation of their S-band authorizations, and we cannot
predict the outcome of these challenges.
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 broadcast auxiliary service, will need to relocate their operations
to a new band to accommodate 2 GHz MSS and other new entrants. As a 2 GHz MSS
entrant, TMI and/or TerreStar will have certain obligations to compensate those
incumbent licensees for their relocation costs and for the costs of providing
"comparable facilities" to them. However, the level to which TMI and/or
TerreStar will be required to participate in such reimbursement is uncertain due
to a variety of factors, and one such factor is that, pursuant to a separate FCC
22
order, Nextel Communications Inc. (Nextel) must relocate incumbent broadcast
auxiliary service licensees in the 1990-2025 MHz band by September 6, 2007. To
the extent that Nextel complies with its band clearing obligations, 2 GHz MSS
entrants commencing operations after Nextel has cleared the band would not have
to clear the band themselves, but could still have obligations to reimburse
Nextel for certain of its band clearing costs. Whether a 2 GHz MSS entrant will
be required to share in certain of Nextel's relocation costs will likely depend
upon whether that entrant commences operations prior to June 27, 2008. 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.
We cannot predict what these band-clearing costs will be to TMI and/or
TerreStar, if any, but they could range from $0 to in excess of $100 million.
8. 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.
Summarized income statement information of MSV for the three months ended March
31, 2006 and 2005 is as follows (in millions):
2006 2005
---- ----
Total revenues $8.1 $7.2
Total operating expenses 23.1 19.6
---- ----
Operating loss (15.0) (12.4)
Other income (expense) 1.6 (7.5)
----- -----
Loss from continuing operations $(13.4) $(19.9)
====== ======
9. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flows information for the three months ended March 31 is
presented in the following table (in thousands):
23
2006 2005
---- ----
Non-cash investing and financing activities:
Accrued Satellite under construction $ 300 $ --
Issuance of common stock purchase warrants -- 48,908
Amortization of deferred financing fees
related to Series A Cumulative Convertible
Preferred Stock 976 --
Dividends payable on Series A and Series B
Cumulative Convertible Preferred Stock 5,808 --
Issuance of common stock -- 370,980
Exercise and Expiration of common stock
warrants $ (820) $ (6,296)
10. SUBSEQUENT EVENTS
In April 2006, Motient added two new directors to its board, Jacques Leduc and
David Andonian.
On April 12, 2006, an entity controlled by James D. Dondero made a demand to
inspect Motient's books and records under Section 220(b) of the Delaware General
Corporation Law. Motient denied this request on April 20 as inappropriate for a
number of reasons including (but not limited to) the lack of a proper purpose
for the demand and the continuing refusal by Mr. Dondero and Highland to respond
to discovery requests in the several pending lawsuits. On April 25, the entity
filed suit under Section 220 in the Court of Chancery of the State of Delaware.
The case has been set for trial on June 1, 2006.
TerreStar Transaction
On May 6, 2006, Motient and certain funds affiliated with Columbia Capital and
Spectrum Equity Investors entered into eight exchange agreements pursuant to
which the funds will exchange an aggregate of approximately 1.5 million shares
of common stock of TerreStar, constituting all of the shares of TerreStar common
stock owned by the funds, for an aggregate of approximately 2.7 million shares
of common stock of Motient. Following these transactions, Motient will own
approximately 58.5% of the outstanding shares of TerreStar common stock on a
fully-diluted basis. Other TerreStar stockholders will have the opportunity to
tag on to this transaction on the same terms on which Motient is acquiring the
TerreStar shares. To the extent any such stockholders elect to tag, Motient's
ownership in TerreStar would increase.
In addition, Motient and the funds entered into a registration rights agreement
pursuant to which Motient will file a registration statement with the SEC
relating to the resale of the Motient shares issued to the funds.
24
Also on May 6, 2006, Motient and a sufficient number of TerreStar stockholders
entered into Amendment No. 2 to the TerreStar Networks Inc. Stockholders'
Agreement which amended, effective immediately, certain provisions of the
existing TerreStar Networks Inc. stockholders' agreement relating to the
issuance of additional securities by TerreStar and the tag along rights of
TerreStar stockholders. In addition, Motient and a sufficient number of
TerreStar stockholders entered into an Amended and Restated TerreStar Networks,
Inc. Stockholders' Agreement which amended and restated, effective immediately
prior to the initial closing of the MSV exchange transactions discussed above,
the current TerreStar stockholder's to revise and delete certain provisions of
the existing agreement among TerreStar stockholders.
MSV Transaction
On May 6, 2006, Motient entered into an Exchange Agreement with SkyTerra
Communications, Inc. pursuant to which Motient, through its wholly-owned
subsidiary Motient Ventures Holding Inc., will, in two or more closings,
exchange all of its shares of common stock of Mobile Satellite Ventures GP Inc.
(MSV's corporate general partner) and approximately 15.7 million limited
partnership interests of MSV for approximately 44.3 million shares of non-voting
common stock of SkyTerra in two or more closings. The shares of non-voting
SkyTerra common stock will be exchanged for shares of voting common stock
immediately prior to distribution or sale by Motient.
Motient will initially exchange all of its directly owned MSV GP shares and
57.5% of its directly owned MSV limited partnership units for 25.5 million
SkyTerra shares, and Motient intends to exchange the remainder of its MSV
limited partnership units over the next several years. Motient intends to
distribute the 25.5 million initially acquired SkyTerra to its common
stockholders. This distribution will be a taxable event to those stockholders.
In addition, pursuant to the terms of Motient's preferred stock, Motient is
required to make adequate provision such that the holders of Motient's preferred
stock shall receive, in the event they convert such shares into shares of
Motient common stock, the same number of shares of SkyTerra common stock as if
they had converted their shares of Motient preferred stock into common stock
immediately prior to Motient's distribution of the SkyTerra shares to its common
stockholders. Due to this requirement, Motient will retain sufficient MSV
limited partnership units such that Motient may exchange such units at
subsequent closings for additional SkyTerra shares in the event a holder of
Motient preferred stock elects to convert its preferred shares into shares of
Motient common stock.
Motient and SkyTerra also entered into a registration rights agreement pursuant
to which SkyTerra has agreed to file a registration statement with the SEC for
the resale of the SkyTerra shares issued to Motient that are not otherwise
distributed to Motient's stockholders.
Also on May 6, 2006, certain corporations of which Motient, certain funds
affiliated with Columbia Capital and certain funds affiliated with Spectrum
Equity Investors are stockholders, entered into six exchange agreements with
SkyTerra pursuant to which these corporations will exchange their shares of
common stock of MSV GP and approximately 3.5 million limited partnership
interests of MSV, constituting all of their interests in MSV, for an aggregate
of approximately 10.0 million shares of common stock of SkyTerra. Motient will
be the beneficial owner of approximately 3.6 million of these shares.
These parties also entered into a registration rights agreement pursuant to
which SkyTerra will file a registration statement with the SEC relating to the
resale of all of the SkyTerra shares to be issued in this transaction.
25
Following the completion of all of these transactions, Motient would be the
beneficial owner of approximately 57.2% of the outstanding shares of SkyTerra
common stock on a fully-diluted basis and SkyTerra would own approximately 69.5%
of the limited partnership units of MSV LP. Other MSV limited partners will have
the opportunity to tag on to these transactions on the same terms. To the extent
any such limited partners elect to tag, SkyTerra's ownership in MSV would
increase.
Also on May 6, 2006, SkyTerra, Motient and a sufficient number of stockholders
of MSV GP entered into Amendment No. 1 to the Mobile Satellite Ventures GP Inc.
Stockholders' Agreement which amended, effective immediately, certain provisions
in the existing Stockholders' Agreement of MSV GP relating to the "Tag Along
Rights" and "Right of First Refusal" among such stockholders.
The closing of all of the transactions discussed above will be subject to
various closing conditions, including FCC and other regulatory approval.
Accordingly, Motient can not assure you that these transactions will close on
the terms outlined here, if at all.
26
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This quarterly report on Form 10-Q contains and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All
statements regarding our expected financial position and operating results, our
business strategy and our financing plans are forward-looking statements. These
statements can sometimes be identified by our use of forward-looking words such
as "may", "will", "anticipate", "estimate", "expect", "project" or "intend".
These forward-looking statements reflect our plans, expectations and beliefs
and, accordingly, are subject to certain risks and uncertainties. We cannot
guarantee that any of such forward-looking statements will be realized.
Statements regarding factors that may cause actual results to differ materially
from those contemplated by such forward-looking statements include, among
others, those under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview - Overview of Liquidity
and Risk Factors," and elsewhere in this quarterly report. All of our subsequent
written and oral forward-looking statements or statements that may be attributed
to us are expressly qualified in their entirety by the cautionary statements
referred to above and contained elsewhere in this quarterly report on Form 10-Q.
You should carefully review the risk factors described in our other filings with
the Securities and Exchange Commission from time to time, including the risk
factors contained in our Form 10-K for the period ended December 31, 2005, 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.
Our Business Segments
Motient owns, operates and develops two-way wireless communications businesses.
We are currently 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. Motient's ownership of TerreStar is subject to
the terms of a stockholders agreement with the other stockholders of TerreStar.
TerreStar was formerly a subsidiary of another satellite communications company,
called 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. We also provide our
customers with two-way wireless data communication services via convenient and
cost-effective access to wireless data networks, such as the Sprint and Cingular
networks, and our own DataTac network.
Our Satellite Communications Business - TerreStar Networks Inc.
We anticipate that TerreStar will allow us to provide Mobile Satellite Service,
or MSS, in the S-band in conjunction with ancillary terrestrial component, or
ATC, which would allow us to integrate satellite based two-way communications
services with land-based two-way communications services. The mobile devices
utilizing this service 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
27
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 which
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 for a user to have a communications
device that would provide ubiquitous service across the United States and
Canada. TerreStar's ability to effectively use ATC depends on its continued
ability to license certain intellectual property from MSV, including patents
covering ATC operations. TerreStar has a perpetual, royalty free license to such
technology pursuant to its agreement with MSV.
During 2002, TerreStar entered into a contract with Space Systems/Loral, Inc. to
purchase a satellite system, including certain ground infrastructure for use
with the 2 GHz band. Principal construction of this satellite began in mid-2005.
At the end of 2005, TerreStar entered into a letter of intent to execute, and in
2006, TerreStar executed a contract with Hughes Networks Systems, LLC for
additional ground-based components of the system. The communications system
being developed by TerreStar will ultimately include a main satellite, a spare
satellite, ground-switching infrastructure, launch costs and insurance, among
other things. The cost of the satellite system alone 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, and Motient is under no obligation to provide such
financing. The value of our investment in TerreStar could be negatively impacted
if TerreStar cannot meet any such funding requirements.
Our Terrestrial Wireless Business - Motient Communications Inc.
We are a nationwide provider of two-way, wireless mobile data services and
wireless internet services. Owning and operating a wireless radio data network
that provides wireless mobile data service to customers across the United
States, we primarily generate revenue from the sale of airtime on our network
and from the sale of communications devices, which are manufactured by other
companies. Our customers use our network and our 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.
Our subscriber's wireless devices, which may be mobile or stationary, receive
and transmit 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.
28
In December 2004, we launched a new set of products and services designed to
provide these integrated wireless data solutions to our customers over
alternative, higher bandwidth-capable communications networks called iMotient
Solutions. iMotient allows Motient's customers to use multiple networks,
including our own DataTac network, plus the networks of Cingular (GPRS) and
Sprint (1XRTT), via a single connection to Motient's back-office systems,
providing a single alternative for application and software development, device
management and billing across these multiple networks. Once connected to
iMotient, customers receive our proprietary applications and services that
reduce airtime usage, improve performance and reduce costs.
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 and in various coastal waters.
MSV, together with Mobile Satellite Ventures (Canada) Inc., licensed by Industry
Canada, is licensed to operate in the L-Band spectrum, which it has coordinated
for use. MSV currently has coordinated approximately 30 MHz of L-band spectrum
for use throughout the United States and Canada. The L-band spectrum is
positioned within the range of frequencies used by terrestrial wireless
providers in the United States and Canada. Like TerreStar, MSV is also
developing an ATC- based next-generation integrated wireless network. MSV is
headquartered in Reston, VA, with an office in Ottawa, ON, Canada.
MSV is structured as a limited partnership, of which Motient is one of the
limited partners. Motient holds a proportionate ownership interest in the
corporate general partner. Motient has certain rights to appoint directors to
the sole general partner of the limited partnership, but does not have any
direct or indirect operating control over MSV.
In 2006, MSV entered into a contract with Boeing Satellite Systems Inc. (Boeing)
to construct a space-based network that consists of a space segment and ground
segment. Under the terms of the contract, MSV will purchase up to three
satellites with options for two additional satellites. Payments by MSV to Boeing
under the contract could exceed $1 billion if the contract is not cancelled
prior to completion by MSV.
On March 30, 2006, MSV completed the sale of $750 million aggregate principal
amount at maturity of its 14% senior secured discount notes due 2013 for gross
proceeds of approximately $436 million. MSV has stated that it intends to use
the net proceeds from the sale of the notes for working capital and general
corporate purposes including the construction of its next generation integrated
network.
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.
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 forward. We have identified the
impact of TerreStar on our results of operations where material.
29
In the three months ended March 31, 2006, we experienced the loss of certain
large customer contracts, such as UPS, and a general erosion in our customer
base, primarily as a result of those customers' desire to utilize newer wireless
technologies, such as GPRS or CDMA, which we cannot support on our DataTac
network. A significant portion of our decline in revenue was due to a decline in
our wireless internet segment, which was driven generally by the aforementioned
desire to move to newer (voice-capable) technologies. As a result of this
revenue decline, we have been required to take numerous actions to reduce our
cost structure and change our operating strategy, including a reduction in our
DataTac network coverage. During the first quarter of 2006, Motient started an
initiative to further reduce its DataTac network within the Top 40 Metropolitan
Statistical Areas (MSAs). This plan involves the decommissioning of DataTac
network components and reduction of service coverage in previously served MSA's
within the Top 40 MSA's. Given the similar coverage profiles of the Cingular and
Sprint networks, the significantly increased bandwidth capabilities of these
networks relative to the DataTac network, 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.
It is possible that these reductions in DataTac network coverage have also
caused some of this revenue deterioration and we expect that our anticipated
further requirements to reduce our DataTac network coverage in response to
declining revenues may lead to a further deterioration in related revenues. In
addition to this general network reduction, we also believe that several
components of our cost structure are larger than required for our relative
business size, and we believe that we can continue to reduce our cost structure
in our continued efforts to improve our profitability. In an effort to
counteract this revenue decline and market demand for newer wireless
technologies, we developed a new set of products and services in early 2005
which we branded iMotient Solutions. These products and services extend our core
competencies of providing mobile data solutions to the advanced wireless
networks of Sprint and Cingular, without reliance on our DataTac network. We
believe our iMotient Solutions suite of products and services will be our
primary source of new revenue for 2006 and beyond, and we are focusing the
majority of our development, sales and marketing on this area.
Subscriber Statistics
Our customer base can be generally divided into six broad categories, Wireless
Internet, Field Services, Transportation, Telemetry, iMotient and Other. The
services provided in all categories, except iMotient and iMotient related
revenues in the Other category, are provided over our DataTac network. 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 subscriber base. Wireless devices
may be divided into two primary categories, billable and active. In prior
financial reports, we presented another category referred to as registered
devices. Registered devices represented devices that our customers had
30
registered for use on our network. Certain numbers of these devices may be kept
in inventory by our customers for future use and are not revenue producing.
Customers would normally then move such inventory into a production status upon
which it typically becomes billable and generates revenue. We have removed this
device classification from our reports given the material decline in wireless
devices on our DataTac network and our expectation that few, if any, of these
devices will be activated in the future. We will, however, continue to provide
statistics on billable and active units as these metrics are relevant to our
revenue reporting. Billable units, while revenue producing, 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.
As of March 31,
2006 2005 % Change
---- ---- --------
Billable Active Billable Active Billable Active
-------- ------ -------- ------ -------- ------
Wireless Internet 10,101 2,543 28,523 15,359 (65)% (83)%
Field Services 1,701 108 6,723 3,211 (75)% (97)%
Transportation 35,343 35,507 40,383 40,517 (12)% (12)%
Telemetry 16,552 5,991 21,124 10,947 (22)% (45)%
iMotient 8,801 7,707 345 0 2,451% N/m
All Other 85 69 150 90 (43)% (23)%
------ ------ ------ ------ ----- -----
Total 72,583 51,925 97,248 70,124 (25)% (26)%
====== ====== ====== ====== ===== =====
Revenue
The table below sets forth, for the periods indicated, a year-over-year
comparison of the key components of our revenue:
Three Months Ended March 31,
----------------------------------------
Summary of Revenue 2006 2005 Change % Change
- ------------------ ---- ---- ------ --------
(in millions)
Wireless Internet $0.8 $2.6 $(1.8) (70)%
Field Services 0.1 0.8 (0.7) (87)
Transportation 0.4 0.6 (0.2) (33)
Telemetry 0.3 0.4 (0.1) (25)
iMotient 0.3 0.0 0.3 N/m
All Other 0.1 0.1 0 (100)
---- ---- ----- ----
Service Revenue $2.0 $4.5 $(2.5) (55)%
Equipment Revenue 0.0 0.5 (0.5) (100)
---- ---- ---- ----
Total $2.0 $5.0 $(3.0) (60)%
==== ==== ===== ====
The decrease in service revenue in the three months ended March 31, 2006 as
compared to the same period in 2005 was primarily the result of a material
decrease in wireless internet revenue, including revenue from Skytel, RIM and
Lucent and the loss of several large accounts, most notably IBM in the field
service segment. We anticipate that our wireless internet revenue will continue
to decline in 2006 as a result of the continued decrease in our wireless
internet customer base. As we continue to reduce our DataTac network coverage,
we expect revenue in our other categories that utilize this network will also
decline in 2006. We expect our iMotient Solutions revenue to increase in 2006 as
we focus our sales and development efforts on this category. By category , we
note:
31
DataTac:
o Wireless Internet: The revenue decline in the wireless internet sector
during this period was driven almost exclusively by the migration of
our wireless internet customers to newer technologies and newer
wireless internet products (for example, RIM wireless email devices
that incorporate a wireless telephone, which cannot be used on our
network). We anticipate that our wireless internet revenue will
continue to decline in 2006 for similar reasons. In addition, our
recent and anticipated future changes to our DataTac network may have
been or may be a proponent to this revenue decline over the last year
or in the future. We do not offer wireless internet services under our
iMotient platform.
o Field Service: The decrease in field service revenue was primarily the
result of the termination of several customer contracts, including
IBM, as well as the general reduction of units and/or rates across the
remainder of our field service customer base. In addition, our recent
and anticipated future changes to our DataTac network may have been or
may be a proponent to this revenue decline over the last year or in
the future. Motient believes, however, that customers in this category
may 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 partially the result of UPS continuing to remove units from our
network. UPS represented $0.1 million of revenue for the three months
ended March 31, 2006, as compared to $0.2 million of revenue for the
three months ended March 31, 2005. Other customers accounting for the
decrease in revenues include Avis, Roadnet and Telecommunications
Systems, offset by increased revenue from Geologic Solutions. Our
recent and anticipated future changes to our DataTac network may have
been or may be a proponent to this revenue decline over the last year
or in the future. Motient believes, however, that this category will
potentially present new opportunities to generate new revenues with
our iMotient Solutions(TM) products and services.
o Telemetry: We experienced revenue declines for the first quarter of
2006 in certain telemetry customer accounts, including Metersmart,
Progress Energy Transaction Network Services, Inc. and Securitylink as
well as the loss of other customers including Norcom, MIST and Alabama
Power. Our recent and anticipated future changes to our DataTac
network may have been or may be a proponent to this revenue decline
over the last year or in the future. Motient believes, however, that
this category will potentially present new opportunities to generate
new revenues with our iMotient Solutions(TM) products and services.
iMotient:
o iMotient: We activated our first customer units and generated our
initial revenue from the iMotient platform in February of 2005. We
have signed up 15 application, integration and distribution partners
and 15 device manufacturer partners. All of these partners will assist
us in generating future revenue from these products and services. As
of March 31, 2006, we had 51 customers with a total of 8,801 billable
units on the network. We expect iMotient revenues to increase over the
course of 2006.
32
For the three months ended March 31, 2006, two customers, Geologic Solutions and
SkyTel , accounted for approximately 24% and 14%, respectively, of Motient's
service revenue and no other single customer accounted for more than 10% of our
service revenue. As of March 31, 2006, two customers, Geologic Solutions and
ADT/Security Link accounted for approximately 17% and 11%, respectively, of our
net accounts receivable and no other single customer accounted for more than 10%
of our net accounts receivable. For the three months ended March 31, 2005, four
customers accounted for approximately 49% of the Company's service revenue, with
one customer, SkyTel Communications, Inc. ("SkyTel"), accounting for more than
24%. No other single customer accounted for more than 10% of our service
revenue. As of March 31, 2005, one customer, RIM, accounted for more than 20% of
our net accounts receivable. No other single customer accounted for more than
10% of our net accounts receivable. 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.
Expenses
The table below summarizes, for the periods indicated, a period-over-period
comparison of the key components of our operating expenses. Please note that
2006 includes expenses related to TerreStar which were not consolidated in the
first quarter of 2005.
Three Months Ended March 31,
--------------------------------------------
Summary of Expenses 2006(1) 2005 (2) Change % Change
- ------------------- ------- -------- ------ --------
(in millions)
Cost of Service and Operations $ 4.7 $ 7.5 $(2.8) (37)%
Cost of Equipment Sales 0.0 0.5 (0.5) (100)%
Sales and Advertising 0.3 0.4 (0.1) (25)%
Research & Development 0.5 0.0 0.5 --
General and Administration 10.4 14.3 (3.9) (27)%
Operational Restructuring Costs 0.0 0.1 (0.1) (100)%
Depreciation and Amortization 2.9 3.7 (0.8) (22)%
Loss on Disposal of Assets 0.1 0.0 0.1 --
----- ----- ----- --
Total Costs and Expenses $18.9 $26.5 $(7.6) (29)%
===== ===== =====
(1) Includes non-cash stock-based compensation expense of $3.7 million
across various captions..
(2) Includes non-cash stock-based compensation expense of $11.6 million
across various captions.
Cost of Service and Operations: Cost of service and operations 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, on
our DataTac network and iMotient platforms. Our aggregate expenses in this area
decreased $2.8 million, including a $0.6 million decrease in non-cash
stock-based compensation expense. Given our ongoing cost-reduction efforts, we
expect these costs will continue to decrease in 2006. 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
revenue continues to decline. The decrease in 2006 is primarily due to:
33
o lower employee salary and related costs of $0.3 million for the three
months March 31, 2006 as compared to the same period in 2005 due to
workforce reductions implemented in March 2005.
o the decrease in licensing fees paid primarily to RIM for licensing
Blackberry as a result of the decline of wireless internet units and
revenues, of approximately $0.4 million from 2005 to 2006.
o lower site lease costs of approximately $1.4 million from 2005 to
2006, and lower telecommunications costs of approximately $0.6 million
from 2005 to 2006, for base station locations as a result of the
removal of base stations as part of our efforts to remove base
stations under our network rationalization efforts initiated in the
second quarter of 2005. As we continue to remove base stations from
the network, we anticipate that these costs will continue to decrease.
o lower compensation expenses associated with stock options issued to
employees of $0.6 million for 2006.
These decreases were partially offset by:
o an increase in base station deconstruction costs of approximately $0.5
million as a result of the removal of base stations under our network
rationalization efforts initiated in the first quarter of 2006.
Costs of Service and Operations does not include any expenses for TerreStar, as
TerreStar currently has no revenue-producing operations.
Cost of Equipment and Sales: The decrease in cost of equipment was the result of
the elimination of sales of devices on our DataTac network. Cost of equipment
and sales does not include any expenses for TerreStar.
Sales and Advertising: The decrease in sales and advertising expenses for the
three months ended March 31, 2006 was primarily attributable to lower employee
related costs of approximately $0.1 million. We anticipate that sales and
advertising costs will increase in the future in conjunction with our increasing
efforts to sell and promote our iMotient Solutions (TM) platform. Sales and
advertising expenses as a percentage of total revenue totaled approximately 15%
for 2006, compared to 8% for 2005. Sales and advertising expense does not
include any expenses for TerreStar.
Research and Development: Research and development consists of approximately
$0.5 million of research and development costs from TerreStar. For the three
months ended March 31, 2006. We expect these costs from TerreStar to increase in
the future as development efforts on its satellite and terrestrial systems
accelerate.
General and Administrative: Our aggregate expenses, including TerreStar expense,
in this area decreased $3.9 million or 27%, including a decrease of non-cash
stock-based compensation expense of $7.2 million.. The change in general and
administrative expenses was primarily attributable to:
34
o a decrease in consulting and advisory fees of $9.6 million for 2006
from $10.5 million for the three months ended March 31, 2005 to $0.9
million for the same period in 2006 due to lower corporate finance and
mergers and acquisitions activity.
o An increase due to TerreStar expenses of $5.4 million in 2006, as
compared to $0.0 in 2005 includes $0.8 million in salary and related
costs, $1.9 million in stock compensation expense for stock options
issued to employees, $1.6 million for consulting, $0.9 million for
legal and regulatory fees and $0.2 million for other expenses.
We anticipate certain general and administrative costs will decline in the
future in conjunction with our overall cost-cutting efforts. As we expand our
efforts on TerreStar, however, related general and administrative expenses are
anticipated to increase.
Depreciation And Amortization: Including TerreStar expenses of $1.3 million
during the 2006 quarter - which include the amortization of its intangible
assets, depreciation and amortization expense decreased $0.8 million for 2006
primarily due to TerreStar's expenses being more than offset by the impact of
our June 2005 network rationalization for which we accelerated the depreciation
of certain base station equipment. Our core business depreciation expense also
declined as a result of our decline in asset value related to network reduction
efforts in 2005 and our December 2005 disposal and impairment of our 800 MHz
licenses as part of our review of our intangible assets.
Loss On Disposal Of Assets: We recorded a loss on disposal of assets of $0.1
million for the three months ended March 31, 2006. Due to the material decline
in our network traffic, certain of our computer switching equipment was no
longer operating at or near capacity and in order to reduce costs, certain
equipment was removed from service.
Other Expenses & Income
Three Months Three Months
Ended Ended
March 31, March 31,
2006 2005
------------ ------------
Other Income/Expense
- --------------------
(in thousands)
Interest and other Income $ 2,663 $ 80
Equity in Losses of Mobile Satellite Ventures (8,193) (9,767)
Minority interests in losses of TerreStar $ 2,328 $ --
Interest and Other Income: Interest and other income increased for the three
months ended March 31, 2006, as compared to the same period for 2005, due to
increased cash balances from the proceeds of our financing transactions.
35
Equity in Losses of Mobile Satellite Ventures: Our ownership in MSV increased
from approximately 39% to approximately 47% in November 2004 as a result of our
$125 million investment and note cancellation and then to approximately 49% on
February 9, 2005 as a result of an exchange of Motient common stock valued at
$371 million for additional interests in MSV. Pursuant to the February 2005
transaction, Motient's investment in MSV included a significant fair value
adjustment regarding MSV's intangible assets. As such, the recorded equity in
MSV's losses for the quarter ended March 31, 2006 and 2005 include Motient's
applicable percentage of MSV's net losses plus $1.7 million and $0.9 million,
respectively, of amortization of this fair value adjustment. MSV had revenues,
operating expense and net losses of $8.1 million, $23.1 million and 13.4
million, respectively for the 2006 quarter and $7.2 million, $19.6 million and
$19.9 million, respectively, for the 2005 quarter. We anticipate that our equity
in losses of MSV will increase in 2006 as MSV's expenditures on its next
generation network will increase, coupled with a small expected decrease in the
revenues from its current customer base.
Minority Interest in TerreStar: For the three months ended March 31, 2006, the
Company recorded an approximately $5.9 million net loss for TerreStar. The $2.3
million minority interest in TerreStar represents the approximately 39% of
TerreStar that is not owned by the Company.
Liquidity And Capital Resources
The Company's future financial performance will depend on the successful
implementation of its business plan. As of March 31, 2006, the Company had $149
million of unrestricted cash on hand, of which approximately $67 million was
held at Motient and $82 million was held at TerreStar. In 2006, Motient
anticipates completing its previously announced rights offering for proceeds of
approximately $21.4 million.
TerreStar's business plan will require substantial funds to finance the
anticipated operating and capital expenditures of TerreStar. TerreStar currently
has remaining contractual commitments in 2006 for its satellite system and part
of its planned ground segment totaling approximately $107 million, excluding
anticipated additional contractual cost if TerreStar elects the option for its
second satellite in 2006. These contractual commitments exclude TerreStar's
operating requirements for 2006. In the case of each of TerreStar's contractual
commitment, TerreStar has the ability to terminate its financial obligation with
30 days notice and its liability would be limited to monies expended to date of
termination. However, if the progress of the satellite system or ground segment
system is curtailed by this termination, it could materially impede TerreStar's
ability to complete its satellite and ATC network in a timely fashion and
thereby prevent TerreStar from timely generating revenues at the levels
anticipated.
TerreStar will likely face a cash deficit in 2006 under its current business
plan. If TerreStar is unable to secure financing from a third party source to
meet this cash deficit in 2006, then Motient may decide that it will support
TerreStar's funding obligations with cash on hand at Motient. However, Motient
is under no obligation to do so. The Company cannot guarantee that additional
financing sources will be available for TerreStar from third party sources, the
capital markets or the Company at any given time or available on favorable
terms. In addition, MSV has substantial funding requirements in the near and
long term future, and while the Company is not obligated to meet such funding
requirements, MSV's failure to meet such requirements could materially impair
the value of the Company's investment in MSV.
36
On March 30, 2006, MSV completed the sale of $750 million aggregate principal
amount at maturity of its 14% senior secured discount notes due 2013 for gross
proceeds of approximately $436 million. MSV has stated that it intends to use
the net proceeds from the sale of the notes for working capital and general
corporate purposes including the construction of its next generation integrated
network. 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.
The cash requirements for TerreStar and MSV, along with the Company's possible
obligation to rescind $90 million of the Series A Preferred Stock, may place
significant pressures on the Company's liquidity position and the value of its
assets and/or investments. If future cash requirements exceed those currently
anticipated, the Company may require additional financing in amounts that will
be material in advance of the currently anticipated funding timeframes. The
type, timing and terms of financing that the Company obtains will be dependent
upon its cash needs, the availability of financing sources and the prevailing
conditions in the financial markets. The Company cannot guarantee that
additional financing sources will be available at any given time or available on
favorable terms.
Summary Of Cash Flows For The Three Months Ended March 31, (in thousands):
2006 2005
---- ----
Net cash flows used in Operating Activities: $ (8,467) $ (5,924)
Net cash flows used in Investing Activities: (23,367) (10)
Cash flows from Financing Activities:
Proceeds from the issuance of equity securities 90 34
Stock issuance costs and other charges -- (9)
Proceeds from the exercise of employee stock options 21 1,064
Net cash provided by financing activities 111 1,089
Net decrease in cash and cash equivalents (31,723) (4,845)
Cash and Cash Equivalents, beginning of period 180,774 16,945
Cash and Cash Equivalents, end of period $ 149,051 $ 12,100
Operating Activities:
Cash used in operating activities increased $2.5 million over the first quarter
of 2005 despite a decrease in our net loss of $11.1 million. The increase in
cash used in operations was primarily a result of significant decreases in
non-cash items. Decreases in non-cash items for the three months ended March 31,
2006 as compared to the same period for 2005 include a decrease in depreciation
and amortization of $0.7 million, lower equity in MSV losses of $1.6 million and
lower non-cash stock compensation of $7.9 million. The minority interest in
TerreStar losses of $2.3 million also contributed to the non-cash items offset
of our lower net loss.
Changes in assets and liabilities during the three months ended March 31, 2006
resulted in operating cash used of approximately $1.0 million as compared to
operating cash provided of $0.2 million for the same period in 2005. The $1.2
million 2006 increase in cash used is primarily due to a $0.8 million decrease
in accounts payable and accrued expenses as opposed to no change in 2005. This
decrease is a result of lower 2006 expenses and reduced accruals.
37
Investing Activities:
Net cash used in investing activities for the three months ended March 31, 2006
was $23.4 million as compared to minimal cash used for the same period in 2005.
The 2006 cash usage was attributable to payments released to Loral of
approximately $79 million related to the satellite construction contract for
TerreStar and other additions to property, plant and equipment and capital
equipment purchases of approximately $0.1 million, offset by the release of
$55.6 million of restricted cash under the Loral contract due to paying all
outstanding amounts due as of January 31, 2006.
Financing Activities:
Net cash provided by financing activities was $0.1 million for the three months
ended March 31, 2006 as compared to $1.1 million for the three months ended
March 31, 2005. The $1.0 million decrease in cash provided by financing
activities in 2006 over 2005 was the result of a decrease in proceeds from the
exercise of employee stock options.
We believe that our funds available at March 31, 2006, 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. 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 March 31, 2006, Motient had no outstanding debt or preferred stock
obligations other than obligations with respect to the repayment of its Series A
and B Preferred Stock. If not converted or repaid, the entire preferred stock
amount of $408.5 million will be due on April 15, 2010. The first two years'
dividend payments for approximately $43 million were placed in escrow and, as of
March 31, 2006, the unpaid portion of approximately $32 million is represented
by restricted cash, which will be paid out at a rate of approximately $10.7
million on April and October 15, 2006 and April 15, 2007. Dividend payments
after these first two years will be due bi-annually in April and October,
payable in cash (at a 5.25% annual interest rate) or in common stock (at a 6.25%
annual interest rate).
Contractual Cash Obligations
As of March 31, 2006, we had the following outstanding cash contractual
operating commitments in addition to the preferred stock commitments described
above:
More than 5
Total <1 Year 1-3 Years 3-5 Years Years
----- ------- --------- --------- -----
(in thousands)
TerreStar Satellite (1) $147,602 122,532 25,070 $ -- $ --
Operating leases (2) $ 13,461 5,229 6,020 2,212 --
-------- -------- -------- -------- -----
Total Contractual Cash Obligations $161,063 $127,761 $ 31,090 $ 2,212 $ --
-------- -------- -------- -------- -----
38
(1) These commitments include time payments related to the satellite
construction contract with Space Systems/Loral, Inc. and the ground-based
satellite beam access subsystem contract with Hughes Network Systems, LLC.
This satellite is scheduled to be completed in November 2007.
(2) These commitments generally contain provisions that provide for an
acceleration of rent upon a default by us, except that certain long-term
real estate leases, categorized as Operating Leases, may not contain such
provisions.
Other
On August 16, 2005, Highland Equity Focus Fund, L.P., Highland Crusader Offshore
Partners, L.P., Highland Capital Management Services, Inc., and Highland Capital
Management, L.P., affiliates of James Dondero, a former director of Motient,
filed a lawsuit in Dallas County, Texas against Motient. The Plaintiffs
purchased 90,000 shares of Series A Preferred for $90 million in the private
placement in April of 2005. Their lawsuit sought rescission of their purchase of
Series A Preferred, and unspecified damages, on the ground that the absence of
voting rights was material to purchasers of the Series A Preferred including the
Plaintiffs. On October 17, 2005, the plaintiffs amended their petition, removing
the allegation that the lack of voting rights was material and asserting instead
that the Series A Preferred was void because of a conflict between the
Certificate of Designations therefore and Motient's certificate of
incorporation. Motient believes that this claim is without merit and intends to
vigorously defend this lawsuit.
Critical Accounting Policies And Significant Estimates
Below are our accounting policies that 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.
Deferred Taxes
We have generated significant net operating losses for tax purposes as of March
31, 2006. We have had our ability to utilize these losses limited on two
occasions as a result of transactions that caused a change of control in
accordance with the Internal Revenue Service Code Section 382. Additionally,
since we have not yet generated taxable income, we believe that our ability to
use any remaining net operating losses has been greatly reduced; therefore, we
have provided a full valuation allowance for any benefit that would have been
available as a result of our net operating losses. See Note 2, "Significant
Accounting Policies - Income Taxes", of notes to the consolidated financial
statements for further details.
Revenue Recognition
The Company generates revenue almost exclusively through airtime service
agreements and in minor amounts, consulting services and equipment sales and
services. Revenue is recognized as follows:
Airtime Service Agreements: 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. The Company
defers and amortizes any revenue and costs associated with activation of a
subscriber over an estimated customer life of two years.
39
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. 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.
Valuation of Long-Lived Assets
The Company evaluates whether long-lived assets, excluding goodwill, have been
impaired when circumstances indicate the carrying value of those assets may not
be recoverable. For such long-lived assets, an impairment exists when its
carrying value exceeds the sum of estimates of the undiscounted cash flows
expected to result from the use and eventual disposition of the asset. When
alternative courses of action to recover the carrying amount of a long-lived
asset are under consideration, a probability-weighted approach is used for
developing estimates of future undiscounted cash flows. If the carrying value of
the long-lived asset is not recoverable based on these estimated future
undiscounted cash flows, the impairment loss is measured as the excess of the
asset's carrying value over its fair value, such that the asset's carrying value
is adjusted to its estimated fair value.
Other Intangible Assets
Upon the initial consolidation of TerreStar on May 11, 2005, the assets and
liabilities of TerreStar were recorded on the Company's Consolidated Balance
Sheet based upon their fair values at such date. TerreStar's results of
operations have been included in the Company's Consolidated Statements of
Operations since that date.
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. There
was no excess purchase price over the estimated fair values of the underlying
assets and liabilities consolidated into Motient. In certain circumstances, the
40
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.
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 business model used to prepare the valuation of TerreStar's assets
relies on revenues and cash flows generated by communications services provided
by its satellites as well as terrestrial infrastructure. Communications services
are assumed to be provided in three principal ways - (i) by utilizing only the
satellites, (ii) by utilizing only the terrestrial infrastructure, or (iii) by
utilizing a combination thereof via appropriate interfaces between the two
methods. The valuation model assumes that a substantial portion of TerreStar's
future revenues will be generated by the provision of services utilizing
terrestrial components only (approximately on average two-thirds of all revenues
over the projection period). The Company believes that a significant portion of
the value of TerreStar's spectrum and intellectual property assets lies in the
amount of revenue generated from these terrestrial components. If the amount of
terrestrial revenues generated by TerreStar's operating business in the future
is lower than anticipated, this could materially decrease the value of TerreStar
and its assets.
The valuation model further assumes that these terrestrial revenues will be
generated in partnership with a terrestrial wireless service partner that either
(i) already has existing terrestrial infrastructure, or (ii) who would have the
interest and the capital to deploy such terrestrial infrastructure to provide
the scale and scope of communications services assumed in the Company's
valuation model. The Company believes that this partner could also potentially
provide a large existing subscriber base and/or brand recognition, to go along
with the terrestrial infrastructure. Since the model assumes that this partner
would provide substantial operating, marketing and capital expenditures in
support of these terrestrial services, the Company has assumed that TerreStar
would receive a low percentage of the revenue generated by the business (as
detailed below). The Company can provide no assurance that it will be successful
in entering into a partnership of this nature on the terms assumed in the
Company's valuation model, if at all. If it is not successful, it may be
required to raise significantly more capital to provide support services to
TerreStar and/or to deploy a terrestrial infrastructure on its own, which may be
dilutive to existing shareholders. In this case, the Company would retain all of
the revenues from the provision of terrestrial services. However, if raising the
capital necessary to reach the scale and scope assumed in the valuation model is
not possible, the value of TerreStar and its assets would be materially
decreased.
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:
41
- - 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 (rather than the satellite
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 systems 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 our 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,
42
EBITDA margins grow to 60% early in the forecast period and expand to 70%
later in the forecast period.
- - 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 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, as necessary, record impairment
charges to reduces these intangible assets down to their revised estimated
values and/or adjust the remaining amortization periods.
43
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Quantitative and Qualitative Disclosures about Market Risk
Currently, we do not use derivative financial instruments to manage our interest
rate risk. We invest our cash in short-term commercial paper, investment-grade
corporate and government obligations and money market funds.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We have performed an evaluation under the supervision and with the participation
of our management, including our principal executive officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act").
As previously disclosed in the Company's annual Report on Form 10-K for the year
ended December 31, 2005, the Company determined that, as of the end of December
2005, 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 believes it has taken the measures necessary to remediate those material
weaknesses, but cannot be certain until our testing of those remediation efforts
are complete. Consequently, based on the evaluation described above, the
Company's management, including its principal executive officer and principal
financial officer, have concluded that, as of the end of the first quarter of
2006, the Company's disclosure controls and procedures were not effective.
Material Weakness
The following material weakness was identified and included in management's
assessment of the Company's internal control over financial reporting reported
in the Company's Annual Report on Form 10-K for the year ended December 31,
2005:
Management has identified a lack of sufficient oversight and review involved in
the quarterly and year-end financial reporting process. In addition, management
identified a lack of resources to ensure complete application of generally
accepted accounting principles as it relates to non-routine transactions.
Specifically in 2005, we consummated two merger and acquisition transactions
related to two separate entities that we have a material investment in (MSV) or
acquired a controlling interest in (TerreStar). This deficiency in the design
and implementation of the Company's internal control over financial reporting
resulted in a misstatement to the financial statements for the quarterly
reporting periods in 2005. The Company filed amended Form 10-Q's for all 2005
quarters in March 2006 to reflect the adjustments for these restatements and the
information presented in this report for the quarter ended March 31, 2005 is
that restated information. The quarterly statements provided herein reflect the
adjustments for these restatements. No additional restatements related to this
deficiency were required.
44
Actions Taken to Correct Material Weakness
We have taken the following actions to remediate the above identified material
weakness:
We have recently engaged the consulting services of a new independent public
accounting firm to review and support our quarterly and annual accounting and
reporting functions. We have also selected new consultants to assist in our
Sarbanes-Oxley Section 404 reporting requirements. We have extended our
subscription to a GAAP and SEC compliance information service and are increasing
the participation of financial management personnel in continuing education
courses, requiring such personnel to attend a minimum of two courses per year.
Given our resulting material weakness despite adding additional resources in
2005, we intend to continually evaluate the need for additional resources to
support our evaluation of complex transactions as discussed above for 2006 and
beyond. We will also dedicate additional substantial review at the point of each
complex transaction to review all appropriate accounting requirements. We
believe that the control deficiency involving lack of sufficient oversight and
review of the processes involved in the financial reporting process as it
relates to complex, unique and sophisticated transactions will be remedied with
the addition of these additional resources. We have discussed our corrective
actions and future plans with our Audit Committee, which has approved them, and
with our independent registered public accounting firm.
The Company believes that the corrective action described above 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.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that
occurred during our last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Please see the discussion regarding Legal Proceedings contained in Note 7
("Legal and Regulatory Matters") of notes to consolidated financial statements,
which is incorporated by reference herein.
Item 1A. Risk Factors
In addition to the challenge of growing revenue as described above, our future
operating results could be adversely affected by a number of uncertainties and
factors, including:
o We Have Undergone Significant Organizational Restructuring And We Face
Substantial Operational Challenges In Our Terrestrial Wireless
Business.
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.
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 We May Have To Take Actions That Are Disruptive To Its Business To
Avoid Registration Under The Investment Company Act Of 1940.
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.
46
o The Consummation and Potential Impact of the Proposed Consolidation of
MSV and TerreStar by Motient is Uncertain.
o Ongoing Litigation Could Negatively Impact Our Value and Our Ability
to Successfully Implement Our Business Plan.
For a more complete description of the above factors, please see the section
entitled "Risk Factors" in Motient's recently filed Annual Report on Form 10-K
for its year ended December 31, 2005. The Company's risk factors have not
changed substantially from those described therein.
Item 6. Exhibits
The Exhibit Index filed herewith is incorporated herein by reference.
47
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MOTIENT CORPORATION
(Registrant)
May 15, 2006 /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)
48
EXHIBIT INDEX
Number Description
10.42* - Employment Agreement, dated November 21, 2005, by and
between Motient Corporation and Christopher Downie
(incorporated by reference to the Company's Annual Report on
Form 10-K, exhibit 10.42)
10.43* - Amended and Restated Employment Agreement, dated March 8,
2006, by and between Motient Corporation and Christopher
Downie (incorporated by reference to the Company's Annual
Report on Form 10-K, exhibit 10.43)
10.44* - Employment Agreement, dated November 21, 2005, by and
between Motient Corporation and Myrna Newman (incorporated
by reference to the Company's Annual Report on Form 10-K,
exhibit 10.44)
10.45* - Amended and Restated Employment Agreement, dated March 8,
2006, by and between Motient Corporation and Myrna Newman
(incorporated by reference to the Company's Annual Report on
Form 10-K, exhibit 10.45)
10.46* - Employment Agreement, dated November 21, 2005, by and
between Motient Corporation and Robert Macklin (incorporated
by reference to the Company's Annual Report on Form 10-K,
exhibit 10.46)
10.47* - Amended and Restated Employment Agreement, dated March 8,
2006, by and between Motient Corporation and Robert Macklin
(incorporated by reference to the Company's Annual Report on
Form 10-K, exhibit 10.47)
10.48 - Exchange Agreement dated May 6, 2006 by and among
Registrant, Motient Ventures Holding Inc. and
SkyTerra Communications, Inc. (incorporated by
reference to Exhibit 99.1 of the current report on
Form 8-K initially filed on May 11, 2006).
10.49 - Form of Exchange Agreement dated May 6. 2006 by and among
Registrant, MVH Holdings, Inc., SkyTerra Communications,
Inc., and certain corporations affiliated with Registrant,
Columbia Capital and Spectrum Equity Investors (incorporated
by reference to Exhibit 99.2 of the current report on Form
8-K initially filed on May 11, 2006).
10.50 - Registration Rights Agreement dated May 6, 2006 by and among
Registrant, SkyTerra Communications, Inc., each of the
Blocker Corporations and each of the stockholders of the
Blocker Corporation (incorporated by reference to Exhibit
99.3 of the current report on Form 8-K initially filed on
May 11, 2006).
10.51 - Form of Exchange Agreement dated May 6. 2006 by and among
Registrant and certain funds affiliated with Columbia
Capital and Spectrum Equity Investors (incorporated by
reference to Exhibit 99.4 of the current report on Form 8-K
initially filed on May 11, 2006).
10.52 - Registration Rights Agreement dated May 6. 2006 by and among
Registrant and certain funds affiliated with Columbia
Capital and Spectrum Equity Investors (incorporated by
reference to Exhibit 99.5 of the current report on Form 8-K
initially filed on May 11, 2006).
49
10.53 - Amendment No. 2 to TerreStar Networks, Inc. Stockholders'
Agreement (incorporated by reference to Exhibit 99.6 of the
current report on Form 8-K initially filed on May 11, 2006).
10.54 - TerreStar Networks Inc. Amended and Restated Stockholders'
Agreement (incorporated by reference to Exhibit 99.7 of the
current report on Form 8-K initially filed on May 11, 2006).
10.55 - Amendment No. 1 to Amended and Restated Stockholders'
Agreement of Mobile Satellite Ventures GP Inc. (incorporated
by reference to Exhibit 99.8 of the current report on Form
8-K initially filed on May 11, 2006).
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).
31.2 - Certification Pursuant to Rule 13a-14(a)/15d-14(a), of the
Controller and Chief Accounting Officer (principal financial
officer)
32 - Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
of Executive Vice President, Chief Operating Officer and
Treasurer (principal executive officer) and Controller and
Chief Accounting Officer (principal financial officer)
----------------------------------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report pursuant to Item 14(c) of this report.
50